Leasing practice to hospital can be a viable business plan

A column about keeping your practice in good health

By Victoria Stagg Elliottis a longtime staff member. She covered practice management issues and wrote the "Practice Management" column from 2009 to 2013. She also covered public health and science from 2000 to 2009. Posted June 13, 2011.

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Hospitals and physicians increasingly are looking at ways to work together. For some doctors, that may mean leasing a practice to a hospital.

Leasing arrangements vary, and physicians will need to determine what is right for them. A lease agreement usually involves a hospital or large health system paying a monthly rent for a practice's hard assets rather than buying them.

"We're doing a lot of [leasing] deals," said Tom Ferkovic, managing partner with SS&G Healthcare Services in Cleveland.

Leasing may be more complex than an outright sale, but experts say leasing is an attractive option for doctors who want to test the waters before selling a practice. A lease doesn't have to lead to a sale. Some practices stay in a leased arrangement.

Leasing also may be an option for a physician who wants to sell a practice but can't find a hospital interested in buying. And it tends to be easier to undo if the relationship sours.

"There's an easier exit strategy than if you sell," said Linda Fleming, a health care attorney with Carlton Fields in Tampa, Fla. "It's much easier to terminate a lease."

A lease also may be financially advantageous to a sale, particularly when taxes are taken into account. A sale usually involves a lump sum. A lease tends to require monthly rent to be paid by the hospital to the practice. An accountant should analyze the financials of a sale versus a lease.

"When you sell a practice, you have a big influx of money all in one year. The tax ramifications for that could be pretty hard for a physician. With a lease, you can stretch it out a lot more," Fleming said.

Maintaining autonomy

Under a lease, physicians may be able to maintain a greater degree of autonomy in running their practices than is usual in the sale of a practice. Depending on the agreement, leasing a practice to a hospital may allow a physician to keep doing some management tasks and maintain some autonomy in how a practice is run.

"Physicians want to maintain their autonomy as much as possible," said Kristin Ficery, a partner in the health strategy practice of Accenture in Atlanta.

The first step is to determine a potential partner. Talking to other physicians affiliated with an institution may identify which ones suit a practice. "Does the hospital have a vision, and does that vision fit with the physician's vision?" Ferkovic said. "What type of infrastructure does a hospital have to support a physician's practice?"

The next step is to contact the hospital CEO or director of business development to determine the possibility and potential terms of such a deal. The amount of money paid by a hospital must be set at fair market value, as evaluated by an outside party, to avoid contravening laws regulating hospital-physician relationships. Goodwill is rarely a factor in pricing.

"Because purchase prices are not as big as they used to be, a lease may be a better way to go," said Sidney Welch, MPH, an attorney and partner with Arnall Golden Gregory in Atlanta.

But several aspects of a lease will be negotiable.

Will the physician become an employee or be paid through a professional services contract? Would the doctor receive payment for managing the practice in addition to providing medical services? How will insurance payments be handled? What responsibilities will continue to be handled by the practice and which ones will be handed over to the hospital?

"What are everyone's objectives? What are the aspects of your practice that you would have to relinquish? What parts would you maintain control? How are we going to make it work?" Fleming asked.

Those who work with physicians to lease practices say agreements are possible for both specialists and primary care physicians.

Victoria Stagg Elliott is a longtime staff member. She covered practice management issues and wrote the "Practice Management" column from 2009 to 2013. She also covered public health and science from 2000 to 2009.

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