The private practice of medicine isn’t for everyone, especially for older physicians who are just tired of the grind of both managing a business (the practice) and practicing medicine. In this post, I discuss eight things that physicians should be aware of as they enter into negotiations for the potential sale of a medical practice. This post assumes you are selling your medical practice to the hospital, but the same issues will apply if you are selling your practice to another physician.
Letters of Intent Can Restrict You in the Sale of Your Medical Practice
Letters of intent for sales of a medical practice are generally not legally binding. However, you should assume that anything specifically set forth in the letter of intent is “off the table” when it comes to further negotiations. I have previously written a blog post about letters of intent for physician contracts, so I won’t repeat myself here.
Your Medical Practice is a Business that is Valuable in Its Own Right
A remarkable number of hospitals attempt to take over physician practices by simply offering employment agreements to the physicians. Sometimes a simple bill of sale is prepared to evidence transfer of ownership of the office equipment.
The envisioned “transaction” is that a physician is in private practice one day, and the next day is employed by the hospital. Of course, appointments have been scheduled for weeks, patient medical charts are on-site, and thousands of patients have the physician or physicians’ phone number, and would never consider going anyplace else for medical services. Nevertheless, the hospital pretends that the practice is nothing more than a collection of employed physicians.
In fact, the medical practice itself is a business, and the physician or physicians selling their practice to the hospital should be paid for this business, separate and apart from what the physicians are being paid to be employees of the hospital.
Physicians Selling Their Practice Should Get Some Payment for Goodwill
Some hospitals claim that a payment for the goodwill of your practice is illegal. The Stark Law, they claim, prevents paying for referrals – and paying for goodwill is paying for referrals. This is simply not true.
A long line of federal cases has approved hospital payment to physicians for goodwill. The actual payment for goodwill can be a material portion of the purchase price for your practice. The range of goodwill payments varies by specialty and geography, but is almost always a material part of the total consideration for the practice.
Make Sure Your Physician Employment Agreement has an Adequate Guarantee Period
Many physicians leave the private practice of medicine because they are weary of the constant need to monitor their productivity in order to assure a reasonable income. The idea of a guaranteed salary from the hospital holds enormous appeal. However, these physicians frequently execute employment agreements that pay them a salary for a brief period, and then compensate them purely (or mostly) based on productivity. If you are unsure about the compensation, get a MGMA compensation analysis.
Hospitals, if pressed, will generally guarantee salary for a reasonable period of time (up to three years if they really want your practice).
You Should be Paid for Agreeing to a Restrictive Covenant
Unlike the physician coming out of a fellowship, you are bringing a ready-made practice to the hospital. In this circumstance, some hospitals are willing to waive a covenant not to compete.
If the hospital is not willing to waive this restriction, the hospital should pay you to assume this restriction. This is a separate agreement, and the restriction on your practice should not be part of your salary.
Protect your Staff
As part of the sale process to the hospital, make sure your staff will be protected. The sales agreement should provide that, unless you designate an individual as not to be hired, the hospital will hire your entire office.
This isn’t just for the staff – you don’t want your practice decimated by departing staff while you negotiate with the hospital.
Try to Obtain “Do-Over” Rights
Hospitals naturally want to retain you until you retire, even if administration changes, your compensation changes, or the hospital doesn’t deliver on what it promised.
You should bargain for the right to resume private practice if employment doesn’t work out for you. Specifically, try to negotiate the right to purchase your practice (goodwill and equipment) back from the hospital. If you are selling real estate, you should also be permitted to buy back the office. If you are leasing your space to the hospital, make sure the lease can be terminated if you exercise the right to undo the sale.
Experienced Advisors Make a Difference
Your medical practice is not like a pizza parlor. Selling a medical practice involves many legal issues (Stark Law, etc.) unique to physicians. The lawyer who helped you incorporate and handles debt collection for the practice may not be the best lawyer for this important transaction.
Make sure the lawyer you utilize has both the legal and practical knowledge to make the transaction a success. Yes, this is a shameless plug for my favorite physicians’ lawyer! You might also be interested in my post on physician compensation after sale of practice.