Hospitals Acquisitions of Physician Practices

Traditionally, physicians in the United States have owned and managed their medical practices.   Hospitals are finding it more and more difficult to employ physicians to take care of hospital patients.  Hospitals attempted to solve this problem by pursuing collaborations with physicians through collaborations with physician practice management companies.  Now, facing financial pressures, hospitals and physicians are looking to go back to a direct employment business model. 

Hospitals can benefit from industry and regulatory changes and address immediate operational needs, such as staffing shortages, incentive compensations options, increasing market share, increasing Medicare reimbursement and reducing the threat of competition.  Physicians would no longer have to struggle with quality of life issues, shrinking reimbursements, increased capital costs, and expanded regulations.  Physicians are frustrated with the burdens private practice brings, i.e., investments in new technologies such as electronic health records, and growing criticism of physicians using tangential financial opportunities to supplement their income. 

Before acquiring a physician practice, hospitals must purchase the practice for a price that does not exceed fair market value.  Since acquisitions of physician practices are usually structured as asset acquisitions, the hospital may acquire the practice through a subsidiary to assure a level of autonomy to the practice and to insulate the hospital from liabilities.  The due diligence process is necessary to determine how to settle the purchase agreement, in particular the seller's representations and warranties to the buyer about its business.  Representations and warranties covering the absence of conflicting agreements, licenses and medical staff privileges, professional services and patient charts should be negotiated. 

When acquiring a physician practice, the Anti-kickback Statute and Stark law must be reviewed.  The hospital needs to ensure that the valuation method did not take into account the volume or value of referrals the selling physician made to the hospital, where the purchase price could be perceived as a kickback or inducement.  The hospital must also consider the pros and cons of qualifying as a "group practice" under the Stark Law.