Decreasing reimbursements, a changing regulatory environment, lifestyle changes and retirement are a few reasons why physician practice purchases by hospitals are on the rise. When a purchase commences, there are a number of considerations to take into account by both the physicians and the hospitals.

  1. Structure of Transaction. Typically, the purchase of a physician practice is done as an asset purchase agreement or stock purchase agreement. Both arrangements have advantages and disadvantages. Generally, in a stock purchase transaction all assets, receivables and liabilities are transferred to the buyer. This means that the buyer is at risk for future liabilities of the seller. The advantage of a stock purchase, however, is that there is uninterrupted cash flow because contracts with third-party payors remain intact and it is possible to assume existing provider numbers, licenses and contracts. The more common purchase vehicle is the asset purchase agreement where the buyer only purchases the tangible and intangible assets set forth in the purchase agreement. However, the buyer in this approach will have to often get assignments for contracts and licenses and obtain a new provider number.
  2. Valuation. There are several different methods on how a physician practice may be valued. The cost approach takes the aggregate value of the assets net the liabilities of the practice to arrive at the equity of the practice. This approach does not recognize goodwill. The income approach believes that the value of a business is directly related to the present value of all future cash flows or earnings that the business can reasonably be expected to approach. The market approach uses a variety of methods that compare the subject with transactions involving similar investments. Usually, this valuation is established by a qualified professional, independent party appraiser. All valuations should be supported by written documentation and be based on current data.
  3. Restrictive Covenants. A buyer may want the seller, as part of the purchase agreement, to be bound by a restrictive covenant. All restrictive covenants should be reasonable in length of time and geographic scope. In some cases, the buyer may also want a liquidated damages clause that provides that if the seller is in violation of the restrictive covenant that the seller shall immediately pay to the buyer a certain amount of money.
  4. Employment. A buyer may purchase a practice and employ the seller. If this occurs, there should be a written employment agreement that sets forth the agreed upon terms of employment between the parties. Such employment should meet the Anti-Kickback statute Safe Harbor and Stark Law employment exception or fair market value exception.
  5. Fraud and Abuse. Any practice acquisitions should comply with all healthcare fraud and abuse laws. This means that the purchase price for a physician practice must be fair market value.
  6. Licenses. An analysis should be done of what current practice licenses can be transferred or terminated.
  7. Medical Records. Any purchase agreement should address what will happen to the selling practice’s medical records. A sale may include an agreement that the buyer will store, maintain and access all of the seller’s medical records. A seller may want to retain rights of access to medical records. There is no goodwill value associated with the purchase of paper medical records (there may be some electronic health record value). Some states do require patient notification for any transfer of ownership of medical records so applicable state law should be reviewed for such requirement.