Acquisition of Physician Practices – Legal Observation

Acquisition of physician practices are on the rise! Hospitals acquired 31,000 physician practices across every region of the country between 2012-2015 making the number of employed physicians increase from 95,000 in 2012 to more than 140,000 in 2015. These acquisitions typically involve the purchase of the services of multiple physicians through employment contracts, as well as the practice’s physical building and equipment. For example, Northwestern Memorial Healthcare in Chicago in 2014 committed $230.5 million plus annual payments of $118.5 million through 2016, to acquire the 900 physician Northwestern Medical Faculty Foundation. 

Physicians, who have preferred independence in the past, have embraced the thought of employment to relieve them of the many pressures that come along with a physician practice. All have different reasons for considering employment with hospitals, these may include:

• Regulatory requirements that lead to increased administrative pressures,
• Meaningful use requirements which require purchase of electronic medical records, and
• ICD-10 conversions.

Unfortunately, in some cases, these acquisitions of physician practices can be plagued with conflict over physician contracts, practice prerogatives, and the scope of professional practice which poses one of the single most significant issues with hospital mergers.

 

Acquisition of Physician Practices – Legal Observation

Recently, Cindy Winn, MBA, CHSP, Deputy Director of Consulting Services at The Fox Group a healthcare consulting firm, conducted a brief interview with Ms. Ingrid Brydolf, Partner and Co-Chair of the Health Care Practice Group, Davis Wright Tremaine LLP (DWT), to discuss some of the issues in Acquisitions of Physician Practices today.  DWT is a multi-city law firm with a large health care law practice.

Cindy: Ms. Brydolf, according to an analysis released by the Physicians Advocacy Institute (PAI), acquisitions of physician practices resulted in 38 percent of U.S. physicians now being employed by hospitals or health systems. In your opinion, what are the most important issues a hospital faces as it approaches the acquisition of a physician practice group?

Ingrid: Broadly stated, the most important issues during an acquisition of physician practice is fulfilling the expectations of the parties in a legally compliant manner.  Too often, compliance professionals and legal counsel are brought into the discussions after leadership for the hospital and the physician group have established the timing, scope and financial terms of the acquisition and subsequent employment of professionals and staff.  A better approach, an approach that will assist the hospital and the physician group in meeting their objectives, is to discuss the legal parameters for the possible transaction early to ensure that the guide rails are in place.

Cindy: In your professional opinion, what else should be considered when a hospital decides to acquire a physician group?

Ingrid: First, consider the reasons for the potential acquisition and whether the parties’ objectives can, in fact, be met.  If a rural practice group is losing money and faced with closure, and a local hospital fears the loss of key specialists to meet specialized healthcare needs in their community, it may make sense for the hospital (or a related entity) to employ the physicians and their staff.

But consideration should be given to the financial projections for the acquired practice, and whether the professionals, once hired, will be culturally and professionally satisfied with their new positions as employees of a larger entity.  Candid discussions about accreditation requirements, the use of hospital IT systems, staffing standards, and other practical elements of the practice should be discussed in great detail.

Secondly, consider the structure of the transaction.  From a liability standpoint, an acquisition of assets, rather than stock, is generally preferable for the hospital.  For Stark law, anti-kickback statute and tax-exemption reasons, the hospital should pay no more than fair market value for the assets and, in most cases, the value should be supported by a valuation opinion issued by a qualified valuation expert with healthcare experience.  While there are some exceptions, generally only “hard” assets should be purchased.

Thirdly, we recommend that the valuation be conducted before any purchase price is determined.  Once the valuation establishes a range of fair market value, the parties can negotiate within those parameters.  It is also important to remember that any employment compensation (including benefits) must also fall within the range of fair market value. The uncertainty of certain arrangements under the Anti-Kickback Statute demands that performing due diligence on such arrangements becomes extremely important to understanding associated risk.

 

Due Diligence in Acquisition of Physician Practices

Due diligence of a physician practice and operations must also include a thorough review of compliance with state and federal health care statutes, rules and regulations.  These include:

• Regulations related to health care billing, fraud and abuse,
• Patient privacy and information security regulations, and
• Licensing and employment practices.

Assess Compliance with Stark Law and the Anti-kickback Statute:

Key elements of federal law can limit the ability of physicians and hospitals to structure financial relationships. Under Medicare’s “anti-kickback” statutes, it is illegal for hospitals to offer physicians financial inducements to admit patients to their institutions or to order the hospitals’ services. This prohibition must be kept in mind in structuring directorships and practice or medical office rents, loans and all other financial relationships with physicians. But these prohibitions also extend to the hospital’s paying physicians more than fair market value for their own professional services as employees.

Compliance and legal personnel must work together closely in reviewing documents and asking questions about all financial arrangements with physicians.  Prospective buyers must make sure that no regulatory issues exist in a physician practice or other entity being acquired.

The parties must take the opportunity to address any risks during due diligence:

• Legal matters, including current ownership structure and tax status
• Financial matters, including billing and account receivable and internal control procedures
• Indebtedness, including business and personal loans guaranteed by the physician practice
• Assets
• Regulatory matters
• Environmental matters
• Contracts
• Employee matters
• Insurance
• Litigation

The examples above show that there are a multiplicity of pitfalls! The risks and rewards are both numerous. Proceeding carefully and using experienced advisors will minimize the risks and maximize the rewards!