The Changing Healthcare Landscape: The Physician Fall-Out of Medical Acquisitions (Part II)

By: Monica P. Navarro, Esq.

Date: August 5, 2015

There has been a frenzy of M&A activity in the healthcare sector in the last five years, particularly in the physician medical group sector, as described in my earlier post The Changing Healthcare Landscape: Medical Practice Acquisitions (Part I).

Amid this acquisition frenzy, physicians anxious to merge and/or sell typically want to close their deals fast primarily for two reasons: Many see greener pastures ahead by aligning themselves with health systems that can afford to integrate and innovate, while many simply fear being left behind by Health Care Reform. Whatever the reason, physicians are jumping on the M&A train fast and not always with the requisite due diligence and foresight that selling a medical practice requires.

When closing these deals, it is important to ensure that physicians receive top dollar for their assets, which include long-standing relationships with patients not otherwise accessible to the acquiring health system. It is also important to ensure that physicians are entering into profitable leases with the acquiring health system for the practice real estate, which often is not acquired outright by the health system. Further, it is important to put in place appropriate professional service/employment agreements that take the physicians from independent professionals to employees of the acquiring health system. But those are far from the most important parts of the transaction. Practice acquisitions carry with them a shadow (with a long tail) that must receive equal attention. The fact of the matter is that the life of the acquired physician will not remain the same after the acquisition, even if the location, patients, and employees of the practice remain the same after the acquisition. And the anticipated changes cut deeper than simply operating under a new name.

Unfortunately, the onboarding of acquired physicians into the acquiring health system will often fail. The reasons are innumerable. The loss of independence can be intolerable for the physician who is used to operating his or her practice without dealing with the layered decision-making of a health system. Alternatively, the physician might have failed to ensure that there was true compatibility with the health system or the initial compatibility that existed between the parties might have ended when the acquiring entity is itself acquired by a third party. Further, innovation and ongoing M&A activity of the health system can have a significant impact on the philosophy of the practice, the business strategies, the management personnel, and the specialty focus, among other factors that can impact the physician’s professional path and compensation. Under those circumstances, what is a physician with seller’s remorse to do?

Predictably, as part of the deal, the physician will have entered into a non-compete that forbids the physician from coming anywhere near the practice or in any way recouping the patients for a period of time. Further, there will be non-solicitation provisions in the physician’s service agreement with the health system that will preclude the physician from seeking to recoup his or her old staff. Even waiting around for the termination of these restrictions in order to start over is not a guarantee that the physician can resume his or her practice in the physician’s building, given that the lease agreement with the health system likely commits the physician to landlord-status for an even lengthier period of time. In sum, it is very likely that the deal will not have left open for the physician the option of picking up where he or she left off prior to the acquisition. One would think physicians are aware of the foregoing before they consummate the sale, but often they are not. Perhaps they were not told by counsel. Perhaps they did not listen when they were told. All the same, it is an oppressive reality for a physician to wake-up to.

Certainly, no health system will consummate a medical practice acquisition without these restrictive provisions. However, safeguards can and should be built into these provisions which offer a cushion for the physicians that fall-out, as well as to dis-incent the health system from banishing the physician from his/her customary practice area should the relationship fail. For example, the geographical and duration restrictions of the non-competes can be tiered based on length of service or reason for separation. Further, severance agreement formulas commensurate with future loss can be negotiated and built into the service/employment agreement between the physician and the acquiring system. Likewise, leases treated like separate transactions can contain lease-out provisions and can be coordinated and be dependent upon continuation of the physician’s employment agreement with the health system.

These and other safeguards require serious thinking about the shadow the deal leaves behind, as well as thoughtful analysis and counsel regarding the rewards and risks faced by the physician through and after the acquisition. Sure, insisting on safeguards that protect the physician long term might cause a deal to fail, but that, in-and-of-itself, is a sign that the marriage should not happen in the first place. Of course, there are times when a health system will not budge in the restrictions and the deal happens anyway. But a physician who choses to jump into the marriage under those circumstances at least does so with his or her eyes open and can, at a minimum, consider front-loaded solutions that might compensate the physician for the risk. Regardless, no good union between a health system and a medical practice can be born without this give-and-take.

*Monica P. Navarro specializes in healthcare and business law. She represents a wide array of healthcare entities and professionals. She can be reached at mnavarro@vezinalaw.com