Key Considerations for Hospitals and Physicians Involved in the Buying and Selling of Medical Practices by Whitney K. Schiffer, CPA
Physicians operating in a highly scrutinized and demanding regulatory environment with lower reimbursements are continuing to sell their practices to hospital networks at a rapid rate. In most instances, this consolidation results in a win-win for all parties. Physicians gain steady salaries while losing the administrative headaches of managing a private practice; hospitals receive the benefit of new revenue streams and referrals from their newly-employed on-staff physicians. However, these arrangement are not without risks. Both independent practices and the healthcare facilities seeking to purchase them should engage in an exhaustive process of preparation and due diligence to improve the likelihood that the merger will yield the positive benefits that all parties hope to receive.
Considerations for Physicians
Compliance with patient privacy laws and the Affordable Care Act, and requirements for electronic health records and the transition to ICD-10 are just some of the burdens of managing a private practice. They take time away from delivering patient care and drain resources that together may spur a decision to sell a practice. Before pursuing a sale, physicians should consider their own goals and needs and weigh them against the financial, legal and emotional ramifications of their actions, including how a sale might affect their time, independence, compensation, tax liabilities, net earnings and ownership of assets; or how will it impact existing staff and patients. When a decision to sell is made, physicians must begin the arduous and time-intensive process of preparing their practices to fetch the best possible sale price.
Prepare the Practice for Sale
Preparation is key to consummating a sale in which physicians can receive top-dollar for their practices. By demonstrating a trend of sound financial performance, physicians can often command a higher sales price. If profits are trailing, physicians should take the time to make improvements or enhance operations before putting the practice up for sale.
Engage professional counsel. The earlier a physician consults with legal, tax and financial counsel, the better the chances he or she will be prepared to commence the sale process. Lawyers and accountants understand the physician’s practice and have the experience required to maximize a practice’s purchase price and secure the best terms to meet the physician’s needs and desires.
Clean Up Financial Records. Physicians should gather at least three years of tax returns and clean financial records to substantiate claims of positive practice performance. Look at physician compensation and personal expenses paid by the practice, CPT codes and relative value units (RVUs), insurance reimbursements and payor mixes, and ensure all the numbers are accurately reported and have underlying source documentation which can be provided during the due diligence process. The accrual method of accounting should be employed to demonstrate a more accurate picture of the practice’s operating activity and practice profitability.
Don’t Overlook the Practice’s Non-Tangible Assets. In addition to hard assets, such as furniture and equipment, the value of a medical practice is influenced by the skills and reputation of its physicians and staff as well as the relationships these individuals have developed with patients and insurers. Prepare information to support claims of active patients and favorable reimbursement agreements with insurers.
Benchmark Practice Metrics against Similar Practices. A medical practice that can demonstrate it performs better than similar practices in the same market may be able to command a higher sales price. By compiling data that compares the number of patient visits the practice sees in a year, RVUs, cash collections and insurer reimbursements with similar practices, the practice may be able to earn a higher appraisal. If the numbers are not impressive, the physicians should consider holding off on a sale until they can turn things around for the better.
Keep Cash Flow in Reserves. Should a medical practice succeed in attracting a buyer and securing a positive valuation, the managing physicians should ensure they maintain ample cash flow in reserves to cover a potential slowdown in reimbursements before the transaction is consummated.
Considerations for Hospitals
Engage Professional Counsel. Just as physicians want the best terms for the sale of their practices, hospitals and health care facilities want real value for their investment in a private practice. Proper due diligence with the assistance of experienced lawyers and accountants will help the hospital make an informed decision and avoid potentially expensive missteps.
Carefully Analyze Financial Records. Arriving at a fair valuation for a medical practice requires hospitals to examine the underlying financial aspects of the practice’s operations, which are not always easily apparent. What is the quality of the practice’s billing and collection efforts? Are receivables in line with reimbursements and expenses or are they inflated? Are the reimbursement agreements favorable? What tangible assets does the practice own and what assets will the hospital need to maintain? What expenses can be carved out of the valuation (i.e. physicians’ personal, discretionary expenses) to identify the practice’s true earnings?
Consider the Non-Financial Aspects of the Practice’s Operations. Because medical practices and hospitals operate in a highly litigious and regulated environment, it behooves hospitals to assess a practice’s internal controls, compliance history and legal judgements before pursuing a practice purchase. Similarly, hospitals must consider their own legal responsibilities when structuring purchase agreements to avoid potential violations of tax laws, anti-kickback statutes and the Stark Law, which prohibits medical providers from making referrals to others with whom the provider has an existing financial relationship.
Prepare for Negotiations. The best way to ensure a smooth buy-sell transaction is for all parties to engage in open dialogue, build consensus and leave nothing to misinterpretation. Specificity and attention to detail can go a long way to ensure a win-win for all. Be clear on the terms of the sale, employment agreements and compensation for physicians and support staff; how the transaction will be structured; how the hospital will roll the practice into its existing operations; and the responsibilities of all parties prior to and during the closing and through the transition.
The accountants and advisors with Berkowitz Pollack Brant’s Audit and Attest Services practice have a long history of working with hospitals, health care facilities and medical professionals to audit financial statements, assess internal controls and implement processes and procedures to ensure regulatory compliance and improve profitability and tax-efficiency.
About the Author: Whitney K. Schiffer, CPA, is a director with the Audit and Attest Services practice of Berkowitz Pollack Brant, where she works with hospitals, health care providers, HMOs and third-party administrators. She can be reached in the firm’s Miami office at (305) 379-7000 or via email at firstname.lastname@example.org.