AUSTIN,TEX. – There a lot of tough questions to answer when selling a medical practice during a government investigation, according to Morristown, N.J.–based health law attorney Glenn P. Prives.

How much information should potential buyers know about the case? Should the investigation be resolved before the sale? A wrong move in any direction may reduce sale profits or harm the investigation’s defense,

Mr. Prives said at an American Health Lawyers Association meeting.

Selling a practice in the midst of state or federal inquires has become more common in this era of increased government scrutiny, he said. Probes may include inquiries related to the False Claims Act, Stark Law, or Anti-Kickback Statute.

“Because of how hard the government is coming down on health care issues, more and more practices are finding themselves dealing with the government in an unfavorable light,” he said in an interview. “At the same time, you’ve got mass consolidation in the health care industry overall. Put those together, and it’s becoming more and more common” to sell a practice during an investigation.

“Just because the seller’s practice is under investigation does not mean it can’t be sold,” Mr. Prives said. “It requires extra effort and caution, but a deal is still possible.”

Be cautious about how much information about the investigation is disclosed to buyers, Mr. Prives warned. During the due diligence process, purchasers typically want to review the practice’s finances, leases, disciplinary complaints, malpractice history, and other pertinent information.

Be careful not to inadvertently waive the attorney-client privilege when divulging information to a potential buyer, Mr. Prives said. “Oftentimes, you’re dealing with health care laws that are vague and gray and broad. Physicians, like other health care providers, will engage health care attorneys to give them confidential advice on different structures. If [sellers] share that information with the buyer, and they have arguably lost the privilege, that advice may find its way into the government’s hands, which could be very damaging to the seller.”

Consider entering into a joint defense agreement, a contract that allows two parties conducting a transaction to freely share information about an investigation without waiving the attorney-client privilege. However, there is mixed case law about how effective joint defense agreements are in preserving the privilege, Mr. Prives said.

A better idea may be to limit disclosures to buyers to a “need to know” basis and provide more information only as the deal gets further along. Share enough information to keep the buyer engaged, but carefully frame issues to best position the practice in transaction negotiations, Mr. Prives advised.

There are pros and cons as to whether to resolve the investigation before closing the transaction, he said.

The selling physician may want to have the inquiry wrapped up before the sale is final to avoid the buyer’s involvement in the case. If the inquiry is ongoing, the buyer will likely want a large escrow or hold back in the purchase price, Mr. Prives said in an interview. In addition, the buyer may want to be part of discussions with the government about the case resolution.

“That can be a double-edged sword for the physician-seller,” he said. “Their objections are not necessarily aligned. The sellers are going to want to resolve the immediate issues and be done with it because they’re selling their business. The buyer cares less about the monetary payment to the government and is more concerned about what’s it’s going to have to do going forward to satisfy the government.”

On the other hand, the buyer may lose interest if kept waiting until the case is resolved.

“Many times when these investigations start, the sellers don’t know if they’ve done anything wrong or their exact role,” Mr. Prives said. “If a seller waits until the investigation is done, they may be waiting years, and a buyer is unlikely to be around for years. That’s the advantage for not waiting and doing the deal anyway.”

A wise move is to negotiate into the purchase agreement that the seller will take the lead in all government negotiations if the transaction closes before the investigation is complete, he added. Remember, however, that the deal will not likely close unless the buyer can approve or veto the final settlement. Ensure through buyer negotiations that such final confirmation is the only influence buyers can have on resolutions, he said.

“Basically, [conduct] everything until it’s about to be tied up with a nice bow, and then send that document over to the buyer for approval or disapproval,” he said. “That way the seller-physician will control the process, but satisfy that the buyer has final approval before everything is done.”

agallegos@frontlinemedcom.com

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Expert counsel: Selling a practice during a government investigation