Issues for the Physician in the Sale of a Medical Practice

This article addresses some of the important issues facing a physician in the sale of all or part of a practice.  Each practice and transaction is different and thus a complete discussion of all of the possible issues in a sale would be extensive and beyond the scope of this article.

Tax Issues

As a general rule, medical practices are acquired through asset purchase agreements for liability and tax reasons.  Great attention should be given to the tax ramifications of the sale of the practice which may require some planning prior to the sale in order to minimize taxes.  Greater attention should be given if the practice will survive in the form of a merger or its assets will be transferred to another entity in which the practioner has an interest.  In some cases, the structure of the merger may be tax free.  Some of the most important tax decisions will be made early on by deciding the form of business entity of the acquiring company.  The decision to employ a C Corp., S Corp. Partnership or Limited Liability Company require an analysis of each entity’s pros and cons.

With respect to allocation of the purchase price, the goal of the selling physician is to allocate as much of the purchase price to goodwill as opposed to hard assets.  Goodwill is taxed at a capital gains rate as opposed to a higher ordinary income rate attributed to depreciated hard assets.   Needless to say, sound tax advise is indispensable.

Treatment of Employees

Depending on the purchaser’s plans, not all employees or staff will be rehired to remain in the practice.  Thus, the issue will arise with respect to continuation and termination of employee benefits such as pension plans and health insurance.  With respect to pension plans, alternatives may include termination or freezing of old plans, merging of plans or adoption of new plans. With respect to health insurance, a plan should be put in place to avoid any lapse in coverage for those staff members who stay, and arrangements for COBRA coverage should be made for those who are not rehired by the purchaser.  The parties may allocate COBRA responsibilities amongst themselves in a manner different from the regulations.

Medicare Reassignment

At the time of the sale, the practice may have Medicare receivables which may or may not be part of the transaction.  As a general rule, Medicare does not pay amounts that are due a physician or other supplier under an assignment to any other person under a reassignment, power of attorney or other direct arrangement unless an exception applies.  Thus, if the sale and purchase agreement reassigns Medicare receivables, careful consideration should be give to ensure that the reassignment falls within the exceptions.

Employment Agreements

Purchasers will continue to need the services of the selling physician to ensure continuity of patient care and loyalty to the practice, and thus revenues.  At a minimum, physicians will be hired for a transition period.  The terms of compensation, from salary to benefits should be negotiated up front.  Medical malpractice insurance both during the relationship and in the event of termination also need to be addressed.  For physicians who want to be compensated for productivity, the compensation can be adjusted every six months under a formula which takes into account the revenues collected related to the physician’s services.

Covenants Against Competition

In order to prevent a physician from selling the practice an immediately setting up shop next door, purchasers usually insist on including some form of non complete, typically two to five years, within a certain geographical area.  From the selling physician’s point, if the employment relationship sours, the physician (if not retiring) will need to find employment.  However, as a result of the non compete, this may require the physician to relocate.  In order to avoid this situation, the physician may negotiate: (1) a “buy out” of the non compete by agreeing to pay back a portion of the sale proceeds; (2) to maintain staff privileges and to limit restrictions on solicitation; or (3) an agreement that allows him or her to terminate the non compete if his or her income decreases or does to reach a certain fixed amount.

State and Federal Government Regulations

Depending on the type of merger or acquisition, and the entity acquiring the practice, a number of State and Federal regulations can come into play.  They are:


  • Federal and State Anti-Kickback Statutes
  • Federal and State Self-Referral Statutes (Stark and Florida Self-Referral Act)
  • State Fee Splitting Laws

These laws have “safe harbor” provisions and exceptions.  Navigating them requires some expertise.


The sale of a medical practice involves complex accounting and legal issues.  Proper advise from a professional is paramount to the success of any sale, and a physician’s continuing relationship to the acquiring entity.

Manny R. Lopez, Esq., is an attorney with over thirteen years of experience in the healthcare industry. His practice concentrates on health law transactions, regulatory compliance and litigation.