Building a profitable medical practice from the ground up takes years and a considerable, long-term financial commitment. Today many physicians in private practice choose to purchase established practices that come with patients, records, equipment, employees and office space.
Buying a private practice is one of the biggest decisions many physicians will ever make, so it’s important that they understand any potential pitfalls. The following outlines some of the biggest mistakes physicians make when acquiring a medical practice.
They Haven’t Spent Time at the Practice
Not spending considerable time at the practice you’re looking to buy is a little like buying a very expensive car without test driving it. Each physician’s practice has a personality of its own. The more time spent with it upfront will result in fewer disappointments later.
Due Diligence is an Afterthought
Do your research. While thoughts of purchasing a medical practice usually bring to mind things like patients and assets, there are many other things to consider. For instance, uncover information about the lease, contracts in place with physicians or other personnel, or whether the purchase will transfer enrollments and filings in government programs, like Medicare and Medicaid. It is also critical to assure that the physician has not been sanctioned or excluded from any payer program.
The Evaluation of the Practice is Incorrect
The best way to properly evaluate the value of a practice is by obtaining the last several years of tax returns and financial statements. Financial statements should include:
- billing and collection records,
- aging reports for receivables,
- all third-party payer (insurance companies, government agencies) contracts, including their respective reimbursement rates,
- a detailed list of all expenses, and a
- comprehensive list of all assets.
In short, make sure you take all guess work out of the purchase.
Forgetting the Restrictive Covenant
A restrictive covenant prevents the seller from taking the proceeds of the sale and opening up a practice next door. A restrictive covenant should include a designated period of time and geographic constraints. In some states such as Texas, there are specific statutory requirements to assure enforceability of the covenant.
A Letter of Intent Isn’t Entered or Considered
When an agreed upon price has been negotiated, a formal letter of intent lets the seller know of your intent to purchase their practice. While it’s non-binding, it lays the groundwork for the final purchasing agreement. It should set forth the basic principles of the deal, including price and payment terms. Having one in place will make the final purchase agreement easier to complete.
They’re Unable to Bill Services to Insurance Companies or Government Agencies
When purchasing a medical practice, don’t assume that you’ll simply retain all of the patients and the associated revenue. As a practical matter, patients belong less to physicians and more to third-party payers, like insurance companies, government agencies or employers. Most third-party payer contracts are not assignable, so working with an experienced healthcare law attorney is important, especially as it relates to third-party payers.
There’s No Protection Against Liabilities Incurred by the Seller
There must be contractual language that holds the purchasing physician harmless so creditors can’t pursue them for liabilities incurred by the seller. To minimize liability, purchasers often acquire only the “hard assets” of the practice.
Tax Issues Involved with Buying the Medical Practice Haven’t Been Considered
There are numerous tax ramifications involved when purchasing a medical practice, and they start based on the type of transaction involved. Ensuring that you involve an experienced healthcare contract attorney early in the process will help you guard against an expensive “gotcha” tax later.
These are some of the biggest mistakes physicians make when acquiring a medical practice. Oftentimes the purchasing physician has a close personal relationship with the seller, making questions and conversations about legal issues uncomfortable. But making sure all issues are addressed upfront will save you a lot of time and money later…and possibly save a great, professional relationship.
Working with an experienced health law attorney early in the process is the best way to avoid the biggest mistake—not obtaining legal assistance. If you have questions about purchasing a medical practice, contact Larry “Max” Maxwell, one of the Texas’s most experienced healthcare contract attorneys.