By: Mathew J. Levy, Esq.
Stacey Lipitz Marder, Esq.
Weiss Zarett Brofman Sonnenklar & Levy, P.C.
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There are many reasons physicians make the choice to sell their practice. Increasingly, physicians are making the choice to sell their practice to a large group or hospital and entering into employment agreements with the particular purchaser, perhaps seeking a change in their quality of life and the peace of mind of a stable salary. Other physicians wish to relieve themselves of the burden of dealing with the “business” of medicine in order to have more time to focus on the actual treatment of patients. Yet other physicians simply choose to sell their practice upon retirement instead of closing it outright.
Whatever the reason may be, there are fundamental issues that, when thoughtfully considered with the assistance of attorneys concentrating in health care law, will determine whether the transaction garners maximum value, properly protects the patients of the practice, and is compliant with applicable law. There are numerous complex issues, legal and otherwise, that the seller of a medical practice needs to consider, both in preparations of the sale and during the transaction.
In preparing for the sale, it is advisable to begin planning years in advance. Planning well in advance will both ensure an accurate valuation of the practice and allow the seller to avoid being “forced” to sell the practice at an unfavorable price due to current market trends. To that end, it is in the best interest of the physician to retain a team of professionals – attorneys, accountants, appraiser, etc. – who specialize in health care transactions. It is their specific expertise in health care transactions, as opposed to a general knowledge, that will help in obtaining maximum value for the sale of the practice.
The value of a medical practice is determined by taking into consideration three distinct categories of assets. The first are the tangible assets of a practice. These tangible assets consist of the furniture, fixtures and equipment owned by the practice including but not limited to, examination tables, desks, chairs and medical equipment. The second category of assets is the practice’s accounts receivable. The accounts receivable includes the revenue due the practice prior to the sale. The last category of assets is known as “goodwill”. The goodwill of a medical practice includes its reputation, the trained support staff, practice history and practice location. It is important to note that medical records cannot be sold as per applicable law. Of the three categories of assets, goodwill typically comprises the greatest value, however is the most difficult to assess a value. Again, as there are specialized methods in determining the value of a medical practice specifically and tax implications in the way assets are categorized upon sale, it is imperative that the physician discuss the asset allocation carefully with those professionals retained by the physician to facilitate the transaction.
During the time leading up to the actual sale, it is imperative that physicians avoid any action that would result in the reduction of the value of the practice. Although it may be tempting for a would-be seller to slow down the operation of the practice in anticipation of the sale, this may result in the loss of patients or staff – effectively a reduction in the goodwill of the practice. This reduction in goodwill can also be avoided by notifying the staff and patients of the practice of the imminent sale at the right time so as to avoid their loss by attrition.
The seller of a medical practice also needs to consider numerous legal issues pertaining to its current patients. As an example, in the event the purchaser of the practice is paying for the practice over an extended period of time, as opposed to a payment in full at the closing, the physician-seller and his attorney need to take careful consideration of whether the transaction is inviolate of New York State’s prohibition against “fee-splitting”. Generally, New York law and federal law prohibits a physician from paying another physician for referrals of patients.
Another issue to take into consideration is patient abandonment. Abandonment is a form of professional negligence that occurs when a physician fails to provide adequate notification to his/her patients which would enable a patient to seek alternative healthcare, causing an injury to the patient. As per applicable law, physicians are required to give adequate notification to their patients to ensure continuity of medical care. Adequate notice is dependent upon the patient’s individual treatment, however, it is recommended that at least thirty days’ notice be given prior to termination or transfer of medical care. A letter is generally sent to patients advising them of the physician’s intention to transfer the practice and the date the selling physician will no longer be rendering services. This letter also often serves as a mechanism to introduce the patients to the buying physician. This letter must be carefully constructed with the input of both buyer and seller to ensure that the interests of all parties are protected.
Another legal issue to consider is the privacy of the patients of the practice and, more specifically, their medical records. Under New York law, a patient’s medical records are required to be maintained by the physician for a minimum amount of time. Moreover, these records may not be released to any third-party without the patient’s express authorization. It is essential that the physician-seller’s attorney prepare the proper legal documents to ensure both that the privacy rights of the patients of the practice are respected and a smooth transition of the maintenance of their medical records. In the event of a sale of a practice, the physician who purchases the practice typically becomes the custodian of the patients’ medical records. This means that the transferred records will be retained by the purchasing physician for the applicable statutory period. Thereafter, treatment will either continue to be rendered by the purchasing physician, or a copy of the records will be made available to the patient in the event that they wish to see a different physician or to a physician determined by the patient. Until a patient authorizes or consents to treatment, the purchasing physician may not review the patient’s medical chart.
Physicians selling their medical practices should also review all of their existing contractual agreements. For instance, the medical practice may have employment agreements, a lease, and various service and vendor agreements. Specifically, it needs to be determined whether those contracts will be terminated or transferred. In some instances, it is beneficial for the buyer to assume an agreement if the terms are favorable, specifically with respect to a lease.
It is also important for prospective buyers to inquire what managed care contracts the seller has. If a buyer does not have contracts with those managed care organizations, the practice may be less valuable to him/her since patients may not want to receive services from a provider not in their network.
Physicians selling their practices also need to consider how controlled substances will be handled. Since controlled substances are not considered assets they must be disposed of appropriately.
In the case of a physician who is retiring from practice, he/she must also reach out to his/her Professional Liability Insurance Carrier to discuss cancellation of his/her malpractice policy. Additionally, retiring physicians should notify the New York State Education Department, Division of Professional Licensing with respect to appropriate registration.
In selling a medical practice, a physician should take great care in preparing for the sale in order to both maximize the value obtained from such a sale, protect its patients, and comply with applicable law.
Mathew J. Levy is a Partner of the firm and co-chairs the Firms corporate transaction and healthcare regulatory practice. Mr. Levy has particular experience in advising health care clients with respect to contract issues, business transactions, practice formation, regulatory compliance, mergers & acquisitions, professional discipline, healthcare fraud & billing fraud, insurance carrier audits including prepay and post payment review, litigation & arbitration, and asset protection-estate planning. You can reach Mathew Levy at 516-926-3320 or email: email@example.com.