Navigating Earnouts in Healthcare Transactions: Regulatory Risks and How to Avoid Them

This post is part of our ongoing Healthcare Transactions Series, where we explore legal, operational, and strategic issues that matter most to providers, investors, and entrepreneurs navigating the healthcare business. Today, we’re tackling a nuanced feature in healthcare M&A - earnouts.

Earnouts: Why They’re Popular—And Why They’re Tricky in Healthcare

Earnouts—provisions that tie part of the purchase price to post-closing performance—are often used to bridge valuation gaps in deals. While common in general M&A, these arrangements pose unique regulatory risks in healthcare, particularly under the federal Stark Law and Anti-Kickback Statute (AKS).

In transactions where sellers remain involved post-closing (such as by joining the buyer’s team), parties sometimes structure these contingent payments as productivity bonuses within employment agreements. This approach may, in some cases, align better with available exceptions under federal fraud and abuse laws.

However, when earnouts are structured as part of the purchase price and are tied to future performance—especially in deals involving referrals for government-reimbursed services—they can raise significant compliance concerns. Regulatory scrutiny is particularly acute when the seller continues to generate business for the buyer post-closing.

Structuring Earnouts with Stark Law in Mind

When a seller (e.g., a physician, dentist, or other DHS-referring provider) continues referring designated health services (DHS) after closing, the Stark Law imposes clear limitations:

• The total purchase price must be fixed and set in advance.
• Contingent payments cannot be based—directly or indirectly—on the volume or value of referrals.

These constraints often limit the use of performance-based earnouts in transactions involving DHS referrals. While there may be exceptions or alternative structures, careful planning and legal review are essential.

The Anti-Kickback Statute: A Broader Compliance Lens

The AKS casts a wider net than Stark and applies whenever the buyer will bill federal healthcare programs post-closing. Under the “One Purpose” test, if even part of an earnout arrangement is intended to induce referrals, the arrangement may be considered noncompliant—even if there are legitimate business purposes as well.

Notably, if the seller retains the ability to refer patients reimbursed by federal programs after closing, the AKS safe harbor for practice sales may not be available. In some cases, parties explore structuring contingent payments as employment compensation—subject to the AKS’s employment safe harbor, which offers broader protections. However, these structures require individualized legal assessment.

Practical Considerations for Structuring Earnouts

To help reduce regulatory risk, transaction parties might consider the following approaches:

• Use employment agreements to house contingent compensation, where feasible, rather than structuring it as part of the purchase price.
•  Avoid tying earnouts to referral volume, revenue from government payors, or similar metrics that may trigger fraud and abuse concerns.
• Retain experienced healthcare counsel early in the transaction process to help evaluate available structuring options and applicable regulatory exceptions.
• Maintain thorough documentation to support any contingent arrangements based on post-closing metrics (e.g., EBITDA, retention milestones, or growth metrics), and ensure they are grounded in commercial rationale.

Bottom Line

Earnouts can be a valuable tool in healthcare deals—but only if structured with a full understanding of the regulatory landscape. Because Stark and AKS introduce complexity that is unique to this industry, early legal input is critical.

At Mooradian Law, we help healthcare providers and investors evaluate structuring options and navigate compliance risks in complex transactions, including those involving earnouts, bonuses, and other contingent compensation.

Have questions or want to discuss a specific transaction? Contact us for guidance on employee and clinician transitions in your healthcare transaction:

Email: info@mooradian.law

Phone: (734) 219-4890

About the Author

Serj Mooradian is a healthcare attorney and the founder of Mooradian Law.With over a decade of experience at top national law firms, Serj focuses on healthcare transactions and regulatory compliance. He regularly advises on Stark Law, the Anti-Kickback Statute, HIPAA, and state fraud and abuse issues—bringing a practical, business-focused lens to each client matter.