Should You Sell Your Practice to a Hospital? Here Are the Top 5 Things to Consider

Certified public accountants, appraisers and consultants are seeing physician practices being sold to hospitals with increasing frequency. If you’re considering selling your practice, here are the Top 5 considerations to have in mind before making your decision.

1. What is the hospital’s process and overall strategy relating to the acquisition?Too many hospitals don’t have a plan or overall philosophy for physician integration. Beware if a hospital cannot provide you with a strategy for integration or convince you that you’re a key part of the process. Hospitals such as these are typically difficult to work with. A disorganized system is more apt to enter into a bad business deal, which can benefit you financially, but that benefit is likely to be limited: Hospital administrators eventually will recognize a lopsided deal and work to eliminate it.

Bottom line: Ask what the timelines are for valuing your practice, setting compensation, receiving a term sheet, etc. The response you get will be telling. Additionally, trade notes with your peers in the community to obtain private information regarding processes and people to see if the hospital actually follows through on its promises.

2. What is the post-acquisition compensation?

Money drives deals. Among the most important considerations for selling physicians is the potential for more clinical compensation, better benefits, and perhaps new opportunities to provide management services. The compensation methodology and anticipated future compensation should be well-documented prior to signing on the bottom line. Don’t overlook benefits -- though hospitals tend to have better insurance coverage, their retirement packages may not be as comprehensive as what you’re used to at your own practice.

Bottom line: Make sure you understand and evaluate the total compensation package, including the compensation methodology and the length of any guarantees.

3. How are the key post-acquisition control issues managed?Have a thorough understanding of the most important aspects of practice control, including issues such as hiring and firing of staff, allocation of capital, physician recruiting, reporting and budgeting, etc. Promises are not good enough for control issues: Most hospitals seem to recognize that physician cooperation is essential for the practice to thrive post-sale and, therefore, are willing to be flexible regarding a number of post-sale control issues.

Bottom line: Come to an understanding with the hospital before the sale on all key control issues of how the business will be operated, and get the agreement in writing.

4. How will selling my practice affect my referral base?Aligning with a system that irritates your referral sources can have unintended consequences with respect to a physician’s income. Also, affiliating with a hospital system too far from your current referral base can leave you on an island. This can directly affect your future compensation, especially if you are to be paid on a productivity basis.

Bottom line: Invest the time to project your post-acquisition referrals. Discuss new referral opportunities with the acquiring hospital and meet with your key referral sources (if possible) to create an accurate projection of your future productivity and related compensation.

5. What is my exit strategy?Get key protective language in your contract with respect to a divorce. A successful integration should never get to that point, but deals go bad from time to time. This is an important area to work out ahead of time, as there are a number of factors that will make going independent after the sale of a practice very challenging. These challenges include current and expected changes to reimbursement, start-up capital expenditures, payer contracting, and securing referral streams, among other things.

Bottom line: Request a window to unwind the deal, such as two years. You might have to agree to a “buy back” price for your practice, but the cost of starting over might be too high otherwise. Also, request that any non-compete agreement only restrict your future employment from other hospital systems. This will allow you to join an independent group (or start your own) without penalty.

Randy Biernat is director at Katz, Sapper & Miller in Indianapolis, and a proud member of the National CPA Health Care Advisors Association, a nationwide network of CPA firms devoted to serving the health care industry. Its members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.