Selling a Physician’s Goodwill as Part of a Medical Practice Divestiture

When a physician or professional service entity sells a medical practice to another physician, the divestiture usually involves the transfer of tangible assets—such as furniture, fixtures, and equipment—and intangible ones—such as contractual rights and intellectual property, but most notably, goodwill. Goodwill refers to the physician’s reputation, patient relationships, and the loyalty those relationships command. It has significant value. A practice with strong goodwill is likely to retain patients, even after a change in ownership, making it more attractive to buyers. A good reputation can attract new patients and build a strong brand, enhancing the practice's overall value. A physician's reputation, relationships, and expertise within the community can also be considered personal goodwill and add value to the practice.

However, when a physician or professional service entity sells a medical practice to a health system or hospital network, the divestiture must not violate either the Stark Law or Anti-Kickback Statute. The Stark Law is concerned with ensuring that financial arrangements between a physician and a health system or hospital network do not incentivize referrals of patients for designated health services covered by federal healthcare programs, and payments for goodwill must be structured in a way that avoids this concern. So, the Stark Law places strict limits on how goodwill can be valued and compensated. It does not prohibit a buyer from paying for goodwill in a physician practice acquisition. However, payments for goodwill must be “commercially reasonable” and consistent with “fair market value” without regard to the “volume or value of referrals.”

The Anti-Kickback Statute (AKS) also prohibits payments intended to induce referrals of patients covered by federal healthcare programs. In 1992, the Office of the Inspector General (OIG) issued an opinion on goodwill — formally known as OIG Advisory Opinion 92-1 (AO 92-1) but informally known as the Thornton Letter — that addressed the issue of health care providers paying for a physician’s practice goodwill in the context of referrals, and whether such payments could violate the AKS. The OIG stated that paying for the goodwill of a physician’s practice, especially when the primary value of that goodwill is based on anticipated referrals, may be considered illegal remuneration under the Anti-Kickback Statute. AO 92-1 is still valid as general guidance on how the OIG interprets the AKS with respect to goodwill in practice acquisitions. However, in 1991, AKS adopted safe harbors. If an arrangement fits squarely within a safe harbor, it is automatically protected from AKS liability. Still, the OIG’s concern about health systems or hospitals paying for referrals remains central to its enforcement efforts.

In sum, in medical practice divestitures to health systems and hospitals, payments to the physician must be “commercially reasonable” and consistent with “fair market value” (FMV) without regard to the “volume or value of referrals.” Goodwill may be part of the transaction, but it must not be a proxy for buying referrals. The Department of Justice and OIG continue to scrutinize medical practice acquisitions and compensation arrangements under the Stark Law and AKS, and transactions involving inflated buyouts or post-sale compensation tied to referrals have led to significant settlements.