Legal Issues That Often Arise When Physicians Sell Their Medical Practices to Private Equity Hedge Funds

The Problems That Arise for Physicians and Other Healthcare Professionals Who Sell Their Practices to Private Equity Hedge Funds That Purchase Them.

In recent years, there has been a huge increase in lawsuits and arbitrations between physicians and the hedge funds that purchase those physician and other healthcare professionals’ practices. These private equity arrangements span the gamut from cardiology, from gastroenterology to urology and ophthalmology and a host of other specialties. What unites them is the overarching flaw in the typical transaction:  the gap between the differing (a) expectations of how the practice will be conducted after the sale, and (b)  compensation that it will engender for the physician.

The physicians often assume that they are going to monetize their ownership interest in the new practice, while maintaining at least some level of control of its post-sale internal administration. The hedge funds and health systems often take the position that they have the right to assume disproportionate control over the practice administration because a key aim of purchasing the practice is to improve the efficiency of its internal administration and consequently, cut costs by scaling them. The problem is that there is no generally accepted way to draw a bright line between reigning in costs to ensure profitability and maintaining appropriate levels of medical care and compensation to the physician. Therein lies the problem.

This often comes to a head when the practice reduces its workforce after the sale in the interest of cost-cutting. For example,

• What message does it send the patient if they cannot get their doctor’s office on the phone, but instead are consistently routed to a generic call center?
• How does it enhance the patient experience for them to be unable to obtain an appointment with a specialist without a four to six month wait time?
• What is the benefit of forcing a patient to communicate with their physician through an instant message app in which they cannot provide a full and complete understanding of their question, and certainly cannot have a reasonable conversation over something as complicated as their medical condition?

Likewise, what about the corresponding deterioration of the physician and other healthcare professional experience of serving the needs of their patients? For example,

• What about a dermatologist who is forced to refer a potential skin cancer lesion to a surgical provider who the dermatologist would not normally utilize?
• What about an orthopedist who is forced to prescribe durable medical equipment (DME) for patients that are of substandard quality, but more cost effective price?
• What about a cardiologist or urologist who is forced to send their patient to a particular hospital that does not have the most state of the art equipment for a critical procedure, but does have a contractual relationship with the hedge fund that owns the doctor’s practice?

The point of all this is to highlight that medical assistants, nurses and physician assistants can only do so much. They are already largely overwhelmed by too much administrative work involving the complexity of  seeking third party insurance reimbursement, complying with applicable regulatory and licensing requirements and, of course, attending to patient care. How much further can we push them before they are truly the  victim of burnout? How do we require healthcare professionals  to practice within the prevailing standards of care without the related support necessary to make that happen?

The Nissenbaum Law Group has practiced in the area of healthcare law for its entire existence. Its clients have ranged from individual physicians forming practice groups to those involved in disputes involving the aforementioned hedge funds that purchase them. The firm has handled both the transactional legal work involved in government filings, regulatory compliance, contract preparation and the purchase or sale of healthcare practices. Likewise, its litigation team has handled contested lawsuits or other claims between the physicians and physician groups or the investor funds that purchase their practice

What are some of the key points that need to be negotiated when entering into a contract when a physician or other healthcare professional practice enters into a contract with a hedge fund or other investor group? The following is a non-exclusive list of some of the key provisions that should be addressed in the underlying agreements for such a transaction.

1. There should be a clear and well-defined protocol for the physician to have some level of control over the internal administration of the medical practice.

As stated above, one of the key ways that hedge funds or investor groups purchasing healthcare practices are able to improve profitability is to centralize and scale their internal administration. The upside is that this will frequently reduce duplication of effort, and as a result, costs as well. The downside is that the centralized level of service can create a disconnect between the physicians whose practice is being administered and the new practice model that is administering that practice.

This can cause a great deal of inefficiencies, insofar as one hand will often not necessarily know what the other is doing. For example, when a patient calls the practice to change their appointment and is unable to reach anyone who is physically in the office, they may well be left with the clear impression that the practice is not affording them the opportunity to pose a simple question to the physician about items that might not warrant a visit: for example, obtaining a refill on medication or questions about exposure to Covid or other communicable virus. Asking a patient to wait weeks or even months to see a physician about such concerns may be impractical.

While this issue can be addressed to some extent with digital apps that can be accessed by the patient, not every patient is comfortable using them. Even the most advanced app should not be the only way of reaching the doctor.
From the legal perspective, this problem is compounded by the fact that the agreements that are signed as part of the transfer of ownership of a medical practice are complex and multi-layered. Therefore, it is important that the issue of administrative control regarding patient accessibility to their physician be expressly discussed as one of the key aspects to be incorporated in the final agreement being negotiated between the parties.

2. The formula for physician compensation can be unnecessarily obscure, resulting in differing expectations between the parties.

One of the more surprising aspects of negotiating the contracts between hedge funds or other investor groups and the physicians whose practice they purchase is the fact that the compensation for the physicians is often not clearly set forth in the document. When the subject arising, the answer may understandably be “Well, it depends…”

It is vital that counsel seek to create objective standards for the compensation formula, such as clear definitions of the following.

Will there be sufficient infrastructure for the practice to continue at the same level of quality as before the sale? For example:
– Will a dermatology practice have robust digital platforms to follow up on skincare screenings?
– Will an obstetrics/gynecology practice have a sufficient number of examination rooms?
– Will an orthopedic practice have a rapid means of obtaining the medical equipment the patient needs to begin the process of healing from an injury?

Will the physician maintain an equity interest that will allow them to have a favorable tax treatment?
– Will the physician have the right to require a certain number of nonphysician staff to assist them in proportion to the number of patients for which they are responsible, and
– Will the physician have any level of input into the means and manner of internal billing for third party payment.

3. The approach to dispute resolution can be critical to maintaining the viability of the practice as an ongoing concern when a difference arises.

Given the confidential nature of both (a) the compensation structure and internal management of medical practices and (b) the care provided to patients, resorting to the court system when a dispute arises can be particularly troublesome. Therefore, one of the matters that should be discussed when entering into a sale transaction with a hedge fund or investor group is whether the parties wish to impose mandatory and confidential mediation and arbitration, so as to avoid a public battle in court.

In the absence of that, the parties will be relegated to utilizing litigation to resolve disputes between the physicians and the private equity company. The question this raises is one of legal strategy: would a court of law be a better forum than an arbitration to resolve the intricacies of such items as medical billing disputes, equity ownership, and allegedly inadequate administrative and clinical support so as to properly serve the patients?

If the parties decide to impose the requirement of alternate dispute resolution, the means by which it will take place should be defined in a manner that will provide efficiency and a relatively rapid outcome. This can be especially complex in the healthcare field, because it will also need to be accomplished in a manner that adheres to the requirements of HIPAA (Health Insurance Portability and Accountability Act of 1996).

4. There should be an exit ramp by which the parties can disengage.

Frequently the sale of a medical practice to a hedge fund or health system is seen as a one-way process; the physician’s interest is being sold, but it cannot be repurchased. The reason for that is obvious: the very purpose of the transaction is to reduce the overhead and level of duplication in the existing practice in favor of the more centralized administration provided by the new entity. In other words, it would be particularly difficult to reverse the process once completed.

Accordingly, the physician or physician practice should engage in a conversation with their counsel before entering into the sale transaction about, not only about what lucrative outcome there could be if everything falls into place, but also what could be done if everything does not. For example, the parties should consider putting in place some sort of severance package or other mode of disengagement, if one can be agreed upon.

The Nissenbaum Law Group’s Health Law Legal

The Nissenbaum Law Group has continuously focused in the area of health law for almost three decades. Accordingly, the firm has found itself in the position of advising physicians and physician groups in regard to the result of transactions involving the sale of practices to hedge funds and other investor groups. Such healthcare professionals often find themselves in an adversarial position with the very hedge funds or investor groups that have purchased their practices. The Nissenbaum Law Group also represents physicians in legal matters involving the sale of a medical practice and associated arrangements, in Pennsylvania, Texas, New York, and New Jersey. Explore our health law services, today.