Is Your Practice Selling to a Health System? A few considerations...before you cash the check

Oops!  There goes one.  Oops!  There goes another one!  We hear about it every week.  Shrinking Medicare and private payer reimbursements,  increasing regulatory demands, and high cost technology are just a few of the reasons that many physicians are crying "Uncle" and actively looking to sell their practices.  As quickly as they can, many are relinquishing the freedom of being their own boss and are becoming employees of a hospital or health system.

Of course, for some docs, selling to a hospital system may make a lot of sense.  You may be overworked, under capitalized or ready to soon retire.  There may be a problem with billing, taking call or, dare we say it, you just want to take care of patients and HATE the business side of medicine.  Regardless of the reason, you, your accountant and your attorney need to evaluate several issues before making the big decision. And, if you decide to take the plunge, be careful to make sure that you have an “out” if the deal isn't all both parties expect..

Due diligence review (discover your own dirty laundry)

Don't even think about entering into discussion about the sale of your practice until you've conducted an internal due diligence review.  This allows you to be certain the the practice is in the condition to be sold. 


Make sure you identify billing and coding problems, contractual arrangements, or legal issues including potential litigation. Take a look at leases, employment contracts, service agreements, and other contractual arrangements should be current and meet present regulatory requirements. Finally, the review should also include a verification of accurate and complete medical records (and it doesn't matter how much you hate documenting!) and a billing audit.


If there are any problems, fix them before beginning negotiations.  

Personal and professional areas to think about

This may be a little too touchy-feely for some, but you must consider your own personal practice philosophies and professional goals:

• How does selling your practice and becoming an employee fit with who you are as a physician? 
• What if the arrangements don’t work out?  Will you be back looking for work after only a few years? 
• Do you expect to practice beyond the initial employment contact agreement?  
• How hospital employment fits with your career goals?  
• Can you go from being a boss to being the worker?  Selling the practice you built can be a traumatic for some doctors, and more than one clinician used to "doing it my way" may find the transition to being an employee difficult at best.

Pick the right buyer
When making the decision to join a health system, remember that what works for a large, corporate hospital may not work an individual practice. These are some questions you should ask:

• What is the hospital’s strategic plan?  
• Will it support your specialty’s growth after the ink is dry on the contract?   
• What is the health system's physician employment model? Some hospitals may already have other clinics formed and in place to employ physicians. 
• Does your practice has unique features that the buyer will want to preserve?   If it does, the hospital might be willing to establish a new model for your practice.
• What about its current technology?   An electronic medical record (EMR) system that meets the needs of the system's employed FP and IM doctors may be mind-numbing for your specialty practice.

The final step: the purchase agreement 
If your group recently put a substantial investment into technology (EMR, equipment, computers), you may want to make sure to be reimbursed or that you can continue to use it after the sale, and that the existing license agreements can be assigned to the hospital. What about the transfer of  medical records? 

Is your medical practice a corporate entity?  If it is, you may be able to handle the sale as a stock purchase, and simply transfer all your stock to the hospital system.  However, its important to remember that most corporate health care entities will only want to purchase the assets, and a stock purchase transfers liabilities as well. 

What should be in an asset purchase agreement?
 Legal experts say that the asset purchase agreement should address the following issues: 

1. The purchase price and terms
2. The handling of technology issues (EMR, compatibility, etc)
3. The transfer of medical records, and disengagement if the arrangement doesn’t work out
4.  Should include a mechanism to disengage from the arrangement, and should address your ability to reacquire your assets and return to private practice
5. 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
So now you have gone as far as reviewing the hospital employee agreement.  This agreement sets the stage for your practice's arrangement with the health system and should address issues such as term and termination, compensation, and dispute resolution processes.  The agreement should also include an adjustment mechanism if performance targets set by the hospital system aren't met.  


Most hospital employment agreements will have a term of not more than 5-years, and  3-year terms are fairly typical. However, the typical employment agreement can allow for early termination by the hospital, the doctor, or both. If the agreement can be terminated “for cause,” make sure the grounds for cause are spelled out clearly and are as objective as possible. Also, if the agreement can be terminated prior to the end of the term without cause, adequate notice should be required to permit you to make new practice arrangements.  Be sure you have a lawyer review your contract and these terms very carefully.  

Watch for more:  What do do after the contract is signed


Note:  The thoughts and opinions on Training Wheels are my own, unless otherwise referenced, and are to be food for thought.  If contemplating business changes, these blog posts are not a substitute for consulting your lawyer or accountant. I"ll bet you already figured that out, didn't you?