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AAOS Now

Published 12/1/2010
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Todd A. Rodriguez, JD

Selling to a hospital? Be sure to look before you leap

Five issues to consider before signing on the dotted line

Faced with shrinking reimbursement rates for their professional and ancillary services and increasing administrative, regulatory, and technological burdens, many physicians in private practice are considering selling their practices to and becoming employees of a hospital or health system.

Although selling your practice to a hospital may make a lot of sense for a variety of reasons, you and your legal counsel should evaluate the following considerations before making the decision. And, if you do decide to sell, carefully structure the transaction so that you have an “out” if expectations on either side are not met.

Internal due diligence review
Even before you enter into discussions, you should conduct an internal due diligence review to ensure that your practice is in a condition to be sold. The review should identify legal problems such as billing and coding deficiencies, noncompliant contractual arrangements, or potential litigation. It should also include a billing audit and verify that medical record documentation is accurate and complete.

Finally, any employment agreements, leases, service agreements, and other contractual arrangements should be reviewed to ensure that they are current, properly executed, and meet applicable regulatory requirements. If any compliance or other concerns are identified, the practice should correct any deficiencies before discussions begin.

Personal and professional considerations
Does selling your practice and becoming an employee make sense in light of your professional practice philosophies and goals? Selling a practice can be an emotional event, and many entrepreneurial physicians may find the transition to employment quite difficult.

Additionally, if the arrangements don’t work out, you may be back in the job market or private practice after only a few years. This transition can be extremely disruptive to an otherwise thriving practice, so if you expect to practice beyond the initial employment term, you should carefully consider how hospital employment fits with your professional timelines and goals.

Identifying the right buyer
When evaluating potential buyers, remember that what works for a hospital may not work for you. For example, an electronic medical record (EMR) system that meets the diverse needs of a hospital’s employed primary care physicians may be overly cumbersome for an orthopaedic practice, resulting in diminished productivity and increased frustration.

You should also explore the hospital’s strategic plan to determine whether it will support your practice’s continued growth after the sale. Finally, carefully evaluate the proposed physician employment model. Some hospitals may already have entities formed and in place to employ physicians. If, however, your practice has unique attributes that the hospital wants to isolate and preserve, it may be willing to establish a new model for you.

The purchase agreement
If your medical practice is a corporate entity, you may be able to structure the sale as a stock purchase, transferring all your stock to the hospital. But because a stock purchase transfers liabilities as well as assets, most hospitals will only want to purchase the practice assets from the corporate entity.

An asset purchase agreement should address the following issues: the purchase price and terms, the handling of technology issues, the transfer of medical records, and disengagement if the arrangement doesn’t work.

If you recently made a substantial investment in EMR technology, you may want to ensure that you can continue to use it after the sale or be reimbursed for it as part of the transaction. Your due diligence review can identify EMR and other technology issues to determine the potential for compatibility.

If the hospital is willing to acquire your technology, existing license and service agreements should be reviewed to ensure that they can be assigned to the hospital. If custom software is required to enable compatibility, the asset purchase agreement should specifically address these costs.

For purposes of operational continuity, the agreement should also include a provision assigning custody of your medical records to the hospital. Under the federal Health Insurance Portability and Accountability Act and privacy regulations, both the acquiring hospital and the selling physician are “covered entities” subject to the privacy rule requirements. Patients will also need to be notified of the transfer of their records, so the assets purchase agreement should allocate this responsibility.

Finally, because no hospital/physician employment arrangement is “a sure thing,” the asset purchase agreement should include a mechanism to disengage from the arrangement. The unwind provisions should address your ability to reacquire your assets and return to private practice, and it should dovetail with employment agreement and restrictive covenant provisions. The provisions should also clearly spell out when and how the unwind option can be exercised.

The employment agreement
The employment agreement sets the parameters for your ongoing relationship with the hospital and should specifically address issues such as term and termination, compensation, and dispute resolution processes.

Most hospital employment agreements will have a term of not more than 5 years, although 3-year terms are fairly typical. Even with a defined term, however, the typical employment agreement will permit early termination by the hospital, the physician, or both. If the agreement can be terminated “for cause,” the grounds for cause should be spelled out clearly and should be as objective as possible. Also, if the agreement can be terminated prior to the end of the term without cause, sufficient notice should be required to permit you to make new practice arrangements.

Expect productivity to be a key component in your compensation arrangement. Productivity may be measured by charges, collections, or surrogate measures such as relative value units. Compensation plans may also allocate certain direct and indirect practice costs to you as an employee. Performance criteria should be designed to create appropriate incentives, measurable, and reasonably achievable. Any costs allocated to the employed physician should be clearly defined in advance and subject to budgetary limits. Finally, the employment agreement should include an adjustment mechanism if performance targets are not met.

Because disputes are bound to arise in any relationship, a dispute resolution process should be part of the employment agreement. Effective dispute resolution processes may involve formal mediation through an outside service, but informal processes may be more efficient and cost-effective for resolving small disagreements. For example, the agreement may call for certain kinds of disputes to be resolved by a small committee made up of representatives from hospital administration and medical staff members.

Tailored for success
Selling to a hospital and entering into an employment agreement can be an attractive alternative to private practice in these uncertain times. Both parties to the transaction must carefully evaluate their differences and seek to structure the relationship to create incentives for mutual long-term success.

Todd A. Rodriguez is a partner in the Exton, PA, office of Fox Rothschild LLP. To learn more about Mr. Rodriguez or his firm, visit the AAOS Practice Management reSOURCE Directory.