5 Things to Do Before Buying a Healthcare Practice
If you’re thinking about purchasing a medical, veterinary, or other healthcare business, you don’t want to skip these five crucial steps.
(Updated August 2019)
1. Review the Books
Before you buy a practice, you’ll need to evaluate all liabilities and assets. This helps you understand how much business is necessary to sustain the practice, how adequately (or inadequately) employees are compensated, whether patient accounts are sent to collections, and whether the practice is something in which you want to invest.
With the books in front of you, ask yourself how you will grow the business. Will you hire more providers, contract with more insurance companies, or switch-up the practice model? How patient will you be with the practice’s financial growth?
Knowing the books can also help you assess how the business might be impacted if a third-party payor lowered their reimbursement rates, an important vendor raised their monthly rates, or a popular provider left the practice.
The books also offer important clues about the practice’s operations. If you feel like the providers are under-compensated, then you may suffer greater employee turnover or dissatisfaction. A practice with an aging workforce may experience unique challenges with the departures of those who know the business best and the inconsistency brought on by considerable new hires.
When guiding clients through the process of purchasing a practice, we counsel clients about how legal or regulatory changes might impact the practice. For example, an independent rehabilitative medicine practice may see a slight downturn in patient visits if physical therapists succeed in obtaining direct access. Conversely, increased regulatory scrutiny over independent laboratories may increase the profitability of a medical practice’s in-house lab.
If you thoroughly review the books, you’ll better understand where the practice earns its money and where it spends those earnings.
2. Evaluate the Practice’s Patients
If the current owner practices at the clinic, critically evaluate what percentage of the patients will be lost because of her departure. (Hint: This number is never zero.)
What portion of the practice’s patients does the owner personally treat? Also consider whether some of the practice’s other popular providers might leave with the current owner, and evaluate the impact of such departures on the practice’s financial health.
Your review of the practice’s operations should also consider the patients’ insurers. Many providers in Illinois have struggled to obtain Medicaid reimbursements during the State’s budget impasses. For those operating practices with heavily Medicaid-dependent patient populations, this creates a substantial burden.
Conversely, if the practice primarily serves Medicare beneficiaries and your municipality has approved construction of a high-rise senior housing complex across the street, you may soon experience an influx in patients.
While some of these details are speculative, so is the fact that the practice is worth anything. Remember that you are considering buying an existing practice instead of starting a new one because of the patients, providers, goodwill, vendor relationships, real estate, and reputation that the practice has accrued. If any of those categories of value are seriously deficient, it can impact the overall value of the practice and may negate the benefits of purchase.
3. Review the Practice’s Compliance with Healthcare Laws and Regulations
Small established practices have often neglected their legal and regulatory compliance. In contrast, mid-sized to larger practices are sometimes the most compliant, as they’re keenly aware of what was required to build their practice and view compliance as something that cannot be compromised (these are the practices most likely to use corporate counsel services too).
If you’re looking at buying a practice, an experienced healthcare attorney can work with you to evaluate the practice’s compliance. This information can be used to negotiate the purchase price, but it also gives you lead-up time to remedy the deficiencies before you purchase the practice and land yourself personally responsible for its ongoing compliance.
Consider this like the inspection you have performed before you purchase a house. Most new practice owners — in recognition of the substantial investment involved with purchasing a practice — have low risk tolerance and want to ensure the practice is compliant. We frequently identify the following deficiencies:
The practice’s corporate form (e.g., LLC, corporation) is not one that can be operated for practicing the professional services offered at the practice. This is a common issue that arises when a business was started by a tax professional, a healthcare provider, or an online service. Healthcare businesses are subject to very specific rules, so this often requires correcting before the practice can be sold.
HIPAA Policies and Procedures
The practice does not have compliant HIPAA policies and procedures. This means that it does not perform risk assessments annually (or more frequently, as required), and it does not maintain written policies addressing all aspects of HIPAA’s privacy, security, and breach notification rules.
The practice lacks a single governing employment document — most commonly an employee handbook — by which all employees are uniformly hired, promoted, paid, disciplined, or terminated. The absence of such policies can create increased liability in employment claims and lawsuits.
Without clear guidance, hiring professionals might collect legally-prohibited information, employee disciplinary sanctions may be inadequately documented, or employees may engage in social media-related misconduct.
4. Obtain an Independent Valuation of the Practice
This will require the current practice owner to open up the books for your valuation consultants. Often, sellers are more willing to do this when a third party requests the information, and it’s easier for a third party to request supplemental information and more details than for you to feel like you’re being a squeaky wheel.
With a third-party valuation of the practice in-hand, you’ll be in a better position to make an informed purchase offer or respond to counter-offers. Practice owners also commonly expend significant sweat equity on their businesses, and a neutral third party can take some of the emotion out of the negotiation and help quantify the practice’s true value.
Finally, the valuation can help you secure a loan to purchase the practice — much like a home appraisal can help establish a property’s value when you’re seeking a home loan.
When a client wants to sell their established practice, we also recommend that they obtain an independent valuation of their practice. The information gathered from such an analysis can help to set a list price, negotiate offers, and draft counter-offers.
5. Make a Transition Plan
Many practices are purchased by a provider who is currently employed by the practice. This can make for either a very smooth or a challengingly rocky transition.
The primary challenge? Your current coworkers will soon be your employees, meaning you’ll be charged with paying, disciplining, and supervising them. Think carefully about the transition, and consider how these changes will be perceived by your workforce. You may also want to carefully consider the timing and manner in which you’ll announce your new ownership to the practice.
It’s also common for an outsider to purchase a healthcare practice, particularly if the current owner is retiring. While this transition sidesteps the stressors associated with a former employee suddenly becoming the boss, it carries its own challenges. Namely, the new owner is unfamiliar with the practice’s operations and culture. This can be an asset — particularly if the practice needs a rejuvenation of energy, capital, or structure — but a cautious introduction of the new leadership to the workforce is important to ensure that employees remain motivated and optimistic about the change.
Whether you’re buying it as an insider or an outsider, we find that this is a crucial juncture for introducing changes to the employee benefits structure, practice culture, or other policies. These details are all addressed in our healthcare employee handbooks.
As a new owner, the best way to set the stage for your leadership is to present your workforce with a fresh employee handbook that explicitly outlines your expectations, employees’ rights and responsibilities, and grievance procedures. Read more about our healthcare employment services here, or schedule a free consultation with one of our attorneys.
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