Operational and Post-Sale Issues

All marriages are happy. It’s the living together afterward that causes all the trouble. —Raymond Hull

As difficult and time-consuming as it can be to get the deal done, myriad issues can arise after the sale as well. Problems these issues create can be minimized if they are addressed during the sale process, so be sure to include questions from this article in your discussions with the hospital.

The biggest issues post-sale usually take place during the transition from independent practice to hospital-owned. In every sale transaction, there is a closing during which everyone signs the agreements, funds change hands, and an effective date is established. The effective date is often the day after closing. Everything from the effective date forward such as billing, personnel, payroll, benefits, accounts payable, and accounting are now legally the responsibility of your new employer, the hospital.

All these issues should be considered prior to the effective date, and both parties should understand how they will be handled.

TIMING

As noted earlier, often there is a drive in a practice sale to “get the deal done.” This is not always in the best interest of either party. This urgency is driven just as often by the physicians as by the hospital. Once you’ve made the decision to sell and negotiated your best deal, it is understandable that you’re ready to get on with it.

The hospital often has the same anxiousness: It has made its decision, too, and often wants to move on. The hospital’s business strategy may come into play as well. For example, if the strategy is to renegotiate payor contracts around the broader physician network, the hospital wants that network in place as soon as possible.

The hospital may defer to you on determining the effective date. What an appropriate timeframe is will vary depending on the circumstances. For example, if practice billing is going to be moved on to the hospital’s system, more time may be needed for hardware and software installation and staff training than if current systems remain in place.

The best approach with timing is to establish a reasonable effective date and predicate that date on milestones being met. Checklist 1 at the end of this article lists typical critical path items that need to be considered in establishing an effective date. A flexible effective date conditioned on identifiable milestones will serve both parties better than an artificial date that must be adhered to at all costs.

TRANSITION ISSUES

Transitions are difficult by their nature; mounds of details need to be dealt with. Many of the problems can be minimized with good advance planning and attention to detail. Let’s look at some of the major issues and how to minimize their effects.

Provider numbers and payor credentialing

Provider numbers and payor credentialing are often a complex issue. What needs to be done varies significantly depending on the organizational structure of the hospital’s ownership, ever-changing regulations, and even varying interpretations of those regulations by fiscal intermediaries.

Hospital administration is generally not well-versed in the detail requirements, so experienced personnel are important. Regardless, it is hard to push bureaucracies; they move at their own pace. Medicare usually isn’t as big a potential problem as the commercial payors. Medicare allows retroactive billing, so even if it takes several months to get the paperwork straightened out, the money will eventually come in. This isn’t true with most commercial payors.

Sometimes it seems as if commercial payors deliberately drag out the process because they typically don’t allow retroactive billing. If your effective date is before everything is completed, the payors know you’ll likely continue to see their patients — effectively for free — so there is little incentive for them to cooperate. Rushing the effective date without everything in place plays right into their hands.

If the parties are pushing for an effective date without allowing a minimum of 60 days to complete the provider number and credentialing work (90 or 120 days is often more realistic), the potential losses are huge.

This is also where the structure of your incentive compensation is important. If the hospital insists on forging ahead and billing and collection problems result, you want to make sure your bonus is not based on those collections or profitability because the problems then inevitably affect your income. Even if the resulting billing and collection issues are not your fault and don’t directly affect you bonus, hospital management may find itself having to explain unexpected operating losses that may taint your practice’s reputation.

Staff issues

Your staff members will be going through a transition also, and they likely will have a lot of questions and concerns about their salaries, benefits, and job security. Their job descriptions and reporting lines may change as well. Small medical practices usually have ripe rumor mills. It is unlikely you’ll get to this point without having to address the rumor that you’re selling to the hospital.

In an independent physician practice, the staff knows who the ultimate authority is: the physician owners. Once the sale to the hospital is complete, this is often less clear.

While many hospitals have a general hands-off policy on most day-to-day operational issues, many physicians sell their practices to be out from under these responsibilities. That can be a double-edged sword. Conflicts arise and staff members can get caught in the middle between the hospital’s practice manager, to whom they technically report, and the physician, who is used to being in charge.

Even if the hospital has a hands-off policy, that doesn’t mean nothing changes. While this issue varies depending on the legal structure the hospital uses, it is likely your staff members are now employees of the hospital or one of its affiliated companies and therefore subject to the hospital’s personnel policies. Hospitals are subject to employment laws from which most small practices are exempt, such as the Family and Medical Leave Act.

Hospital personnel policies probably are more stringent and formalized. For example, there likely is a formal process that has to be followed before a staff member can be terminated. Staff evaluations are probably more formalized and mandatory. Work rules such as break time and overtime requirements most likely are less flexible.

Most hospitals have salary scales based on job classifications. Progress through these salary scales often is based on years of service. Future staff raises may be subject to these pay scales and the hospital’s budgets. Hospitals generally have higher salary scales and more generous employee benefits. These additional costs can affect your overhead and incentive compensation as well.

The process for hiring staff may also become more complex. While it may be a relief to have the hospital source and screen candidates, the hiring process can sometimes seem slow and cumbersome.

Almost assuredly, your staff members will be quite concerned about changes in their benefits. While in most cases, fringe benefits such as health insurance and retirement benefits improve under hospital employment, problems can arise for long-term employees whose years of service provide them with additional vacation and sick days. Hospitals sometimes refuse to grandfather these benefits. Staff may not like these changes, resulting in increased turnover.

Before the effective date, the hospital should schedule a meeting with your staff members to explain the employee manual and answer staff questions about benefits and other changes. Often, hospital personnel policies require a formal staff orientation.

Financial reports

Almost all physician practices use the cash basis of accounting, while hospitals are required by generally accepted accounting principles to report their financial results on the accrual basis. In the simplest terms, here is the difference: To a physician, cash collections equal revenue. To a hospital, revenue is what it expects to collect from gross charges, so it must be estimated.

Accounting is simply dividing the financial results of a business into artificial periods such as months, quarters, and years. Over the life of any business, cash and accrual accounting will ultimately lead to the same financial results. Problems arise when hospitals try to get physicians to understand accrual accounting, and this is especially true during the early stages of employment when the lack of historical collection data can make accurately estimating accrual basis revenue impossible.

While many hospitals have learned this lesson and prepare separate financial reports for their employed physicians on a cash basis, the larger the hospital’s employed physician group becomes, the more likely they will insist on using accrual basis.

If all or part of your compensation is based on revenue, such as under a profit-based incentive or the virtual private practice models, make sure you understand how the estimate of accrual basis revenue is made and assure it is reasonably accurate.

Vendor payments

After the effective date, all your practice’s bills — utilities, rent, telephone, and supplies — become the responsibility of the hospital. As a practical matter, it is impossible to get all your vendor accounts transferred into the hospital’s name on the effective date. While this usually isn’t a major issue, it does mean that somebody must be on top of these details to make sure the bills get paid on a timely basis and that ultimately the funds get accounted for properly.

Generally, the hospital will handle the payments after the effective date. In cases where invoices include both pre- and post-sale charges, a list of payments is generally maintained along with an allocation of what is the practice’s responsibility and what is the hospital’s responsibility. Generally, the totals are reconciled after 60 to 90 days, and any amounts due-to/due-from are settled and paid.

HOSPITAL PERSPECTIVE

Problems with post-sale issues tend to arise with inexperienced hospitals; hospitals that have experience have systems and procedures in place to address these issues.

Inexperienced hospitals often default to doing things through existing hospital systems and bureaucracy. If the hospital with which you have chosen to affiliate lacks experience, it is incumbent on you and your advisors to carefully work through the issues discussed in this article in advance. Inflexibility and inexperience are a bad combination. These issues can be critical to getting the relationship off to a good start, and failure to adequately deal with them may even reach the level of causing you to revisit your decision.

TAKEAWAY POINTS

1. Myriad issues can arise after the sale, and these can be minimized if they are addressed during the sale process.

2. There often is a drive in a practice sale to “get the deal done.” This is not always in the best interest of either party.

3. A flexible effective date conditioned on identifiable milestones will serve both parties better than an artificial date that must be adhered to at all costs.

4. If the parties are pushing for an effective date without allowing a minimum of 60 days — and 90 or 120 days is often more realistic — to complete the provider number and credentialing work, the potential losses are huge.

5. Your staff members will be going through a transition also, and probably have a lot of questions and concerns about their salaries, benefits, and job security.

6. Your staff members are now employees of the hospital or one of its affiliated companies and probably are subject to the hospital’s personnel policies.

7. Before the effective date, the hospital should schedule a meeting with your staff to explain its employee manual and answer staff questions about benefits and other changes.

8. Problems always arise when hospitals try to get physicians to understand accrual accounting. Most hospitals have learned this lesson and prepare separate financial reports for their employed physicians on a cash basis, but you should ask just to make sure.

9. Somebody must be on top of the detail of vendor payments to make sure the bills get paid on a timely basis and that ultimately the funds get accounted for properly.

10. These issues can be critical to getting the relationship off to a good start, and failure to adequately deal with them may even reach the level of causing you to revisit your decision.

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Checklist 1: Critical Path Items in Establishing an Effective Date

• Payor credentialing

  • Medicare number transfers

  • Medicaid

  • Commercial payors

• Personnel

  • Staff informational meetings

• Staff orientation and/or policy manual review

  • Benefit enrollment

  • Payroll

• Billing system

  • Hardware, software, and data line installation

  • Demographic data transfer

  • Staff training

  • Revisions to financial policies

• Accounts payable

  • Approval process

  • Payment policies and procedures

  • Vendor account transfers

  • Pre- and post-sale invoice reconciliation plan

• Malpractice

  • Tail premium if changing carriers

  • Changes in coverage

  • Other

Checklist 2: Operational/Staff Issues to Discuss with the Hospital

• How and by whom will vendor payments be handled during the first transitional months?

• Can the hospital’s financial reports be generated on a cash basis for physicians?

• Does the hospital have a “hands-off” or an “involved” policy for day-to-day operational issues concerning your staff? Does that align with your preference?

• How will your staff be informed about salaries, benefits, and job security? Will the hospital schedule a meeting with your staff to explain its employee manual and answer staff questions about benefits and other changes?

• How will staff job descriptions and reporting lines change?

• How will benefits such as health insurance and retirement benefits improve or change under hospital employment? Problems can arise for long-term employees who have years of service that provide them with additional vacation and sick days. Does the hospital grandfather these benefits?

• Since your staff will likely be subject to the hospital’s personnel policies, are those policies more stringent and formalized? What process must be followed before a staff member can be terminated? How are staff evaluations handled? What are the work rules for things such as break time and overtime?

• Hospitals generally have higher salary scales for staff and more generous employee benefits; how will these additional costs affect your overhead and incentive compensation?

• What is the hospital’s process for hiring staff?

Excerpted from Time to Sell? Guide to Selling a Physician Practice: Value, Options, Alternatives 3rd Edition by Randy Bauman.