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Pay Special Attention to Provider Numbers When Purchasing a Medical Practice
In general, one of the most valuable assets of a medical practice is its government-issued provider number(s). For those not in the industry, a provider number is a business identification number that is used to process payments from insurance carriers, Medicaid, Medicare, etc. Provider numbers can be transferred when a medical practice is sold or purchased. This is often desirable because it is costly administratively — and in payment time-delay — to obtain a new number and then transfer patient billing to the new number(s).
However, there are risks in taking over the provider number(s) of a medical practice that you are buying. In general, when buying a medical practice — or any business for that matter — the buyer wants to take ownership free of any of the debts and obligations of the seller. This goal goes under the rubric of avoiding “successor liability.” Taking control of the seller’s provider number(s) can create a risk of by-law-imposed successor liability. So, special attention must be paid to provider numbers when structuring the deal and drafting the purchase agreements and otherwise preparing for the closing. A good San Diego corporate lawyer is essential.
San Diego Corporate Law: Successor Liability and “Substantially All” of the Assets
When buying a medical practice, avoiding automatic successor liability is important, and the deal must be structured to avoid any unexpected liabilities. Let us use an example: If you want to buy a medical practice that has a $10,000 obligation, you and your trusted lawyer must plan carefully if you, as the buyer, want to take ownership without being responsible for that obligation. Assume that the $10,000 is a bank loan. Prior to consummating the purchase, the buyer must account for that loan in some manner. There are many choices including:
- Paying off the loan at closing (usually from the seller’s proceeds)
- Getting the bank to release the loan (impossible without payment)
- Having the seller retain the obligation to continue paying the loan after the sale (generally requires the lender’s approval and requires the seller continue doing business post-closing)
- Having the buyer assume the loan (also generally requires lender approval)
Note that these are all viable options for the buyer and, typically, the purchase price will reflect the option being chosen. In simple terms, if the buyer is going to assume the loan, the buyer will offer $10,000 less in terms of purchase price. A similar set of options is available if the obligation is a tax obligation — withholding, sales, or income taxes. For tax obligations, it is not “approvals” that are obtained, but rather “tax clearance letters.” Tax obligations are particularly dangerous for a buyer.
Aside from these strategies, the other common method of avoiding successor liability is to structure the deal as an “asset purchase.” So, let us say you do not buy the shares of stock of a medical corporation, but only the assets of the medical practice. In general, just buying assets does not make the buyer responsible for the $10,000 obligation UNLESS, the buyer is purchasing “substantially all” of the assets. Thus, if only $2,000 in office furniture is being purchased, in general, there is no problem. But, if $9,900 of furniture is being purchased AND the medical practice has few other assets, then successor liability can be imposed by law particularly if the seller “runs off” with the $9,900, does not apply that money to the $10,000 obligation and the buyer knew or had reason to know that such was seller’s plan.
This discussion is relevant to provider numbers because, sometimes, a medical practice’s provider number(s) are truly “substantially all” of the assets of the medical practice. As such, structuring the purchase as an asset purchase will not necessary prevent a claim of successor liability. This risk is heightened when the target medical practice is expected to cease doing business.
Aside from this general risk under California law, there are specific risks with each provider number since, in general, if you assume a seller’s provider number, you also assume the terms and conditions of any provider agreement associated with the number. Almost universally, these provider agreements make the holder of the provider number responsible for overpayments, overcharges, erroneous charges, fraudulent charges, penalties, damages, interest, and other fees that might be assessed.
For these reasons, even though provider numbers are valuable assets and even though delays in payment might result, caution is required with respect to provider numbers. Indeed, the better decision might be to obtain new provider numbers. It takes time to get the numbers, but this processing time can be built into the due diligence period and obtaining the new numbers can be made a necessary condition before the buyer is required to close the purchase.
In some situations, there are contractual automatic assignments of provider numbers under provider agreements. If this is the case with your proposed purchase, then focused attention is needed with respect to those provider agreements and with respect to seller indemnification provisions.
Contact San Diego Corporate Law
For more information, contact attorney Michael Leonard of San Diego Corporate Law. To schedule a consultation, contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has been named a “Rising Star” four years running by SuperLawyers.com and “Best of the Bar” by the San Diego Business Journal.
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