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Monday, November 1, 2010

Selling Your Medical Practice and Relying on the Hospital Fairies

Few physicians believe in the Tooth Fairy.  However, a surprising number of physicians seem to believe that the Hospital Fairies will protect their income if they sell their practice to the hospital.
A few years ago I asked the general counsel of a national hospital chain how he could explain not paying for goodwill in a purchased physician practice while requiring a covenant not to compete from the newly employed physician.  Specifically, I asked how a physician could “irreparably harm” a health system by competing, if that physician’s practice was only worth the value of its fixed assets the day before the acquisition.  With a big grin, he said, “we bring in fairies…”
On a serious note, he then stated that the covenant not to compete should have been separately bargained for.
His good-natured response seems like one possible explanation for a physician’s belief that declining reimbursement in the physician’s private practice will somehow be overcome if the physician is employed by a hospital. 
The typical hospital deal will provide an initial period of income based on what the physician made last year.  The physician is always keenly aware of declining reimbursement, and usually expects to earn less this year.  Therefore, the hospital offer often appears like a windfall. 
Unfortunately, after an income guarantee period, the hospital usually pays something based on MGMA percentiles or some other objective comparison of the physician’s income against the income of other physicians in the same specialty. 
In fairness to the hospital, income of a physician referral source must be pegged at fair market value to avoid Stark Law and other fraud and abuse concerns.
In other words, the law generally requires that hospitals do not pay their employed physicians more than they could earn in private practice.  Because of delays in collection and analysis of comparison data, there is usually a lag in the benchmarks.  In an era of ever-declining reimbursement, this lag tends to lead to higher salaries during the income guarantee period.  However, ultimately, the hospital will not be able to pay significantly more than a physician could earn in private practice.
Too many physicians are seduced by the initial income guarantee, and convince themselves that the hospital will somehow be able to continue to pay them more than what third party payors reimburse them for services, minus practice overhead.  Given the high overhead of most hospitals, the only way most physicians could earn more working for the hospital would be if the Hospital Fairies are working overtime.
I have represented many physicians who sell their practices to the hospital.  Some of these physicians were forced to sell because the costs of running their practices were increasing, while reimbursement remained constant, or fell.  In some cases, the physician had a critical specialty (OB/GYN, for example) that the hospital had to subsidize because of community need.  In far too many cases, however, the physician sold a valuable practice because of an expectation that the hospital would provide better compensation over time.
Selling a medical practice can be a frustrating experience.  Getting the best deal can be complicated.  If you are contemplating selling your practice to the hospital, consider your motivations carefully.  If you believe your compensation will increase as an employed physician, consider the possibility that you are basing your assumptions on the work of the Hospital Fairies.