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By Mauro Viskovic, Esq.
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Private equity investments in health care continue to trend rapidly upward. $151 billion of private equity capital surged into healthcare globally the past year, more than double the prior year, and more than seven times the volume of investment ten years ago.  In light of these developments, health care practices planning to sell to a private equity firm need to understand the important considerations in advance to ensure that the terms of the sale transaction are appropriate, legally compliant and in the best interest of the practice owners.

Below are 5 key issues practice owners should focus on when negotiating a private equity sale

1. Practice Value and Purchase Price:  

In order to maximize the purchase price from the sale of a healthcare practice, practice owners must learn and understand how private equity firms are valuing their business.  The price is usually determined using multiple of the practice’s earnings but the private equity’s incentive to invest in the practice is primarily based on the practice’s future revenue prospects, contracts, and potential intellectual property or proprietary processes.

Upon determining the amount of the purchase price, the next step is agreeing on how the purchase price will be paid.  Practice owners should seek to have all or a vast majority of the purchase price to be paid in cash.  Most deal, however, include equity in a buyer-affiliated company as part of the purchase price.  A transaction with an equity component will require a due diligence review of the entity that is issuing the equity.  Practice owners should also negotiate for full and immediate vesting of the equity with limited forfeiture provisions in only extreme circumstances.  

Some transactions will provide that a portion of the purchase price will be delayed after closing, for a period of 3-5 years.  If the buyer entity providing the promissory note for this debt component of the transaction is a mere shell entity with no assets, then practice owners should seek some form of security, such as a guarantee from the private equity firm or an affiliate of the private equity firm that has substantial assets and revenue prospects.  

2. Transaction Structure and Compliance with Health Care Laws:

More so than most other industries, health care is subject to a myriad of regulations which requires that the practice owner and private equity firm agree on a structure that is both mutually beneficial and compliant with all applicable laws.  In the State of New York, a primary regulatory consideration to be considered when determining how to structure a physician practice acquisition is the prohibition against the “corporate practice of medicine”. The overall purpose of this prohibition is to prevent non-physicians from interfering with a physician’s medical judgment. Accordingly, the rule prohibits non-physician owned business entities, from owning a medical practice.

To comply with laws against the corporate practice of medicine, private equity firms often use a management or administrative services organization, commonly referred to as an “MSO.” An MSO is paid a fee for providing non-professional services to a medical practice, but does not interfere or otherwise exert control over the professional aspects of the health care practice. Please see our firm’s past article on this subject, “Understanding Private Equity Transactions In Healthcare”, for a fuller explanation of the role of MSOs in health care transactions with private equity firms.    

3. Control of the Practice:

With respect to the control of the practice after closing, the private equity firm focuses on the business side of medicine and leaves the clinical decisions to the doctors. It is not unusual, however, for private equity firms to seek physician representation  among the directors and officers of the practice entity.  As such, practice owners should be prepared to negotiate strong protections with respect to all clinical decision-making authority.  This can include negotiating a requirement that existing management will stay in place and have representation with respect to the management of the MSO that will be assuming the administrative operations of the practice post sale.  Note, however, that even in situations where pre-sale management is retained, the private-equity firm may demand rights to allow it to take control of the practice if it is performing poorly. Several scenarios can trigger such action, including breaches of financial covenants in financing arrangements, failure to meet specified financial thresholds, material breaches of the MSO agreement, and more. Practice owners must carefully examine these clauses to ensure their interests are maintained

4. Post-Transaction Compensation:

In many private equity acquisitions of health care practices, there is a substantial compensation reduction for the physician-owners selling the practice. The private equity firm typically compares the median compensation for physicians in that region with what the physicians in the targeted practice are making.  As such, the practice owner and their accountant must analyze all deal metrics relative to their current compensation to make sure the deal works for them in the long term.

5. Non-Compete Agreements: 

As an MSO cannot perform professional health care services, the private equity investor is reliant on the continued services of the physician selling the practice following the closing of the sale. As such, private equity firms require some form of a non-competition provision setting forth the duration and geographic scope of the restriction, to prevent the seller from taking the money, quitting, and opening up a shop across the street soon after.  In negotiating such restrictions, the practice owner’s interest is to ensure that the restrictions are as limited in time and scope as possible and are no more than reasonably necessary to protect the private equity purchaser’s investment.  Note that, with respect to enforceability, courts are more amenable to longer restrictive time periods and broader geographic areas in connection with the sale of a business than it might otherwise allow in employment arrangements.

With so much to consider, navigating the complexities of a private equity transaction calls for the care and attention that a highly-skilled and experienced team of attorneys can provide.  If you are a healthcare provider considering whether to sell your practice to a private equity firm, please contact Mauro Viskovic at 516-751-6537 or mviskovic@weisszarett.com.

ATTORNEY ADVERTISING: PRIOR RESULTS DO NOT GUARANTEE FUTURE OUTCOMES.

By Mathew J. Levy, Esq.
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To attract talented people into the medical profession at a time of such significant strain and while also retaining those who have been working so tirelessly these past two years, NYS has implemented the Healthcare Worker Bonus Program (HWB). The HWB was implemented to recognize the efforts of our health care and mental hygiene workforce and reward them financially for their service. To do so, as part of the Fiscal Year 2023 New York State Executive Budget legislation, is providing $1.2 billion in funding for the payment of bonuses for certain frontline healthcare workers.

Most practices are not aware that this is a mandatory program. The first deadline has been extended to match the second Vesting Period submission window starting on October 1st, 2022.

Note: Qualified employers who fail to identify, claim, and/or pay bonuses for more than 10 percent of eligible workers may be subject to penalties of up to $1,000 per violation.

We anticipate there will be OMIG Audits for those that are not compliant within the next 6 years. If you should have any questions regarding the NYS Healthcare Worker Bonus Program please do not hesitate to ask.

ATTORNEY ADVERTISING: PRIOR RESULTS DO NOT GUARANTEE FUTURE OUTCOMES.

By Joshua D. Sussman, Esq.
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Email is now the preferred means of communication in the business world. Both within an organization, and between the organization and its third-party vendors, customers and others, virtually everyone emails. Sometimes, those communications are sent without much forethought. Not unexpectedly, a business’s email files have become a treasure trove for far-reaching and intrusive discovery in virtually any lawsuit or arbitration. It is not unusual for the proverbial “smoking gun” pivotal evidence to be found within one brief, spontaneous email communication from among terabytes of digital material. 

In response, some companies have adopted creative strategies to attempt to shield their routine emails from discovery production. One such example is highlighted by a recent antirust case that the U.S. Department of Justice commenced against Alphabet, Inc. and Google LLC, and raises the interesting legal issue of whether routine emails can be shielded from discovery simply by copying or “cc’ing” a lawyer.  

Generally speaking, the attorney-client privilege protects certain communications between a lawyer and their client that concern legal advice from being produced during discovery. However, can merely copying in-house general counsel on emails shield them from discovery production under the attorney-client privilege? 

A federal court Judge considered this issue in the context of a motion to sanction Google and to compel it to produce emails withheld on attorney-client privilege grounds under  its “Communicate with Care” program, which advised employees to add a lawyer as a recipient to emails. The DOJ argued that Google implemented the program so that it could assert the attorney-client privilege over those emails, thus shielding them from disclosure to an adverse party in a lawsuit even though the attorneys did not participate in the communications.  The Court  ordered Google to produce a random sample of emails for the Judge to review and inspect to determine whether Google properly asserted the privilege.

The U.S. Department of Justice argued it does not, and there is precedent to support their position. In Boca Investerings Partnership v. United States, 31 F.Supp.2d 9, 11 (D.D.C. 1998), the Court held that before the privilege applies it must determine whether the attorney was acting primarily in a professional legal capacity. If the attorney is being consulted on business decisions, those communications may not be privileged. Ultimately, “[a] court must examine the circumstances to determine whether the lawyer was acting as a lawyer rather than as business advisor or management decision-maker.” Id. 

After the Court’s inspection of the sample, the Court denied the DOJ’s motion to compel and for sanctions, but directed Google to re-review the remaining “silent-attorney emails” to determine whether are protected from disclosure. The transcript containing the Court’s decision is not yet available, but by denying the motion, the Court apparently found that sample contained emails where employees were seeking legal advice. If the Court had granted the DOJ’s motion and found that attorney-client privilege did not apply to the withheld emails, then the Court could have forced Google to produce some or all of the emails it sought to protect.

In the immortal words of coach Herm Edwards: “Don’t press send!” And if you are going to, think twice before you do, because once that email or text message is sent it may become the subject of litigation. 

Should you need the assistance of skilled and experienced counsel to assist you in litigation, do not hesitate to contact Joshua Sussman at jsussman@weisszarett.com.