Surgeons Guide to Buying a Practice

Bhagwan Satiani, MD, MBA, FACS, Professor of Surgery Emeritus and Academy Professor, The Ohio State University College of Medicine, Columbus, OH; and Jessica L. Bailey-Wheaton, Esq., Senior Vice President and General Counsel, Health Capital Consultants, St. Louis, MO; present tips and considerations for buying a surgical practice.

The number of employed physicians has increased significantly over the last decade. In a recent study by Avalere, supported by the Physicians Advocacy Institute, 3 out of 4 physicians now are employed by the corporate sector, health systems, and hospitals.¹Even though the number of physicians in private practice has dropped to 26% in 2021, physicians still own 46% of practices in the United States.² This reversal in practice ownership over the past few decades has occurred because of difficult economic conditions, including inflation, debt, work force shortages, burnout, professional isolation, and compensation stability, as well as the increasing administrative burdens in healthcare. Concurrently, plentiful capital in the hands of private equity and health insurance companies has allowed them to buy out medical and surgical practice owners looking to get out, with the hope of profiting in 3–7 years when they sell off the practice.³

However, there are a significant number of surgeons who like the features of a private practice. These features include clinical and business autonomy, more productivity and satisfaction with electronic medical records, and the ability to preserve the traditional relationship with patients rather than being on the clock.² Indeed, in a survey of 1,354 adults, nearly 74% associated the increase in hospital acquisitions with fewer options for patients and increased costs for care at existing hospitals.⁴The independent surgeons also prefer the ability to adapt to the changing healthcare landscape quickly and more efficiently rather than a bureaucratic employment model.

A buyer for an existing surgical practice can vary from an individual to a larger, single-specialty or a multi-subspecialty surgical practice. Since the cost of doing business is increasing, a larger or “super” group may be able to leverage their size with economies and efficiencies of scale, including contractual negotiations with insurance payers.

Before reviewing the details of the financial and legal parts of the purchase or buy in of a surgical practice, it is important to be clear about the goals and priorities in evaluating the choice of the existing practice.

Particularly for a first-time buyer, the priorities are somewhat similar to buying a house, albeit with the addition of the market (volume of patients) and the revenue estimates derived from the existing patients. These factors include the practice type and culture (if buying a share in the practice), geographic location, patient population, and size specific to the surgical subspecialty. The advantage of buying an existing practice is that if employees and patients are already in place and digging into the financials shows a profitable enterprise, one has a chance of improving the efficiency of the practice with new ideas.

What Type of Practice Setting Am I Interested In?

A buyer must have a good idea of the parameters of what one is looking for, such as location, size, referral area, hospital affiliation, price range, and, if important, any teaching opportunities.

There are many pros and cons associated with buying into an existing practice depending on whether it is a solo practice or a single- or multi-specialty practice. For instance, you may feel uncomfortable with business decision-making or nervous about complex surgical procedures to start with and may prefer to join senior colleagues in a larger group and/or single-specialty group.

How Do I Find a Practice to Buy?

Typically, once there is some clarity about the type of private practice and geographic location, the search should start at least 6—and preferably 12 months—prior to starting work. Most leads are obtained through colleagues, residency or fellowship mentors/faculty, specialty websites, and journals. Even if there are no surgical practices for sale in locations you prefer, it may be possible to make an offer to an attractive practice run by an older surgeon or surgeons.

Most times a recruiter will not be necessary unless there are specific conditions or needs that make it difficult to find the right opportunity. Recruiters either work for hospitals or health systems (in-house) or for recruiting companies (headhunters). A few large private practice groups also use recruiting companies. Going through a recruiter does not cost the buyer and their services are paid by the employer or seller.

What Should I Evaluate in the Practice?

Whether one is intending to buy an existing solo practice or buy into a surgery specialty group, there are important nonbusiness items to check (see Table 1). These include:

Leadership within the practice.
Quality of work-life balance. Call schedule, weekday and weekend coverage, and vacation time.
Culture of the practice. This may take more than one visit and conversations with not only the business manager but other support staff and hospital employees who the surgeons interact with regularly.
Reputation in the community. Ask around to discern from patients, hospitals, and other physicians as to the practice’s reputation in regards to patient care and working with others.
Strength of the support staff in terms of experience, quality, dedication, and numbers to allow one to focus on patient care. Team-based care is preferable and needs to be observed on a visit.
Quality of and access to support for electronic medical records and other communication tools.
How is it structured? What are the incentives, perks, benefits, etc.?

Table 1. Decision to Buy

Components

Negotiation for purchase price, determine fair market value
Purchase/Sell Agreement
Warrants & Representations (statement of facts and indemnity clauses)
Transaction structure: Asset acquisition, stock acquisition, or merger
Valuation: Select one or more methods (Comparable, Discounted Cash Flow, Internal Rate of Return, Payback Period)
Tax issues
Listing of assets and liabilities
Non-compete clause
Terms related to patients (EMR, HIPAA, Stark, AKB)
Referring physician reports
Termination of transaction
Transition plan
Post-closing items

Legend:

EMR = Electronic Medical Record

HIPAA = The Health Insurance Portability and Accountability Act of 1996

AKB = Anti-Kickback Law

Is the Practice (or Business) Really What It Appears to Be?

The complexity of buying a part or the entire practice can vary in complexity from a simple due diligence process to a very detailed intricate financial and legal process with accountants, attorneys, and valuation experts all needed to achieve a satisfactory conclusion.

Let us start first with a brief outline of the typical transactions and the process to follow once you have decided on the surgical practice and the owner has agreed in principle to sell all or part of the practice to you.

Types of Practice Transactions (Equity versus Asset)
Transaction related to the purchase of the practice can be of two types (see Table 2).

Table 2. Types of Practice Transactions

Equity	Asset
“Assets” of the Practice are sold Seller can identify/acquire specific assets and liabilities to assume Typically, favorable tax treatment for buyer (step up/goodwill amortization)	Equity (aka Stock/Membership Unit) Sale Equity ownership changes hands Same bank accounts, payor agreements, HR policies, etc. Liabilities (known and unknown)

Process

Involved parties
Legal counsel
Compliance (must have a seat at the table from the start)
Brokers
Valuation professional (if a valuation is needed/required)
Financial planner/accountant
Transaction life cycle (Figure 1)
Expected timeline
Estimated or range of cost of process
Negotiations: Depends on whether one is buying the entire practice or buying into a share of the practice. For the former common items include price, how the purchase price is to be paid back (cash or in installments), a non-compete, and if the seller is required to work for a limited time to allow patients to become familiar with the new owner. If the buy-in is to own a share of the existing practice negotiations may be about almost every part of the process including valuation, due diligence, etc.
Due Diligence (ensuring licenses are up to date, no fraud going on, etc.): This process has been described as “kicking the tires” or “lifting up the sheets before getting in bed” before making a deal. This means reviewing and analyzing an acquisition practice company’s relevant source of value and risk profile before doing a deal. Another goal is to identify any risks often synonymous with liabilities and/or “hidden costs,” any non-compliance with healthcare laws, and finally to determine if any necessary filings are needed. These due diligence measures can be reviewed in six main domains (see Table 3).

Figure 1. Used with permission of Health Capital Consultants

Table 3. Due Diligence

Type	Details
Corporate due diligence	An organizational chart, governing and constitutional documents of the corporation/organization, minutes of any board, shareholder, and managerial meetings List all related party transactions Include the Practice’s policies with respect to related party transactions Compile the CVs for all board members, managers, and vital employees Compile all information about the capital structure of the Practice that is not included on the Statement of Shareholder Equity Compile a list of all of the Practice’s permits, licenses, and authorizations Disclose if the Practice is currently restricted from doing business under any regulatory or legal provision and collect any communications with a regulatory agency, litigation, and investigation matters
Compliance due diligence	Practice’s compliance policies and program, oversight, operational structure, evaluations, and any related documentation Document review of Policy and Procedure differences to determine integration changes Billing and coding reviews, denials, payor contracts, and audits Training documentation HIPAA compliance, inspection, and survey findings
Tax due diligence	Copies of all federal, state, and local tax returns and any audits for the past 5 years including the resolution of any findings. Copies of any tax sharing, tax allocation, or related inter-company agreements Summary of all deferred tax assets, valuation allowances, and deferred tax liabilities Summary of any tax assets (e.g., carried forward trading or capital losses, excess management expenses), including details of how they are reflected in the statutory accounts Summary of any sale and leaseback transactions Details regarding the tax base cost of major assets where their base cost is other than the original cost
Financial due diligence	Copies of audited and unaudited financial statements and each subsidiary and affiliates Detailed description of any off-balance sheet/statement of financial position items, liabilities, or obligations of any nature Schedule and description of any contingent liabilities not disclosed or referred to in the financial statements Detailed schedule of the components of all prepaid expenses and deposits Summary of all material changes to accounting policies adopted Copies of all budgets, operating plans, and financial projections Summary of any cash management controls and practices Summary of investment policies Report reflecting all aged accounts receivable trial balances Summary of the Practice’s inventory costing system and other procedures and policies related to inventory All Vendor contracts
Human resources due diligence	List of current employees and/or independent contractors Obtain employee rules of conduct handbooks and safety policies Determine which employees should stay with the practice Review past employee disputes and future problems Review employee and/or independent contractor agreements Provider credentialing files Review employee health insurance and retirement plans Obtain a list of employee grievances and complaints Evaluate policies about labor unions and check for pending labor disputes or lawsuits Review workplace accidents and/or worker's compensation claims in the past five years Obtain documents and/or videos of new hire orientation and training sessions Review policies about sick days, paid holidays, paid vacations, and overtime pay Review policies about bonuses, incentives, commissions, and deferred compensation Evaluate emergency training and recovery plans
Information technology (IT) and intellectual property due diligence	Details of any current and planned IT initiatives/key projects Summary of all key IT resources, the practice's policies, and practices regarding the purchase and maintenance of software and hardware Summary of all material software and hardware utilized by the Practice including the physical location thereof Diagram of the Practice's technical architecture including servers, storage devices, operating systems, and databases Description of the networking systems utilized by the Practice Summary of any specific hardware configurations utilized Summary of any external IT contractors/consultants, vendor support or other support services and summary of services provided by all external IT contractors/consultants to which the practice is entitled Summary of annual costs associated with maintenance of IT hardware for the past 3 years Copies of all material contracts related to software and/or IT services obtained by the Practice Describe the capacity for growth in the Practice's current IT environment Summary of how technology acquired by the Practice Description of the key security protocols adopted by the Practice Description of the Practice's policies and procedures related to backups and/or disaster recovery Description of the Practice's data privacy policies and procedures Summary of all personal and/or sensitive information held and/or processed by the Practice Summary of all monitoring measures/tests conducted

Valuation
How do you determine fair market value (FMV)? A practical way to frame FMV (per the IRS) is the price at which a practice would change hands between a willing buyer and seller when neither is any compulsion and both sides have reasonable knowledge of the facts. A practice valuation is utilized for a variety of reasons including mergers, acquisitions, and buying or selling the practice. The value of intangibles such as good will depends on the existing laws and practices in the area. An appraiser will collect numerous data points before submitting a report.
- The cost of appraisal depends on the complexity of the deal being considered and if litigation is involved.
- Most reports are not formal but simply to allow the buyer to get an idea of the worth of the seller’s practice. Basically, the buyer wants to know (a) if the revenue stream is strong and confirmed by data and (b) if there is predictability for a future income stream.
- Commonly utilized approaches to valuation include: the cash flow or income method, the asset method based on assets minus liabilities, and the market value approach, which is similar to real estate transactions using comparable sales in the area. Because there may not be enough practice sales in the area, the other two methods may be more practical.
- Discounted Cash Flow (DCF) method. This method accounts for the existing surgical practice as a ‘going concern’ that is expected to generate future cash flows in the future. This is followed by estimating future revenues and expenses and then “discounting” it back to calculate present value of the projected profits.
- How to determine “investment value.” May be defined as the specific value of an investment to a particular investor (or class of investors) based on individual investment requirements.⁵This is distinguished from FMV, which is impersonal and detached.
Regulatory Considerations: Agencies Involved
While there are many regulatory agencies involved in buying all or part of a practice, the specific actions are dependent on state laws and guidance. Some common areas to concentrate on are listed below. Is there a management services organization (MSO) involved? If so, the practice will execute a management services agreement with the MSO for it to provide administrative and management services to the practice. That agreement is usually a long-term agreement.
- Be sure to review the key management agreement provisions, including compensation and fair market value, medical records, hours/schedules, employment of licensed professionals, selection of equipment and supplies, third-party payor contracting, proprietary information, clinical care
- Federal Anti-Kickback Statute
- Stark Law
- Anti-assignment laws
- Representations and Warrantees. Regardless of deal structure, the basic transaction documents typically contain representations and warranties of the buyer and the seller to one another, which set forth the basic assurances of a party that certain facts are true and may be relied upon when entering into the transaction. Seller representations and warranties will usually address substantive areas such as compliance with laws and permits, litigation matters, material contracts, real property matters, and broker’s fees
Drafting of Agreements
- While dictated by legal counsel, based on the specific transaction, the practice setting, and the state in which the transaction is consummated, typical types of documents included may be:
  - Letter of Intent/Term Sheet
  - May wrap up a Non-Disclosure Agreement within the LOI or execute a separate document
- Definitive Agreement: Purchase Agreement or Shareholder Agreement if only buying in as a partner of an established practice
  - Sample provisions include:
    - Representations and Warranties
    - Indemnification/Fundamental Representations
    - Post-Close Cooperation Clauses
    - Closing Conditions
  - Promissory Note (if executing a Shareholder Agreement)
  - Common Interest Agreement
  - Transition Services Agreement
Closing
Post-Closing Items
- Patient/staffing
- Liability carrier
- Marketing
- Advance notification of any local, state, or federal agencies.
  - Whenever a practice undergoes a transaction, there will almost always be some notice, consent, application, or other process to engage in with respect to each “Permit” (i.e., each license, certificate of need, certification, provider number, or filing with, any Governmental Body necessary for the conduct of, or relating to the operation of, such Person’s Business as currently conducted).
  - Types of permits: Operating permits, equipment permits, materials/waste permits (e.g., medical waste, radioactive materials), local permits, federal permits Drug Enforcement Agency Controlled Substances, and Clinical Laboratory Improvement Amendments of 1988).

Conclusions

It is important at the start to be clear about the acquisition strategy and goals to define the type of practice that is ideal for the long-term success and happiness that one desires. Essentially your goals drive the strategy, which then becomes the roadmap for your acquisition initiatives and will serve you well. You are only as good as your team, so be sure to recruit your team—whether that legal counsel, compliance, broker, valuation professional, and/or financial planner/accountant—at the outset so that nothing is missed.

References

COVID-19’s Impact On Acquisitions of Physician Practices and Physician Employment 2019-2021. Available at http://www.physiciansadvocacyinstitute.org/Portals/0/assets/docs/PAI-Research/PAI%20Avalere%20Physician%20Employment%20Trends%20Study%202019-21%20Final.pdf?ver=ksWkgjKXB_yZfImFdXlvGg%3d%3d. Accessed 7/20/2022.
Newitt P. Private practice physicians by the numbers. https://www.beckersasc.com/asc-news/private-practice-physicians-by-the-numbers.html. Accessed 7/21/2022.
Satiani B. Zigrang TA, Bailey-Wheaton JL. Should surgeons consider partnering with private equity investors? Am J Surg 2021 (2):453-458. doi: 10.1016/j.amjsurg.2020.12.028.
New Poll Numbers Indicate Growing Concerns Among Americans. About the Impact of Healthcare Consolidation. Available at https://www.lugpa.org/polls-indicate-concerns-about-healthcare-consolidation. Accessed 7/20/2022.
Pratt S. Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 5th ed. (New York: McGraw-Hill, 2008), p. 43.

About the Authors

Bhagwan Satiani MD, MBA, FACHE(R), FACS, is Professor Emeritus of surgery at The Ohio State University in Columbus.

Jessica L. Bailey-Wheaton, Esq., is Senior Vice President & General Counsel at Health Capital Consultants in St. Louis, MO.

The Surgeon's Guide to Buying a Practice