Thinking of Selling Your Medical Practice to a Health System?
Over the past two decades, hospitals and large health systems have been rapidly acquiring medical practices. As of 2022, more than 70% of U.S. physicians were employed by hospitals or corporate entities (e.g., insurers, private equity). The specialties most affected have been primary care, cardiology, orthopedics, and oncology, although our firm has represented physicians in other specialties. This shift is often framed as part of a broader move away from fee-for-service and toward value-based care, integrated delivery networks, and the consolidation of healthcare providers.
However, such acquisitions are fraught with legal and regulatory issues and with financial and contractual issues. Let’s briefly review some of these issues.
Legal and Regulatory Issues
Antitrust Law
· Consolidation may reduce competition, especially in rural or mid-sized urban markets.
· The FTC and DOJ monitor acquisitions to ensure they don’t lead to monopolistic behavior or price gouging. In fact, the DOJ has challenged mergers in markets where a health system's purchase of medical practices gave it an outsized market share.
Stark Law & Anti-Kickback Statute
· These laws prohibit physicians from self-referring patients to entities with which they have a financial relationship, even an indirect financial relationship.
· Acquisitions must be structured to avoid illegal inducements for patient referrals.
· A sale of the assets of a medical practice and the making of any post-closing employment and lease arrangements must both satisfy an exception under the Stark Law and fit within a safe harbor under the Anti-Kickback Statute, including the “fair market value” and “commercially reasonable” requirements and the exclusion from the purchase price of the value of goodwill, an ongoing business unit, covenants not to compete, exclusive dealing agreements, patient lists, and patient records.
New York Corporate Practice of Medicine
· New York restricts or prohibits non-physicians from owning or controlling medical practices.
· Workarounds often involve a management services organization (MSO) model, which separates non-clinical operations from clinical operations.
Financial and Contractual Issues
Valuation and Fair Market Value (FMV)
· The acquiring health system must pay FMV for the physician practice, for the physician’s services, and for any leased space in order to comply with federal law and avoid fraud allegations.
· Any overpayment could be seen by CMS as a way for the health system to “buy” referrals.
· The health system and medical practice often engage a medical practice valuation expert to provide a valuation consistent with the requirements for medical practice acquisitions and related matters under the Stark Law and Anti-Kickback Statute.
Physician Employment
· The physicians of the acquired medical practice become employees of the health system pursuant to employment agreements.
· The physicians may be compensated based on productivity with a quarterly target for wRVUs and a set rate per wRVU with a one or two-year guarantee.
· The physicians may receive a signing bonus and retention bonus.
· The physicians may receive stipends for the supervision of other physicians and/or advanced practice providers as well as for medical directorships.
· The physicians must bind themselves to a non-competition agreement.
· The physicians may lose control over the practice’s administrative decisions, although health systems tend to leave such matters in the hands of the physicians so as to ensure smooth transitions and continued operations within the acquired medical practice.
Staff Employment
· After the execution of a definitive agreement, and prior to the closing, the health system directly negotiates new employment arrangements with the staff of the medical practice.
Integration
· The health system requires an on-boarding period of several months after the execution of a definitive agreement.
· Merging billing systems, coding practices, and reimbursement strategies can be complex and legally sensitive.
· Among other integration tasks, the health system will have the newly acquired providers credentialed with the payors.
Pros and Cons of Health System Acquisitions
Upon the sale of a medical practice to a health system, physicians may enjoy stable compensation and reduced administrative burdens, improved access to technology for the delivery of patient care, and a potential for higher quality care through integrated electronic health records. However, physicians lose autonomy and face quarterly productivity targets, see higher prices due to “facility fees” and reduced competition, and suffer potential conflicts between clinical decision-making and business incentives. In addition, health system-owned medical practices tend to charge more for the same services, and consolidation may shift resources away from underserved areas or limit patient choices.