One result of health reform's drive toward integrated delivery systems is that hospitals are buying more physician practices and entering into more ventures with physician groups.
Hospitals going this route must consider more than the expertise, revenues and synergies that come with physician practices. They also must study the lease obligations of those practices. Some financial consultants estimate that total lease obligations at many physician groups often exceed total debt obligations.
"The biggest financial obligation a physician practice has is probably a real estate lease," says Bryan Burgett, a vice president in Kaufman, Hall & Associates' mergers and acquisitions group. "Hospitals stepping into a lease when they acquire a physician practice must understand what they're getting into with that lease."
That is especially true if the acquiring hospital wants to have its physicians practicing adjacent to the hospital or in close proximity, but the physician group being acquired leases space that is not nearby, Burgett says. "The last thing the hospital wants is legacy obligations that don't have any use."
Hospitals also must take a hard look at physician group leases that are not arm's length transactions, such as when the physicians themselves own the building and lease it to their group practice, says Marisa Manley, president of Healthcare Real Estate Advisors. Above-market-rate lease terms in such cases should figure into the acquisition price paid by the hospital, she says.
Complicating this issue is the fact that the Financial Accounting Standards Board is proposing that real estate leases be posted on balance sheets, as opposed to the current practice of handling them as off-balance sheet transactions. The rule changes are still in flux, but Manley says the end result likely will add significant weight to hospital balance sheets, and could cause some hospitals to be in violation of loan covenants.
Experts say the new standards, which could take effect next year, also will increase the financial reporting burden of hospitals.
Fleury Yelvington, president and CEO of the Carondelet Health hospital group in Kansas City, Mo., says she is not concerned about the balance sheet question. However, she says outstanding leases are a major factor when Carondelet looks at buying physician practices.
"There have been a couple of deal breakers," Yelvington says. "We're scrupulous. If we think they're overpaying, we have chosen in some situations not to take that on. We have told them to let those leases run out, and then we'll talk."