Tips for Navigating Physician Practice and ASC Transactions During COVID-19
Careful scrutiny, reality-based assessments, and frank communication between parties are key
By Lori Beam, JD
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Just as the positivity rate in COVID-19 cases continues to go up, the positivity rate for physicians considering selling their private practices has also been trending upward. In a national survey of general and specialty physicians conducted in 2019 and repeated six weeks into the pandemic, McKinsey & Company found that:
- 53% of all independent physicians expressed worry that their practice would not survive the pandemic.
- One-third said they were considering partnering with a larger entity, selling their practice or becoming employed.1
The upshot is that many physician practices are considering new opportunities. At the same time, health systems are evaluating whether—and how—to respond. Some opportunities might also involve businesses that physician practices directly or indirectly own or operate: ambulatory surgery centers (ASCs), diagnostic imaging centers, outpatient laboratories or other related businesses.
Despite concerns about an uncertain economic landscape, there’s no need to panic. Avoiding buyer’s or seller’s remorse requires calm, cool analysis and communication.
As negotiations progress, each party should communicate areas of flexibility for meeting the other party’s needs. Health systems should define and effectively communicate the value their platform offers as well as the expectations of physician employment. Physicians should also be thoughtful and candid about their expectations.
TIPS FOR EFFECTIVE NEGOTIATIONS
Following are tips for approaching deals and negotiations:
Appraisals. Get an independent valuation expert’s appraisal of the value of the physician compensation, the physician practice and related ASCs and businesses. Then establish a purchase price and physician employee compensation in the range of fair market value specified by the appraiser.
- Consistent with pre-pandemic times, obtain an appraisal and use it to establish the purchase price and physician employee compensation. This would ensure that, if ever challenged, the parties would have proof that they based the purchase price and physician employee compensation on fair market value— not on the volume or value of referrals, which are prohibited by the Anti-Kickback Statute and the Stark Law. In most cases, health systems will pay only a tangible asset value for a physician practice. But they will accept an earnings-based methodology for determining the purchase price of an ASC or other associated business.
- Each party should also consider getting a new appraisal, an update or a confirmation opinion from the same appraiser in cases where a valuation was done pre-coronavirus. However, if patient volumes and revenue have returned since restrictions limiting operations to only essential visits and procedures were lifted, the parties may not need a new appraisal. But getting a confirmation opinion is worth considering. The valuation expert may adjust the proforma to better reflect 2020 financials under normal operations, finding that the months directly affected by the coronavirus are not representative of future results.
Due diligence. It’s essential to take an even more thorough approach to due diligence review of the physician practice. Since historical business information may be less useful, health system buyers and appraisers should carefully scrutinize it as a predictor of future performance and valuation. Near-term impacts, though, should be distinguished from long term.
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