What to consider before selling your practice to a private equity firm

Private investors are increasingly developing an appetite for acquiring physician practices and other healthcare entities.

One recent example is LifePoint, a health system based in Nashville, Tenn., which went from a publicly traded company to a privately held company funded by private equity.

For physicians, there are two schools of thought about private equity: it’s a great option or it’s an unsavory option. There is merit in each position.

Often times, private equity, which includes private equity firms and hedge funds, comes at a very high price. And, there may be issues if the firm or fund divests the assets. As another consideration, if a practice is part of an accountable care organization (ACO), then a potential divesture could impact whether you still meet the requirements of an ACO, which could also affect cost savings and reimbursement.

Before signing any agreements, you must first consider the following: 

• how much of your medical practice ownership you are giving up,

• the downside in the event of a divestiture or acquisition by another fund or firm,

• legal implications of Stark Law and the Anti-Kickback Statute (AKS), among other laws,

• the cost of the capital,

• the requirements and parameters of an ACO, and

• HIPAA and the HITECH Act.

Entering into an agreement with private equity could change your ownership status and, therefore, your safe harbor exemptions. You must be aware of abiding by and meeting legal criteria, but you can be held accountable for the private equity firm’s actions, too. There are several laws both parties need to review and considerations that must be arranged in advance through a collaborative effort. Failure to do so could cause both parties to land themselves in the throes of civil and/or criminal liability, including Stark Law, 42 U.S.C. § 1395nn, the AMA fee-splitting opinions, 6:02-04 and the Federal Anti-kickback Statute (AKS), 42 U.S.C. § 1320a.

In a recent article I penned with Sean McKenna, we note:  

“While the pros of physician investing look promising, the cons can be costly. Specifically, the cost of compliance with various laws e.g., AKS and Stark Law, as well as the potential civil and criminal liability for non-compliance with these laws cannot be understated or overlooked.  Entities must take the appropriate steps to have the corporate structure and deal evaluated to ensure that any applicable protections, like AKS safe harbors or Stark exceptions, are met to avoid liability.”

According to the Centers for Medicare & Medicaid Services (CMS),three types of physician relationships that could signal danger are: relationships with payers, relationships with physicians and other providers, and relationships with vendors.

Physician investments in healthcare business ventures offering something for free, below market value, or have a disproportionate rate of return are of particular interest to the Office of the Inspector General (OIG). Even so, OIG Advisory Opinions for AKS and CMS Opinions for Stark Law are agency guidance to the industry and nonbinding for non-requesting providers.  OIG opinions are not meant to be guidance for every possible scenario; however, they do examine a range of facts and circumstances and serve as barometers for enforcement trends.

Private equity should not be outright excluded as a viable option. In the right circumstances, it can be a win-win for both parties. However, physicians should also explore other options depending on your practice’s needs. Proceed with caution and take the time to understand the full ramifications of these relationships. And remember, you would be selling at least part ownership of a medical practice that you have a good portion of your career building.  

Rachel V. Rose, JD, MBA, advises clients on compliance and transactions in healthcare, cybersecurity, corporate and securities law, while representing plaintiffs in False Claims Act and Dodd-Frank whistleblower cases. She also teaches bioethics at Baylor College of Medicine in Houston. Rachel can be reached through her website, www.rvrose.com.