Liability Checklist: Buying a Medical Practice

October 14, 2014

Physicians who buy a medical practice assume a large spectrum of risk beyond their personal medical malpractice liability.

Over the last few weeks I've discussed both estate-planning-related issues doctors should consider when buying or selling a medical practice and the unique liability issues sellers must consider. Today I would like to discuss joining an existing practice as a partner or buyer. Addressing these new or expanded issues is as important to your practice's longevity as being professionally represented for the transaction itself.

Here are legal and financial issues to consider in medical practice sales transactions and a basic liability checklist for new owners and partners.

1. New partners aren't exempt from responsibility

I'm surprised by how many partners don't have any idea about how their practice handles these sensitive issues, and in many cases I hear a nearly identical response, "We have a senior doctor/partner that handles that stuff for us, I don't really know the details." In many cases after asking just a few simple questions, I discover that many liability exposures are poorly addressed or have never been dealt with at all.

I always advise my clients who are buying into a practice as a partner to ask questions before buying and to advise their attorneys of issues that need to be included in the purchase agreement. Just because a practice is successful or has been around many years does not mean you can assume liability issues have been adequately handled.

2. Congratulations, you now have CEO liability

In many cases buyers and new partners of medical practices seem to forget that they are often now legally responsible for all corporate acts and omissions to a high degree of civil and even criminal liability, as practice owners or executives. I've stressed the importance of high limits of D&O insurance if you are a medical practice owner, officer, or executive, as the first essential line of defense. Again, this liability is diffuse and covers nonmedical issues you may not be familiar with, so get good help in identifying the issues and the order in which they need to be addressed such as:

HIPAA violations and loss of patient financial data including both to hackers and in the increasingly common case of theft or intentional misuse by employees;

Internal revenue code violations for tax status filing and reporting requirements imposed on the business. Someone in your organization is always personally responsible;

Medicare/Medicaid fraud and billing liability;

Emergency Medical Treatment and Active Labor Act (EMTALA) violations for failing to meet legal burdens to provide care to indigent patients seeking emergency care.

3. Employer liability

You are now also responsible for a wide range of issues as an employer. Examples of direct liability I've previously provided tips on handling include employment practices, wage and labor compliance, the proper classification of employees as contractors, and preventing any harassing conduct between employees. You are also assumed to be in control of the daily conduct of a large number of people both personally and in terms of their position and reasonable qualifications as service providers, for instance, employees that require credentialing for certain provider functions and more basic issues like employee screening.

4. Debt liability

I've seen many doctors get in trouble with debt of all kinds: purchase money debt; business real-estate-related debt; and even vendor and equipment expenses in during medical practice startup. Adding this debt load to your existing fixed personal overhead must be approached carefully, as doctors often have multiple layers of risk at play - most notably their personal income, the investment they put into the practice purchase (including building or significant capital investment in some cases), and any underlying personal guarantees. Make sure you understand the limits of the debt you are assuming, how it is secured, and how it may affect your other assets, including the assets of your spouse.

Finally, a reminder that given this increased level of liability on so many fronts, your personal asset protection plan must be well established and put in place by experienced counsel, ideally before you make the purchase transaction itself. Remember that you may need to make personal guarantees, collateralize specific assets and/or provide financial statements. Almost no planning will work against such a secured creditor or one you plan against only after signing personal guarantees, nor will any remedial planning protect you from the liabilities above.