Buying a Medical Practice: Legal Due Diligence for Physicians

What Legal Due Diligence Should Physicians Do Before Buying a Medical Practice?

Before buying a medical practice, you need to understand the legal and operational risks that come with it, in addition to its financial performance. Due diligence is the process of reviewing the practice before the purchase to identify its legal, financial, and operational risks. Your due diligence should examine the legal structure and day-to-day operations of the practice so you understand the risks attached to the business before you commit to the purchase.

A healthcare attorney can review the practice’s legal and regulatory history, identify potential problems, and determine whether to resolve issues before closing or address them in the purchase agreement. The goal is not necessarily to find a practice with no problems. It is to know what problems exist and determine who will be responsible for them.

1. Confirm the Entity and Ownership Structure

Start by determining exactly who owns the practice and whether the existing entity is legally permitted to own and operate a medical practice in the applicable state.

Healthcare practices are subject to ownership and corporate practice of medicine restrictions that do not apply to ordinary businesses. The entity may be a professional corporation (PC), professional limited liability company (PLLC), or another structure permitted under state law. If the current entity was formed incorrectly, the issue may need to be corrected as part of the transaction.

You should also determine whether the seller has authority to sell the practice and whether other owners, shareholders, or partners must approve the transaction.

Jackson LLP advises physicians on practice entities, ownership structures, and corporate practice of medicine (CPOM) requirements.

2. Understand the Purchase Structure (Asset or Stock Purchase)

The purchase agreement should clearly establish what you are acquiring and what you are not. An asset purchase generally involves purchasing specified assets of the practice rather than purchasing the entity itself. Those assets may include equipment, furniture, intellectual property, goodwill, patient relationships, and other business assets.

An equity or stock purchase involves acquiring the ownership interests in the existing entity.

The distinction matters because the structure can affect which contracts, liabilities, licenses, permits, and other obligations continue with the practice.

A healthcare attorney should review the proposed structure before you sign a letter of intent or any other binding document. Our team understands how much asset purchase agreements matter in a healthcare transaction.

Considering buying a medical practice? Jackson LLP works with physicians on practice acquisitions, transaction documents, and healthcare due diligence. Schedule a free 15-minute consultation before you sign the purchase agreement.

3. Review Existing Contracts

A practice may have dozens of agreements that affect its operations. Your due diligence should identify which contracts and agreements will transfer to you, which require consent, and which should be terminated or renegotiated.

Review agreements involving:

• Physicians and other clinicians
• Employees and independent contractors
• Vendors and service providers
• Billing companies
• Equipment leases
• Software and technology
• Medical directors
• Management services organizations
• Real estate
• Marketing and referral arrangements

Pay particular attention to termination rights, automatic renewals, assignment provisions, compensation obligations, indemnification, and restrictive terms.

If the seller or another physician will continue working in the practice after the transaction, that relationship should also be documented in a new or revised agreement.

4. Identify Existing Liabilities

A profitable practice can still have significant legal exposure. Your due diligence should look for pending or threatened litigation, regulatory investigations, insurance audits, payor disputes, billing problems, employee claims, tax obligations, unpaid vendors, lease obligations, and other liabilities.

You should also determine whether the practice has received demands for repayment or experienced Medicare, Medicaid, or commercial payor audits. Insurance audits can lead to denied claims, clawbacks, or additional scrutiny when billing or documentation problems are identified.

The purchase agreement should address known liabilities and clarify which obligations remain with the seller and which the buyer will assume. Representations, warranties, indemnification provisions, and other protections may be important depending on the transaction.

5. Review Patient Records and Privacy Compliance

Patient records are among the most important assets in a medical practice acquisition, but they cannot be treated like ordinary business files.

Determine how records will be transferred, who will have access, where they will be stored, and how patients will be notified when required. You should also review the practice’s HIPAA policies, privacy practices, record-retention procedures, and history of privacy or security incidents.

If the practice has inadequate HIPAA policies or has experienced a breach, identify those issues before closing. Jackson LLP advises healthcare practices on HIPAA policies, patient records, privacy, and related state requirements.

6. Evaluate Employees and Clinician Agreements

The people who work for the practice may be a significant part of what you are purchasing. Review employee and independent contractor agreements, compensation arrangements, benefits, accrued leave, classification, disciplinary issues, and any pending employment disputes.

Determine which employees will remain after closing and whether new agreements are necessary. For physicians and other clinicians, pay particular attention to compensation, termination rights, malpractice obligations, ownership rights, and restrictive covenants.

You should also review the employee handbook and workplace policies. A practice without consistent employment policies may have greater exposure to employment claims. Jackson LLP advises practices on healthcare employment agreements, classification reviews, and employee handbooks.

7. Examine Payor Agreements and Credentialing

Payor relationships can be a major part of the value of an established medical practice, but you should not assume that every payor agreement automatically transfers to a new owner.

Review the practice’s Medicare, Medicaid, and commercial payor agreements and determine whether a change in ownership requires notice, consent, recredentialing, or a new agreement.

Also review the practice’s billing history and any payor disputes, overpayments, audits, or credentialing problems. If reimbursement depends heavily on a particular payor, understand the terms of that relationship before relying on the practice’s historical revenue.

8. Plan for the Seller’s Transition

Decide whether the current owner will stay involved after the sale and, if so, for how long and in what role. The seller may remain as an employee, independent contractor, consultant, or medical director to transition patients, staff, referral relationships, and day-to-day operations to the new owner.

The agreement should clearly address the seller’s post-closing role, compensation, responsibilities, and transition period. It should also include appropriate protections against the seller opening or joining a competing practice after the sale. Depending on the transaction and applicable state law, this may include a non-compete or another restrictive covenant.

A clear transition plan can make the change in ownership easier for patients and employees while protecting your investment in the practice.

9. Review Regulatory and Compliance Issues

Healthcare practices operate under a range of federal and state requirements. Your due diligence should be tailored to the specialty and services offered by the practice.

Depending on the practice, the review may include:

• Corporate practice of medicine requirements
• Licensure and credentialing
• HIPAA and patient privacy
• Medicare and Medicaid requirements
• Fraud, waste, and abuse concerns
• Stark Law and Anti-Kickback Statute issues
• Controlled-substance requirements
• Telehealth compliance
• Billing and documentation
• Employment and worker classification
• Required policies and procedures

A compliance problem does not necessarily mean the transaction should not proceed. It may, however, affect the purchase price, closing conditions, representations and warranties, indemnification, or the work that needs to be completed before the transaction closes.

Let Our Team Help You With Your Practice Purchase

Legal due diligence should begin before you sign a binding purchase agreement. A healthcare attorney can create a due diligence checklist, identify documents to request from the seller, review the practice’s agreements and compliance history, and determine which issues to resolve before closing.

A thorough review can give you information to use when negotiating the purchase agreement and deciding whether you need additional protections.

Jackson LLP represents physicians in practice acquisitions and can review the transaction, identify legal risks, and prepare or negotiate the agreements needed to complete the purchase. Connect with us for a free 15-minute consultation to discuss your transaction.

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Frequently Asked Questions About Purchasing a Healthcare Practice