Call it a hangover a long time in the making. Many medical practices, which jumped at the opportunity to be leased by hospitals in a wave of transactions around 2008, are now regretting the terms of these arrangements as they come up for renewal.
Many of the agreements — which resulted in what looked like an outright acquisition — involved the leasing of a medical practice's facilities and physicians to a hospital-owned entity, typically another medical practice. These leasing arrangements usually involve specialty practices, such as cardiology, urology, and gastroenterology, among others. More recently, primary-care practices have also been targeted.
Hospitals have pushed for the leasing arrangement after going through a period, more than a decade ago, of acquiring medical practices, often at very significant prices, and paying the physicians a fixed salary and benefits. As a result of these costs, the hospitals failed to realize the financial benefits they expected. These new leasing arrangements are very favorable to the hospitals because, unlike prior acquisitions, the hospitals are not paying any purchase price for the medial practice, and the physicians are being paid strictly on their productivity.
A significant number of these formerly independent medical practices neglected to incorporate adequate protections for themselves in these initial leasing agreements and are now facing unreasonable proposals from hospitals seeking lease renewals. One prominent northern New Jersey cardiologist, in response to an insultingly low financial lease renewal proposal from a hospital, resigned from the practice and is sitting out the one-year restrictive covenant imposed by the hospital in the original agreement.
The motivations for physicians to sell —or lease — their practices are the higher reimbursement rates the hospitals can command for the same services performed by physicians, and the financial, staffing, and other assistance the hospitals can provide the practices to cope with their ever-increasing administrative burdens. Hospitals' major motivation for leasing or acquiring a medical practice is to enlarge the geographic area from which the hospital draws its patient base in order to increase admissions and other utilization of the hospital's facilities and services. The establishment of accountable care organizations under the Affordable Care Act, with their potential for enhanced levels of reimbursement, appears to be another motivating factor.
Although not much can be done at this time to protect medical practice owners who participated in this first wave of transactions, physicians who are considering, but have not yet entered into such arrangements with hospitals can learn from their mistakes and negotiate better deals than their predecessors.
A medical practice's ability to negotiate protective provisions into a leasing agreement is dependent on its bargaining strength when it comes to the hospital. This comparative strength varies greatly from practice to practice, but our experience indicates that most medical practices underestimate their bargaining clout in the initial negotiations.
Among the most important provisions medical practice owners must insist upon when negotiating initial leasing agreements are:
1. Protection of the practice's ownership of its patient base;
2. Protection of ownership of practice clinical records;
3. Protection of the practice's continuing separate identity and name recognition;
4. An "escape and return to status quo" clause or, in the alternative, a "honeymoon period;"
5. Limited, or the elimination of, non-compete restrictions;
6. Ensuring fair market value for the hospital's payments for the lease of the practice's office and other facilities;
7. The ability to re-open negotiations over lease payments during the term of the lease if certain triggering events occur ( triggering events can include the unexpected cost to repair or replace medical equipment or the staffing and support costs associated with adding a new physician to the practice);.
8. The establishment of a budget for the practice's operations, to be paid by the hospital;
9. The ability to re-open negotiations for unexpected increases in the practice's operational costs;
10. Ensuring the RVU reimbursement rate properly compensates the physicians;
11. Protection of the RVU rate from reductions in third-party reimbursement rates;
12. Allocation to the hospital of as much of the risk as possible with reimbursements by third-party payers;
13. Protection of the practice from liability for the hospital's activities;
14. Establishment of criteria, standards, or other parameters to be applied to determine the physician's RVU rate in the negotiations for a renewal of the leasing agreement; and
15. Similarly, establishment of criteria, standards, and/or parameters to be used in negotiations over the renewal of the lease, for determining the lease payment for the practice's facilities.
Other possible, alternative provisions could include, in effect, a line of credit from the hospital and perhaps, but not likely, that the lease arrangement is not exclusive.
Dennis J. Alessi is an attorney with the law firm Mandelbaum Salsburg who has more than two decades of experience in representing various types of healthcare and related companies, including management and billing service providers, surgical and imaging centers, medical groups, physicians, and companies in the healthcare industries. E-mail him here.