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When it Comes to Practice Mergers, No Detail is too Small

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Your practice needs to diversify its subspecialty offerings to attract more patients, decrease overhead, expand your geographic presence, increase negotiating clout for contracts and expenses, gain financial clout, become more attractive to young physicians, or add ancillary services. Your options are to borrow money and begin to recruit physicians, join a larger medical group owned by a health system, or merge with a like practice. Have you considered the last option lately?

All businesses must plan for the future to maintain low cost structure, continued revenue growth and capital replacement. And, indeed, many physician practices are dealing with strategic issues to assist them with challenges such as decreasing reimbursement, competition from hospitals, decreased leverage with managed care payors and increasing government restrictions. All these things make it difficult to maintain adequate capital to keep the practice moving in the right direction.

Many nonmedical businesses use mergers as a means to grow and meet strategic needs. The medical community, however, typically doesn’t engage in mergers for a number of reasons:

  • Physicians are often less strategic in thinking than nonphysician business owners,
  • Physicians tend to be more competitive with colleagues than other businesses, and
  • Physicians tend to have compensation models that are more “eat what you kill” than do other businesses.

Indeed, it’s interesting to note that many physicians will consider a change of employment before reviewing opportunities for a practice merger.

Why to merge

A merger isn’t a strategy to use because it looks or feels like a good idea.

Valid reasons to merge practices include the following:

  • To obtain economy of scale advantages,
  • To increase geographic coverage and referral base,
  • To increase market share, managed care contracting and diversification of services,
  • To make sure referrals to physician subspecialties are kept in-house instead of being sent to other practices, and
  • To improve recruitment of young physicians and retain good staff.

Whatever the initial reason, however, a merger should be considered a realistic option only after a well-thought-out strategic plan determines growth is necessary for the practice to achieve its goals. These goals must be clearly identified, researched and achievable, and they must be shared with potential merger partners. After all, the goals must achieve positive growth for all parties involved if the merger strategy is to truly succeed.

Potential merger issues

Mergers aren’t easy. Practices may encounter many bumps in the road and should expect to confront issues such as:

Staff anxiety and buy-in. Staff will likely be anxious, managers will probably worry for their jobs or posture for new positions and some surprising staff personality traits may emerge. Some of these issues will be perceived and some will be real. It’s vital that physician owners maintain open communications with staff to keep them informed and to hear about pending issues that can be dealt with before disaster strikes.

To obtain staff “buy-in” regarding a merger, physician owners need to assure everyone that the merger will benefit all parties. You may have to clarify that benefits may not be equal or the same. For some, the benefits may be financial while, for others, they may be more related to an improved clinical environment or a more enjoyable work environment. In any case, all must feel that they will benefit and eventually see these benefits come to fruition.

Compatibility/operational details. Personal compatibility is vital to physician practices — it’s the nature of the profession. Therefore, be sure that personalities, as well as clinical styles and communication channels and styles, will fit together. Take the time to make sure that staff are compatible, because an unhappy staff can doom a merger.

Trust of all parties is vital. Take the time to discuss issues such as practice culture, philosophy, and work and clinical styles before the merger. Discuss all the hard issues up front — doing so will save legal bills later if the merger goes through and you run into conflicts. A bad merger is not worth doing.

Additionally, consider the practical issues of the merger, such as daily activities of billing, patient scheduling, benefits, staff coverage, physician call schedules, staff compensation, human resource procedures and employee rules. No detail is too small to discuss.

Physician compensation. All physicians must understand and agree to the compensation model. Talk about issues such as time off, call coverage, cross-hospital coverage, procedure referrals, ancillary income distribution and income discrepancies. (Note that there are legal issues related to ancillary services that need to be discussed with legal counsel.)

Risk management. Physician owners should consider risks, including ownership conflicts. Buy-sell issues must be thoroughly investigated and agreed upon. Also, noncompete provisions will require significant discussion. To draft both a buy-sell agreement and any noncompete agreements, the physician partners will need to engage a team of professional advisors. All physician owners involved in the merger will need to agree on who these advisors will be.

Thorough and honest

In choosing a merger partner, it’s critical to thoroughly and honestly evaluate what each prospective partner can bring to the merger. Dealing with any potential problems before the merger can prevent spending significant capital on merger-related issues that could well have been prevented.

Granted, even with much preparation, there will still be many legal and financial issues to deal with. These include how to structure the merger for tax purposes, what retirement accounts/profit-sharing plans and health care benefit packages to offer, and which personnel laws or regulations you may need to start complying with. Fortunately, good advice is available from your accounting and legal advisors.

Are you ready to start a conversation?

Tagged with: Healthcare Consulting