There has been an increase in the number of physician practices that have been bought by health systems and other physician practice groups in recent years. Physicians have also sold their practices to other health care providers or closed their practices due to the regulatory landscape, the Patient Protection and Affordable Care Act, retirement, or other life decisions. Prior to selling or closing a practice, physicians should get the practice’s books and finances in order, determine the difference between the asking price versus asset value and goodwill, decide how compensation will be paid, identify the practice’s strengths, and identify the best time to sell the practice.
Physicians who decide to sell or close their practices will have to consider several key issues including: valuation of the practice, transitioning the practice to the buyer, medical records, notification to patients, and determination of the physician’s involvement and/or position with the practice post-closing.
Valuation of the Practice
Valuation of the practice seems to cause the most discussion and negotiation between the selling physician and purchasing physician. Valuation should be used as a benchmark for negotiation of the purchase price of the practice. Physicians should consider utilizing a valuation firm to conduct a valuation of the practice. The outside valuation process, analysis, and generated valuation report should identify the tangible versus intangible assets of the practice including: equipment, supplies, furniture, and goodwill.
Physicians should utilize fair market value (“FMV”) in the valuation of the practice and determination of the purchase price in order to comply with regulatory requirements. While there is no bright line test for FMV of a physician practice, FMV should result from bona fide bargaining at arms lengths between a well-informed buyer and seller. FMV should not take into account volume or value of referrals by the referring physician or other business generated between the parties.
The valuation of the practice’s goodwill will also need to be determined and agreed upon by the selling and purchasing physicians. Goodwill is an intangible asset of the practice that is generally based upon the practice’s size, location, reputation, patient market, and profitability. The Buy-Sell Agreement should include the amount of the purchase price and the allocation of the purchase price between tangible and intangible assets, the exclusion of prepaid expenses, the amount of any deposit(s), any adjustments to the purchase price, and the amount of any closing payments. Generally, in the purchase of a practice, the accounts receivable are not an acquired asset and therefore are not sold to the purchasing physician. The selling physician usually retains the accounts receivable and there will need to be a mechanism in the Buy-Sell Agreement to ensure the purchasing physician’s ability to collect the selling physician’s accounts receivable post-closing. Additional practice assets that are typically not included in the sale of a practice may include: real property, cash, bank accounts, pension funds, insurance proceeds/cash value of an insurance policy, and artwork, personal affects, diplomas and certifications of the selling physician. In order to avoid future disputes, the Buy-Sell Agreement should include a list of all excluded assets on a schedule. The liabilities of the practice should also be listed on a schedule of the Buy-Sell Agreement to identify the liabilities the purchasing physician will assume at closing. Liabilities of the practice may include: lease agreements, equipment leases, service agreements for equipment servicing, billing, staffing, and janitorial services, and government audit and investigations.
Physicians will also have to determine the structure of the transaction and whether the Buy-Sell Agreement should be a Stock Purchase Agreement or an Asset Purchase. Key documents for selling a practice may include: Non-Disclosure and Non-Competition Agreement, Letter of Intent, Buy-Sell Agreement, Consulting Agreement, Physician Employment Agreement, patient notification letter, and Staff Termination and Transition letter.
Transitioning the Practice to the Buyer
The Buy-Sell Agreement should include pre-closing and post-closing responsibilities of the parties and representations and warranties. If the selling physician is remaining in the geographic area of the practice and the physician will not have a continuing professional relationship with the purchasing physician, covenants not to compete is an important component of the Buy-Sell Agreement to protect the interests of all the physicians. Covenants not to compete, also known as restrictive covenants, are enforceable if the covenants are reasonable in length, duration and geographic area in all states except for California.
Indemnification provisions also protect the purchasing physician in the event the selling physician breaches any representations or warranties of the Buy-Sell Agreement. A selling physician will most likely be expected to indemnify and hold harmless the purchasing physician from losses arising out of the selling physician’s misrepresentations or failure to disclose liabilities or conditions which give rise to costs or damages to the purchasing physician.
Pursuant to state and federal regulations, patients must be given the option to choose another physician and to have a copy of their medical records sent to the physician of their choice. Medical records should not be transferred to another physician or practice without the patient’s consent. Physicians should check state and federal regulations regarding record retention. When selling or closing a practice, physicians should review their medical records to ensure that the records contain all information and documentation as required by state and federal law. During the sale or closure of a practice, the issue of who actually owns the medical records often is raised. Generally, the physical medical record is owned by the physician or corporate entity responsible for compiling and maintaining the medical record.
Medical record ownership is established by state law, licensing regulations, and judicial decisions. Physicians who are selling or closing their practice should ensure that the control, ownership and patient’s right to access their medical records is specifically addressed prior to transferring or storing any medical records in order to be in compliance with the applicable state law. The Health Insurance and Portability Act of 1996 (“HIPAA”) expanded patients’ right to access, audit and amend their protected health information (“PHI”) pursuant to the HIPAA Privacy Standards. Many states also have laws regarding medical records and the release of patient information regarding certain diagnosis and patient conditions related to AIDS, elder abuse and neglect, domestic violence, and abused and neglected children. Physicians, as custodians and owners of medical records, must take special care regarding the destruction, retention, or transfer of medical records when their practice is sold or closed.
In light of the current regulatory environment which includes increased audits and investigations by government agencies, the negotiations for the sale of practice and all related documents, including the Buy-Sell Agreement should be in compliance with all applicable state and federal regulations including: Fraud and Abuse laws, Stark Law, Anti-Kickback Statute, HIPAA, Tax Exempt Status (if applicable), Anti-Trust laws, and state and federal regulations regarding the transfer, maintenance and retention of patient medical records.
Notification to Patients
If the practice is being sold, the physicians who are selling and buying the practice should consider who will ultimately be responsible for the medical records upon the sale or transfer of the practice. When the medical records are transferred with other assets as part of a practice sale, the physician selling their practice should advise and notify patients of such transfer to comply with the terms of the Asset Purchase Agreement, licensing requirements, and ethical and professional standards.
Physicians who are closing their practice should consult with their attorney regarding the storage or destruction of the medical records and consider providing patients with notice and an opportunity to retrieve their medical records prior to the practice closure. Upon identifying patients who have been treated by the practice, physicians should send a notification letter which: informs the patient of the practice sale or closing; includes the last date of the practice’s operation; identifies where the patient can pick up their medical records; and informs the patient where future medical record requests can be sent.
Determination Physician Involvement Post-Closing
It is important that both the selling and purchasing physicians have a meeting of the minds prior to closing as to the role and involvement of the selling physician post-closing. If the selling physician is leaving the geographic area of the practice and will no longer be practicing, a formal written agreement regarding employment or consulting will not be needed. However, if the selling physician is staying in the geographic area and the purchasing physician wants to continue working with the selling physician during the transition period, the physicians should consider executing an employment or consulting agreement which includes the role and responsibilities of the selling physician and the term of such agreement. The employment and consulting agreement should correspond to the terms of the Buy-Sell Agreement.
Selling or closing a practice involves a lot of preparation, planning, and completion of certain tasks. Prior to selling a practice, the physician should secure a valuation of the practice and consider transitioning the practice to the purchasing physician, medical records, notification to patients, and determination of the selling physician’s involvement and/or position with the practice post-closing.
About the author: Clark Hill attorney Jayme Matchinski concentrates her practice on health care and corporate law. She handles regulatory compliance, reimbursement, licensure and certification issues affecting health care providers, health care transactions, and the purchase, sale and formation of health care entities. She has also successfully represented health care providers in reimbursement claims against insurance carriers and the Center for Medicare and Medicaid Services.