Hospital Physician Practice Acquisitions: How Electronic Medical Records Impact the Transaction

Trends in Physician Practice Acquisitions

Today’s acquisitions of physician practices are resulting from the move toward value-based payment and health management for particular patient populations and the increased cost of maintaining independent and interconnected health information systems. Hospitals are taking a much more thoughtful and planned approach to these acquisitions. Due to changes introduced by the Affordable Care Act (ACA), ¹Patient Protection and Affordable Care Act of 2010, Pub. L. No. 111–148, 124 Stat. 119 (2010). such as changes in reimbursement structures, physicians, hospitals and health systems are all looking for opportunities to consolidate. Physicians are interested in selling their private practices in large part due to concerns over declining reimbursement. They are also often drawn by the promise of access to capital for electronic health records (Ears) technology and less business or administrative work, which comes with owning their own practices. Hospitals, namely those participating in accountable care organizations, are interested in acquiring practices in order to solidify and expand their provider networks.

In addition to the introduction of value-based payment and population management, hospitals now have to take into account the presence of Ears, either in their physician practices or the hospital, or both. Ears introduce a new element for hospitals to take into account when acquiring physician practices. The standard medical record custodial issues are still present, but the actual transition from old owner to new owner can be much more complicated than it was previously in the days of paper medical records. The presence of Ears has added an extra layer to the complexity and importance of conducting a proper due diligence review prior to acquiring a physician practice.

Why the Move Away From Paper Records?

There are two main federal initiatives that have helped promote the implementation of Ears in physician practices. The first initiative addresses the ePrescription and EHR donation exceptions under the federal physician self-referral law (Stark law) ²42 C.F.R. §411.357 (2014). and safe harbors under the federal anti-kickback statute ³42 C.F.R. §1001.952(x) (2014). that were introduced in 2006 (EHR donation regulations). In brief, the EHR donation regulations allow certain entities to provide nonmonetary remuneration to physicians and other health care providers in the form of a “donation” of 85 percent of the donor’s cost of qualifying items and services necessary and used predominantly for an electronic health record.

Second, a sharp increase in implementation of EHR programs by physicians has also resulted from the Medicare or Medicaid Meaningful Use Incentive Payment Program (EHR incentive program) established under the ACA (a/k/a “meaningful use”). Under the EHR incentive program, in order to receive an EHR incentive payment, providers must show that they are “meaningful users” of certified EHR technology by meeting certain measurement thresholds that range from recording patient information as structured data to exchanging summary care records.

The EHR incentive program includes three stages with increasing measurements for participation. All providers begin participating by meeting the Stage 1 requirements for a 90-day period in their first year of participation and for a full year in their second year of participation. ⁴75 Fed. Reg. 144 (2010). After meeting the Stage 1 attestation requirements, providers are then required to meet Stage 2 requirements for two full years. Eligible professionals participate in the program on the calendar years, while eligible hospitals and critical access hospitals participate according to the federal fiscal year.

According to HealthIT.gov, 60 percent of eligible professionals (which included physicians) and 85 percent of eligible hospitals have received EHR incentive payments as of December 2013. ⁵Robert Anthony, Centers for Medicare and Medicaid Services, Medicare and Medicaid EHR Incentive Programs (2013), available at http://www.cms.gov/Regulations-and-Guidance/Legislation/EHRIncentivePrograms/Downloads/HITPC_Feb2014_Full_Deck.pdf. This means approximately $40 billion has been paid out to date. It is estimated that EHR incentive payments could exceed over $22.5 billion in 2014 alone. ⁶Joseph Conn, EHR incentive payments could exceed $22.5B estimate, Modern Healthcare, March 2014, available after registering at http://www.modernhealthcare.com/article/20140303/NEWS/303039952/ehr-incentive-payments-could-exceed-22-5b-estimate.

Acquisition Considerations for EHR

There are over 550 different EHR vendors in the United States currently. ⁷Conor Green, Numbers Don’t Lie—The EHR Market Must Consolidate, The Health Care Blog, August 2012, available at http://thehealthcareblog.com/blog/2012/08/06/numbers-dont-lie-the-ehr-market-must-consolidate. It is not surprising that despite the government’s efforts to create standards or requirements for these EHR systems, there are often noticeable or incompatible differences between the types of systems offered. In some markets, EHR systems are provided by a hospital under a services arrangement, and acquisition of the practice by a hospital other than the hospital hosting the service can create significant data migration challenges. Therefore, hospitals and physician groups will want to keep in mind the following when evaluating a physician practice for an acquisition that is currently using an EHR:

• Compatibility

• Given the variety of options available to providers, it is common for a physician practice to operate on a separate EHR system. If this is the case, the decision will need to be made whether to allow the physician practice to continue to operate using its current system or if the practice will need to be transferred over to the hospital’s EHR. A review of the current EHR system being used by the physician practice should be conducted early in the due diligence process to determine if the system is compatible with the hospital’s current system, if adjustments can be made to increase compatibility or if it is a lost cause. Hospitals will want to keep in mind that physicians may have invested a large amount of time or money in the adoption of their current EHR system. If they are being asked to transition over to a new system, this may create some tension during the transaction that will need to be managed accordingly to ensure a smooth transition to the new EHR system.

• License and/or Service Agreement Terms and Conditions

• Even if the systems are found to be compatible, the acquiring hospital will want to review the current license agreement governing the physician practice’s EHR and related service agreement. In general, physician practices are less likely to review and negotiate agreements and may not have given adequate consideration to regulatory requirements. There may be terms and conditions present that complicate the hospital’s proposed acquisition (e.g., the license may be nontransferable or include a significant fee associated with its assignment). In addition, the physician practice agreement may not align with hospital’s regulatory requirements, risk tolerances or business practices.
• If the hospital plans to accept assignment of the license agreement, it will want to be certain critical terms and conditions are present in the agreement. For example, the hospital will want to be sure the agreement meets legal requirements for providing the Department of Health and Human Services with access to underlying cost information for contracts in excess of $10,000, that the business associate agreement is current with all legal requirements and that, if the software will be used to meet a regulatory requirement, the agreement expressly identifies the requirements necessary to meet the regulatory objective. The agreement should also cover what sort of training the EHR vendor will provide, the interface and interoperability of the system and a commitment to future enhancements or upgrades. The hospital may want to consider negotiating an amendment to the agreement with the current vendor if key terms and conditions are not present in the current agreement. The vendor should be willing to negotiate in order to retain the hospital as a client.

• Back-Up Plan if Transferring

• If the decision is made to transfer the physician practice over to the acquiring hospital’s EHR, the hospital will want to estimate a closing date of the current EHR system and communicate that to the practice’s current vendor. A back-up plan will also need to be developed in order to ensure that no data are lost and the information is readily available to the physician when needed for patient care. Such a plan may require the hospital to maintain the incumbent software simply for data archive purposes. The back-up data should be provided in an industry-recognized, nonproprietary format. The hospital may also need to work with the practice’s vendor and the hospital’s vendor to create an appropriate transfer plan. Namely, the hospital will want to ensure that the physician practice can continue to use the EHR system until all data is transferred to the new system and the back-up copy has been delivered.

• Meaningful Use Impact

• Under the Health Information Technology for Economic and Clinical Health (HITECH) Act, ⁸Health Information Technology for Economic and Clinical Health Act of 2009, Pub. L. No. 111-5, 123 Stat. 226 (2009). qualifying hospitals and physicians can receive structured incentive payments for successfully attesting to the EHR incentive program. If either the hospital or the physician group is participating in the EHR incentive program, the acquisition may impact the process, timeliness, value and likelihood of a successful transaction. The hospital and the physician group should determine what incentive payments the qualifying physicians have already received and whether the acquisition will impact either the hospital’s or physician’s ability to receive subsequent incentive payments. Also, the hospital and the physician group will need to agree upon the assignment of any incentive payments. This discussion should also address any incentive payments earned prior to the acquisition but paid after the closing. For example, if members of the physician group successfully attest to the EHR incentive program and qualify for an incentive payment for the reporting period prior to the acquisition but receive the incentive payment after the closing, the parties will need to determine whether the incentive payment is assigned to the hospital or if it remains with the physician group.
• Furthermore, starting in 2015, qualifying physicians who do not successfully attest to the EHR incentive program are subject to an annual payment adjustment. ⁹Centers for Medicare & Medicaid Services, Payment Adjustments & Hardship Exceptions Tipsheet for Eligible Professionals (March 2014), available at http://www.cms.gov/Regulations-and-Guidance/Legislation/EHRIncentivePrograms/Downloads/PaymentAdj_HardshipExcepTipSheetforEP.pdf. The hospital should confirm whether the physicians will be subject to the payment adjustment. Any discussion of the EHR incentive program with the physician group should also include determining whether any qualifying physicians are currently being audited by CMS’s third party auditor or by the designated state auditor pursuant to the EHR incentive program. In the event the hospital acquires a physician group with physicians who fail an EHR incentive program audit, and who previously received an incentive payment, the hospital may be responsible for repayment of the applicable incentive payments. ¹⁰Id. Hospitals should weigh the benefit of conducting an EHR incentive program audit of the physician group during the diligence process in order to determine if a repayment will be necessary.

• Medical Record Custodial Considerations

• Regardless of the medical record format, during a physician practice acquisition, the buyer and seller should take into consideration the conditions of the records at closing and how to retain patient records after the sale, including whether there is a need for a custodial agreement. Also, the parties must determine how to notify patients of the transfer of the practice. State and federal law may require certain retention or notification obligations depending on the transaction and the type of medical records in question. For example, some states require a notification letter be sent to each active patient or public notice be given in local newspapers. Also, patients should be provided the opportunity to have their records transferred to a new physician if they do not want to continue with the physician practice after the acquisition.
• Hospitals and physicians alike have an active interest in ensuring that the integrity of the medical record information remains intact for the requisite period of time. The custodial considerations may become a bit more complicated when examining records stored in Ears currently, especially if the records are going to be transferred to another EHR system. The due diligence review should include a review of the physician practice’s health information management policies and procedures, including storage, maintenance, retention and release of records processes. This will help the hospital identify any medical record custodial risks.

• HIPAA Considerations

• In accordance with the Health Insurance Portability and Accountability Act of 1996 (HIPAA) ¹¹Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 100 Stat. 2548 (1996). and the HITECH Act, patients are afforded a number of rights with respect to their protected health information (PHI). When acquiring a physician practice, hospitals must ensure that they will be able to continue to provide patients with the right of access, amendment and accounting of disclosures for PHI in the EHR both during and after the acquisition. Additionally, hospitals must ensure that requests for restrictions, requests for confidential communications and acknowledgements of receipt of the physician practice’s notice of privacy practices that were granted or obtained by the physician practice continue to be documented and adhered to both during and after the acquisition. Documentation related to patient rights should be retained for at least six years. To ensure compliance with HIPAA, it is recommended that during the due diligence review, the hospital request and review the physician practice’s policies and procedures related to patient rights, as well as documentation of any restrictions that have been granted. This will help ensure that when integrating the physician practice’s EHR with the hospital’s EHR, or migrating paper records to the EHR, no violation of HIPAA occurs.
• Additionally, the hospital must ensure compliance with the HIPAA Security Rule. Specifically, the hospital needs to consider administrative, physical and technical safeguards related to storage and transmission of electronic PHI both during and after the acquisition. Again, it is recommended that during the due diligence review, the hospital obtain details regarding the physician practice’s HIPAA Security Rule compliance efforts to determine what vulnerabilities exist within the EHR and what risk may arise when transferring the electronic PHI. If the physician practice is still using paper records, the hospital must ensure adequate safeguards are in place when migrating patient records to an EHR system. If the hospital is using a third party vendor to perform the migration, the hospital must enter into a HITECH compliant business associate agreement. The hospital should also consider the need to retain any auditing or monitoring documentation or reports stored in the EHR or otherwise. Further, all user names, passwords and access available to the physician practice should be terminated and new user names, passwords and access issued after the acquisition.

Conclusion

Hospital purchases of physician practices can result in quality of care, financial and operational benefits to both the acquired physician practice and the hospital buyer. Ears are another element of the acquisition that may present some challenges; thus, no matter the business reason for an acquisition, the parties must pay close attention to the transfer and/or integration of patient information. If done correctly, a universal EHR system for a hospital and its physician practices improves the quality of patient care, permits anytime/anywhere access, enhances consistency in patient care, creates consistent policies and procedures for coding and documenting medical care, assists with regulatory and accreditation compliance and increases patient satisfaction. On the other hand, if adequate due diligence is not performed prior to the acquisition, hospitals may find that they have inherited contractual, compliance and regulatory risk that could result in costs that far outweigh the benefits they attempted to achieve when acquiring the physician practice. The key to success is conducting a thorough due diligence review to make certain all risk and vulnerabilities have been identified and addressed both during and after the acquisition.