Health Care Law Blog

Joining a health system through acquisition can offer meaningful benefits to a physician practice, including enhanced operational support, access to capital, improved payer contracting leverage, and long‑term sustainability. At the same time, these transactions involve a complex and highly regulated legal landscape. Physician owners who understand the key legal and operational issues early in the process are better positioned to manage risk, preserve value, and avoid post‑closing surprises.

Outlined below are several primary legal considerations physician practices should be aware of when evaluating a potential acquisition by a health system.

Transaction Structure and Its Implications

One of the earliest and most important issues in any acquisition is how the transaction is structured. Health system acquisitions of physician practices are most commonly structured as either an equity purchase or an asset purchase.

In an equity transaction, the health system acquires the practice entity itself, including its assets and liabilities. In an asset purchase, the health system acquires only designated assets, such as select equipment, real estate, and contracts, while the practice generally retains responsibility for historical liabilities unless expressly transferred.

From the physician’s perspective, an equity transaction may offer operational continuity and administrative simplicity. However, equity deals also expose the health system to potential compliance and billing risks, which often leads to heightened scrutiny. As a result, health systems frequently prefer asset purchases. Physicians should be prepared for this and understand that, in asset transactions, certain legacy obligations, such as contracts, accounts receivable, equipment, real estate, or medical record retention duties, may remain with the practice post‑closing.

Transaction structure also affects taxes, deal timing, and how liabilities are allocated. Early coordination with legal and tax advisors is critical to ensure the structure aligns with the physicians’ financial and risk‑management objectives.

Stark Law and Anti‑Kickback Compliance

Physician practice acquisitions are heavily influenced by federal fraud and abuse laws, most notably the Physician Self‑Referral Law (“Stark Law”) and the Anti‑Kickback Statute. These laws directly affect both the purchase price paid for the practice assets and the compensation physicians will receive following closing.

At a core level, these laws require that compensation and other remuneration be consistent with fair market value, commercially reasonable, and not determined in a manner that takes into account the volume or value of referrals. Fair market value generally reflects the price that would be paid in an arm’s‑length transaction between unrelated parties, while commercial reasonableness focuses on whether an arrangement serves a legitimate business purpose even absent referrals.

From the physician’s standpoint, it is important to understand that a strong referral base or anticipated downstream health system revenue cannot be used to justify higher purchase prices or compensation. Health systems are understandably cautious in this area, and regulators regularly scrutinize practice acquisitions to ensure they are not, in substance, payments for referrals.

Physician Employment and Compensation Expectations

Employment arrangements are a central component of most physician practice acquisitions. Following closing, physician owners typically transition from practice owners to employed physicians of the health system. These agreements must comply with Stark and related regulatory requirements, which may impose constraints on compensation models.

Physicians should be mindful that informal or early compensation discussions may later need to be recalibrated to ensure compliance. For practices where physician owners are critical to long‑term success, health systems may offer retention‑focused incentives, such as sign‑on bonuses tied to service commitments.

Physicians should also be prepared to evaluate compensation models used by the health system, such as base salary plus productivity or quality‑based incentives and consider how those models compare to prior practice economics. For example, in an independent group practice, physicians often have more flexibility in how they’re paid, including sharing in the practice’s overall financial success. That flexibility exists under special federal rules for independent practices and are often not available after a health system acquisition. Once physicians become system‑employed, compensation is typically tied to the physician’s personal productivity. Understanding these structures early can help manage expectations and support a smoother transition.

Licensure, Enrollment, and Change‑of‑Ownership Issues

Practice acquisitions frequently trigger licensure, credentialing, and payer enrollment consequences. These may include change‑of‑ownership filings, commercial payer notices, reassignment of billing privileges, credentialing updates, accreditation changes, and, in certain circumstances, certificate of need approval.

Physicians should be aware that failure to address these requirements well in advance of closing can lead to reimbursement delays or interruptions after the transaction closes. Early coordination between the practice, the health system, and legal counsel is essential to maintaining continuity of patient care and cash flow.

Due Diligence and Compliance Considerations

Health systems will typically conduct extensive due diligence before acquiring a physician practice. This process often includes reviews of billing and coding practices, compliance programs, documentation standards, litigation/claims history, and exclusion screenings.

From the physician’s perspective, preparation is key. Organizing records, understanding historical compliance practices, and anticipating areas of scrutiny can help the process move more efficiently. Health systems frequently engage independent third‑party valuation firms to support fair market value determinations, and physicians should expect detailed operational inquiries as part of that process.

Physicians should also understand how medical records and accounts receivable will be handled post‑closing. In asset transactions, responsibility for pre‑closing accounts receivable and record retention may remain with the selling practice unless expressly transferred, which can affect post‑closing administrative obligations.

Real Estate, Equipment, and Ancillary Arrangements

Most physician practices maintain office leases, own or lease equipment, and participate in ancillary service arrangements. Physicians should expect the health system to carefully evaluate which leases, equipment, and contracts it intends to assume.

In some cases, the health system may not assume all existing arrangements, particularly if they do not align with system standards or strategic objectives. These obligations may remain with the practice or require renegotiation. Early and candid discussions regarding real estate, equipment, and ancillary services can help avoid misunderstandings and last‑minute complications.

Employment and Staff Transition Issues

The treatment of non‑physician staff depends heavily on transaction structure. In an equity transaction, existing employment relationships generally continue, though the health system may assume historical employment‑related liabilities. In an asset purchase, staff do not automatically transfer, and new employment offers may be required.

Physicians should understand how staff benefits, compensation, accrued leave, and seniority will be addressed and communicate clearly with employees to maintain morale and continuity of care.

Conclusion

Acquisition by a health system can be a transformative opportunity for a physician practice, but it is not merely a financial transaction. Many of these issues reflect system‑level compliance and operational realities rather than negotiating positions, and early transparency benefits both physician practices and health systems alike.

Legal, regulatory, and operational considerations play a central role in shaping deal structure, compensation, and post‑closing success. Physicians who engage experienced legal and financial advisors early, understand the health system’s compliance constraints, and approach the process strategically are best positioned to achieve a favorable outcome.

If your practice is considering a potential acquisition by a health system or has already begun discussions, contact Thomas Huyck for counsel on how these issues may apply to your specific circumstances.