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The University of Texas School of Law Presented: 19th Annual Health Law Conference April 11-13, 2007 Houston, TX Buying and Selling Physician Practices Kevin Reed Lawrence Foust Kevin Reed Davis & Wilkerson 1801 South Mopac, Suite 300 Austin, Texas 78768-2283 [email protected] 512-482-0614 Lawrence Foust Kaiser Foundation Health Plan One Kaiser Plaza Suite 1900 Oakland, California 94612 [email protected] 510-271-6674 Continuing Legal Education • 512-475-6700 • www.utcle.org BUYING AND SELLING PHYSICIAN PRACTICES Kevin Reed & Larry Foust TABLE OF CONTENTS Introduction Selected Health Law Resources Part I: Preparation Commentary Form 1 Form 2 Inventories of Contracts Inventory of Accounts Payable Not Represented by Written Contracts Part II: Confidentiality Agreements Commentary Form 3 Confidentiality Agreement Part III: Letters of Intent Commentary Form 4 Letter of Intent Part IV: Sale and Purchase Agreements Commentary Form 5 Asset Sale and Purchase Agreement Part V: Preparation for Closing Commentary Form 6 Form 7 Form 8 Form 9 Due Diligence Checklist Notice of Assignment/Non-Consensual Notice of Assignment/Consensual Landlord Consent and Estoppel Certificate Form 10 Form 11 Form 12 Form 13 Notice of Termination of an Unassigned Contract Mutual Termination Notice of Excluded Assets Status Report on Third Party Consents Part VI: Closing Instruments Commentary Form 14 Form 15 Form 16 Form 17 Form 18 Form 19 Form 20 Form 21 Form 22 Form 23 Form 24 Form 25 Form 26 Bibliography Closing Checklist Assignment and Assumption Agreement Assignment of Office Lease Bill of Sale Seller’s Closing Certificate Buyer’s Closing Certificate Seller’s Incumbency Certificate Buyer’s Incumbency Certificate Seller’s Corporate Approvals Buyer’s Corporate Approvals Seller’s Legal Opinion Buyer’s Legal Opinion Physician Employment Agreement INTRODUCTION This is a modest attempt to set forth observations and methods as to how sellers and buyers can reach an agreement to acquire a physician’s practice. Since there is a great number of variations among exempt, publicly traded, and roll-up buyers, on one hand, and partnerships, professional associations, and solo practitioners, on the other, these materials use as a base model the paradigm of an asset acquisition of a solo practice (organized as a professional association) by a Texas certified nonprofit health organization where the selling physician will become the employee of buyer. The base model also presumes there is no sale of real estate in the transaction. Instead, it is based on the physician assigning his lease to the buyer and continuing to practice at the same office. During the presentation, some of the complications and variations will be discussed, but at over 100 pages, the written materials simply could not accommodate the many variations that exist. Like the ABA model acquisition documents, these model documents have a slight bias towards the buyer. From a normative point of view, acquisitions are highly situation-specific. What is “best” is what works well for both the buyer and seller. Accordingly, the solutions and observations offered ought to be understood as possible solutions -- but not necessarily the only solutions -- for any particular acquisition. The authors admit, however, to two biases. The first bias is that time is the enemy. It may be more of an enemy to sellers, but can be the enemy of buyers as well. Acquisitions tend to be corrosive to relationships, and therefore the value of a healthcare business. Employers, customers, vendors, and suppliers as a general rule dislike change and acquisitions are nothing if not change. Accordingly, the resolutions to problems offered tend to favor the quick. Generally speaking, sellers and buyers should seek the fastest, most secretive transaction with the fewest third party consents required. The second bias is that solutions ought to be simple, even when the problems are not. The financial, regulatory, psychological, and political issues of acquisitions are often difficult, complex, and controversial. Also, because much of health care is focused on specialized personal services, as opposed to one-time transactions, the preservation of relationships among buyer, seller, customers, employees, and suppliers is vital. Accordingly, the resolutions offered tend to favor solutions that are easily understood and administered, and reasonably comforting, to both seller and buyer. These are the key attributes of a simple solution. 1 SELECTED HEALTH LAW RESOURCES Texas Corporate Practice of Medicine. Texas Medical Practice Act, Texas Occupations Code, Subtitle B, Chapters 151-165. Section 155.001 provides that a person may not be licensed to practice medicine in the State of Texas unless they hold a license; Section 155.003 describes the eligibility requirements for a license to practice medicine which can only be met by a natural person; Section 157.001 authorizes physicians to delegate certain medical acts but prohibits the delegation to a person who represents to the public that that person is authorized to practice medicine when they are not; Section 164.052(8) prohibits a physician from using or selling the physician’s medical degree or license to practice medicine; subsection (13) prohibits a physician from permitting another to use the person’s license or certificate to practice medicine; and subsection (17) prohibits a physician from directly or indirectly aiding or abetting in the practice of medicine by a person, partnership, association, or corporation that is not licensed to practice medicine. Section 165.156 specifically provides that a person, partnership, trust, association, or corporation commits an offense if it in any manner indicates that a person, partnership, trust, association, or corporation is entitled to practice medicine when it is not licensed to do so. See also exceptions to the prohibition located at Sections 162.001, 162.051, 162.201 and 151.055 of the Texas Occupations Code. Stark Self Referral Law & Regulations. 42 U.S.C. § 1395nn (2003); 42 C.F.R. §§ 411.350 – 411.389 (2006) Personal Services Exception. 42 U.S.C. § 1395nn(e)(3); 42 C.F.R. § 411.357(d) Physician Recruitment Exception. 42 U.S.C. § 1395nn(e)(5); 42 C.F.R.§411.357(e) Isolated Transactions Exception. 42 U.S.C. § 1395nn(e)(6); 42 C.F.R. § 411.357(j) Employment Exception. 42 C.F.R. § 411.357(c) Federal Anti-kickback Statute & Regulations. 42 U.S.C. § 1320a–7b (2003); Sale of Practice Safe Harbor. 42 C.F.R. § 1001.952(e) Personal Services Safe Harbor. 42 C.F.R. § 1001.952(d) 2 Sale of Practice Safe Harbor. 42 C.F.R. § 1001.952(e) Employment Safe Harbor. 42 U.S.C. § 1320a–7b(3)(B); 42 C.F.R. § 1001.952(i) Recruitment Safe Harbor. 42 C.F.R. § 1001.952(n) 12/22/92 Application of anti-kickback statute to the acquisition of physician practices (letter to IRS) at http://oig.hhs.gov/fraud/fraudalerts.html Texas Anti-Kickback Statutes. Texas Occupations Code §§ 102.001 et seq. (any person) Texas Occupations Code § 102.051 (practitioners except physicians) Texas Occupations Code § 165.055 (physicians) Texas Health & Safety Code §§ 164.001 et seq. (mental health) Texas Commercial Bribery Law, Texas Penal Code § 32.43 Health Insurance Portability and Accountability Act of 1996 - Privacy Rules Practice Purchase. 45 C.F.R. § 164.501 “Health Care Operations” (6)(iv) & § 164.502(a)(1)(ii) Covenants Not to Compete in Texas. Texas Business & Commerce Code §§ 15.50 et seq. Federal Tax Exemption. Revenue Ruling 76-91, 1976-1 C.B. 149 Hospital Audit Guidelines (March 27, 1992) §§ 333.3(3)(e) & (12). Manual Transmittal 7(10)69-38 1995 CPE Text, p. 166 1996 CPE Text, pp. 410-436 Medicare Reassignment Rules for Employees. Medicare Claims Processing Manual Chapter One, §30.2.6 (online version) 3 PART I: PREPARATION Commentary A. B. C. Sellers should organize their due diligence files long before the first buyer appears 1. So that skeletons in the closet can be managed 2. So that seller can prepare for buyer’s questions and thereby convey a sense of control and confidence rather than surprise and defensiveness. 3. So that seller can prepare for debates over representations and other terms 4. So that schedules can be started in advance and not detract from the negotiation and preparation of the purchase agreement 5. To identify in advance where third party consents are required, not only for the closing, but for due diligence. Seller and buyer should each form a clear view of their closing objectives before they begin discussions 1. The effect of the annual market cycle on the timing of closing 2. Nature of purchase price 3. The delicate balancing of representations, due diligence, indemnification and conditions precedent The common wisdom and transaction etiquette is for buyer to draft the acquisition documents. Under certain circumstances, however, seller should prepare the draft acquisition documents. Those circumstances are: 1. Auction sales 2. Seller’s business is extremely complex 3. Seller has the ability, wherewithal, and negotiation strength to seize the moment 4