Transition Issues in Selling and Buying a Practice: Part 2

By Jared L. Shwartz

In Part 1 of our post exploring transitional issues in selling and buying a practice, we examined the role that credentialing, staff licensing issues, and medical records custody each play in ensuring a smooth and efficient sale of a practice.  In Part 2 of our series we examine certain post-closing matters that are critical for all buyers and sellers, and which should be negotiated and spelled out in the Purchase Agreement.

“Tail” Insurance Coverage

Selling a practice does not make the seller or the practice judgment-proof against malpractice claims.  In the event that the seller holds a claims-made policy, purchasing “tail” coverage is critical to ensuring that you are protected against malpractice claims arising from acts occurring prior to the sale.  Under a tail policy, your medical malpractice insurance provider will keep you insured for a set period of time following the sale of your business in exchange for a premium. While tail insurance is often mandatory requirement for any seller  with a claims-made policy who will stay on with the purchaser as an employee, sellers should consult with their medical malpractice insurance provider to discuss the length and extent of coverage. The seller should discuss with the buyer whether the buyer will pay for the seller’s tail coverage, particularly if the seller will remain with the buyer’s practice as an employee following the sale. Therefore, the Purchase Agreement between buyer and seller should state whether the buyer or seller will pay for seller’s tail policy.

Patient Notification

Notifying patients of a practice sale is largely a matter of a provider’s ethical obligations, and the failure to carefully plan the notification process can disrupt patient treatment and have adverse consequences on the financial health of the practice.  Section 1.1.5 of the American Medical Association’s Principles of Medical Ethics requires that providers alert patients of any disruption in the continuity of care.  Providers are obligated under Section 1.1.5 to (i) provide adequate notice to the patient to allow the patient to choose another physician, and (ii) facilitate the transfer of care if appropriate.  Although a seller cannot require patients to remain with the practice following a transfer of ownership, a well-drafted Purchase Agreement will address issues such as patient introductions to the buyer, the wording of the announcement notifying patients of the transfer, and joint-marketing efforts following the closing of the sale.

The issues covered in Part 1 and Part 2 of our series represent only a small number of legal and regulatory issues associated with the sale and purchase of a practice. Careful analysis and negotiation of a Purchase Agreement addressing details relating to practice transition will undoubtedly save a buyer and seller the added expense of troubleshooting these matters after the practice has changed hands and any obstacles to ensuring continuity of care.

To read part 1 of this article, click here.

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