How Buyers Can Structure Safer Health Care Transactions

In Health Care, Structure Drives Outcome

In health care transactions, purchase price is only part of the story. Deal structure is where acquisitions succeed or fail.

Health care acquisitions are not like other business transactions. Buyers are not simply acquiring furniture, equipment, and accounts receivable. They are acquiring a business built on reimbursement systems, regulatory compliance, payer relationships, provider productivity, and clinical operations. If the transaction is not structured carefully, the buyer can inherit problems they never intended to assume.

The costliest mistakes in health care M&A usually do not come from overpaying, but from under-structuring the deal. A well-crafted transaction is structured to allocate risk before problems arise. This article addresses the structural provisions that matter most when acquiring a medical practice or other health care business.

Asset Purchase vs. Stock Purchase: Why Structure Matters

In the vast majority of health care acquisitions, an asset purchase provides the buyer with significantly greater protection than a stock or equity purchase. That distinction is critical in health care. An asset deal allows the buyer to identify exactly which assets it wants to acquire and which liabilities will remain with the seller. In health care, where historical exposure may include billing issues, coding errors, overpayment liability, employment claims, tax problems, or regulatory noncompliance, these are extremely important factors to understand and negotiate. An asset purchase helps reduce the risk that these legacy issues follow the business after closing.

If a buyer were to pursue a stock or equity purchase deal, this will often mean acquiring the entity together with its history. Even with indemnification language, the buyer may find itself dealing with inherited liabilities tied to the seller’s past operations. In the health care space, those risks are often significant and are not always visible during due diligence. Buyers who proceed with a stock deal without fully accounting for this exposure do so at considerable risk.

Earnouts Can Protect Against Overpaying

When future performance is uncertain, earnout provisions can be effective tools to bridge valuation gaps while protecting the buyer from overpaying. If a seller is projecting revenue based upon anticipated collections, patient volume, or post-closing growth, the buyer should consider tying a meaningful portion of the purchase price to actual-post closing performance.

Earnout provisions must be carefully drafted with precision. The performance metric, the applicable accounting methodology, the measurement period, reporting obligations, and the degree of post-closing operational control must each be defined clearly. Vague earnout language is an invitation to post-closing disputes.

Representations Warranties and Indemnification Must Address Health Care Risk

General commercial representations and warranties are not adequate in a health care transaction. The purchase agreement must directly address the risk areas that are specific to the health care industry. These areas include billing and coding compliance, the accuracy of financial statements, the collectability of accounts receivable, payer contracts, provider enrollment, licensure, employment matters, HIPAA and privacy compliance, and the absence of audits, repayment demands, government investigations, or whistleblower activity.

Indemnification provisions should be structured to match this risk profile. Survival periods, caps, indemnity caps, deductibles, baskets, and carve-outs should reflect the reality that health care liabilities often surface months or years after closing and can carry severe financial consequences. Buyers should not assume that a standard commercial indemnity package provides adequate protection in a regulated health care environment.

Escrows and Holdbacks Create Real Recovery Rights

A contractual indemnity is only as useful as the buyer’s ability to collect on it. Indemnification provisions mean little if the seller has distributed the proceeds of sale and has no assets available to satisfy a claim. Escrows and holdbacks are essential.

By withholding a defined portion of the purchase price for a post-closing period, the buyer creates a practical source of recovery in the case that a seller’s representations prove inaccurate or if post-closing issues emerge.

Escrow terms should reflect the actual risk profile of the transaction. In health care, liabilities do not always become visible immediately so using a short escrow period may offer little protection.

Physician Employment and Restrictive Covenants Matter

In many physician practice acquisitions, the providers are the business.

Patient loyalty, referral relationships, and practice revenue often depend on the continued involvement of the selling physicians. If those physicians leave shortly after closing, reduce productivity, or begin competing nearby, the value of the acquired practice can erode quickly.

Employment agreements, compensation terms, and restrictive covenants must be treated as central deal documents – not ancillary exhibits. They must align with the purchase transaction and be structured to be both enforceable and compliant with applicable state law and federal health care regulations, including the Anti-Kickback Statute and Stark Law.

Accounts Receivable and Working Capital Need Close Review

Accounts receivable have value only to the extent they are collectible.

In a physician practice, collectability depends on more than aging. It depends on payer mix, denial rates, coding quality, documentation support, billing efficiency, and patient payment patterns. Buyers should look closely at the quality of receivables rather than relying on summary financial data.

The transaction should also clearly address whether pre-closing receivables will be retained by the seller or acquired by the buyer, and whether a post-closing true-up will apply. Without careful drafting, receivables can become an expensive source of disappointment and dispute rather than a component of value.

Regulatory Compliance: Structure Cannot Be an Afterthought

Health care transactions operate within a dense regulatory framework and therefore must be structured with close attention to federal and state law.

Depending on the transaction, this may include Stark Law, the Anti-Kickback Statute, corporate practice of medicine restrictions, fee-splitting prohibitions, licensure rules, payer enrollment issues, and privacy obligations. These legal constraints affect not only compliance, but also ownership structure, compensation design, governance rights, and operational control.

A transaction that is economically attractive but legally unsound is not a viable deal. Regulatory structure must be addressed from the outset, not retrofitted at the end.

A Strong Deal Structure Protects the Investment and Experienced Legal Counsel Makes the Difference

A successful health care transaction does more than transfer a business. It allocates risk intelligently, protects the buyer’s investment, and positions the post-closing operation for long-term success.

Buyers who focus primarily on purchase price often overlook the structural provisions that matter most when problems arise. Buyers who prioritize deal structure are better positioned to protect value, limit liability, and manage post-closing transition successfully.

In health care M&A, experience matters. So does disciplined document drafting. The right deal structure can be the difference between a sound acquisition and a costly lesson.