Get your house in order before a practice transaction

Before selling your practice, bringing on a new partner or investor or entering into a new practice management relationship or joint venture, you should first determine if there are any business or regulatory risks present in your practice, as they could jeopardize your transaction or put a portion of your proceeds at risk.

Getting your house in order in advance of a potential transaction is crucial to maximizing value and ensuring a smooth and efficient transaction process. 

Your transaction counterpart will likely conduct a robust diligence review of your practice; your goal should be to minimize the issues or surprises that turn up during that review. 

If there are issues or surprises, your counterpart may require any number of remedies before consummating the transaction, including requiring you to change your ownership structure, obtain or revise licensure, terminate or modify arrangements with referral sources or remediate billing and coding errors or any Stark Law violations. 

There are certain fundamental corporate and tax issues that will be evaluated by your transaction counterpart. 

Not surprisingly, there are many legal and regulatory risks that must be carefully evaluated before proceeding with a transaction.

Business structure

Many states’ laws prohibit the corporate practice of medicine (lay person ownership of a medical practice). This could be implicated, for example, if (i) a practice offered its practice administrator shares in its group practice; or (ii) a practice has a management agreement with an outside vendor to manage the center (state laws may restrict the level of control exercised by the management company and may restrict how the management company is paid). If corporate practice of medicine issues are present, you may be required to restructure or pursue applicable licenses. 

Depending on the scope of services and items being provided, state laws may also require licensure. For example, surgical practices may require ambulatory surgical center licensure or accreditation, or a facility that is owned (in whole or part) by a lay corporation or lay person may require licensure.

If proper licensure is not in place, your transaction counterpart likely will require proper licensure or accreditation before completing the transaction. Not only will this delay the transaction in many cases, the facility may need to be renovated in order to be licensed (which can be expensive), and you may need to indemnify the purchaser for any prior liability.

Marketing activities

Both federal and state laws restrict and limit sales and marketing activities directed to patients. Examples where this restriction may arise include offering free items or services to induce patients to come for covered services, routinely waiving patient co-payments and misleading advertisements. Where compliance issues are present, your transaction counterpart will likely require that you implement new policies and procedures to address these issues.

Financial arrangements

Both federal and state laws impose restrictions on financial arrangements with referral sources. 

The Federal Anti-Kickback Statute prohibits the provision or receipt of “remuneration” with an intent to induce or reward referrals for services reimbursed under federal healthcare programs (though certain safe harbors are available). Key factors to consider are a bona fide business need for the service, fair market value of the payments and whether the arrangement is commercially reasonable. Examples where these restrictions may arise include real estate and equipment leases and medical director agreements. Your transaction counterpart may require some level of fair market value documentation and other materials with respect to any such financial arrangements. In addition, to the extent that you provide any items of value to referral sources, such as tickets to athletic events, holiday gifts, or professional courtesy, these are likely to be examined closely for regulatory compliance.

Compensation plans

The Stark Law has very specific restrictions on productivity bonuses paid to physicians, and unfortunately many physician practices unknowingly structure their bonus plans in violation of the Stark Law. 

This is largely driven by the fact that physicians may not receive compensation for certain “Designated Health Services” that they did not personally perform. This is arguably the most common compliance issue that arises during the diligence phase of a transaction and often the transaction counterpart demands self-disclosure of the violation to the Centers for Medicare & Medicaid Services with some form of settlement reflecting the claims paid associated with the non-compliant arrangement.  

Coding & billing

Compliance with billing and coding requirements is fundamental to the valuation and on-going viability of the business, and there are many requirements (from Medicare, Medicaid, commercial payers, etc.) that must be met. 

Your transaction counterpart will be reviewing your auditing and monitoring process, as well as your investigations and audit history. Your counterpart may hire an outside billing and coding expert to conduct an audit of claims. Any significant compliance and billing and coding issues will be a material deal point and the presence of a significant error rate may affect valuation and purchase price negotiations in a transaction.

Managing risk

In any transaction, your counterpart’s risk tolerance will likely be significantly lower than yours. The more issues presented in your business, the more risk you will be asked to bear (whether by providing indemnification for extended periods post-closing, and/or setting aside proceeds to protect against such risks). 

Significant issues discovered in diligence also increase the risk that the transaction will not be consummated. To the extent you are able to reduce issues and resolve risks prior to a transaction, the more leverage you will have when negotiating transaction terms.  

Alan Reider is senior counsel and J. Matthew Owens is a partner in the Washington, D.C.-based firm of international law firm Arnold & Porter Kaye Scholer LLP.