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

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There is a frequent disconnect between the expectations of the physicians who sell their practices and the hedge funds or health systems that purchase them.  

The Disconnect Between Physicians Who Sell Their Practices and the Hedge Funds or Health Systems That Purchase Them.

In recent years, there has been a huge increase in lawsuits and arbitrations between physicians and the hedge funds or health systems that purchase those physicians’ practices. There are many complex aspects to these disputes, but at its root, the basic disconnect usually centers around differing expectations of how the practice will be conducted after the sale, and the 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 one key aim of purchasing the practice was to improve the efficiency of its internal administration and consequently, cut costs by scaling them. The problem is that there is no one 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. Medical assistants, nurses and physician assistants can only do so much; if they are overwhelmed with too much administrative work involved in seeking third party insurance reimbursement, complying with applicable regulatory and licensing requirements and, of course, attending to patient care, they will be subject to burnout. Hence, they will be put in the impossible position of being required 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 hedge funds that purchase their practice.

The following is a non-exclusive list of legal issues that should be addressed when a physician is selling their practice to a hedge fund or health system.

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 health systems purchasing medical 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 and, therefore, also cannot pose a relevant question to the physician about the healthcare concerns regarding how long the patient can wait before rescheduling. 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. It should not be the only way of reaching the doctor’s office.

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 in 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 health systems and the physicians whose practice they purchase is the fact that the compensation for the physicians is often not clear from the outset. When the subject arising, the answer generally 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:

  • what constitutes attributable overhead,
  • whether the physician will maintain an equity interest that will allow them to have a favorable tax treatment,
  • whether the physician will 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
  • whether the physician will 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 health system is whether the parties wish to impose mandatory mediation and arbitration, so as to avoid a public battle in court.

The flip side of this is that the means by which such alternate dispute resolution 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 well over two decades. Accordingly, the firm has frequently found itself in the position of advising physicians and physician groups. They often find themselves in an adversarial position with the hedge funds or health systems that have purchased their practices. It represent physicals in legal matters, including support of the sale of a medical practice and associated agreements, in Pennsylvania, Texas, New York, and New Jersey. Explore our health law services, today.

 

Publications & Presentations

Gary D. Nissenbaum, Esq.

  • 3/1/18 Interview of Mr. Nissenbaum, Systematic, “The Psychodynamics of Lawyering with Gary Nissenbaum”
  • The Increasing Pace of Digital Change: Why Does Our Culture Always Seem so Blindsided?, Huffingtonpost.com, August 4, 2016
  • Presented Seminar, Top 10 Legal Issues Confronting Nonprofits, State Council of New Jersey Junior League’s Get On Board Conference, April 2017
  • Awarded (Nissenbaum Law Group, LLC), Law Firm/Corporate Legal Department Pro Bono Award for Small Law Firms, New Jersey State Bar Association, 2019
  • Facilitator, 2003 Mediation Training, Superior Court of New Jersey, Union County
  • Panelist, 1996 Annual Health Law Symposium
  • Lecturer, Managed Care Provider Contracts, New Jersey Institute for Continuing Legal Education, 1996
  • Seminar, Health Care: Duty of Confidentiality to AIDS Patients, New Jersey Bar Association Annual Convention; Garden State Bar Association Annual Convention, 1989
  • Presented Seminar, Current Legal Issues Relating to Health Care, Graduate Studies Program in Health Advocacy, Sarah Lawrence College, 1988

Awards & Recognition

Gary D. Nissenbaum, Esq.

  • Awarded (Nissenbaum Law Group, LLC), Law Firm/Corporate Legal Department Pro Bono Award for Small Law Firms, New Jersey State Bar Association, 2019

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