Small Practice to Hospital: What to Consider

For many private practice physicians, the traditional business model predicated on third party reimbursement from insurance carriers and Government sponsored health programs has ensured a decent living. However, in the uncertain healthcare climes of healthcare reform and the bundled payments, Accountable Care Organizations and shrinking reimbursements that accompany it, many in the private practice field are abandoning the time-tested methodologies for something seemingly more secure: selling their practice to a hospital.

The option of turning a practice over to a large hospital certainly comes with a share of advantages, but it's certainly not a cure-all solution. For one, many private practice physicians see job security in a hospital, a larger medical entity that can weather an economic storm with more fortitude than a small or mid level practice can. For others, a hospital's provision of additional resources, state of the art medical equipment and assistance with staffing and administration alleviates the burden of tackling a shifting healthcare climate on their own. But how does practice acquisition really work?

Stock or Assets
Physicians turn over their private practices to large hospitals by either selling their stock or their assets. Generally speaking, a private practitioner will sell stock when he or she still wishes to retain partial ownership of the practice. When a hospital acquires a practice's stock, they not only gain control of the practice's assets, but their liabilities as well. These include any outstanding contractual obligations to employees, their accounts payable and any malpractice suits or actions they may be facing.

Hospitals usually purchase assets when a private practitioner wishes to close his or her practice, but still retain control of the accounts receivable. In this instance, the buying hospital may also not wish to take on a practice's liabilities but still acquire additional healthcare services.

What's Your Practice Worth?
The process of determining a practice's value is complex and time consuming. Much of the difficulty comes from the fact that "value" and "price" are differing concepts in that value is determined through formula, but price is the literal dollar amount for which a practice sells. The three approaches to valuing a practice boil down to an asset based approach (also known as the "cost approach"), an income based approach (also known as the "discounted cash flow" approach) or a market based approach. Regardless of the technique employed, all valuables contained within a practice should be clearly indicated by written documentation that clearly identifies the formulas for determining their value. This helps non-expert readers to follow the appraisals and to further verify the numbers.

Still, even when a private practitioner has determined a practice's value, found a willing buyer and they're nearing the precipice of a career as a hospital employee, there are other factors they should explore before making any sort of leap.

Internal Due Diligence Review
In his article Selling to a Hospital? Look Before you Leap, Todd A. Rodriguez, P.D. outlines some basic tenants for all private practitioner to follow before selling out to a hospital. The first one is a due diligence review.

Just as a home-owner will conduct basic maintenance and checking to ensure their house is in fit condition to be sold, savvy private practice physicians will conduct their own due diligence review to make sure their practice is in its absolute best shape. This includes identifying any legal problems which may exist (including deficiencies with coding, non-compliant arrangement and any pending lawsuits or litigations). They should also find and document their own billing and audit activities and make certain that all their medical record documentation is accurate and complete. Any existing employment agreements, leases, service agreements and contractual arrangements should be addressed, identified and if necessary, made current. If any concerns or foibles are discovered, it is their responsibility to correct them before any transaction business is discussed.

Professional Goals
For all the immediate benefits that selling a practice may entail, it can also be a sizable stumbling block. If the arrangement is made with haste or in prematurity, hospital-employed physicians may find themselves back in private practice or even back in the job market within a few short years. The transition is disruptive to a thriving practice, and so a careful evaluation of an established professional timelines and goals should be consulted before any transition to a hospital. Remember that what may seem like a quick fix, may come bundled with more problems in the future.

The Best Buyer
In simple terms, what is working for a hospital may not be what works for a private practice. Rodriguez highlights the example of a hospital's extensive EMR system. While it may be appropriate for a bustling hospital and all its employed primary care physicians, it may be burdensome and unnecessarily time intensive for a small orthopedic practice. In turn, these conflicts in working style result in compromised productivity and increased frustration on the part of the employees.

Private practice physicians on the fence can explore a hospital's strategic plan and make projections about whether it supports the practice's growth after the sale has been made. Furthermore, some private practitioners may be wary of selling their practice and losing some of the attributes that made their specific practice unique. They can address these concerns to hospitals and find out if they're flexible and willing to isolate and preserve those attributes after the acquisition. Some hospitals may even be willing to establish a new model to accommodate these attributes.

Purchasing Nuts n' Bolts
Practices can be sold in various ways (as discussed earlier) and it's important for private practice physicians to determine how it happens (whether it's best to sell stock or assets). Most hospitals prefer to simply buy the assets of a practice and leave the liabilities in place. An asset purchase should still address issues like the purchase price and terms, the handling of technology issues and the transfer of medical records. If a private practice physician has made an investment in EMR technology, they can ensure that they can still use it after the sale, or at least be reimbursed for it on the transaction.

If the hospital wishes to acquire a practice's technology, existing licensing and service agreements need to be checked to make sure that they can be transferred and assigned to a hospital. Additionally, if a private practice uses its own customized software, these costs must be addressed.

Finally, and most importantly, selling a practice is never a "sure thing." Smart physicians will implement an "unwind provision" that basically includes a mechanism from which physicians can disengage from the agreement if it doesn't work out. The provision should include detailed instructions on the selling physician's ability to reacquire assets and reform to private practice should the need arise, and should also include the employment agreement.

Hospitals will usually only purchase a private practice under the condition that the private practice physicians become employees of the hospital for a designated period of time. This can range from one to five years. State and Federal anti-kickback laws require that physicians will be compensated for their services at a fair market value, and many hospitals call for an income guarantee predicated on the private practice's earnings the previous year.

A hospital's biggest risks in acquiring a practice are that the newly employed physicians won't meet critical economic and service related goals in place. Physicians looking to sell their practice should examine any throwback provisions or percentage compensations that a hospital will withhold if relative value units (RVU's) aren't achieved. On the flip side, physicians may be eligible to receive incentive bonuses for improving patient satisfaction or exhibiting core measure compliance and outreach participation.

Private practice physicians should specifically address the issues like termination, compensation and dispute resolution. Since the transition from private practice to hospital employment may be tough, many hospitals will allow for formal mediations through an outside service or through a small committee made up of representatives from the hospital administrative and medical staff. Regardless, physicians should know the terms they're agreeing to when working for a hospital.

Some Warnings
A few legal matters that a selling physician and a purchasing hospital must consider are Federal Anti kickback laws which govern many transactions in the healthcare industry. Certain statutes prohibit payment or compensation to any person for referring patients with any degree of medicare or medicaid coverage.

STARK laws also prohibit the making of referrals or billing for payment for designated health services covered by medicare or medicaid if there's an existing financial relationship between the referring physician and the entity receiving payments. Since the sale and purchase of a practice constitutes a "financial relationship" between the two, these laws should be carefully acknowledged and carefully followed to avoid penalties.

Though it may be attractive for a private practice to sell to a hospital in formidable times, both parties must carefully explore the differences and structure that the newly forged partnership will create and insure mutual success.

For private practice physicians slow to give up autonomy and unwilling to deal with the legal and bureaucratic red tape that accompanies the transition into working with a hospital, riding out the storm and waiting before selling off to "greener grass" may be something to wait for.

Bruno, Lucia F., J.D., L.L.M, M.B.A. "What Physicians Should Know Before
Selling Their Practice to a Hospital." Physician's News Digest, 4 Sept. 2012. Web. 13 Oct. 2012.

Rodriguez, Todd A., J.D., L.L.M, M.B.AD. "Selling to a Hospital? Be Sure to
Look before You Leap." American Academy of Orthopedic Services, 2010. Web. 13 Oct. 2012.