Physician Practice Acquisitions: Legal & Operational Considerations for Effective Integration

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1 Physician Practice Acquisitions: Legal & Operational Considerations for Effective Integration May 12, 2011 Presented by: Jason S. Greis, Attorney, McGuireWoods LLP Armen Gallucci, Assistant Vice President Business Development, Medical Affairs; Assistant Professor, Department of Health Systems Management, Rush University Medical Center

2 Overview I. Background II. Legal Transaction Considerations 1. Process and Structure 2. Key Legal and Compliance Issues III. Acquisition Integration: A Hospital s Perspective 1. Operational Integration 2. Key Strategies for Success 3. Practical Considerations IV. Summary McGuireWoods LLP/Rush University Medical Center 2

3 I. Background What is driving physician practice acquisitions? Reimbursement declines in certain specialties leading to decreased physician compensation resulting in a desire for income stability Healthcare reform requiring physicians and hospitals to measure and report quality and efficiency Threat of bundled and integrated payments as well as Accountable Care Organizations Practice demographics and physician qualify of life issues Capital costs to adopt new technologies Desire to reap infrastructure and management benefits of larger health systems McGuireWoods LLP/Rush University Medical Center 3

4 Background Two types of physician integration occurring: Source: The Advisory Board, 2010 McGuireWoods LLP/Rush University Medical Center 4

5 II. Legal Transaction Considerations 1. Process and Structure Typical Process: 1. Confidentiality Agreement 2. FMV Valuation 3. Due Diligence 4. Letter of Intent 5. Draft Documents and Negotiation 1. Asset Purchase Agreement, Stock Purchase Agreement, Merger Agreement 2. Employment Agreements 3. Leases (with acquired group or third parties) 6. Hospital Board Approval (if necessary) and Physician Shareholder Approval 7. Sign Transaction Documents 8. Obtain third-party assignments and consents 9. Physician medical staff and payor credentialing 10. Closing McGuireWoods LLP/Rush University Medical Center 5

6 Legal Transaction Considerations Process and Structure - Transaction Structures Asset Purchase Attempt to limit pre-existing liabilities that the practice may have Allows the practice owners to retain cash, accounts receivable and certain other assets Practice $ Assets Hospital, Foundation, or Hospital- Owned Practice McGuireWoods LLP/Rush University Medical Center 6

7 Legal Transaction Considerations Process and Structure - Transaction Structures Stock Purchase Rarely used by hospitals that have an existing entity used to employ physicians May be unavoidable if key leases or contracts that must be assigned cannot be transferred in an asset structure Hospital Acquiring Practice Entity $ Stock Target Physician Practice McGuireWoods LLP/Rush University Medical Center 7

8 Legal Transaction Considerations Process and Structure - Transaction Structures Merger Typically used when similar-sized practices are combining Retains all liabilities of both entities Retains key licenses and permits Avoids need for recredentialing or assignment of contracts $ Hospital Target Physician Practice Merger Acquiring Practice Entity McGuireWoods LLP/Rush University Medical Center 8

9 Legal Transaction Considerations Process and Structure - Transaction Structures Post-Closing Physician Employment Employment Agreement Can be employed by either: hospital directly; an affiliate (wholly-owned) practice; foundation; or faculty practice plan in an academic medical center Compensation Structure Base Salary/Income Guaranty Productivity-Based Bonus McGuireWoods LLP/Rush University Medical Center 9

10 Legal Transaction Considerations 2. Key Legal/Compliance Issues Stark Act Isolated Transaction Exception Must be in writing (signed by parties) Requires no other transaction for 6 months (except certain postclosing adjustments) FMV Not related to volume or value of referrals Must be commercially reasonable Special Considerations: Installment Payments Aggregate payment must be set before first payment is made (but certain post-closing adjustments are allowed) Must not take into account volume or value of referrals Must be secured McGuireWoods LLP/Rush University Medical Center 10

11 Legal Transaction Considerations Key Legal/Compliance Issues Stark Act (cont d) Fair Market Value Compensation Exception Applies to any physician or group of physicians (regardless of whether the group meets the definition of a group practice ) Must be in writing (signed by parties) Must specify the timeframe (can be less than one year, but only one agreement for the same goods or services in the same year) FMV, set in advance and not related to volume or value of referrals Special rules for rental of equipment McGuireWoods LLP/Rush University Medical Center 11

12 Legal Transaction Considerations Key Legal/Compliance Issues Anti-Kickback Statute Concern: Remuneration paid for physician practice is intended to induce referrals to the hospital acquiring the practice Important to establish FMV of consideration paid for the practice stock/assets. Establishing FMV demonstrates that no remuneration was paid in exchange for referrals. Important to document the intent behind the acquisition of the practice. Practice Acquisition Safe Harbor (Physician or Hospital Acquirer) Date from agreement to closing is not more than one year Seller will not be in a position to make referrals post-closing If Hospital is the Purchaser, then: Practice must be in a HPSA for that specialty Purchaser must engage in recruitment activities that: (i) may reasonably be expected to result in recruitment of new practitioner to take over the acquired practice within one year; and (ii) will satisfy the conditions of the practitioner recruitment safe harbor McGuireWoods LLP/Rush University Medical Center 12

13 Legal Transaction Considerations Key Legal/Compliance Issues Other Legal/Compliance Issues Corporate Practice of Medicine Certificate of Need Laws May be implicated if certain types of assets are being acquired (e.g. CT, linear accelerator, imaging, etc.) FMV Important to defend under Anti-Kickback Statute and to meet Stark Exception as well as tax-exempt issues Need Valuation Billing and Coding Issues Coding Audits Recoupment Actions Any pending or past recoupment actions? McGuireWoods LLP/Rush University Medical Center 13

14 III. Acquisition Integration: A Hospital s Perspective Consider Different Perspectives Hospital / System CEO Hospital / System CFO Attorneys Legal Most importantly!!! The Physician McGuireWoods LLP/Rush University Medical Center 14

15 Acquisition Integration: A Hospital s Perspective Physician perspective Happiness I need the correct staffing to run my practice Make the systems work for me Insure efficient work-flow Get the phones answered Bill and collect correctly Keep my patients satisfied Pay me fairly for the work I do Create a healthy fun work environment that I enjoy Help me achieve better quality of life through my work McGuireWoods LLP/Rush University Medical Center 15

16 Acquisition Integration: A Hospital s Perspective Physician Perspective I Need I need to have confidence in who is running my practice I need to know you know what you are doing I need to know that there is a plan I need to know that you value me I need to know that you will listen to me I need to know who is in charge I need to know there is good Leadership McGuireWoods LLP/Rush University Medical Center 16

17 Acquisition Integration: A Hospital s Perspective Faculty Recruitment Transition Resources: Responsible for operations involved in on-boarding faculty, faculty practices, and staff to enable successful transitions. This may include: Staff recruitment, placement, training Office and clinical space planning and build-out Identifying equipment requirement and procurement Obtaining Medical Staff privileges for faculty Physician Hospital Organization and billing credentialing Determining and managing IS and telecommunication requirements Determining and managing OR requirements, if applicable Billing implementation/epic system build Medical supply procurement Forms development and procurement Marketing, announcement, and business development Determining and implementing regulatory agency requirements Off-site contracting for faculty, if applicable Assistance with transferring research grants, if applicable Assistance with on boarding research recruits in conjunction with the Office of Research Affairs McGuireWoods LLP/Rush University Medical Center 17

18 Transition Tool: Work Plan A checklist, created for the purpose of ensuring the new physician can successfully begin seeing patients on day one Checklist includes the following areas: # Task Clinical Staffing & Training Space Clinical Time Telecom & Information Services Medical Records & Forms Supplies & Equipment Billing EPIC System Build Operating Room Time Transcription & Answering Services Joint Commission Compliance Obtain Tax ID Obtain Cost Center Staffing Determine Staffing Requirements Obtain Necessary Approvals & Have HR Post Positions Interview and Hire Staff Walkthrough Space to Determine Needs: Office Equipment Needs Determine any patient care issues related to space Determine if any administrative limitations due to space Office Equipment Walkthrough & Determine Needs Order Copier Order Fax Order Computers Order Printers Patient Letter (With Medical Records Transfer Form) PHO (Form Completion) Telecommunications: Notify Carol Russo's group of the transition Telecom walkthrough Notify Call Center of the transition Notify any other internal & external communications constituents Information Services Notify IS of transition (Karl Oder) IS Walkthrough of Space to determine any potential needs Order any necessary computers Insure All Necessary Applications are Loaded on Computers (EPIC, RUMBA, Magic Web, R-Chart) Order all necessary Logins McGuireWoods LLP/Rush University Medical Center 18

19 Key Strategies for Success: Financial and Productivity Analysis Clinical Proforma with RVU benchmarks Step 1: Determine clinical or research need Complete Financial/ Productivity Analysis Research Proforma Contribution Margin Goals: Set clear expectations Capital investments Expense requirements Productivity (clinical or externally funded research) Teaching (medical students or graduate medical education) Teaching Program Impact McGuireWoods LLP/Rush University Medical Center 19

20 Key Strategies for Success: Financials Clinical and Research 1. Complete Financial Proforma 2. Projected Revenue and Expenses for the first three years for Clinical and five years for Research (Capital and Operating) 3. Review of similar cases and physicians to obtain contribution margin 4. Reviewed by Medical Affairs Finance before presented to the workgroup McGuireWoods LLP/Rush University Medical Center 20

21 Key Strategies for Success: Developing A More Complete Financial Assessment Understanding the complete financial impact of employing physicians is critical Although the median direct operating loss per physician is generally large, aggregated hospital revenues from surgeries, interventions, and diagnostics can easily total several million dollars McGuireWoods LLP/Rush University Medical Center 21

22 Practical Considerations Other Physician Financial Relationships Medical Director Agreement Physician-Owned Equipment and Space Leases Call Coverage Agreements (may be with competitors) Management Agreements Consulting Agreements Retirement of Key Physicians Dealing with Physician Ownership of Competing Interests Retirement Plans and Employee Benefits Addressing participation in competing ACOs McGuireWoods LLP/Rush University Medical Center 22

23 Practical Considerations Be aware of the acquired practice's debt and lease arrangements Real Estate Leases Physicians may have invested in their offices and may want to continue in that space and be landlord going forward Need to ensure that lease payments are FMV Nose and tail insurance Can be cost prohibitive - will the hospital pick up cost? If so, should this value be included in valuation? Can the hospital provide nose insurance instead? Transfer of employees Will hospital employ all employees? How will benefits transfer over smoothly? Will the hospital assume PTO and give credit for years served for vacation accrual and benefits? McGuireWoods LLP/Rush University Medical Center 23

24 Practical Considerations Need strong physician leadership representative If a large physician group, encourage the practice to select a small committee of 2-3 physicians to lead negotiations Establish a plan to communicate with the group at large Assumption of Liabilities Existing equipment leases or service agreements Existing loans and lines of credit Post-Closing Windup Will physicians retain Accounts Receivable, Cash and Liabilities? Ensure tail coverage in place Consider employee benefits implications for employees that are not hired by the new owner will non-retained employees have COBRA coverage? McGuireWoods LLP/Rush University Medical Center 24

25 IV. Summary Only marry GOOD docs Hold people accountable Physician-centric focus Invest in great leadership Up- front difficult conversations help to avoid conflict down the road Avoid special deals Employment Agreements Asset Purchase Agreements Compensation Malpractice Insurance Policies and Procedures EMR and Medical Records Integration McGuireWoods LLP/Rush University Medical Center 25

26 Summary Clearly define what is expected up front Work ethic / productivity Use of EMR Compliance Education Accountability / discipline Support the mission McGuireWoods LLP/Rush University Medical Center 26

27 Questions Jason S. Greis Attorney, McGuireWoods Blog: Armen Gallucci Assistant Vice President Business Development, Medical Affairs; Assistant Professor, Department of Health Systems Management, Rush University Medical Center McGuireWoods LLP/Rush University Medical Center 27

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