Practice Acquisitions: Key Legal and Regulatory Considerations for Private Equity Firms and Physicians | Morgana Lewis

Since 2016, there has been a strong overall upward trend in both the size and volume of healthcare services transactions. After recovering from a decline in 2020 due to the outbreak of the COVID-19 pandemic, 2021 saw growth of over 50%, with a particularly strong recovery in medical practice acquisitions.

According to PwC Health Services: 2022 Deal Outlook report, while long-term care was the most popular subsector, it was the number of deals targeting physician medical groups that was particularly notable: more than 400 from November 15, 2020 to November 15, 2021. This compares to about 200 to 250 agreements per year from 2017 to 2019.

In a recent presentation that was part of the Morgan Lewis Mergers & Acquisitions Academy, Morgan Lewis partners Banee Pachuca and Adam Prince explored market trends and provided insight into key legal considerations in private equity (PE) medical practice acquisitions. You can find more information on this subject in the complete presentation.


Medical practices are basically small businesses that are run mostly by doctors with a full load of patients. With this construct in mind, physicians face many benefits and challenges when deciding to partner with a physical education company.

  • Benefits: One of the biggest motivators is access to capital to allow the practice to keep up with the ever-changing health technologies, especially with electronic medical systems, which are expensive investments. By partnering with a PE company, the necessary capital is provided, allowing physicians to focus on patient care and service quality. Some other positive considerations for physician groups include earlier and greater cash opportunities than physician retirement or buyouts would; capitalize on brand awareness; scale gains by consolidating the back office; and consolidation opportunities.
  • Challenges: The actual acquisition of a medical practice is very complex, compounded by the pressure and expectation to grow the practice. At a more individualized level, there is the loss of ownership and control over the commercial aspects of practice and the fear of commercialization of health care. Finally, many physicians hold stakes in the private equity investment, which can represent a significant portion of the purchase price, and there can be uncertainty as to when and how this “working” capital will be realized.


When structuring a transaction, parties involved should focus early on on tax structuring and transaction forms, as well as business issues such as third party and corporate consents, the transaction process and the calendar. Specific to healthcare transactions, parties in some states should be aware of the Practice of Medicine in Business (CPOM), a state law doctrine that prohibits businesses from profiting from the practice of medicine or to directly employ a physician to provide professional medical services. To acquire in these states – for example, California, Texas, New York, and New Jersey – alternative structures, including the Friendly Physician Model and the Foundation Model, can be used.

In a healthcare provider acquisition, consents and notices are essential. Change of ownership (CHOW) comes into play with the Medicare and Medicaid programs; a Certificate of Need (CON) may be difficult to obtain as well as transfer and may be necessary in a medical practice transaction; and notification to the prosecutor can vary from state to state, ranging from a simple notification form to a full antitrust review period.


When acquiring a medical practice, the transaction time is often extended compared to many other M&A areas, as due diligence and negotiation efforts can take longer due to record keeping. company and physician patient hours during the week. Buyers should also be aware of conflicts of interest within partner physician groups, due to varying ages and/or buying/selling the “family business”. Other aspects to consider are the conversion of the structure from a PLC and S corporation to an LLC and the various state laws governing the change, as well as the practice management documents.


  1. Letter of Intent: As with non-health related areas of M&A transactions, the Letter of Intent (LOI) can be important and beneficial to both buyer and seller. For the buyer, the purpose of the letter of intent is to obtain exclusivity from the seller. More often than not, these types of acquisitions are less competitive and the buyer may obtain a longer period of exclusivity, as the due diligence process will take longer. For the seller, the letter of intent provides the opportunity to gather as many details as possible about the terms of the transaction, such as the sale price, employment contracts, terms of engagement, etc.
  2. Due diligence: By performing due diligence, involved parties mitigate risk by identifying healthcare compliance issues early on. In transactions where the buyer is considering obtaining representation and warranty insurance (RWI) coverage, or the buyer is obtaining debt financing, full legal due diligence and accompanying reporting is required. However, even when RWI hedging and debt financing are not in play, organized and thoughtful due diligence can be essential.
    • Major regulatory issues will vary depending on the specialty of the physician’s practice, such as speech-language pathology, gastroenterology, women’s health, substance abuse, and hospital specialties. Diligence must be personalized by specialty.
    • Healthcare regulatory due diligence typically includes the following: written due diligence requests for documents and information; engage experts to perform billing and coding review and fair market value assessments; and a management interview with the physician owner or the administrator of the practice.
    • When performing healthcare due diligence, common areas to review include assessing an existing full or partial compliance program, reviewing payer agreements, fraud risk analysis and abuse, reviewing billing and coding programs, confirming necessary licenses/CPOMs, and assessing privacy compliance.
    • Medical practices must also perform due diligence on their non-health care matters, including but not limited to employment and benefits matters, corporate and material contracts, real estate, property intellectual and others.
  3. Transactional documents: In the primary transaction document, working capital is often an important part of any medical practice acquisition, as buyers need selling doctors to remain invested in the practices after the sale or otherwise risk driving them away or taking their retirement. Buyers will want to determine early on what turnover percentage they expect the selling physicians to maintain, who the rollover participants will be, and how best to structure in a tax-efficient way for both buyer and sellers. The acquisition agreement should also give due consideration to purchase price adjustment mechanisms, sufficient representations and warranties and indemnification obligations, and appropriately tailored covenants. The new set of employment contracts created for the selling doctors are perhaps even more negotiated than the main purchase contract, given that they often come from a place where they were the sole owners responsible for everything. For a private equity firm, another important set of transaction documents is the firm’s management documents, including the management services agreement. This includes ensuring physicians are aware of the associated management fees, as well as the Directed Capital Transfer Agreement. Other documents and attachments effect the provision of administrative and management services on a non-clinical service basis.
  4. Post-closing obligations: For a private equity firm, certain healthcare-related items on their post-closing list should include notifying government agencies of a “change of information” filing (often within 30 days of closing) as well as relevant notices to licensing agencies and commercial payers. Buyers should closely follow the due diligence recommendations arising from the pre-closing due diligence process and develop a plan to cover themselves from a compliance and legal perspective, as well as prepare for success in future transactions. Release.
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