The successful sale of a healthcare practice largely depends on business operations during the growth stage of the business. Buyers understand that efficient, compliant operations during the growth stage can lead to profitability and expansion post-transaction.
Unfortunately, many practices cut corners to reduce short-term expenses when growing the business. Cutting corners may save money in the near future, but it often has costly implications in a later sale transaction.
We often see these cost saving issues arise during the due diligence stage of a transaction. When a buyer discovers issues, depending on their nature, the buyer may reduce the purchase price, extend payment terms for the purchase price, add indemnification provisions or other nuanced contract requirements, or terminate the deal altogether. Sellers often incur additional legal expenses because counsel must resolve the underlying issues.
To reduce the number of issues that a buyer might raise in a transaction, a practice can engage in some general clean-up of its business. The following represents straight-forward, practical steps providers can take during the growth stage to ensure a successful and efficient future sale of a healthcare practice.
Reduce Notice and Consent to Assignment or Change of Control Requirements
Eliminating consent to assignment, or change of control, and notice provisions during contract negotiation reduces transaction inefficiencies because it reduces the number of third parties that involved in the transaction. Most form contracts furnished by vendors, service providers, landlords, payers, and others require the counterparty’s consent to the assignment of the contract or the seller’s change of control. Some contracts are less stringent and require prior notice that the contract is being assigned or that there is a change of control. For example, payer contracts often require a practice to provide ninety (90) days’ prior written notice before a sale.
These provisions often slow a transaction down. If these provisions are present, seller’s counsel must provide the appropriate notices and obtain the requisite consents. Buyers almost always require proper consent and notices as a condition to close the transaction. These types of provisions also give the third party a chance to renegotiate the applicable contract.
To counter these issues, practices should analyze vendor contracts, and try to negotiate simplified notice and consent to assignment and change of control provisions. The goal it is to eliminate the practice’s requirements to obtain written consent and reduce the notice period where negotiable
Consolidate Practice Contracts
As a practice adds new locations and providers, consolidating contracts increases bargaining power, and reduces administrative expenses. As a practice grows, particularly when it merges with, or purchases, existing provider locations, the business typically assumes responsibility for the contracts in place at the new location. Due to this assumption, the practice may have contracts with multiple entities for the same service or product at different locations (e.g., EMR, hazardous waste services, marketing, etc.). Similarly, a practice may maintain distinct contracts with the same vendor for separate locations or providers.
From an operational perspective, maintaining separate contracts for the same service or product requires separate payments, relations with numerous account representatives, and multiple administrators at different locations coordinating with several vendors. From a legal perspective, this increases transaction costs and the number of contracts to address in diligence (it also gives rise to numerous consent provisions as noted above).
Practices should consider consolidating these contracts with a single vendor. This allows for reduced costs due to increased market power and leverage and reduces the number of parties a buyer must deal with. Similarly, transaction counsel will spend less time per applicable operational facet working through contract requirements concerning the transaction and thus reduce transaction costs.
Maintain Proper Compliance Parameters
Implementing appropriate compliance practices ensures transaction viability. During diligence, buyers analyze compliance policies and practices related to credentialing, licensure, anti-fraud and abuse laws, HIPAA, and billing practices. Buyers often conduct billing audits and background checks. Many practices are tempted to cut compliance corners to reduce short term expenses or to increase reimbursement rates by billing improper codes and engaging in wrongful billing. Although reducing short term expenses and billing improper codes (therefore increasing collections) may appear to increase the practice’s bottom line, these issues may stop a transaction in its tracks.
The larger and more sophisticated the buyer, the more attuned it will be to seller’s compliance issues. Additionally, the larger a healthcare entity is, the more likely it is to undergo regulatory scrutiny. Buyers are not willing to bring on additional regulatory risk. Ensuring that the practice takes diligent steps to comply with government and private payer billing policies, employs prudent HIPAA and anti-fraud and abuse law practices, and is keenly aware of applicable credentialing and licensure requirements, can ensure a successful sale.
Sellers must ensure their compliance with state and federal laws, rules, and regulations as well as third party payor contracts and policies incorporated by reference therein. Questionable accounts receivable and compliance practices can cause a buyer concern and lead to renegotiating financial and other deal terms.
Corporate Structure
Practices can utilize certain corporate structures to reduce professional liability risk. The appropriate corporate structure can ensure that malpractice claims are mitigated and only have an effect on small portions of the business. Preferable corporate structures ensure practice redundancy and the possibility for a later sale even in the case of major malpractice liability.
Practices can be structured to reduce regulatory reporting obligations. This can reduce transaction expenses and regulatory scrutiny, thereby increasing the likelihood of a smooth transaction. Regulators often maintain statutory mechanics for reporting changes of ownership or control. Requirements vary by state and regulatory agency.
State “corporate practice of medicine” statutes often prohibit corporations from practicing medicine or employing providers or may limit the practice to professional corporations or professional limited liability companies. Providers must account for their state’s laws when determining the optimal corporate structure.
Next Steps
Whether the practice is a start-up, growth-stage company, or a mature entity ripe for a transaction, taking certain measures can increase transaction success. These measures may increase sale price and reduce legal expenses in a future transaction.
**This Legal Bulletin is for informational purposes only and not intended as legal advice for specific situations.
Article written by: Ryan Morris. Reach him by phone: (904) 513-2663 and email: ryan@rezlegal.com