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Formation of an integrated delivery system--regardless of the model selected--invariably involves the acquisition of one or more physician practices. Acquisitions require those hospitals and hospital systems seeking to integrate with physician practices to confront the dilemma of whether goodwill can be purchased as part of an acquisition.
Two market realities contribute to this problem: physician practices--especially primary care group practices--are in great demand; and physicians believe they are entitled to substantial returns on the investments made in their practices. These factors often result in premium asking prices for these practices that reflect a value in excess of that which can be attributed solely to the so-called "hard assets," i.e., the practice's furniture, fixtures, and equipment.
Healthcare providers should be alert to this issue whether the payment for goodwill (which for these purposes will be considered the component of the purchase price in excess of the value of the tangible assets that are acquired) will be considered by the Department of Health and Human Services (HHS) Office of Inspector General (OIG) as a disguised payment for future referrals to be made by physicians to the acquiring...