Buying and Selling a Physician Practice – legal considerations for parties.

By Sarah Charles Wright

Dr. Smith has built a successful medical practice over the last 30 years, but is ready to retire and sell the practice to another physician. Dr. Jones practices with a group in the same specialty as Dr. Smith and thinks buying Dr. Smith’s practice presents a great opportunity for him to leave his medical group and open up his own office. Dr. Smith has the practice professionally appraised for fair market value. Based on the appraisal, he and Dr. Jones agree on a purchase price. At least a month before the closing, Dr. Smith will send a letter to his active patients explaining his retirement, that Dr. Jones is taking over the practice, and recommending Dr. Jones’ services. At closing, Dr. Jones will make a down-payment and sign a two-year note for the balance of the purchase price. Dr. Smith will turn over his active patient files, office equipment, etc., to Dr. Jones and sign a two year non-compete. Dr. Jones calls his lawyer, explains the deal and asks the lawyer to draw up an agreement.

Sounds fairly straight-forward, right? Dr. Jones’ lawyer says “Not exactly.” Compliance with HIPAA and the federal Anti-kickback statute are just two of the legal concerns Drs. Smith and Jones should discuss with their attorney before finalizing the terms of the deal.

 Transferring Medical Records Under HIPAA

Patients have the right to choose their physician. HIPAA takes both the patient’s choice and privacy into account. The physical records belong to Dr. Smith but the protected health information in them is subject to the patient’s HIPAA privacy rights. HIPAA does not allow Dr. Smith to hand-over patient files to Dr. Jones without the patients’ written consent. Until he receives that signed consent, Dr. Smith will continue to be responsible under HIPAA and the AMA Code of Medical Ethics for maintaining the confidentiality and security of the PHI in his patient records and cannot disclose patients’ PHI to Dr. Jones.[i]

Dr. Jones’ best opportunity to acquire Dr. Smith’s active patients is to take custody of the records from Dr. Smith at closing. To facilitate this, Dr. Smith should enclose a patient consent form with his letter notifying patients of his retirement. The letter should ask patients to sign and return the form authorizing Dr. Smith to transfer their file to their new physician. At the closing, Dr. Smith should also have Dr. Jones sign a HIPAA business associate agreement to serve as custodian of Dr. Smith’s remaining active patient files until receipt of the patient’s signed consent to transfer.

 The Anti-kickback Law and Selling a Medical Practice.

The federal Anti-kickback law makes it illegal to knowingly and willfully solicit, offer, pay or receive any “remuneration,” directly, indirectly, overtly or covertly, in cash or in kind, for referral of business reimbursed by Medicare or Medicaid.[ii] The compliance concern is that Dr. Jones’ payments to Dr. Smith over two years may be seen by the OIG[iii] as disguised illegal remuneration to Dr. Smith to make future referrals of Medicare and Medicaid patients to Dr. Jones.[iv] Federal regulations provide various safe harbors under the statute, including one for the sale of a practice by one practitioner to another.[v] Strict compliance with the safe harbor is necessary and Dr. Smith and Dr. Jones will need to modify the terms of their deal to satisfy both of the following requirements:

(1) the period between the closing date and when Dr. Jones finishes paying Dr. Smith for the purchase price cannot be longer than one year; and

(2) Dr. Smith cannot be in a professional position to make referrals or otherwise generate business for Dr. Jones that is reimbursable under Medicare, Medicaid or other federal health care programs after one year from the date of the first agreement pertaining to the sale.

If the date of the first agreement is the closing date, Dr. Jones must pay Dr. Smith for the practice within one year of the closing date, not two years. This also means that Dr. Smith needs to close his practice and truly retire within one year of the closing date. Any arrangement for Dr. Smith to provide consulting services or work at Dr. Jones’ office part-time during that year will require compliance with additional safe harbors under the Anti-kickback law.

 Other Legal Considerations.

If Dr. Jones’ pays Dr. Smith the purchase price over time, Dr. Smith will have a financial interest in Dr. Jones’ practice until paid in full. If the practice involves designated health services, the sale must be reviewed by counsel for Stark implications.[vi] Other matters to consider include: (i) canceling ongoing contracts with payors; (ii) whether active equipment and space leases can be assigned to Dr. Jones; (iii) collecting patient receivables; (iv) obtaining advice on the tax consequences of the sale; (v) professional liability tail coverage, (vi) fair notice to Dr. Smith’s employees of the practice closing date; (vii) whether Dr. Jones wants to hire any of Dr. Smith’s staff; (vii) employee benefit plans sponsored by Dr. Smith and what is required to close and transfer plan funds; and (vii) arranging continuity of care for patients under active treatment; and (viii) compliance with DEA regulations on transfer and disposal of controlled drugs if Dr. Smith keeps any at his office.

[i] See 45 CFR §§ 164.502, 506 and 508.

[ii] 45 USC § 1320a-7b(b)

[iii] Health and Human Services Office of Inspector General.

[iv] See letter -- D. McCarty Thornton, Assoc. Gen. Counsel to T.J. Sullivan, Tech. Assist. –

HealthCare, IRS Office of Assoc. Chief Counsel (Dec. 22, 1992), under "other guidance" at http://oig.hhs.gov/fraud/docs/safeharborregulations/acquisition122292.htm .

[v] 42 C.F.R. § 1001.952(e)(1) and (2).

[vi] See 42 USC 1395nn