Buying back the practice

July 17, 2018

Physicians need to consider what they might need to do in order to repurchase their medical practice-then get those provisions in place before agreeing to the sale.

When physicians sell their medical practice to a local hospital, the focus is typically on getting the best price for their assets and negotiating a generous long-term compensation package.  These are certainly important aspects to any practice sale. However, more and more often, I am working with physicians who desire to repurchase their medical practices after some period of time. Unfortunately, provisions related to buying back a practice are rarely contemplated or included in sale documents, which can make it difficult-if not impossible-for physicians to easily reacquire their former practice.

If physicians are even remotely interested in one day reacquiring their practice, it is a good idea to think about including provisions that describe how that process would occur. Some concepts to consider include the following:

  • How long must the selling physicians work before they can seek to reacquire the practice? Typically, practice sales are accompanied by an employment commitment of up to three (3) years. I like to link the reacquisition right to the physicians meeting this obligation.

  • What happens if there are numerous physicians in the practice being sold? Who has the right to repurchase the practice? Typically, the selling physicians should agree in advance how this process will work (i.e., a majority must agree to the transaction). Without establishing this clearly upfront, a battle can occur among the physicians, which is not in anyone’s best interest.

  • The time frame for the reacquisition should be specified in the initial sale documents to ensure the selling entity assists in getting the deal done. Without a time frame, the transaction may linger indefinitely and frustrate physicians. I like to suggest that the physicians be required to provide written notice triggering the reacquisition, and the parties then must use best efforts to complete the transaction within six (6) months or another agreed upon time frame. Because a valuation of practice assets and renegotiation of equipment and other leases may be required, it is important to provide adequate time to complete the particular deal. Additionally, creation of a new practice entity, credentialing new payer contracts, and other details may need to be put into place, which can take several months to complete.

  • In drafting the reacquisition language, remember that the physicians reacquiring their practice will need to take possession of medical records, equipment, employees, practice space, and other assets essential to practice operations. These assets will either need to be valued at the time of the transaction or the parties will need to agree in advance to another approach that will meet fair market value requirements. It’s important to think through exactly what the practice will need to “take back” in order to allow the reacquisition to occur. Forgetting an important element can prevent a successful transaction from occurring. For this reason, it is ideal to draft this language at the time of the initial sale, when the parties are aware of all the assets being sold and can clearly outline future reacquisition needs and challenges.

  • The original sale document/employment agreement(s) entered into by the selling physicians and the hospital usually contain restrictions on competition, solicitation, and other competitive activities. These will need to be waived in the event of a sale. Although this seems obvious, it is essential to clarify this point and link it to the reacquisition rights.

Although some hospitals will not agree to provisions that outline sale of a practice back to the selling physicians, agreeing to a reacquisition approach in advance is advantageous for many reasons. For example, sometimes hospitals are unsuccessful at running the physicians’ practice profitably or the physicians have not assimilated well to hospital employment. Under such circumstances, selling the practice back is an ideal approach. Outlining the sale in advance can help ease the transition. More importantly, even if the practice and physicians are doing fine, this does not necessarily mean the physicians are satisfied or will remain beyond the initial contract term.

From the hospitals’ perspective, agreeing to a reacquisition can provide a mechanism to assure the physicians remain in the community and that they will continue to refer to, and use, hospital resources. This is an important goal for many hospitals that wish to retain certain specialties, avoid losing physicians to competing hospitals, and preserve certain income streams. For all of these reasons (and many others), reacquisition provisions are certainly worth considering.

Ericka L. Adler has practiced in the area of regulatory and transactional healthcare law for more than 20 years. She represents physicians and other healthcare providers across the country in their day-to-day legal needs, including contract negotiations, sale transactions, and complex joint ventures. She also works with providers on a wide variety of compliance issues such as Stark law, Anti-Kickback Statute, and HIPAA. Ericka has been writing for Physicians Practice since 2011.