physician practice acquisitions: legal & operational...

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Physician Practice Acquisitions: Legal & Operational Considerations for Effective Integration

May 12, 2011

Presented by:

Jason S. Greis, Attorney, McGuireWoods LLP

Armen Gallucci, Assistant Vice President Business Development, Medical Affairs; Assistant Professor, Department of Health Systems Management, Rush University Medical Center

McGuireWoods LLP/Rush University Medical Center | 2

Overview

I. BackgroundII. Legal Transaction Considerations

1. Process and Structure2. Key Legal and Compliance Issues

III. Acquisition Integration: A Hospital’s Perspective1. Operational Integration2. Key Strategies for Success3. Practical Considerations

IV. Summary


I. Background

What is driving physician practice acquisitions?• Reimbursement declines in certain specialties leading to

decreased physician compensation resulting in a desire for income stability

• Healthcare reform requiring physicians and hospitals to measure and report quality and efficiency

• Threat of bundled and integrated payments as well as Accountable Care Organizations

• Practice demographics and physician qualify of life issues• Capital costs to adopt new technologies• Desire to reap infrastructure and management benefits of

larger health systems


Background

Source: The Advisory Board, 2010

Two types of physician integration occurring:


II. Legal Transaction Considerations

1. Process and StructureTypical Process:

1. Confidentiality Agreement2. FMV Valuation3. Due Diligence4. Letter of Intent5. Draft Documents and Negotiation

1. Asset Purchase Agreement, Stock Purchase Agreement, Merger Agreement

2. Employment Agreements3. Leases (with acquired group or third parties)

6. Hospital Board Approval (if necessary) and Physician ShareholderApproval

7. Sign Transaction Documents8. Obtain third-party assignments and consents 9. Physician medical staff and payor credentialing10. Closing


Legal Transaction Considerations

Process and Structure - Transaction Structures

Asset Purchase• Attempt to limit pre-existing liabilities that the practice may

have• Allows the practice owners to retain cash, accounts

receivable and certain other assets

Practice

Hospital, Foundation, or Hospital-

Owned Practice

$

Assets




Stock Purchase• Rarely used by hospitals that have an existing entity used to

employ physicians• May be unavoidable if key leases or contracts that must be

assigned cannot be transferred in an asset structure

Acquiring Practice Entity

Target Physician Practice

Hospital

$ Stock




Merger• Typically used when similar-sized practices are combining• Retains all liabilities of both entities• Retains key licenses and permits• Avoids need for recredentialing or assignment of contracts

Target Physician Practice

Hospital

Acquiring Practice Entity

$

Merger




Post-Closing Physician Employment• Employment Agreement• Can be employed by either:

• hospital directly;• an affiliate (wholly-owned) practice;• foundation; or• faculty practice plan in an academic medical center

• Compensation Structure• Base Salary/Income Guaranty• Productivity-Based Bonus



2. Key Legal/Compliance Issues

Stark Act• Isolated Transaction Exception

• Must be in writing (signed by parties)• Requires no other transaction for 6 months (except certain post-

closing adjustments)• FMV• Not related to volume or value of referrals• Must be commercially reasonable • Special Considerations: Installment Payments

• Aggregate payment must be set before first payment is made (but certain post-closing adjustments are allowed)

• Must not take into account volume or value of referrals• Must be secured



Key Legal/Compliance IssuesStark Act (cont’d)

• Fair Market Value Compensation Exception• Applies to any physician or group of physicians (regardless of

whether the group meets the definition of a “group practice”)• Must be in writing (signed by parties)• Must specify the timeframe (can be less than one year, but only

one agreement for the same goods or services in the same year)• FMV, set in advance and not related to volume or value of

referrals• Special rules for rental of equipment



Key Legal/Compliance Issues

Anti-Kickback Statute• Concern: Remuneration paid for physician practice is intended to

induce referrals to the hospital acquiring the practice• Important to establish FMV of consideration paid for the practice

stock/assets. Establishing FMV demonstrates that no “remuneration”was paid in exchange for referrals.

• Important to document the intent behind the acquisition of the practice.• Practice Acquisition Safe Harbor (Physician or Hospital Acquirer)

• Date from agreement to closing is not more than one year• Seller will not be in a position to make referrals post-closing• If Hospital is the Purchaser, then:

• Practice must be in a HPSA for that specialty• Purchaser must engage in recruitment activities that: (i) may

reasonably be expected to result in recruitment of new practitioner to take over the acquired practice within one year; and (ii) will satisfy the conditions of the practitioner recruitment safe harbor



Key Legal/Compliance Issues

Other Legal/Compliance Issues• Corporate Practice of Medicine• Certificate of Need Laws – May be implicated if

certain types of assets are being acquired (e.g. CT, linear accelerator, imaging, etc.)

• FMV• Important to defend under Anti-Kickback Statute and to meet

Stark Exception as well as tax-exempt issues• Need Valuation

• Billing and Coding Issues• Coding Audits• Recoupment Actions – Any pending or past recoupment

actions?


III. Acquisition Integration: A Hospital’s Perspective

Consider Different Perspectives

• Hospital / System – CEO• Hospital / System – CFO• Attorneys – Legal• Most importantly!!! – The Physician


Acquisition Integration: A Hospital’s Perspective

Physician perspective…Happiness…

• I need the correct staffing to run my practice• Make the “systems” work for me• Insure efficient work-flow• Get the phones answered• Bill and collect correctly• Keep my patients satisfied• Pay me fairly for the work I do…• Create a healthy fun work environment that I enjoy…• Help me achieve better quality of life…through my work



Physician Perspective…I Need…

• I need to have confidence in who is “running” my practice• I need to know you know what you are doing…• I need to know that there is a “plan”• I need to know that you value me…• I need to know that you will listen to me…• I need to know who is in charge…• I need to know there is good Leadership



Faculty Recruitment Transition Resources: Responsible for operations involved in on-boarding faculty, faculty practices, and staff to enable successful transitions. This may include:

• Staff recruitment, placement, training

• Office and clinical space planning and build-out

• Identifying equipment requirement and procurement

• Obtaining Medical Staff privileges for faculty

• Physician Hospital Organization and billing credentialing

• Determining and managing IS and telecommunication requirements

• Determining and managing OR requirements, if applicable

• Billing implementation/EPIC system build

• Medical supply procurement

• Forms development and procurement

• Marketing, announcement, and business development

• Determining and implementing regulatory agency requirements

• Off-site contracting for faculty, if applicable

• Assistance with transferring research grants, if applicable

• Assistance with on boarding research recruits in conjunction with the Office of Research Affairs


Transition Tool: Work Plan

A checklist, created for the purpose of ensuring the new physician can successfully begin seeing patients on day one

Checklist includes the following areas:

Staffing & Training Billing

Space EPIC System Build

Clinical Time Operating Room Time

Telecom & Information

Services

Transcription & Answering Services

Medical Records & Forms

Joint Commission Compliance

Supplies & Equipment

# Task

Clinical

Obtain Tax ID

Obtain Cost Center

Staffing Determine Staffing RequirementsObtain Necessary Approvals & Have HR Post PositionsInterview and Hire Staff

Walkthrough Space to Determine Needs:Office Equipment NeedsDetermine any patient care issues related to spaceDetermine if any administrative limitations due to space

Office EquipmentWalkthrough & Determine NeedsOrder CopierOrder FaxOrder ComputersOrder Printers

Patient Letter (With Medical Records Transfer Form)

PHO (Form Completion)

Telecommunications:Notify Carol Russo's group of the transition Telecom walkthroughNotify Call Center of the transitionNotify any other internal & external communications constituents

Information ServicesNotify IS of transition (Karl Oder)IS Walkthrough of Space to determine any potential needsOrder any necessary computers Insure All Necessary Applications are Loaded on Computers (EPIC, RUMBA, Magic Web, R-Chart)Order all necessary Logins


Key Strategies for Success:Financial and Productivity Analysis

Clinical

Proforma

with

RVU benchmarks

Research

Proforma

Contribution

Margin

Teaching

Program

Impact

Complete

Financial/

Productivity

Analysis

Goals:

• Set clear expectations

• Capital investments

• Expense requirements

• Productivity (clinical or externally funded research)

• Teaching (medical students or graduate medical education)

Step 1: Determine clinical or research need


Key Strategies for Success:Financials – Clinical and Research

1. Complete Financial Proforma

2. Projected Revenue and Expenses for the first three years for Clinical and five years for Research (Capital and Operating)

3. Review of similar cases and physicians to obtain contribution margin

4. Reviewed by Medical Affairs Finance before presented to the workgroup


Key Strategies for Success:Developing A More Complete Financial Assessment

• Understanding the complete financial impact of employing physicians is critical

• Although the median direct operating loss per physician is generally large, aggregated hospital revenues from surgeries, interventions, and diagnostics can easily total several million dollars


Practical Considerations

• Other Physician Financial Relationships• Medical Director Agreement• Physician-Owned Equipment and Space Leases• Call Coverage Agreements (may be with competitors)• Management Agreements• Consulting Agreements

• Retirement of Key Physicians• Dealing with Physician Ownership of Competing Interests• Retirement Plans and Employee Benefits• Addressing participation in competing ACOs



• Be aware of the acquired practice's debt and lease arrangements

• Real Estate Leases• Physicians may have invested in their offices and may want to

continue in that space and be landlord going forward• Need to ensure that lease payments are FMV

• Nose and tail insurance• Can be cost prohibitive - will the hospital pick up cost? If so,

should this value be included in valuation?• Can the hospital provide “nose” insurance instead?

• Transfer of employees• Will hospital employ all employees?• How will benefits transfer over smoothly?• Will the hospital assume PTO and give credit for years served

for vacation accrual and benefits?



• Need strong physician leadership representative • If a large physician group, encourage the practice to select a

small committee of 2-3 physicians to lead negotiations • Establish a plan to communicate with the group at large

• Assumption of Liabilities• Existing equipment leases or service agreements• Existing loans and lines of credit

• Post-Closing Windup• Will physicians retain Accounts Receivable, Cash and

Liabilities?• Ensure tail coverage in place• Consider employee benefits implications for employees that are

not hired by the new owner – will non-retained employees have COBRA coverage?


IV. Summary

• Only “marry” GOOD docs

• Hold people accountable

• Physician-centric focus

• Invest in great leadership

• Up- front difficult conversations help to avoid conflict down the road

• Avoid special deals

• Employment Agreements

• Asset Purchase Agreements

• Compensation

• Malpractice Insurance

• Policies and Procedures

• EMR and Medical Records Integration


Summary

• Clearly define what is expected…up front

• Work ethic / productivity• Use of EMR• Compliance• Education• Accountability / discipline• Support the mission


Questions

Jason S. GreisAttorney, McGuireWoods312.849.8217Email: [email protected]: www.greisguidetoltachs.com

Armen GallucciAssistant Vice President Business Development, Medical Affairs;

Assistant Professor, Department of Health Systems Management, Rush University Medical Center

312.563.2833Email: [email protected]