Joining a health system through acquisition can bring real benefits to a physician practice, including operational support, better access to capital, stronger payer contracting leverage and long-term stability.
However, these deals sit inside a complex, heavily regulated legal landscape and physician owners who understand the key issues early are in a much better position to protect value and avoid surprises after closing, according to an April blog post from law firm Foster Swift Collins & Smith.
Here are seven notes physicians should keep in mind when evaluating a potential acquisition by a health system, per the law firm:
1. Health system acquisitions are typically structured as either an equity purchase, where the system buys the practice entity itself along with its assets and liabilities, or an asset purchase, where the system buys only specific assets and the practice generally keeps its historical liabilities, according to Foster Swift Collins & Smith. Equity deals can offer more continuity for physicians, but they also expose the health system to more compliance and billing risk, which is why systems tend to prefer asset purchases. Physicians should expect that in an asset deal, certain obligations, such as contracts, accounts receivable, equipment, real estate or record retention duties, may stay with the practice after closing.
2. Purchase price and post-closing physician compensation both have to reflect fair market value, be commercially reasonable and avoid accounting for the volume or value of referrals, the firm said. A strong referral base or expected downstream revenue for the health system cannot be used to justify a higher price or higher pay. Regulators scrutinize these deals specifically to make sure they aren’t payment for referrals.
3. Most physician owners become employed physicians after closing, and those employment agreements have to comply with Stark law and related rules, which can limit how compensation is structured, according to Foster Swift Collins & Smith. Health systems may offer sign-on bonuses or other retention incentives tied to service commitments, but the flexibility independent practices have, including sharing broadly in the practice’s financial performance, is generally not available once physicians are system-employed.
4. Licensure, enrollment and change-of-ownership filings can disrupt cash flow if they’re not handled early. Acquisitions can trigger change-of-ownership filings, payer notices, reassignment of billing privileges, credentialing updates, accreditation changes and, in some cases, certificate of need approval, the firm said.
5. Health systems typically review billing and coding practices, compliance programs, documentation standards, litigation and claims history, and exclusion screenings before closing, according to Foster Swift Collins & Smith. Independent third-party valuation firms are commonly brought in to support fair market value determinations.
6. Health systems evaluate which real estate leases, equipment and ancillary service arrangements they want to assume, and they won’t always take on everything, particularly if an arrangement doesn’t fit system standards or strategy, according to the blog post.
7. In an equity purchase, existing staff employment relationships generally continue, with the health system potentially assuming historical employment liabilities, according to Foster Swift Collins & Smith. In an asset purchase, staff don’t automatically transfer, and the health system may need to extend new employment offers.
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