Breaking Up is Hard to Do: Dividing Medical Practice Assets

Change is inevitable, as are many of the unforeseen circumstances that can prompt it. While ending any business relationship can be challenging, there are increased complexities and risks when those businesses are involved in health care. Whether a professional relationship or medical practice ends on mutual terms or as the result of dispute, taking steps to address all relevant matters, ensure compliance with numerous health care laws and regulations, and properly divide medical business assets is of the utmost importance.

At Hendershot Cowart P.C., our Houston attorneys are nationally recognized for our thriving business law and health care law practices. Our versatility and depth of experience enable us to provide the comprehensive counsel and representation health care providers need to address a range of issues involving the end of a medical practice, physician departures, and new practice set-ups, mergers, and restructuring. From proactive counsel that can help practices prepare for a break-up, to protecting the rights of clients as assets are divided, we offer comprehensive and tailored solutions to even the most challenging problems.

Division of Business Assets: Medical Practices

Dividing up business assets for a medical practice entails far more than drawing a line through the middle of the office. There are numerous state and federal laws that apply to ending a health care practice, as well as consequences if it is not done properly. From real estate, multiple offices, and equipment to technology and intangible assets such as the goodwill attached to a professional or the practice itself, there needs to be a meticulous and definitive valuation of all assets, as well as advocacy and foresight to ensure your interests are protected when dividing them in a legally compliant manner.

Below, we discuss division of some of the most important medical practice assets:

• Medical Equipment – In many health care practices, medical equipment is leased. This can pose challenges if multiple parties want to keep certain pieces of equipment, or when no party wants to assume existing financial obligations. Whether owned or leased, medical equipment needs to be properly valued in order to ensure proper division. This consists not only of appraising an item’s fair market value, but also taking depreciation into account and evaluating any personal guarantees or outstanding liabilities associated with equipment. Our firm has both the experience and professional connections with expert consultants to properly value medical equipment and ensure their value and liabilities are properly allocated.
• Patients / Patient Records – A medical practice is not simply an office space with equipment and physical assets. It carries tremendous value in the form of patients and patient records, as well as legal responsibilities. Medical professionals who end a practice must address “ownership” issues involved in the patient relationships they have cultivated, including medical records and notifying patients about the practice’s dissolution. Dividing patient records by practitioner may also require extensive evaluation of all records held by a practice, which can trigger important considerations in terms of HIPAA compliance. Carefully crafted agreements that outline specific terms, use of records and information, and confidentiality provisions are important.
• Intellectual Property – Intellectual property is among a business’ most important assets, and that is true of health care practices, especially in terms of patents, copyrights, and trademarks. For instance, a practice’s brand, name, and logo may have inherent value (goodwill) based on reputation, legacy, and identity. As these are key factors in the success of any continuing venture, and can become an issue of dispute and contention when practitioners choose to move on in the same field or geographic area, agreements must be made in determining how those intangible assets will be used, if at all, after physicians split up.

These are only a few key assets that must be valued and divided when breaking up a medical practice. Dividing assets will also require a focus on accounts receivable, cash, jointly owned real estate, referral sources, ownership in ancillary service ventures such as imaging centers or ambulatory surgery centers,

Other issues to address when a medical practice is split up may include:

• Notifying all relevant parties, including patients, staff, insurers, licensing boards, and other health care providers, including compliance with contractually obligated notice periods, and notifications to all patients about moving in compliance with the Texas Medical Board.
• Contract review, including review of medical contracts between physicians and a surviving practice, managed care contracts, independent contractors, non-compete employment agreements (staff and professionals), buy-sell agreements, and shareholder agreements, which may outline the terms of asset allocation.
• Recruitment agreements. Compliance, liability exposure and enforcement of any recruitment agreements that may require repayment if a physician leaves a practice area without completing the term of the obligation.
• Shareholder agreements. While most physician shareholder agreements and employment agreements contemplate the departure from the practice of one physician at a time as a result of retirement or employment termination, rarely is a true practice split-up dealt with in those documents. Since practice split-ups are rarely planned far in advance, once notice of the intended split up has been given, it is too late to modify corporate agreements to deal with these issues. Therefore, physicians are often left addressing the split-up issues through intense and costly negotiations while, at the same time, trying to manage the emotions that often accompany practice split-ups.
• Restrictive covenants. If any contracts contain non-competition, non-solicitation, or severance compensation provisions, or if they are to be drafted as relationships end and a practice continues to operated, they must be thoroughly addressed. Physician non-competes are subject to stronger regulations than those used in traditional business arrangements, and the must comply with a number of requirements. Our firm can assist in reviewing, negotiating, drafting, implementing and enforcing these and other relevant contractual clauses.
• Disputes. Practicing in a group medical practice can intertwine personal and business relationships, creating the potential for dispute and disagreement. The nature of a group practice and the individual relationships involved can also make the process unpredictable. While preparation and proactively drafted agreements can help reduce the potential for such disputes, provide remedies when they arise, or allow for enforcement of claims such as breach of contract, efficiently resolving issues as they arise is critical to all parties involved.

Tailored Representation, Comprehensive & Proactive Counsel

Breaking up a medical practice is a process unique to every practice and the relationships which have been formed, as well as the individual goals and objectives of the parties involved. Whereas one practice may split the proceeds of liquidated assets after paying liabilities by dividing stock ownership, others may involve physicians who start new practices and wish to purchase medical equipment or other assets from the practice. Additionally, there may be existing agreements or circumstances that may impact an equitable distribution of certain assets between physicians, which may necessitate a different approach, such as negotiations or even prohibiting their use by any party after a split.

Due to the complexities, regulations, numerous issues and parties, and potential for unpredictable issues, splitting up a medical practice warrants thorough and insightful preparation. At Hendershot Cowart P.C., our legal team prioritizes a proactive and meticulously prepared approach to handling cases – from identifying which patients are treated by whom and performing a critical review of existing corporate documents, restrictive covenants, and records when practitioners have decided to end a practice to counseling clients in evaluating their readiness for a practice split-up prior to its imminence with legal measures such as shareholder agreements. As with medicine, an ounce of prevention may be worth a pound of cure when it comes to splitting up a medical practice.