Everything Old is New Again: Physician Hospital Integration

Hospitals are once again in the market for physician talent. Hospitals are buying physician practices and entering into employment arrangements with physicians at unprecedented rates. But how does such a transaction unfold?

If you have been approached by a hospital or health system you might have already received and signed a Letter of Intent or at minimum, a Nondisclosure Agreement.

If you are interested in pursuing such a transaction with a hospital, the next likely step will be due diligence. During this stage of the process, you may be given a due diligence request which amounts to a laundry list of everything the hospital needs to know about your practice, including your assets, liabilities and productivity.

As the due diligence process unfolds, you can expect the hospital or health system to commence fair market value analyses for purposes of setting the purchase price of the practice and your compensation package. The measure generally used for setting the purchase price of a practice is the value of the tangible and intangible assets of the practice, with the majority of the purchase price based on tangible assets (i.e. furniture and equipment). In fact, certain intangibles, such as “good will” may be wholly ignored.

Your compensation likewise, will have to fall within the range of fair market value and more often than not, will be based, in large part, on your productivity. In most instances your productivity will be measured in Relative Value Units (“RVU”), but it can be based on charges, collections or patient encounters as well. In addition, if you are dealing with a tax-exempt hospital (as is the case in the New York market), your compensation may be capped to ensure that it is reasonable since excessive compensation could result in intermediate sanctions under federal tax laws.

As a hospital employee, it is unrealistic to expect to receive a big guaranteed salary, and it is unlikely that you will be able to augment your salary based on the productivity of other physicians or physician extenders who were previously employed by you but who may continue to work under your supervision after your practice is taken over by a hospital.

However, once the hospital takes over your practice, you may not have to concern yourself with rising costs associated with rents, equipment, supplies, personnel etc, and will likely have no obligations to pay for electronic health record systems. Moreover, if you structure your compensation based on RVU’s rather than on collections, you can insulate yourself from reductions in reimbursement, capitated fee schedules, contract adjustments and any failures or delays by the hospital in your professional billing and collection.

Once the preliminary due diligence has been completed (bear in mind it will not be fully and finally completed until after the transaction has closed), there may be some re-negotiation of the terms of the Letter of Intent, or if no Letter of Intent was signed or term sheet exchanged, you may receive a term sheet, or you will be invited to participate in a face to face meeting where the terms of the transaction will be clarified. It is at this point that the terms of the transaction really take shape, including what is being sold, the price, the payment terms, and conditions to closing begin to take shape.

At or about this point, you should expect to receive the first draft of the deal documents. In addition to the sale document, you should expect to receive a draft of a proposed employment agreement. Do not be alarmed or surprised to learn that your employer is or may be, in the future, a captive professional entity to the hospital. The captive professional entity is an entity whose owner is a nominee of the hospital; usually a trusted hospital employee who owns the entity as long as he remains an employee of the hospital. The captive professional entity, as a model for the delivery of health care under a hospital’s aegis serves several important functions for the hospital in New York State, and should be of no moment to you. In fact, in many instances, the hospital will be able to include the captive professional entity employees in many of its group benefits plans.

It is strongly recommended that you engage health care counsel as early as you can in the process. Competent counsel, knowledgeable in health care can help you negotiate everything from the non-disclosure agreement, Letter of Intent and final sale and employment agreements. A good health care lawyer will also help you and your staff with due diligence requests, and once the documents are delivered will explain the provisions to you and endeavor to negotiate them in your favor. Your attorney will work with you to prepare any required schedules to the agreements. These schedules will serve to identify things described in the agreement such as assets to be sold and contracts to be assumed. Additionally, schedules can serve to carve out exceptions to representations and warranties that you will be asked to make with respect to the operations of your practice. Last, a health care attorney will be able to perform such functions that will enable you to meet the pre-conditions of closing, such as obtaining the consent of third parties, including your landlord, to assign certain liabilities, such as your office lease.

Before signing on the dotted line, do your own due diligence. Search your own heart and investigate life on the other side. Speak to similarly situated colleagues about their experience. Hospital employment can offer security, in a world where the business of health care seems to offer fewer monetary rewards and greater risks. But hospital employment also means the loss of autonomy in running your business. As with all things in life, you take the good with the bad and try to surround yourself with able advisors who will help you make an informed decision.

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