Selling and Buying Medical Practices
Note: The purpose of this article is to provide an introductory overview of buying and selling medical practices in California. While the primary focus is on physicians, medical professionals, and medical practices, much of the information discussed is also relevant to other healthcare professions, including optometrists and optometry practices.
Various reasons might compel physicians to sell their practices. Some may be exploring new opportunities outside the practice of medicine, while others may be nearing retirement. Some may be dealing with personal issues that demand their full and undivided attention, making the management and operation of a private practice no longer feasible.
On the other hand, potential buyers, including physicians, other medical professionals, and non-professionals, may have several motivations for purchasing an established medical practice. Some physicians, who have never owned a practice before, may prefer acquiring one with existing cash flow and patients instead of starting a new one that demands substantial capital investment without the guarantee of a positive return on their investment. Others may be expanding into a new geographic area and want to quickly build a presence.
In both scenarios, healthcare professionals know that the healthcare industry is among the most heavily regulated sectors in the United States, with rules and regulations often evolving monthly. Engaging a healthcare attorney from a premier firm with a background in mergers and acquisitions (M&A) and representing physicians and other healthcare investors is crucial to ensure a successful transaction. Get to know our team and contact us with any questions you have about buying or selling a medical practice!
Corporate Practice of Medicine (CPOM) in California
The Corporate Practice of Medicine (CPOM) doctrine is a legal principle that prohibits corporations or other non-physician-owned entities from practicing medicine or employing physicians to provide professional medical services. The purpose of this doctrine is to prevent any interference in the physician-patient relationship by a non-physician entity and to ensure that medical decisions are made solely based on the best interests of the patient, rather than financial or business considerations.
California is one of many states that strictly enforces the CPOM doctrine and, as a result, only allows medical practices to be owned and operated by licensed physicians or, in some limited cases, by certain other licensed healthcare professionals. This means that corporations, business entities, and non-licensed individuals are generally prohibited from owning or operating a medical practice in California.
Limited Ownership by Non-Physicians
In specific, limited circumstances, non-physicians may own up to 49% of a medical practice in California, but they must be adjacent medical professionals, such as registered nurses. Other professionals who may own an interest in a medical practice include:
Marriage and Family Therapists
Clinical Social Workers
Professional Clinical Counselors
However, the number of these licensed non-physician professionals cannot exceed the number of physicians in the practice.
Navigating CPOM Rules with Management Services Organizations (MSOs)
Non-physician owners can work within the CPOM rules by creating a Management Services Organization (MSO). An MSO is a legal entity that provides non-clinical services to a medical practice, such as administrative, billing, and marketing services. By forming an MSO and entering into a Management Services Agreement (MSA) with a professional corporation owned by a physician, non-physician owners can provide necessary non-clinical services to the practice without violating the CPOM doctrine.
The MSA outlines the specific services provided by the MSO and the compensation for those services. The MSA must be carefully drafted to ensure compliance with the CPOM doctrine and other applicable laws and regulations. The MSO model allows non-physician owners to be involved in the business and administrative aspects of a medical practice without infringing on the physician’s autonomy in making medical decisions, thereby maintaining compliance with CPOM regulations.
HIPAA Compliance and Patient Records
Navigating the federal Health Insurance Portability and Accountability Act (HIPAA) is a key aspect of any medical practice sale. HIPAA safeguards patients’ medical records and health information. Both seller and buyer must adhere to HIPAA regulations throughout the sales process.
California law explicitly forbids the sale of patient records, which includes any exchange of medical records for monetary gain. However, the law does allow the buyer of a medical practice to assume the role of custodian for the records. As custodian, the buyer assumes responsibility for maintaining the records’ confidentiality, security, and proper handling in compliance with state and federal laws.
Given the buyer’s role in managing protected health information (PHI), it’s recommended that both parties enter into a Business Associate Agreement (BAA). A BAA is a legal document that delineates the business associate’s (in this case, the buyer’s) responsibilities and requirements for handling and safeguarding PHI. It outlines the allowed uses and disclosures of PHI by the business associate and mandates the implementation of appropriate safeguards to prevent unauthorized use or disclosure of the PHI. Learn more about our healthcare law and litigation services today!
STRUCTURING THE TRANSACTION
There are two common methods for structuring the sale/purchase of a medical practice:
Asset Purchase Agreement - In an Asset Purchase Agreement, the buyer acquires specified assets and liabilities listed in the agreement, such as equipment, inventory, licenses, goodwill, accounts receivable, accounts payable, loans, and other obligations. This structure offers flexibility, allowing the buyer to select desired assets and liabilities and leave behind unwanted ones. It also poses a lower risk because the buyer does not assume the entire legal and financial history of the practice, only the specified liabilities.
Additionally, a ‘step-up’ based on the acquired assets may be available, leading to higher depreciation and amortization deductions. However, this availability and its benefits should be carefully analyzed with the purchaser’s CPA. However, this structure is more complicated due to the need to transfer individual assets and liabilities, especially if numerous third-party consents are required.
Stock Purchase Agreement - On the other hand, a Stock Purchase Agreement involves the buyer purchasing the shares or membership interests of the medical practice, thereby taking over the entire legal entity, including all its assets and liabilities. This structure is generally simpler as it involves transferring ownership of the entire entity rather than individual assets and liabilities.
However, this structure also poses a higher risk as the buyer assumes all the assets and liabilities of the practice, including any undisclosed or unknown liabilities. Additionally, the buyer cannot pick and choose which assets and liabilities to acquire and must take everything. Furthermore, there is no ‘step-up’ basis, meaning the buyer takes the assets at their existing tax basis, which may result in lower depreciation and amortization deductions.
Ultimately, the transaction structure depends on various factors, including the preferences of the buyer and seller, tax considerations, and the nature of the medical practice’s assets and liabilities.
To avoid claims of Anti-Kickback Statute and Stark Law violations, the fair market value of the medical practice needs to be determined. These laws prohibit the exchange of remuneration for referrals of services reimbursed by a federal healthcare program and forbid physicians from referring patients to entities with which they have a financial relationship.
To ensure adherence to these regulations, practitioners need to consult appraisers proficient in accurately valuing medical practices. Although there are several methods to ascertain a practice’s value, a qualified appraiser typically amalgamates these methods to deduce a fair market value.
One approach involves analyzing the sale prices of similar practices and adjusting for differences in size, location, patient base, and other pertinent factors. Another method involves a detailed assessment of the physical assets such as medical equipment, furniture, office supplies, and inventory, along with the business goodwill, existing relationships, intellectual property, and liabilities. Other influential factors include the practice’s financial performance, demand for services, payer mix, competitive landscape, and regulatory environment.
Conducting meticulous due diligence is vital to the medical practice buying and selling process. It necessitates a detailed examination and evaluation of all facets of the practice, from legal and financial dimensions to operational and strategic ones. This thoroughness guarantees informed decisions by both parties, minimizes risks, and ensures adherence to legal and regulatory mandates.
Healthcare Law Compliance: Compliance with healthcare laws, including federal and state regulations such as the Anti-Kickback Statute, Stark Law, and HIPAA, cannot be overstated. It is important to assess any potential violations, pending or past litigation, or any regulatory investigations.
Patient Notification: Patients must be informed about the change in ownership of the practice and their rights concerning their medical records. This step is not only an ethical obligation but also a legal requirement.
Billing and Coding: A review of the practice’s billing and coding processes is necessary to ensure compliance with the coding standards and payer requirements. Any discrepancies, irregularities, or patterns suggestive of fraud or abuse need to be identified and addressed.
Financial Statements: A thorough review of the financial statements for the past 3 years is common practice. This includes assessing the income statement, balance sheet, and cash flow statement. An analysis of the financial trends, payer mix, accounts receivable, and accounts payable is necessary to understand the financial health of the practice.
Contracts: All contracts, including leases, equipment leases, service contracts, employment agreements, and payer contracts, need to be reviewed and assessed. It is important to identify any clauses that may affect the transaction or the operation of the practice post-acquisition. Assignment of contracts, especially leases, usually requires the consent of the other party.
MINIMIZING TAX LIABILITIES
Minimizing tax liabilities is a frequently neglected aspect of the sale process. Careful planning and a well-thought-out strategy can result in significant tax savings for the seller. However, to maximize the benefits, the seller needed to have engaged an attorney, a qualified wealth management advisor, and a CPA before the deal closing. These professionals can help the seller understand the tax implications of their transaction structure and implement strategies to reduce their tax liabilities.
Tax laws and regulations are complex and subject to change. Moreover, every individual has different goals and objectives when selling their practice. As such, professional advice needs to be tailored based on the seller’s circumstances.
The process of buying and selling a medical practice in California demands a proactive approach to various aspects including regulatory compliance, transaction structuring, practice valuation, and due diligence. Given the complexities of the transaction, it is advisable to seek the expertise of professionals such as healthcare attorneys well versed in M&A, appraisers, financial advisors, and accountants. Ultimately, a well-organized and executed transaction will not only ensure compliance with legal and regulatory requirements but also optimize the benefits for both the buyer and the seller. Connect with our team today to get started buying or selling your medical practice!
KW: premier firm representing physicians, medical professionals, medical practices
premier firm representing physicians, medical professionals, medical practices