Should You Consider Selling Your Medical Practice to a Hospital?

April 16, 2011

Without a doubt, times are tough for physicians in private practice. Operating costs continue to rise at a staggering pace and reimbursements are simply not keeping up. Recruiting and retaining physician talent continues to be a challenge and as the regulatory landscape continues to change and become more complex, compliance is becoming ever-more important. On top of all of this, it is apparent that impending health care reform is going to place much greater emphasis on technology, quality and efficiency than ever before. With all of these challenges, many physicians are understandably considering whether selling their practice to a hospital makes sense.

Hospitals and health systems can certainly bring to the table some valuable benefits. They can offer greater management expertise, cutting-edge information technology, billing expertise and significant compliance resources. If you are thinking about selling to a hospital, consider the following important factors:

How does your practice philosophy fit with the hospital’s care philosophy? Nonprofit hospitals have a charitable mission to fulfill and that mission must, in many cases, take precedence over profitability. Many physicians used to running a lean private practice may find it difficult to adjust to a nonprofit way of thinking.

How does your practice fit into the hospital’s strategic plan? Before making the leap, find out what kind of marketing and development resources the hospital is willing to commit to your practice. Will they relocate your office(s)? Will you get a prime location in the new MOB or be in the basement? Support commitments should be spelled out clearly in the transaction documents so that promises are not forgotten if and when a new administration comes to town.

Will the hospital’s IT work for your practice? An electronic medical record system that works well for a hospital may not be ideal for a physician practice. Before committing, get to know the hospital’s IT and make sure you can live with it.

Are the financial expectations clear? Many hospitals are avoiding large base salary guarantees in favor of productivity-bases compensation arrangements. Before signing on the dotted line, make sure you understand how your compensation will be determined and whether it is reasonable in light of your specific market and the past performance of your practice. If the hospital will allocate expenses to you, be sure expense categories are clearly defined and consider making a budget part of the transaction documents to avoid future surprises.

Where will you be in three years? Consider that most hospital employment arrangements have a term of not more than three years. Even if the initial deal you strike is too good to pass up, be prepared for changes when the contract is up for renewal.

Finally, what happens if things don’t work out? One of the most important things you can do is build an escape hatch into your arrangements which will allow you to return to private practice if one or the other party is unhappy with the deal. An unwind provision may be tied to specific financial or development milestones or can simply be exercisable by either party if they determine that the arrangement is undesirable.

Selling to a hospital can certainly make sense depending on your specific circumstances. However, before making this decision, always ask yourself this question: “What can the hospital do for me that I can’t do for myself?”

Reed Tinsley, CPA is a Houston-based CPA, Certified Valuation Analyst, and Certified Healthcare Business Consultant. He works closely with physicians, medical groups, and other healthcare entities with managed care contracting issues, operational and financial management, strategic planning, and growth strategies. His entire practice is concentrated in the health care industry. Please visit www.rtacpa.com

Previous post:

Next post: