Contestants on the 1980s game show Press Your Luck competed in a trivia contest for cash and prizes. Before each turn, contestants (often mustachioed or with voluminous hair) chanted the mantra “Big bucks, no Whammies!” in hopes that the half-rodent, half-Tasmanian Devil cartoon Whammy would not destroy their chances of winning. Like its ancestor the Gremlin, Whammies are mischievous beings that can delay or damage your plans unless you identify and guard against their designs.
For many physicians selling their practices, the allure of a sale is based largely on a desire to focus more on the practice of medicine, and less on business, operational, and administrative work. In this context, anticipating and preventing potential transitional pitfalls in a practice acquisition becomes a central issue. The last thing a physician exiting a private practice wants to do is trade the known difficulties of running a practice for new and different headaches associated with transitioning to a new work environment. Following are three common Whammies whose potential to delay or harm a physician practice acquisition can be avoided or minimized with some advance planning.
Electronic Health Records Systems
The Centers for Medicare & Medicaid electronic health records (“EHR”) incentive program has led to a sharp increase in the implementation of EHR systems by physicians. Physicians typically enter into software licensing, as well as service/maintenance agreements with EHR vendors, in order to implement the EHR system in their practices. Implementing an EHR system is costly, requires a significant commitment of internal practice resources to convert from paper records, and entails major changes to the documentation and billing processes of the practice.
For these reasons, physicians selling their practices are often reluctant to part with the system they know and in which they have invested substantial resources. On the other hand, the buyer typically also has an existing EHR system that may be incompatible with the selling practice’s system. If the systems are incompatible, a buyer will commonly not agree to assume and integrate the selling practice’s system.
However, if the buyer will be taking over a seller’s existing EHR system, the parties should determine early in the sale process whether the EHR vendor’s consent is required to transfer the system to the buyer and what fees, if any, the EHR vendor will charge to the buyer to transfer the license. The license transfer fee may be so substantial that assuming the buyer’s EHR system is financially impractical. In this case, the parties will need to develop, well in advance of the closing date, a backup plan for transferring the medical records out of the buyer’s EHR system so that (1) there is no interruption in access to the medical records and (2) the parties are not forced to accept an unreasonably high license transfer fee to prevent an interruption to medical records access.
The parties should also make alternative plans and beware of EHR vendor attempts to charge unreasonably high fees for downloading or retrieving the selling practice’s medical records from an EHR system that will not be assumed by the buyer.
Professional Liability Insurance
The selling physicians and the buyer of a physician practice have a strong mutual interest in making sure that no physician experiences a gap in professional liability insurance coverage as a result of the practice acquisition. If the selling physicians have occurrence-based professional liability insurance that has covered them for all periods prior to the acquisition date, then there will be no gap in coverage as long as the buyer either assumes the selling physicians’ policies after the closing or else obtains a new policy effective as of the closing date.
However, if the selling physicians have claims-made policies, the parties will need to fill the potential gap in coverage that can result from a terminated/expired claims-made policy with respect to events that occurred during the policy period, but for which no claims have been asserted. The parties can close this potential gap by either obtaining an extended reporting endorsement (tail coverage) from the selling physicians’ insurer, or by obtaining prior acts (nose) coverage from the buyer’s insurer under the buyer’s post-closing professional liability insurance policies for the selling physicians.
Provider Enrollment and Payor Credentialing
Both the seller and the buyer in a physician practice acquisition will have invested substantial time and money in the deal by the time it closes. The buyer, of course, will want to begin realizing the economic benefits of its bargain immediately. Because the vast majority of most physician practices’ income derives from third party payers (governmental and commercial) with detailed provider enrollment requirements and/or contracts, the parties should identify early in the transaction process (1) change of ownership (CHOW) and individual physician billing reassignment requirements with respect to governmental payers, and (2) credentialing and/or billing assignment requirements for new physicians joining the buyer’s practice that need to be added to commercial provider and managed care agreements. Providing the necessary notices and filings to the buyer’s third party payers will minimize or eliminate cash flow disruptions post-closing.
Conclusion
Many other transitional considerations must be addressed in a physician practice acquisition to ensure that the selling practice integrates with the buyer seamlessly. These issues include contract assignments, changes to existing licenses, as well as human resources and employee benefits concerns. Tackling the issues described above will go a long way to making the transition process quick and minimally turbulent.
Dan Murphy is a partner in the Health Care Practice Group at Bradley Arant Boult & Cummings. Murphy’s practice focuses on healthcare industry regulation and transactions, as well as the representation of public and private companies in corporate matters, including mergers and acquisitions.
