How a Physician Practice Can Negotiate an M&A Project with a Health System - Option 2
What are the Business Model Options that physician organizations have?
Option 2: The Physician Practice Lease Model
The big difference between acquisition and leasing is that in the physician practice lease model the physicians and their staff remain employees of the physician practice. The practice entity continues in existence as it always has, and the health system is actually leasing the physician and non-physician providers that can bill and provide services for a period of time.
A benefit of the leasing arrangement is that, at the end of the lease term, the physicians can go back into their practice as an independent organization and not have any commitments or ties to the health system. Mr. McLafferty also discusses some of the challenges in the leasing model. For example, the health systems may take over all of the billing and collection functions while under lease, but afterwards the physician practice may need to hire a third party firm to handle these duties, if the practice no longer has a billing department.
0:00 The second option that we talk about is leasing. The big difference between acquisition and leasing is the physicians and their staffs remain employees of the physician practice.
The practice entity continues in existence as it always has been
0:25 and the health system is actually leasing the physician and non-physician providers that can bill and provide services for some period of time. Typically, it's a 3 year term that we're finding, kind of 5-year on the high end, but most of them are 3 and then there are 1-year renewal terms after that. The good thing for the physicians in the leasing arrangement, which we typically find this works
0:50 out for larger groups that have more leverage, is if they wanted to, at some point when they got to the end of the lease term, they can go back into their practice and just start practicing as an independent organization again and not have any commitments or ties to the health system per se.
1:15 Obviously, that option is not there for an acquisition. You're an employee and have to basically leave the organization like any other when you have to start from scratch and start an entity and that's very very difficult to do. It’s a little challenging, even in the leasing model, just to go back and start your own practice because typically the health systems, as part of the agreement, take over all of the
1:40 billing and collection functions, but it’s certainly do-able and you could always initially hire an outside third-party firm to do that for you when you go back into your own practice and then eventually take it over again completely internally if you wanted to.
EisnerAmper Partner Michael McLafferty provides an overview of all the steps in negotiating an M&A with a Health System. Mr. McLafferty has over 20 years of experience in the health care field providing business services to multi-hospital systems, pharmaceutical firms, surgery centers and physician practices.
Physician practices negotiating an acquisition by a Health System. Mr. McLafferty discusses why the pure acquisition option is the favorite for most health systems. Physicians and their staff become employees of the health system and the physician practice will be liquidated.
In the video series, Physician Practices Negotiating an M&A with a Health System, Mr. McLafferty discusses the benefits of a hybrid option where the physician practice is owned by the health system, but the practice remains so physicians can keep putting money into their pensions.