Ericka Adler 00:00:00 I will say I have not had a doctor or hospital deal fall apart because of diligence.

Keith Reynolds 00:00:10 Welcome to Off the Chart, A Business of Medicine podcast featuring lively and informative conversations with health care experts, opinion leaders and practicing physicians about the challenges facing doctors and medical practices. I'm your host, Keith Reynolds, and this week we've got a conversation between Medical Economics managing editor Todd Shryock and Ericka Adler, a health care attorney at Roetzel & Andress. They're talking about selling your practice and what sort of considerations you should make before you throw that for sale sign on the door.

Todd Shryock 00:00:43 I'm Todd Shryock, and I'm here with Erica Adler, an attorney with Ratzel and Andrews, to discuss the due diligence required for the sale of a medical practice. Erica, thanks for joining me.

Ericka Adler 00:00:54 Oh, my pleasure. Happy to be here.

Todd Shryock 00:00:57 So what is a compliance review View. And why is it important when you're selling a medical practice?

Ericka Adler 00:01:05 So when you're selling a practice, one of the things that a buyer is going to do is take a look at how you operated your practice.

Ericka Adler 00:01:13 And this is true whether it's an asset deal or a stock deal. But maybe even more importantly, if it's a stock deal or a unit type deal, and what they're looking for is to see, did you bill payers properly? Did you classify employees versus contractors properly? Did you have a compliance plan? Did you follow HIPAA? Were you compensating people in accordance with state and federal laws? So they're looking to see all of this to make sure a couple of different things. One is what kind of liability might they be taking on if they acquire the practice and continue to run it in the same way? and also, they want to know whether any of these types of issues might impact the value of the practice that they're acquiring. So those are really the main reasons. And in most of the deals we're doing these days, the buyer will have a counsel that handles the actual transaction and separate counsel that is digging into these compliance issues. They take it very seriously and it can impact the value of the deal.

Ericka Adler 00:02:24 But also whether the deal goes through.

Todd Shryock 00:02:27 What is the staff's role in compliance, whether it's before or during the deal? How do they play into this?

Ericka Adler 00:02:34 Well, obviously if you're operating your practice in compliance, then the various people who work for you should know their rules, know what the rules are, and have been complying with it. whether or you know somebody who is is not following your policies might have put your transaction at risk. So, for example, if you have a HIPAA policy in place but somebody has not been following it, then when they do the analysis, they're going to see that that occurred. So one person in your practice can make a very big difference, right? they may or may not want to take that person when they acquire the practice. And typically we're looking for everybody to be taken on as part of the deal. or they may decide that whatever the issue is, it's too big now to even want to acquire the practice. So the particular members of your staff play a really important role.

Ericka Adler 00:03:26 You can't be everywhere all the time. And you're going to assume that everybody has been properly trained, knows their role and is following practice policies.

Todd Shryock 00:03:38 What are some billing issues that can arise during the due diligence process and how should they be addressed?

Ericka Adler 00:03:44 So in a typical transaction, the buyer is going to look at a few different things. First of all, they may perform a billing audit. So they may see have you been billing property properly. What is the rate of error that is occurring. and, you know, does some refund need to be made if they were to correct things going forward? How does that affect your reported revenues. So billing audit can be very important if they see a pattern of issues. is it just simple error. Does it rise to the level of something more, in which case they may demand that a refund be given, or that some other contact with a state or federal government be made in order to address the issue? have you been billing incident to and not meeting the incident? Two supervision requirements.

Ericka Adler 00:04:34 what does that look like in terms of both refunding money but also correcting things going forward? What does that mean for the revenues of the practice and the way the practice is operating? So the billing issues actually can be quite tremendous. It can affect the the overall reported value of the practice and whether or not the buyer really wants to be involved at all. Most importantly from a seller perspective, Active. Not billing properly may actually impact whether or not you have a deal and the overall value of what the buyer is willing to pay.

Todd Shryock 00:05:09 What about compensation arrangements? Can they create compliance issues?

Ericka Adler 00:05:14 Certainly, if you have not been paying people properly, it can definitely affect compliance. So often we see this under stark. So stark law is a law that applies to physicians who offer certain designated health services within their practice. That can be physical therapy, lab imaging. And when you have these type of services, typically you need to qualify as what we call a group practice. And this of course would only apply to practices that are billing the federal government.

Ericka Adler 00:05:46 So Medicare, Medicaid, etc. when you're trying to be a group practice so that you can build for things like an MRI or an X-ray, etc., you need to operate as a group practice which has certain requirements. and I am obviously generalizing here, but it could be, the, the, the structure of your practice, you have to be a single legal entity is one thing, but also how you're compensating your physician. So for example, you cannot pay physicians for referring for the technical component of a designated health service. And your overall compensation formula needs to take into account how you're allocating the revenue from the technical component of these designated health services. So if you're just a practice you've never talked to a lawyer about whether you're doing things properly, then the buyer comes in, looks at your comp formula and is like, wait a second. For the past five years, you've been paying your doctors in a way that violates Starck. We've got a pretty big issue. we can correct things going forward, and that may be what the buyer elects to do.

Ericka Adler 00:06:50 But you've also got a stark violation, which is a black and white strict liability statute. Many buyers will either not be interested in the practice. As a result, they may also require a report a self disclosure to the government before they're willing to go forward. Self disclosures come with a refund of money as well. So, it can be quite a big issue. You might be compensating people who refer to you, in a non-compliant manner, you know, paying a kickback and not realising it. Your lease arrangement may be set up with somebody who's in a position to refer, and that may not be fair market value. They may look at that and say you're violating anti kickback statutes. So when we talk about looking at the compliance of these different situations, they look at everything your employment agreements, your lease arrangements, your referral arrangement, everything. And these type of compliance issues can pop up just about everywhere. So obviously you want to be aware of them before you go to market, because it really kind of sucks to be finding out for the first time when a buyer is asking you questions.

Speaker 4 00:08:00 Say, Keith, this is all well and good, but what if someone is looking for more clinical information?

Keith Reynolds 00:08:06 Oh, then they want to check out our sister site, Patient Care Online. Com the leading clinical resource for primary care physicians. Again that's patient care online.com.

Todd Shryock 00:08:20 During this process you have the potential buyer digging through all your records looking at how your practice is run, how during the sales process, can you make sure that you remain HIPAA compliant and other common mistakes that are made in this part of the the process?

Ericka Adler 00:08:37 Well, typically there's an exception to Hip that allows you to share information when you're in a due diligence process. However, typically most buyers will enter into a letter of intent or something like that and or a nondisclosure agreement, both of which will have confidential information. That being said, we're really careful during this process to make sure that we limit access to the, you know, the minimum necessary for that due diligence process. So, for example, if you have somebody coming in who's just looking at your leases, you know, they don't really need to be looking at patient information, right? So what we do when we do a transaction is we usually have a data room where information is shared.

Ericka Adler 00:09:20 And we can limit who can access certain folders in order to protect that information from being shared. The same thing goes for the seller. So the seller may have staff members, and they're allowing the staff members to upload information to the data room. And maybe it's somebody who's uploading information about employees or information about leases or other things. There's really no reason for them to have to see a fee that they otherwise would not have a reason to see. So the process of assuring compliance with HIPAA does not end just because you're doing a deal. We always try to be mindful of those requirements every step of the way. And that goes for whether we're working on the buyer side or the seller side. Everybody really tries to be on top of that.

Todd Shryock 00:10:06 What about a practice that has locations in more than one state? Like how does that complicate the process?

Ericka Adler 00:10:13 it really shouldn't impact things too much. All the laws HIPAA, stark, anti kickback, etc. those go across state lines right. So it doesn't matter. However particular states can have additional privacy requirements.

Ericka Adler 00:10:27 They can have additional requirements as it relates to kickbacks. Right. So things that may not impact, an analysis of your deals or your arrangements in one state can have an issue in other states, right? If you're doing business with Medicaid in one state and not in another, we may have issues that arise. So most of the laws that we're concerned about when it comes to compliance are federal. But there are definitely some state laws. And also in the past few years we've come up with all these reporting requirements. So when you're going to be doing a transaction with a buyer, you need to look now at the state laws to determine whether or not there's some reporting of the transaction, especially if it's with private equity that's about to occur. that can depend on how many people are involved, how many doctors, the size of the deal, etc., as to whether you have to report. So if you're more than one state, you may have to comply with more than one state requirement. you know, one other thing I'll say is that some states have corporate practice of medicine requirements and others don't.

Ericka Adler 00:11:32 So you may find that the buyer is analyzing the fact that you're structured properly in one state, but not in another. So if you had a lawyer working on something, for example, in Illinois, you know, we have corporate practice of medicine. So, you know, most likely if you're in if you started in Illinois and you're in other states, most likely every state was structured to comply. But if you started in a state that doesn't have corporate practice of medicine, like Ohio or Florida, and then you spread into states that do have it, your lawyer may have unknowingly perpetuated a structure that didn't actually comply with that state's laws. So we see things like that all the time. Some states require separate licensing for a medical practice that others don't. So in some states you may not have had to comply, but another states you did and you didn't take care of it. So it does have an impact as it relates to some state related laws. But, you know, globally, the federal laws apply no matter where you're located.

Keith Reynolds 00:12:36 Oh, you say you're a practice leader or administrator. We've got just like our sister site Physicians practice.com, your one stop shop for all the expert tips and tricks that will get your practice really humming again. That's Physicians practice.com.

Todd Shryock 00:12:54 We've already talked about a lot of different things to consider. What what are some common misconceptions that physicians have going into a sales process?

Ericka Adler 00:13:04 I think, you know, a lot of doctors just think that they're going to take the money and they're going to sell the assets, and the buyer is just going to kind of do what the buyer wants going forward, and they're not really going to care about what the doctor did. And that's really not true. buyers really do care about how a practice was run. Some of the issues can be solved going forward, but some of them are viewed as creating liability for a buyer. and so sometimes the buyer will address it, like I mentioned by, by address, you know, modifying the purchase price that's being offered. Right. Sometimes they will say, hey, we require you to alert the government, make a refund, and then we'll do the deal.

Ericka Adler 00:13:47 Sometimes they want to put a big chunk of money into escrow and wait a couple years to see what happens until they're willing to release it to the doctor. So a lot of time, doctors just think that once they close, they're just going to get the money and the buyer will just kind of do things right going forward. And that's really wrong to think about it that way, which is why I'm always encouraging doctors take six months, take a year before you're ready to sell and make sure your ducks are in a row because this can, you know, throw buyers off. They I've had many deals not go through because of some of the stuff that's found out in due diligence. I've had purchase prices slashed where it doesn't really make sense for a buyer to, to or seller to want to do the deal anymore. Right. So there are a lot of implications of not having a clean house before you go to market.

Todd Shryock 00:14:38 You know, I was going to ask if there's any instances where a sale has fallen through because of mistakes made by the practice owner.

Ericka Adler 00:14:46 Right. we definitely had a few most of them come out of major billing issues. maybe there are audits going on that make the buyer uncomfortable. you know, we've we've had a lot of issues like that. sometimes, you know, the revelations of non-compliance with the federal law, you know, the because you're often taking on the same doctors, even if they're in a new entity, it's a continuation of the same business. So, despite the protections that are put in the document, a lot of buyers will feel like they're just not protected enough or, you know, they're just uncomfortable with what's going on. we've had some deals fall apart. Where, let's say the seller had everybody classified, you know, as a, independent contractor when they should have been employees. And despite the haggling back and forth about indemnification. And what does it matter? You're going to hire everybody and you can make them an employee going forward. that the buyer was just not comfortable with the risk and the amount of money they would have wanted to put aside to protect themselves, which made the deal not worthwhile anymore for the seller.

Ericka Adler 00:15:53 So, you know, we do see deals fall apart, for these kinds of things regularly. most often, I would say that the purchase price becomes so impacted by the deals going on and the legal fees grow exponentially with the number of issues determined that we really have to rethink whether the the practice really wants to sell. A lot of times we might pause, fix things weightier, go back to the same buyer, or go back to market. once we've corrected some of the issues. So yeah, I've definitely seen deals fall apart.

Todd Shryock 00:16:29 It sounds like buyers are really looking for more than just profitability. There's a lot more to it than just what the balance sheet looks like.

Ericka Adler 00:16:39 definitely. I mean, they need to know that what they're putting their money into is either going to sustain, you know, the revenue that's being generated. But most often they're looking for profit, right? They want to grow. So if they know the minute they buy a practice and they correct the things that were being done wrong, that it's going to go down in terms of revenue.

Ericka Adler 00:17:01 You know, they have to really think carefully about whether this is the deal they want. You know, if they could recoup it pretty quickly and it's not too much of a loss, then they may be willing to do it. Also, they're going to spend money on correcting things that were done wrong. Classification of employees, billing issues, compliance, HIPAA. How much money do they need to spend to take this operation, which is now maybe no longer a turnkey deal, right, and correct it? So they've got to take all that into account as to whether it's worthwhile for them anymore. There's just too many issues. Sometimes it's not worth it anymore.

Todd Shryock 00:17:37 This is a process. Change it all depending on the type of buyer. For example, is it any different if a physician group's buying the practice compared to, say, a private equity or a health system?

Ericka Adler 00:17:50 well, I mean, it shouldn't. Right. Everybody buying a practice. So do due diligence obviously in you know doctor to doctor deals there's a true lack of diligence being done by the buyers.

Ericka Adler 00:18:01 Right. The the seller responds to the questions asked. So if the buyer is really not digging in, they don't want to pay for a billing audit. They don't want to pay for the type of investigation that private equity might pay for. So there's a lot less diligence being done, but that doesn't mean it shouldn't be done right. in terms of a hospital, I would say they might do a little bit more, but I think they're probably closer to the doctor to doctor diligence than private equity. Private equity, for sure. Dig into every little piece. Like I mentioned, they will often have an entirely separate legal team just for diligence. They spend a lot of time and money on it, so there's really no comparison between the level of diligence I see them doing and the level that I see a hospital or a practice doing. It's just there's really no comparison. I will say I've not had a doctor or hospital deal fall apart because of diligence, so that's pretty telling right there.

Todd Shryock 00:19:00 I want to ask to a lot of these smaller practices are family run, family owned, and oftentimes they will end up with family members on the payroll that maybe aren't the most qualified for those positions.

Todd Shryock 00:19:13 Do you have any suggestions like those people maybe be removed from the payroll before you start a sales process? Or are the buyers typically seeing that and often it doesn't bother them?

Ericka Adler 00:19:25 Well, certainly the buyer. Everybody gets terminated as of the day of closing, and then the buyer hires who they want to hire. Right? So they're not going to take on anybody who doesn't have a job or isn't doing a good job or isn't qualified. Right. in terms of whether you should get rid of them first, I think it really comes down to the EBITDA or the value of your practice. Right. The more people you're paying who you may not need, or you might be overpaying or they may not be qualified, the more it actually hurts the valuation of your practice, right? So in my opinion, you should be cleaning up many things about your practice before you go to sell it. And and certainly taking a close look at your expenses, your revenue, unnecessary personnel, those are all things that your accountant can help you go through to make your practice the most desirable from a financial perspective.

Ericka Adler 00:20:18 So, you know, maybe not exactly the question you're asking, but if you do have unqualified people, definitely you should get rid of them. But it can affect really the value and the purchase price that you get, at the end of the day. So I think it's worth taking a close look at.

Todd Shryock 00:20:33 What else do physicians need to know when it comes to selling their practice?

Ericka Adler 00:20:38 I think that, you know, physicians really need to know that they should be planning well ahead of time before they think of selling and to spend the time and money to have someone go through the diligence of their practice, look at their contracts, look at their structure, their compensation model, their HIPAA compliance, their stark compliance. It does not cost anything near what a loss Steele costs or legal fees on a deal that's going downhill. What that may cost to really make sure you're in good shape and ready to go to market, spend six months. Get your accountant involved. Get your lawyer involved. Take the time so you can.

Ericka Adler 00:21:20 I mean, you may not uncover everything because certainly, you know, you may not want to do a, you know, everything that a private equity firm is going to do, but you should feel relatively confident. And, you know, for example, I have a list of diligence questions that buyers ask. And we can run through that with a practice and say, what would your answers be to these questions? Right. Are you paying someone off the books? Right. Are you paying them for referrals? Is your compensation model compliant with state and federal laws? Let's clean that up. Now. When the time comes to sell, we may still need to reveal some of that information. We may need to say, you know, we corrected this a year ago. We made a refund a year ago. We're no longer doing this right, but at least it shows that you got yourself in order. You took the time. You're taking it, seriously. And, you know, I can't promise that that'll still make everything perfect, but it'll really avoid a lot of legal fees down the road.

Ericka Adler 00:22:18 it'll certainly impact, potentially the purchase price that you're going to get offered, and can hopefully save a deal that otherwise might not happen.

Todd Shryock 00:22:29 Very good. Ericka, thanks for joining me.

Ericka Adler 00:22:31 My pleasure. Always.

Keith Reynolds 00:22:37 Again, that was medical economics managing editor Todd Shryock and Ericka Adler, a health care attorney with Roetzel & Andress. My name is Keith Reynolds. And on behalf of the whole medical economics and physicians practice teams, I'd like to thank you for listening and ask that you please subscribe to the show on Apple Podcasts and Spotify. Also, if you'd like the best stories, Medical Economics and Physicians Practice published delivered straight to your email six days a week. Subscribe to our newsletters at Medical economics.com and Physicians Practice. Com. Oh, and one more thing. Be sure to check out Medical Economics Pulse, a quick hitting news podcast that offers concise updates on the most important developments affecting your practice, your bottom line, and the broader health care landscape delivered by the editorial team. Medical economics. Off the chart, A Business of Medicine podcast is executive produced by Chris Mazzolini and produced by Keith Reynolds and Austin Littrell.

Keith Reynolds 00:23:29 Medical economics, Physicians Practice, and Patient Care Online are all members of the MJH Life Sciences family. Thank you.