Hospitals and physicians have opposing interests in the sale of a medical practice. Here's how to ensure you get what you want as the seller.
This past week, I had a conversation with in-house counsel for a hospital acquiring my client’s medical practice. As we discussed the open terms of the deal, it became apparent that we shared different goals in the transaction. It is these very opposing objectives that play an important role in how compensation and termination issues are negotiated in a practice sale.
My main goals when negotiating the financial aspects of a physician acquisition include: (a) getting the most money possible for my physician in the practice sale; (b) assuring the physician has a guarantee of employment and best possible compensation; and (c) protecting the physician from termination for failure to meet certain productivity benchmarks and other arbitrary/unanticipated reasons.
The hospital’s concern in negotiating a purchase, on the other hand, is whether the physician will be brought on board only to drop productivity once he or she is no longer in private practice. The hospital, having paid for the practice assets (and possibly tail coverage as well), will be looking to avoid losing more money by keeping an unproductive physician, and to prevent a good employee from easily walking away.
Keeping these opposing interests in mind, the parties must compromise in negotiating the letter of intent and sale documents:
1. Compensation should be set as high as the hospital is willing, taking into account the physician’s performance in private practice as well as the limitations imposed by federal law.
2. Consider an approach that rewards the physician’s productivity through a bonus if the compensation cannot be set as high as desired. Make sure the bonus is payable for measurable goals to which the physician agrees. Ideally, the bonus should be payable as often as quarterly and should be payable in the event the physician is terminated for any reason.
3. Lock in some committed period of time that the hospital cannot terminate the physician without cause. If the compensation program has been fairly/reasonably built to take into account the hospital’s concerns, this should not be an issue. This guarantee provides job security for the physician which is usually a priority in such a transaction. If the hospital insists on being able to terminate without cause at any time, consider payment of severance or another financial payout should without cause termination occur.
4. Always look to have the hospital cover tail costs, if applicable, upon termination of the physician’s hospital employment. Some hospitals may require cost-sharing over a period of time so the physician is incentivized to stay longer. The physician’s goal, however, can still be largely met by assuring that if the physician terminates for cause, or the hospital terminates without cause at any time, the hospital will cover the full cost of the tail.
5. It is impossible to avoid “for cause” grounds for termination in a physician contract but it’s important to limit grounds for termination which can undo the negotiated benefits. Vague or subjective language involving “disruptive” behavior or the “hospital’s reputation” can be unfairly used against a physician. Require good faith to be used by the hospital and mandate some hearing before a committee or peer review board before termination can occur. The physician, additionally, should receive notice and an opportunity to cure as many of the grounds for termination as possible.
6. There are typically two restrictive covenants in a sale transaction. The first is found in the Asset Purchase Agreement and the second in the Employment Agreement. While these two restrictive covenants may not be exactly identical, they should be aligned based on negotiation of the parties. I typically try to modify the restrictive covenants so they do not apply in the event the physician is terminated without cause or the physician terminates for cause. The same concerns about restrictive covenants as I have previously discussed will always be at issue: the covenant must be reasonable as to geography, scope, and time limitation.
The process of negotiating a practice sale and a physician’s subsequent employment can work to everyone’s advantage by knowing what to ask for and keeping the goals of each party in mind. Addressing as many of these issues in the letter of intent as possible serves everyone’s best interest.