The Legal Issues Involved in the Private Sale or Purchase of a Medical, Dental, Psychotherapy, Chiropractic or Other Healthcare Practice

In the current healthcare climate, the most common way in which a medical, dental, psychotherapy, chiropractic or other healthcare practice is sold generally involves either a nonprofit healthcare group or a private equity investor, such as a hedge fund. But what if the healthcare provider simply wants to be bought out privately by others in their own practice group or by a competitor? In other words, what if they decide to do it the “old school” way?

There are a number of critical issues that will often come up in that regard. Here are four of them:

1.Will there likely be sufficient funding to engage in the sale transaction at all?

It is axiomatic at this point that, in the modern era, healthcare practices generally have been unable to generate sufficient cashflow to meet the requirements of running the practice as a business. Whether dealing with a medical, dental, psychotherapy, chiropractic or other healthcare practice, the revenue stream is often strangled by a combination of (a) reduced payment for healthcare services that used to be more readily compensated by insurers, (b) inordinate delays in obtaining the reimbursement for approved services, and (c) vastly increased overhead costs involving such items as electronic medical records (EMR) and other digital platforms. 

The irony here is striking. The very reason that a healthcare professional may want to sell their equity may be the same reason that others may not be able to purchase it: there is simply insufficient cashflow.

From the legal perspective, it is critical to build into a contract of sale not only the requirement of proving at any early point well before the closing that the funding commitment has been obtained, but also to provide for a soft landing if it is not. One obvious example is whether there will be a downpayment upon the execution of the sale agreement and how much of it will be subject to surrender in the event that the financing for the sale is not obtained. 

2. Does the healthcare professional(s) purchasing the practice have a reasonable basis to assume that they will qualify for third-party insurance reimbursement when taking over the patients of the practice being purchased?

A cottage industry has formed involving consultants who assist healthcare professionals in gathering sufficient documentation—and dealing with any bumps in the road—when the healthcare professionals are applying to be approved by the relevant health insurance companies in the area served by the practice.

The typical example arises when a healthcare professional in one state is purchasing a practice in another; under such circumstances, the healthcare professional will often need to apply to an entirely new regime of third-party providers. It is critical that this be considered when assessing whether the cashflow from the practice being sold will continue apace when being administered by the purchaser.

3. Will the healthcare provider leaving the practice need to negotiate how long they will continue to work there as an employee and, if so, under what compensation structure?

One of the typical ways in which a healthcare practice can maintain its value when sold is for the existing healthcare professionals to remain as employees. This provides the patients with visible confirmation that the relationships they have fostered with the existing regime will continue under the new order. Over time, they can “retire from the practice” (either willingly or not), but by then the patients will presumably have developed a familiarity with the new practice, and it will be less disruptive to see their current healthcare provider depart.

Some of the items that need to be negotiated involve the following:

• the amount of compensation to which the healthcare provider will be entitled,
• the duration of the period that they will be required to remain with the practice under the new regime,
• the degree of control the healthcare provider will have over their scheduling and quality of care and
• the duration and scope of a restrictive covenant, if one is allowed under the law of that jurisdiction.

 4. Will alternate dispute resolution (ADR) apply to resolve a breach of the agreement?

As with any purchase or sale of a business, there is a compelling reason to require arbitration of any disputes, rather than resort to the court system: confidentiality. It simply makes little sense to litigate a dispute between healthcare providers in open court since the patients themselves may very well access the filings in the corresponding litigation and, based upon what they see, decide that they do not wish to continue to be served by a practice that is fighting with itself. As unfair as that may seem, it is only human for the very existence of the lawsuit—regardless of the efficacy of the claims or defenses involved—to convince a significant cohort of patients to leave.

That is the key strength of requiring arbitration for any such disputes, since both the parties and the arbitrator will handle the dispute under strict requirements of confidentiality (assuming that the confidentiality requirement is included in the underlying agreement). While there are downsides to arbitration—such as the inability to have a jury, limited appeal rights, limited ability to include parties who were not part of the original contract as so forth—the fact that confidentiality can be included and enforced as a requirement can often outweigh all those downsides.

The Nissenbaum Law Group’s Health Law Legal 

The Nissenbaum Law Group has continuously focused in the area of health law for well almost three decades. Accordingly, the firm has frequently advised healthcare professionals involved in a private buyout of their equity interest. The firm welcomes inquiries from healthcare clients in Pennsylvania, Texas, New York, New Jersey and other states that utilize the multijurisdictional practice rule. Please click here to learn more about the law firm’s healthcare practice.