Transition Issues in Selling and Buying a Practice: Part 1

By Jared L. Shwartz

Growing a practice requires years of relationship building and providing quality care.  Selling a practice is the culmination of those efforts and can often provide financial security upon retirement.  Purchasing a practice is a major investment of time and money for buyers and often results in buyers becoming business owners for the first time in their professional careers.  While selling a practice relieves the seller from the day-to-day operation of running a business, and purchasing a practice empowers providers to control their own professional careers, buyers and sellers should be mindful of a number of issues relating to the transition the practice between the parties—issues that can give rise to legal liability and unforeseen expense if not addressed prior to the sale.

Credentialing

Prior to entering into any definitive agreement to sell a practice, the buyer and seller should carefully examine the practice’s existing third-party payor contracts. Particular attention should be paid not only to agreements with private insurers, but Medicaid provider enrollment as well. The credentialing process can take several weeks, and failing to address credentialing well in advance of the sale can not only impact the financial viability of the practice, but disrupt the buyer’s ability to treat patients as well. While the buyer and seller may be able to address post-closing delays in the credentialing process by executing a Leased Employee Agreement, generating a formidable agreement requires time and expense that can be avoided by remaining attentive to credentialing needs.  Because credentialing can take longer than any other process relating to the transition of practice ownership, credentialing should be the first issue addressed in the discussions and transition planning leading up to the sale.

Medical Records

Patients are the lifeblood of any practice, and any practice worth selling will have hundreds of patient records that require safekeeping.  The custody of medical records involves issues of both state and federal law.  Massachusetts regulations require a provider to retain patient records for a period of seven years. This rule applies not only to providers who continue to practice as an employee of the buyer once the practice is sold, but to the successor of a retiring physician as well.  Furthermore, state and federal law require providers to furnish copies of medical records within specified periods of time following a patient’s request for their own records.  In light of the liabilities a provider may face at the state and federal level for the failure to comply with rules and regulations pertaining to medical record retention, sellers should clearly set forth the procedures by which the seller’s patient records will be stored and supplied upon request. This agreement should be spelled out in a standalone “Medical Records Custody Agreement.” By keeping this agreement in a separate document apart and independent from the Purchase Agreement, sellers can ensure that the obligations of the buyer and seller relating to the custody of medical records following the sale will survive any legal challenges to the Purchase Agreement.

Staff Licensing

As a general rule, staff licenses should be reviewed annually to ensure that all licenses are active and compliant with applicable regulations.  Licenses include not only state-issued authorizations to practice (such as certificates issued to nurses, physicians, and other support staff) but federal licenses issued to practitioners from federal agencies such as the Drug Enforcement Administration. The failure to renew licenses can both delay the timing of potential sale and subject a seller to legal liability for the unauthorized practice of medicine.  By maintaining accurate licensing records and complying with state and federal renewal requirements, sellers can avoid the administrative burden of hastily renewing licenses immediately prior to the sale and limit any liability as a result of their expiration.

Part II of this series on transitional issues will examine areas of particular concern and critical importance to sellers following a practice sale.  To read part II, click here.

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