Considerations for Health Systems Acquiring Physician Practices

While recent news and government inquiries have largely focused on the role of private equity in physician practice acquisitions, hospitals and health systems remain active in the pursuit of physician practice acquisitions. A 2024 report from the Physicians Advocacy Institute found that the pandemic led to a sharp increase in physicians being employed by hospitals and health systems—52.1 percent at the beginning of 2022 as opposed to 44% at the beginning of 2018—and that trend has continued post-pandemic. This article will briefly address some of the underlying factors influencing health systems’ interest in acquisitions of physician practices, as well as diligence considerations when implementing their plans.

Factors Driving Health Systems’ Acquisitions of Physician Practices

Several factors are propelling health systems’ acquisitions of physician practices. From a financial perspective, physician practice acquisitions allow health systems to attract new patients to the system and retain those patients as they subsequently seek additional care through other areas of the health system. Further, as health systems grow, they may enhance their bargaining power to achieve more favorable terms with insurers, vendors, and other business partners. At the same time, such acquisitions can improve outcomes and satisfaction for patient populations though improved care coordination, as primary care practices and specialty practices become integrated under a single health system brand. This consolidation can create a more unified patient experience and ultimately improve the quality and efficiency of care. The trend toward value-based payment models further encourages consolidation of healthcare entities, since larger, integrated organizations may be better suited to align their operations with the demands of the models.

Health systems are finding willing physician practice partners as many physician practice owners are seeking to shed some of the managerial and administrative responsibilities that have come to dominate much of their workday. In addition, physician practice owners are looking for relief from the rising costs of remaining independent in the healthcare industry, including employing personnel needed for compliance monitoring, financial investments in patient records systems and security, and time investments in recruitment of young doctors. For example, 71.4% of physicians whose practices were acquired by a hospital or health system after 2012 cited regulatory and administrative requirements as an important or very important reason for selling, according to the American Medical Association’s 2022 Physician Practice Benchmark Survey. By joining a health system, physician practices also may be able to access more favorable reimbursement rates from commercial insurers and Medicare.

Compliance with Healthcare Fraud and Abuse Laws

Because health system acquisitions are often structured as a fair-market value purchase of assets alongside the physicians becoming employed by a health system-affiliated practice entity rather than a health system acquiring the physician practice’s historic operating entity, the health system’s greater area of risk arises from relationships that will be created or continue post-acquisition. An acquiring health system’s counsel should advise a robust compliance operation in place prior to or at the closing to ensure that go-forward financial relationships comply with fraud and abuse laws.

In addition to the prohibitions in the federal Anti-Kickback Statute (AKS), many states—including California, Florida, and South Carolina—have laws extending this prohibition to all healthcare services, including those paid for by commercial payors. To identify potential AKS or state regulation risks that could arise, acquiring health system counsel should examine a target entity’s financial relationships that may continue post-acquisition, if applicable. Any remunerative relationships that vary based upon the volume or value of patient referrals or that appear to incentivize business generation or patient inducements should be carefully analyzed.

Similarly, acquiring health system counsel must ensure that the system is not in violation of the federal physician self-referral law (Stark Law). Related state laws can be even more stringent, further limiting physician referrals, subject to narrow exceptions. For example, Florida and New York have state-level self-referral laws that apply to all payors and include a broader range of services than those limited under the federal Stark Law (i.e., designated health services [DHS]). The Stark Law is a strict liability rule, so arrangements implicating the Stark Law must meet a specific Stark exception to avoid liability, even where there is no bad intent on behalf of the participants.

To ensure go-forward compliance with the Stark Law, a potential acquirer should identify during diligence the services provided by the physician practice that constitute DHS (e.g., imaging services, durable medical equipment, physical and occupational therapy services). Referrals for DHS and physicians’ compensation, ownership, and investment relationships related to referrals for such DHS must strictly adhere to the elements of applicable Stark exceptions. The exceptions available may vary based on an entity’s ownership. For example, the In-Office Ancillary Services exception allows a physician group practice to order and provide DHS in its own office, provided the DHS is ancillary to the medical services furnished by the group (e.g., lab tests, imaging studies).

However, in order to utilize this exception, physician practices must also meet specific criteria to be a qualified “group practice” and adhere to the Stark Law’s detailed rules for profit shares and productivity bonuses. Analysis of these thorny Stark Law issues relies on keen examination of nuanced fact patterns, so it is vital that a health system and their legal advisors understand how the employment of physicians by a system-affiliated entity utilizes compliant compensation structures and meets any other requirements.

In addition to ensuring the go-forward operations will comply with the fraud and abuse laws summarized above, acquirers should scrutinize the terms of the acquisition itself to ensure the financial relationship created by the transaction complies with the regulations. In making such assessments, experienced healthcare counsel will be needed to analyze complicated factual scenarios against these nuanced fraud and abuse rules.

Risk Areas Deserving of Enhanced Diligence Processes

In addition to the fraud and abuse concerns described above, health systems performing diligence on a transaction target should investigate other issues to assess the risks associated with the new physicians and any support staff who will also become employed by the health system, including:

• Billing and coding practices. Health system attorneys should analyze the target entity’s billing and coding practices and those of the physicians engaged by the target. A health system may be advised to engage a third-party auditor to perform a coding analysis to look for concerns related to upcoding, unbundling, and weak support for medical necessity, as go-forward coding improprieties or errors can create significant liability for the health system under the False Claims Act and potentially also the Stark Law. Reviewing existing internal or external billing audits can also help identify past concerns that require ongoing education or unusual billing trends. A buyer should also inquire as to any recent or ongoing government investigations, complaints, or threatened litigation regarding billing practices.
• Malpractice and other litigation. Counsel for a health system should evaluate the past, ongoing, and any threatened litigation on behalf of the target as a whole and any affiliated physicians, including malpractice claims in civil suits as well as government investigations and sanctions. Past settlements and ongoing litigation can show trends that may reveal underlying deficiencies, which could impact a health system’s decisions on employment offers for some of the practice’s physicians.
• Licensure and certification. Likewise, during the initial diligence phase of a potential transaction, the licensure and certification status of the target’s clinical professionals (e.g., state professional license, DEA certificate, and Medicare and Medicaid enrollment status) should be checked to ensure each would be a candidate to receive an offer of employment by the health system.
• Compliance program. A strong compliance program can help identify potential regulatory issues and reduce the severity of inadvertent errors. Knowing whether a target has a healthy compliance program that includes effective lines of communication to report compliance concerns and clear guidelines to sanction noncompliance is helpful in ascertaining the go-forward education required to bring a practice into alignment with a health system’s expectations. Physician practices without comprehensive mechanisms to identify compliance issues or to train its workforce on identifying and reporting potential risks may lack the capabilities necessary to appropriately identify and address regulatory issues and may underrepresent the healthcare regulatory risks across the enterprise.

What’s Next?

As the industry continues to operate in a period of uncertainty about the direction of the healthcare regulatory environment, counsel for acquiring health system would be well served by reviewing the scope of the diligence they conduct when the health system proposes to acquire physician practices and filling in any gaps. While some historic liabilities of acquisition targets are not likely to become a material risk to an acquiring health system, given the nature and structure of practice acquisitions, health systems and their counsel should continue to thoughtfully and thoroughly review arrangements they may acquire, continuously monitor coding practices, and always maintain an effective compliance program.