Many physicians not working in independent medical practices became employees of a larger organization immediately upon completing their training, and never owned an interest in a medical practice. An even greater number of physicians have become employees of large organizations as a result of selling their practice and becoming an employee of the purchasing organization. In recent years, hospital systems, public and privately-held practice management companies, and private equity firms have been acquiring primary care, specialty, and hospital-based physician practices. More recently, health insurors have begun acquiring physician practices. This trend is continuing and accelerating; independent physician practices are becoming increasingly rare. If you are a physician who is considering the sale of your medical practice, you should read the remainder of this article.

 

Before hospitals, practice management companies and private equity firms began acquiring medical practices on a significant scale, physicians approaching the end of their professional career would often sell their practice to a larger practice group, or to their partners in their own group, as an exit strategy, or a small group might merge into a larger group in order to create increased market share or economies of scale. In the current environment, many physicians are selling their practice not as part of an exit strategy, but in order to ensure their economic survival.

 

The health care industry is experiencing tremendous disruption and change, which is making it more difficult to operate an independent medical practice. Physicians are increasingly looking to sell their practice to a third party which can help them survive the tsunami of change which is affecting the industry. Physicians are becoming overwhelmed with the burdens of complying with new Medicare requirements and regulations, increasing demands of commercial insurors, HIPAA requirements, new HR requirements and increasing costs of providing health care and other benefits for employees, and other burdens of operating a medical practice. Many physicians are selling their practices to obtain management support and to shift the burden of managing what has become a complex business organization to a larger, more qualified business entity. Hospitals and hospital systems, practice management companies, and private equity firms are able to provide experienced professional management personnel to manage the business end of a medical practice, allowing the physicians to concentrate on caring for their patients.

 

In addition to the increasing complexity and difficulty of managing a medical practice, physicians are finding it is becoming increasingly costly to operate a medical practice. Reimbursements are remaining stable or declining. Personnel and occupancy expenses are increasing. Electronic medical records systems are expensive. Depending upon the specialty, a modern medical practice often requires costly new equipment. Selling your practice to a well-capitalized purchaser can provide much needed financial resources to address these financial requirements.

 

Another significant benefit which can be obtained in connection with the sale of your practice is increased leverage in negotiating provider contracts with commercial insurance companies. A hospital system which includes numerous employed physicians or a practice management company or private equity firm which employs a large number of physicians will be able to negotiate better payor contracts than an individual physician or small group practice.

 

Finally, selling your practice will enable you to achieve financial security, by receiving a cash payment that will, hopefully, reflect the value you have created over years of building your medical practice.

 

When is the best time to sell your practice? Some physician may wish to remain independent for their entire professional career and may never sell their practice to a third-party purchaser. Their “exit strategy” may be to have their partners (or a junior associate) buy their shares at retirement. For other physicians, who are becoming overwhelmed by the challenges of managing a practice or the financial demands or operating a practice, or who are being forced to accept unfavorable contracts from health insurance companies, the time to sell may be now.

 

If you plan to sell your practice, you must understand the economics of a practice acquisition. If the purchaser pays you a significant sum of money, it will need to recover its investment, plus a return on its investment, over a period of time. A hospital system may recover its investment by capturing a stream of patient referrals from employed physicians for hospital inpatient and outpatient services. A private equity firm or practice management company will generally seek to recover its investment by paying the employed physicians a lower salary than the physicians were previously drawing from the practice, and retaining the difference. This arrangement can work to the advantage of more senior physicians in a group, who may receive a substantial lump sum purchase price in connection with the sale, but will be receiving a reduced salary for only a limited number of years. The sale of the practice may be less advantageous for more junior physicians, who may be “repaying” the purchase price by receiving a lower salary for a much longer period of time.

 

Physicians should also understand that a practice acquisition will be successful, for both purchaser and seller, only if fundamental and positive changes are made in the operation of the practice—to increase revenues and control expenses. Physicians looking to sell their practice should understand, prior to the sale, what operational changes the purchaser intends to impose, and the physicians must be prepared to accept and embrace these changes, if they want the transaction to be successful. If you are not willing to accept changes in the way your practice operates, a sale of your practice may not be right for you.

 

If you are planning to sell your practice, in addition to understanding how the purchaser plans to operate the practice, you should engage qualified financial and legal advisors to assist and protect you. The sale of your medical practice may be the most important step you take during your professional career. You want to be sure you receive fair value for your practice and that you are legally protected against unreasonable or unfair contractual provisions and unforeseen future events, including but not limited to the possibility of having to “unwind” the transaction if it does not work out as anticipated. Be sure to engage an accountant and an attorney who have handled sales of medical practices.

Many physicians not working in independent medical practices became employees of a larger organization immediately upon completing their training, and never owned an interest in a medical practice. An even greater number of physicians have become employees of large organizations as a result of selling their practice and becoming an employee of the purchasing organization. In recent years, hospital systems, public and privately-held practice management companies, and private equity firms have been acquiring primary care, specialty, and hospital-based physician practices. More recently, health insurors have begun acquiring physician practices. This trend is continuing and accelerating; independent physician practices are becoming increasingly rare. If you are a physician who is considering the sale of your medical practice, you should read the remainder of this article.

 

Before hospitals, practice management companies and private equity firms began acquiring medical practices on a significant scale, physicians approaching the end of their professional career would often sell their practice to a larger practice group, or to their partners in their own group, as an exit strategy, or a small group might merge into a larger group in order to create increased market share or economies of scale. In the current environment, many physicians are selling their practice not as part of an exit strategy, but in order to ensure their economic survival.

 

The health care industry is experiencing tremendous disruption and change, which is making it more difficult to operate an independent medical practice. Physicians are increasingly looking to sell their practice to a third party which can help them survive the tsunami of change which is affecting the industry. Physicians are becoming overwhelmed with the burdens of complying with new Medicare requirements and regulations, increasing demands of commercial insurors, HIPAA requirements, new HR requirements and increasing costs of providing health care and other benefits for employees, and other burdens of operating a medical practice. Many physicians are selling their practices to obtain management support and to shift the burden of managing what has become a complex business organization to a larger, more qualified business entity. Hospitals and hospital systems, practice management companies, and private equity firms are able to provide experienced professional management personnel to manage the business end of a medical practice, allowing the physicians to concentrate on caring for their patients.

 

In addition to the increasing complexity and difficulty of managing a medical practice, physicians are finding it is becoming increasingly costly to operate a medical practice. Reimbursements are remaining stable or declining. Personnel and occupancy expenses are increasing. Electronic medical records systems are expensive. Depending upon the specialty, a modern medical practice often requires costly new equipment. Selling your practice to a well-capitalized purchaser can provide much needed financial resources to address these financial requirements.

 

Another significant benefit which can be obtained in connection with the sale of your practice is increased leverage in negotiating provider contracts with commercial insurance companies. A hospital system which includes numerous employed physicians or a practice management company or private equity firm which employs a large number of physicians will be able to negotiate better payor contracts than an individual physician or small group practice.

 

Finally, selling your practice will enable you to achieve financial security, by receiving a cash payment that will, hopefully, reflect the value you have created over years of building your medical practice.

 

When is the best time to sell your practice? Some physician may wish to remain independent for their entire professional career and may never sell their practice to a third-party purchaser. Their “exit strategy” may be to have their partners (or a junior associate) buy their shares at retirement. For other physicians, who are becoming overwhelmed by the challenges of managing a practice or the financial demands or operating a practice, or who are being forced to accept unfavorable contracts from health insurance companies, the time to sell may be now.

 

If you plan to sell your practice, you must understand the economics of a practice acquisition. If the purchaser pays you a significant sum of money, it will need to recover its investment, plus a return on its investment, over a period of time. A hospital system may recover its investment by capturing a stream of patient referrals from employed physicians for hospital inpatient and outpatient services. A private equity firm or practice management company will generally seek to recover its investment by paying the employed physicians a lower salary than the physicians were previously drawing from the practice, and retaining the difference. This arrangement can work to the advantage of more senior physicians in a group, who may receive a substantial lump sum purchase price in connection with the sale, but will be receiving a reduced salary for only a limited number of years. The sale of the practice may be less advantageous for more junior physicians, who may be “repaying” the purchase price by receiving a lower salary for a much longer period of time.

 

Physicians should also understand that a practice acquisition will be successful, for both purchaser and seller, only if fundamental and positive changes are made in the operation of the practice—to increase revenues and control expenses. Physicians looking to sell their practice should understand, prior to the sale, what operational changes the purchaser intends to impose, and the physicians must be prepared to accept and embrace these changes, if they want the transaction to be successful. If you are not willing to accept changes in the way your practice operates, a sale of your practice may not be right for you.

 

If you are planning to sell your practice, in addition to understanding how the purchaser plans to operate the practice, you should engage qualified financial and legal advisors to assist and protect you. The sale of your medical practice may be the most important step you take during your professional career. You want to be sure you receive fair value for your practice and that you are legally protected against unreasonable or unfair contractual provisions and unforeseen future events, including but not limited to the possibility of having to “unwind” the transaction if it does not work out as anticipated. Be sure to engage an accountant and an attorney who have handled sales of medical practices.