The Pros and Cons of Selling Your HCB to a Hospital
In recent years, selling a healthcare business or joining up with a hospital health system has become a popular move in the healthcare M&A market. However, there are always advantages and disadvantages to any business venture. The Ambulatory M&A Advisor picks out some of the top pros and cons to this type of a sale, in order to help its readers remain informed as to why or why not selling to a hospital health system may be right for them.
Mark Folk, partner at the law firm of Broad and Cassel says the advantages of a seller selling their business to a hospital health system vary tremendously by the type of owner.
Folk says that some of these advantages can be seen simply through the motivations for selling, which can be as varied as the types of ownership structures that own selling facilities.
“Some sellers wind up selling because they are facing financial difficulties, which happens frequently. Some sellers entertain offers from purchasers because they view the job of continuing day to day operations as becoming more difficult as time has gone on, and especially recently. Managed care contracting has become more challenging. Technological requirements for operation of a facility have become more onerous and more sophisticated. Technology requires more money and some sellers are not willing or interested to invest the amount of funds required to provide upgraded technology,” Folk says.
Those are some of the reasons why sellers are entertaining offers to sell the facility, and the areas where a hospital health system could potentially step in to improve the business as the new owner.
Folk says when selling to a hospital there are some big financial advantages to the seller.
“Depending on the type of compensation offer that a seller gets from a purchaser, there could be at least some guaranteed floor or greater continuity in income as opposed to continuing to be a sole proprietor or independent group practice. Number two is generally an employee purchaser will provide a certain base level of employee benefits that in some instances that are extraordinarily advantageous. Be it malpractice insurance, health insurance for the hired physician and/or the physician staff. Those are not inconsequential in many jurisdictions,” Folk says.
“Number three is a relief from day to day administrative burden. For example, the hospital generally becomes the principal managed care contract negotiator. In some instances, some hospitals have better managed care rates than stand alone urgent care centers. This could lead to higher compensation for a physician going forward than if they remained either in private practice or as an owner of a freestanding facility.”
Folk adds that owners must keep in mind that the regulations for selling to hospitals and building new centers varies from state to state. Physicians looking to make this type of a business transaction should consult their legal counsel before moving in.
Janice Anderson, shareholder at Polsinelli agrees with Folk and says an obvious financial pro is that a hospital is a larger entity and they will usually have the capital to make the kind of payments that physicians want.
“I think that the con so to speak is that it is regulated. There are issues related to how they can value the business, how they can pay, and other issues that need to be sorted through as you are doing the transaction,” Anderson says.
Dan Frier, founder of the law firm Frier and Levitt says another of the benefits is that the seller is sharing financial risk with another entity.
“Typically, the hospital has to own at least 51 percent of these ventures. The hospital bears 51 percent of the risk, a lot of physicians are risk averse, so it is helpful to have the hospital involved. The other thing is the hospital may be able to add resources that benefit the center. They may be able to assist with business generation. They may be able to get deals with vendors that physicians on their own would have more difficulty getting. They may have administrative staff that they can pull over to the ambulatory or urgent care setting that allows the business to benefit from high level executives that could help operationalize the business and make it operate better in certain circumstances,” Frier says.
Frier says that although not a huge advantage, a hospital partnership can potentially help with the production of new centers.
“I can’t speak for every state, but unless a state has a certificate of need requirement, it’s not a huge advantage to have the hospital on your side, because anyone who is getting licensed is qualified to build new centers. It may be that the hospital administrators know people at the department of health, and maybe could make the process happen more quickly and smoothly, but with the pure licensing requirements, it’s a question of filling out the application, having the right location and pursing the process appropriately. There should not be a huge impact on whether you have the hospital involved or not,” he says.
Steve Sellars, CEO of Premier Health says that there are also advantages for the hospital itself in the deal. Sellars says the advantage of performing deals like these is the fact that they are expanding their reach and ability to improve access to care in their community.
“They are looking for opportunities to ease the crowding of their emergency department, which ultimately results in improved patient satisfaction for the hospital. An Urgent Care model enables hospitals to get those patients out of the ER who don’t belong in an ER setting. Having an Urgent Care model might help a hospital avoid unnecessary ER visits or readmissions back to the hospital,” Sellars says.
Sellars says he is seeing activity where hospitals are acquiring a lot of practices and creating a lot of consolidation in most markets.
“Having that Urgent Care component as part of their affiliated network of providers certainly enhances and enables the hospital to streamline the referral process among those providers. It also provides a coordinated approach to after-hours care. Having that UCC that’s open seven days a week provides better access to care within the hospital affiliated network and it eases pressure for on-call physicians,” Sellars says.
In Folk’s opinion, the largest disadvantage to selling to a hospital would be what he calls sellers remorse.
“In this context that is equivalent to saying loss of autonomy. Physicians have a fairly entrepreneurial spirit. You have a medical license and you can go out an eventually be your own boss. After you sell a facility, those days are over,” Folk says.
There are Stark and Anti-kickback concerns, but Folk says the concerns are not as deep as one might expect them to be.
“The principal concern from both of those statutes would be that the compensation going forward with the purchaser is what the law calls Fair Market Value. FMV can get extraordinarily complicated, but the requirement of FMV is the principal regulatory hurdle that you need to overcome when a hospital employs a physician/seller,” he says.
Anderson says that regulations are in fact an issue, but she says they are not considered to be a deal killer.
“The nice thing about working with the hospital is that you know the people there from your local market and have relationships with them already. It’s not like you are bringing some for-profit entity into a new community,” Anderson says.
“It’s something that is very easy to work around; but they do present issues that the parties have to be aware of and have to figure out how to deal with it. Particularly if the physicians are going to continue to practice and be referring into the hospital or back into these businesses after the sale.”
In Frier’s eyes the primary disadvantage to doing a business deal with a hospital is the dilution element. According to Frier, hospitals typically want to own 51 percent of all of these deals, and because they need to own at least 51 percent, they typically are not so good to dilution.
“As you bring on more physician participants as investors, the physician ownership dilutes but the hospital ownership does not dilute. What makes it worse is that the hospital is not producing referrals for the facility. Especially in the case of an ASC; the hospital doesn’t bring business to the center, it’s the surgeons that do. Sometimes you are left with a business where you have this 51 percent partner that is not producing any revenue to the center, and they can create a significant problem in terms of recruiting new surgeons. If you think about it from a business standpoint, the ASCs customers are its referring surgeons, not the patients. Patients are obviously its healthcare customers, but from a business perspective the customers are the referring surgeons,” Frier says.
“The idea is to attract as many of those surgeons as you can legally, to become owners of the center, so they can begin to refer to the center. If surgeons know that when they enter a center, they are going to have this 51 percent owner in the form of a hospital who is not producing any revenue, then that center may not look as appealing as another center that is owned exclusively by physicians.”
If you have an interest in learning more about the subject matter covered in this article, the M&A process or desire to discuss your current situation, please contact Blayne Rush, Investment Banker at 469-385-7792 or Blayne@AmbulatoryAlliances.com.