Selling a Rheumatology Practice to a Hospital or Health System

There is no doubt that the state of healthcare in this country is changing again. Many physicians are realizing that in order to keep up with these changes, key business decisions will need to be made in the near future. In fact, increasing numbers of physicians are entertaining the idea of selling their medical practices to hospitals or large health systems.

Case Study

Earlier this year, Main Street Rheumatology Group (actual name withheld) was approached by a local hospital that was interested in acquiring the mid-size rheumatology practice. The practice’s owners were conflicted about whether this was a route they wanted to pursue. Although they had enjoyed the independence of being their “own bosses” for the past decade, they expressed concern that the business of medicine had changed, and it was becoming increasingly expensive to practice medicine independently. The owners also wanted to grow their practice, but they had difficulty with recruitment. Ultimately, the practice’s owners decided to sell to the interested hospital and work for the hospital.

Considerations

Whether you are selling your rheumatology practice to other physicians, a multispecialty practice, a hospital or a health system, the basics of the transaction are the same: who is purchasing from whom, what is being purchased, when is the deal going to occur, and how much will you receive? Of equal importance is the compensation formula you will need to work within the new system. When selling your practice to a hospital or health system, there are additional and unique deal points that need to be negotiated.

When considering the sale opportunity, it is important to evaluate early how your practice group will fit with the hospital’s or health system’s global plans. Prior to the hospital’s acquisition of Main Street Rheumatology Group, the hospital was not well established in rheumatology. The hospital’s primary interest in the practice was that it wanted to enhance its presence in that area of medicine and capture revenue associated with ancillary services generated by the practice. To Main Street Rheumatology Group, this meant the hospital was committed to growing that practice area and would allocate resources to marketing and developing the newly acquired practice within the hospital’s community. Because this was important to Main Street Rheumatology Group’s owners, specific provisions were added to the purchase agreement outlining the hospital’s marketing commitment to growing the practice and specific milestones for the hospital to accomplish.

Although the purchase price for a medical practice is of key importance, the postacquisition business arrangement with the hospital or health system should also be negotiated and memorialized in writing. When a hospital or health system purchases a medical practice, it is not just acquiring the patient base and equipment, but the talent as well.

In general, the hospital or health system will directly employ each physician as an employee via employment agreement or retain the collective services of the physicians via a professional services agreement. If a professional services agreement is utilized, the physicians are not employed by the hospital or health system, but rather are employed by a third-party entity, which itself contracts with the hospital or health system to provide the professional services. In this scenario, the physicians will likely have an employment agreement with the third-party entity. Many physicians prefer the professional services agreement model because it allows the physicians to collectively negotiate for beneficial contract terms. Additionally, professional service agreements are typically for a longer period of time. The professional services agreement often provides the physicians with a voice in hospital or health system decisions. The agreement should also outline specific rights and powers the physicians have with regard to postacquisition decisions. For example, if the hospital wishes to hire a new physician for the acquired practice group, the professional services agreement may provide the current physicians veto power over the hire.

Exit Strategy

If things are not working out as planned with the hospital or health system, do the contracts provide for an exit strategy? This inquiry should not go unanswered, but rather should be included in the purchase contract and post-purchase agreements (e.g., professional services agreement, employment agreement). The parties to the contract may negotiate a “mutual reverse” right whereby the parties can reverse the transaction to the prepurchase status quo, if the parties no longer find the arrangement desirable or fail to meet certain milestones.

Post-Sale Relationship

Selling your practice to a hospital or health system can be advantageous for all parties involved. However, this type of sale is different because you are not necessarily parting ways on the closing date. The contract terms governing the relationship post-sale are often of equal or greater importance than the terms governing the sale of the practice. If you are considering embarking on this journey, be sure that it suits your current and future career goals.

Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins LLC. You may contact him via e-mail at [email protected].