Healthcare M&A: Do’s and Don’ts of Buying or Selling a Medical Practice

As medical doctors near retirement, many begin to think about selling their practice. Physicians who have a better opportunity may need to sell their medical practice. Starting physicians or physicians who are looking to expand their current practice may look to purchase an existing practice. Selling or buying a medical practice can be a strong consideration if one of the doctors wants to move to a different state or location within a state.

An experienced healthcare medical purchase attorney is needed to review the major issues. Some of the primary issues the healthcare lawyer will analyze are:

Understanding Corporate of Medicine Prohibitions

In California, a medical practice must be run by a medical corporation.

The Moscone-Knox Professional Corporation Act governs who can invest in and own the professional medical corporation and the limits that apply to non-medical practitioners. In general, there must be a clear dividing line between the clinical operation, the practice of medicine, and the administrative side which can include investors, managed service organizations, and other non-professional managers.

Medical corporations in California are also bound by:

• The Medical Practice Act, Business and Professions Code section 2052, which provides that the unauthorized practice of medicine is illegal.
• The California Business and Professions Code section 2400 which prohibits corporations and “other artificial entities: from having “professional rights, privileges, or powers.”

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What is being sold?

There are two essential parts of any business – the assets and the liabilities. Sellers usually want to sell both parts. Buyers normally prefer to purchase just the assets and avoid the liabilities. What parts (assets and liabilities or just some of the assets are sold) depends, in part, on the business structure.

In states where a partnership can own a medical practice, the considerations for the sale or purchase begin with the partnership agreement. The written partnership contract usually controls:

• Who can sell the practice
• Who has the right to buy the practice
• The value of the seller’s interest in the medical practice
• Many other factors that are predetermined by the partnership agreement

In California, where the medical practice must be a medical corporation, the starting point is that the sale must be to licensed physicians and not private investors. In corporate practices, stock sales are used to sell the entire practice. Assets sales, as mentioned, are used to sell the customer accounts, medical equipment, buildings if owned by the corporation, and other assets.

There are tax considerations which both the seller and buyer need to consider for all types of sales especially corporate sales.

Determining the Value of The Practice

Unless the fair market value of the practice has been predetermined, such as is often the case in a partnership agreement, the practitioner(s) should consult with qualified appraisers who understand how to properly value a medical practice. The starting point, as with most businesses, is what comparable sales have taken place for a similar type of practice in the same geographical area.

Another way to value the medical practice is to detail the physical assets, the good will of the business, existing business relationships, existing patient list, intellectual property, liabilities, and many other factors such as what patients need to be told about the sale.

Due Diligence & Healthcare Compliance

Buyers need to work with experienced medical practice buy and sell lawyers to understand a full range of legal, financial, and practical issues that affect the sale. These issues, which require due diligence, include:

• Healthcare Compliance. The buyers of a medical practice need to know what healthcare laws regulations apply to their business. There are many federal and state laws that regulate how business referrals work, how bills can be submitted to private insurers and public health care programs, healthcare privacy laws such as HIPAA, and many other issues. A skilled healthcare lawyer explains the impact of Stark Law, the Anti-Kickback Statute, the False Claims Act, and other federal and state laws and regulations. The medical purchase healthcare lawyer will review with the seller and/or the seller’s attorney the seller’s current compliance plan, any current or likely compliance complaints, and other compliance red flags that need to be addressed. If the compliance issues aren’t addressed before the sale, the physicians who buy the practice may find that they are liable for any open compliance issues.
• Patient notification. There are specific rules that apply to sales such as how and when to notify patients about the sale. Patients should also be informed about their right to access and control their medical records in the event of a sale. Typically, an authorization that also meets HIPAA standards) is required to transfer medical records from one medical practice to another practice. Both the seller and buyer normally want the letter to comply with the legal requirements while also helping the patient to choose the new doctors over other doctors. This type of letter must be carefully drafted so as not to unduly pressure the patient.
• Medical records. Who owns the medical records after the sale and how long those records should be kept – should be part of the agreement of sale.
• Billing and coding. Due diligence requires an understanding how the medical practice enters its bills and billing codes and how those bills are submitted. Bills that are improperly submitted may result in a complaint that the medical practice is violating the federal False Claims Act or a state false claims law. The health care purchase attorney should also review which insurance carriers and medical programs the medical practice works with, how quickly and how much of the bills those insurance carriers and programs pay and any issues that have been raised in the past or currently regarding payment. If the medical practice changes ownership, then Medicare, Medicaid, and other payors will need to be properly notified of the change.
• License requirements. Due diligence requires reviewing the current medical licensure needs of the medical practice and the current status of those licenses.
• The financial records and tax statements – normally for the past three years. This includes any judgements, liens, or claims. It also includes withholding taxes that may be due, unpaid vacation pay, the status of any worker’s compensation and unemployment compensation accounts, business and medical insurance, and many other financial issues.
• Current working relationships. The working relationship with the staff such as nurses, technicians, receptionists, and others. Just as with patient records, there may be a legal duty (and often a practical requirement) that staff be properly informed of any sale. Employees and contractors should understand what to expect when the medical practice changes ownership hands.

There are many other due diligence matters an experienced health care buy and sell lawyer will review. These include:

• Any managed service organization agreements. There are corporate practice of medicine issues that should be examined – such as whether the MSO can act as a medical director. Generally, this is not allowed in California.
• All open contracts with administrators, supplies, vendors, and third-parties
• All open litigation the medical practice that is selling their business is involved with
• Any open lease or rental agreements
• All open contracts with employees and independent contractors

Not every contract is assignable. Experienced medical practice lawyers will review the existing contracts.