Question re Healthcare Acquisitions

October 02, 2023

by a searcher from Columbia University in Miami, FL, USA

Hi team: Curious if anyone with healthcare acquisition experience is knowledgeable about the corporate practice of medicine (CPOM) doctrine which prohibits non-licensees (non-doctors, psychologists, etc) from owning equity in the professional entity.

My question is: If you create an MSO structure in which the business and professional decision making are separated, and the practice founder (assuming they are a licensed professional) remains owner of the professional entity, does this create any kind of risk whereby the founder can has a lot of power to potentially against investor interest?

What does institutional PE usually do? Do they replace the founder with a licensee under their control/ on their team? And if so, does that licensee assume risk?

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Reply by a searcher
from University of North Texas in San Antonio, TX, USA

^redacted‌ I'd like to provide you with two perspectives on your query, emphasizing that these are not legal advice but reflections on experiences and common practices.

I'll give you 1 formal and 1 Informal for you to ponder: (Disclaimer: This is for educational purposes only and not legal advice) Formal Response on CPOM Doctrine and MSO Structure:
In response to your inquiry regarding the corporate practice of medicine (CPOM) doctrine in healthcare acquisitions, it's crucial to address potential risks and ensure compliance in these transactions. Creating a Management Services Organization (MSO) structure is a common strategy to mitigate CPOM concerns. This involves allowing the practice founder, assuming they are a licensed professional, to retain ownership of the professional entity. The goal of this structure is to maintain compliance with CPOM regulations. However, it's essential to consider the dynamics within the MSO structure, particularly the potential for the founder to wield significant influence over the professional entity. While this might not inherently violate CPOM, it could lead to governance challenges and conflicts of interest, especially if the founder's interests diverge from those of investors. Institutional private equity (PE) firms, before investing in healthcare practices, carefully assess risk and governance structures. They may decide to retain the founder in a leadership role if they bring valuable expertise and client relationships. Alternatively, PE firms might replace the founder with a licensed professional under their control or on their team. When a licensee assumes a leadership position, they bear the responsibility for ensuring compliance with CPOM regulations and other legal requirements. PE firms often conduct thorough due diligence to assess qualifications and risk profiles, negotiating governance agreements, employment contracts, and non-compete clauses to align interests and address conflicts. In summary, while the MSO structure can address CPOM concerns, careful consideration of governance, control dynamics, and risk mitigation is crucial to protect the interests of all parties in healthcare acquisitions. Informal Response on State Variability and Strategic Guidance:
Each state and healthcare situation is unique, and with upcoming changes in Home Health and lending further complicate the landscape. Given these moving targets, having someone on your board who can assist, especially in communication with your legal team, is essential. Even if you feel like "small potatoes," negotiations occur at all levels. Always prioritize legality, ethics, and morality. Surround yourself with a knowledgeable team that can provide guidance through the complexities of healthcare acquisitions.
Hope this helps you.

Reply by a searcher
from American University in Washington, DC, USA

The primary initial risk lies with the CEO of the founding medical practice. Medical practice founders often possess a more profound emotional attachment to their establishments than founders in other industries. If these leaders lack the necessary adaptability and openness, their methods and views could remain static. Generally, medical practice founders fall into one of two categories: they either welcome change or resist it, particularly if they view the changes as compromising the core values or integrity of their practice. If the Practice CEO haven't scaled their practice yet, there's a 50/50 chance they will like it or dislike it alot! It's common for these founders or licensees to enter into earn-out agreements. These agreements outline a planned exit for the founder, often tying their compensation to the firm's performance metrics. If a decision is made to replace the founder, PE firms can tap into their established networks or proactively scout for a new external candidate. However, locating a suitable replacement with the same medical background and expertise is very challenging. Consequently, many PE firms, perhaps even a majority, eventually settle on CEOs or leadership candidates lacking direct medical experience. The distribution of risks and responsibilities often varies based on the contractual terms agreed upon among the MSO, the professional entity, and the PE firm. While some risks are jointly borne, others may be allocated or transferred. Though my primary expertise lies in healthcare M&A, I can connect you with a colleague who has specifically set up MSOs for OBGYN practices on two occasions. In case you need it in the future, I can also refer you to a company that has real time data and information to help you negotiated rates for payer policies.

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