Managed care contracts usually suffer from two common problems: (1) very important terms are unclear, and (2) the cost control provisions are unfair. In contracting with payers, as in any contract, specificity matters. If the contract is not crystal clear on an issue, the parties can expect to fight about it, sometimes in expensive litigation. Similarly, ensuring fairness in a contract can prevent disputes.
As physicians retire and the era of healthcare reform rocks physicians, opportunities to purchase practices will likely surge, and not just for entities that employ physicians, like hospitals. The big issues generally break down like this:
- What to pay;
- How to structure it; and
- How to pay for it.
It depends on what you’re buying. If all of the practice income is from personal services performed by the selling physician, the answer is generally “not a lot.” The price typically consists of (1) the value of the fixed assets (e.g. equipment, furniture), and (2) maybe a little more in order to avoid the cost of starting up a new practice from scratch. In the event, however, the practice also generates income from services that are not personally provided by the selling doctor, the price is increased to account for this “passive revenue.” How much? Maybe the amount of one year’s profit from that ancillary service.
Practice purchase take one of two forms: (1) stock purchase, or (2) asset purchase. Buyers that buy the stock of a medical practice are rare because the buyers get all the liabilities associated with the stock of the selling practice. Most practice purchases are asset purchases, which makes it easier to say what you’re buying, what you’re not buying, which liabilities you want to assume (e.g. leases) and which ones you don’t want to assume. Sellers often prefer stock purchases because the seller gets better tax treatment on the purchase price (capital gains instead of ordinary income) than sellers who sell just their assets.