Reed Tinsley, CPA

How physicians can avoid legal problems resulting from a practice merger

Physicians who are considering being part of a merger should weigh their risks and take steps to reduce potential legal hurdles. This is usually done before entering the merger due diligence process.
 
Retain experienced advisers. Doctors should confer with legal counsel and merger-experienced healthcare consultants early on. Such consultants can make sure potential problems are discussed before they arise.
 
Review the reasons for the merger. Medical groups who are merging should have pro-competitive reasons for merging such as improving quality of care or access to treatment. Health professionals should be sensitive to their market share and realize the larger the group becomes, the more likely it could attract suspicion of anti-competitive behavior.
 
Discuss how to integrate. Groups that merge sometimes want to maintain independent autonomy by keeping their names or staying in the same location. However, consolidated groups must be able to demonstrate they are working as one unit to prevent government scrutiny.
 
Obtain relevant data. Before a merger, physicians should obtain data on the number of competitors in their community to better defend against an antitrust challenge. They should be able to present information about why their merger would not harm competition.
 
Request an opinion. If you are really concerned about antitrust issues, you can ask the Federal Trade Commission to review your plan and issue an advisory opinion. The opinion is not binding, but can offer the group necessary guidance on whether it should move forward.

Why Income May Drop if You Sell to Hospital

Recent reports from the MGMA (Medical Group Management Association) show that hospital- owned practices are 25% less productive than those that are privately owned. Our experience as medical practice consultants confirms these findings. In some cases, previously-profitable practices start to see a decline in their income. In other cases, the practices may have been less profitable to begin with. Here are the major roots of the problems and some suggested solutions.

1. Centralization of Billing and Collections: A New England hospital brought in varied practices, eventually totaling 82 physicians. The hospital decided to centralize the billing operations and put these activities under the control of the hospital's financial VP. Fifteen months later, when we were called in, the net collections for these physicians, had dropped by an average of 18 percent.

2. Loss of Physician Control and Involvement: When a practice lacks billing and collections staff, then physicians recognize that they have no control over the financial performance of their group. This loss of control results in the physicians being less involved in the oversight of their individual practices.

3. Lower-Performing Practices May Be More Likely to Sell to Hospitals: Higher-performing practices often do not see a need to become part of a hospital system. Therefore, it has been the lower performers, lacking the know-how to be very profitable, that have turned to the hospitals for support

http://www.medscape.com/viewarticle/756560

 

Physicians Swap Traditional Practices For New Models

According to a recent article in the Kaiser Health News, physicians who are currently practicing independently are looking to innovative practice models in order to either maintain or increase their income. The article specifically discusses physicians switching to a "subscription based model." A subscription based model is one in which patients pay an annual fee and the physician limits the number of his or her patients.   In addition, the article states that "a new report projects the number of physicians who practice independently -- rather than become employed by medical groups or health systems -- will fall to 36% by 2013, from 57% in 2000.

http://capsules.kaiserhealthnews.org/index.php/2012/10/physicians-swap-traditional-practices-for-new-models/

 

Should administration be a part of the physician practice merger committee?

Sometimes the question is raised: “Should the administrators or office managers serve on the merger committee or merger team?”  My experience shows that it is not advisable to place them on either team, although they will play critical roles throughout the process.  Merging groups tend to find better solutions when using an objective outside facilitator to assist in this difficult decision making process.  Obviously, these key management personnel will have significant input into the entire planning process.    They will attend and even help plan certain meetings and make recommendations to the committee and the merger team. It will be vital to keep them informed and included in the entire process.  Their approval of the merger plan needs to be gained at every phase of the process.  However, it is not advisable for them to be permanent members of either the committee or the merger team.  There will be times that the merger team and merger committee will need to address issues which will be hard for the respective administrators to be objective about. 

Dear Physician-Do your due diligence if considering selling to a hospital

Here is an article from the recent electronic version of Medical Economics that was produced from a persentation I gave at the annual meeting of the National Society of Certified Healthcare Business Consultants (www.nschbc.org) in Las Vegas.

http://www.modernmedicine.com/modernmedicine/article/articleDetail.jsp?id=780200&cid=PRAC

 

Another take on physician practice merger due diligence

By now the merger committee has the due diligence process underway. The merger team has been interviewed and assembled. The initial funding for this due diligence process has been estimated and funded. The treasurer responsibilities have been assigned for reporting of these premerger costs. The merger committee has established its methodology for communications and established a meeting schedule for the committee as well as the merging entities. Individual physician members have been interviewed or surveyed in reference to the benefits they hope to derive from the merger as well as any issues, which are of concern for them. The merger facilitator has compiled this information and communicated it to the merger committee, which is utilizing this information to not only assess the viability of continuing with the merger but hopefully to develop its vision or mission statement. The committee has drafted and executed a letter of intent in reference to the merger, which outlines basic responsibilities for everyone. The information requests have been sent to each merging entity with instructions and timelines for submission. The committee is scheduled to complete the assessment of premerger legal issues in reference to the merger and will be reviewing possible organizational structure options with legal counsel and the CPA. As information begins to be assembled, the merger committee will prioritize the common deal killers to be addressed early on in the due diligence process.

The issues incident to a merger are for the most part very similar, regardless of the number of physicians or merging groups. However, the greater the number of entities that are party to a merger, the more difficult, costly, political and lengthy the merger process will be. When more parties are involved, it requires getting resolution on more issues by more decision-makers.

The merger committee must take this into consideration during the due diligence process. For example, it might appear to be very beneficial and even seem practical to merge six practices at one time. However, close scrutiny should be made as to what this will do to the complexity of the merger, the reasonableness of doing this all at once and the significant change in culture that will occur. It may be more advisable to take the two or three medical practices which share the most common culture and important attributes to be the first entities merged with the other medical practices being merged in at an agreed upon later date. The merger model established with the initial practices helps facilitate the latter mergers, which can be more difficult if there are more significant differences between the groups. This is an option, which the merger committee must always consider. Sometimes it can be too daunting of a task for management and the merger team to facilitate a merger of numerous groups all at once. Another option that is available to the merger committee in these types of situations is the ability to negotiate and execute the merger for a large number of groups; however, the actual implementation and consolidation of operations occurs over an extended period of time.

The merger of your practices may be very practical and offer some extremely attractive benefits; however, as we have stated several times, this is a very complex process and the critical issue of completing a thorough due diligence process rests solely upon the merger committee’s shoulders. If your merger committee members are not truly prepared to invest the time, money and effort into this due diligence process, your chances of seeing a successful merger are very, very slim. Never discount the importance of writing and continuously reviewing your vision statement to keep the merger process on track and focused toward the benefit that started the process initially.

How Does a Physician Merger Process Typically Work?

Merger processes involve a number of discrete yet inter-related steps. The general process is typically one of: 

Getting comfortable with each other

Understanding each others philosophy of practice

Due Diligence

Discussion and negotiation of key merger issues

Developing agreements in principle

Closing the merger

Implementing operational integration plans 

The specific steps of the merger effort are generally as follows: 

Friendship and courtship: Prior to substantive discussions, the groups likely have made contact with each other via informal means. 

Commitment to move forward: At some point, the groups agree that they should "get down to brass tacks" and look at the merger in a more formal manner. 

Antitrust review: Depending on the local market, a first step for many groups is to engage an attorney to conduct an antitrust review. While the details of such a review are beyond the scope of this document, the group should seek experienced legal counsel in this area if there are any concerns about creating significant market power. 

Merger Committee appointment and empowerment: Unless the practices are very small, it wise to appoint a Merger Committee to do the bulk of the discussion and negotiation effort in the merger. It is desirable that the rest of the physicians empower this group to discuss and negotiate on the key merger issues. Typically this Committee includes one to three individuals from each of the groups. 

Hire a Merger Facilitator: This is a vital part of the process. You need an independent person doing your due diligence, asking the hard questions, identify critical issues that must be resolved so the merger can take place, and basically acting as a referee during the merger process. 

Confidentiality, non-competitive use, "no-shop" agreement: In order to protect their rights and the confidentiality of information, the groups should have their attorney draft a letter in which each group agrees to (a) Keep the other group's information confidential, (b) Use the information only for the purposes of merger negotiations and (c) Not seek or negotiate offers with others for a period of time. While this last point is optional, it can be important if the groups are going to expend significant resources during their negotiations. 

Initial data gathering: In order to improve the efficiency and effectiveness of the merger discussions, a significant amount of information must be gathered from each group. Such information may include practice documents and financial information. In addition, it is typically appropriate to have each physician and administrator interviewed or surveyed to identify any merger concerns that they may have. 

Perform due diligence: During this effort, the facilitator, attorneys and accountants review a number of practice related documents to identify any issue that might impact the merger from a legal perspective. 

Merger Committee meetings/retreat to review data, discuss and resolve issues: Using the information gathered in step 6, the Merger Committee meets to discuss, negotiate and reach agreements in principle related to the key merger issues. There are two alternatives in how this process may be conducted: 

a. For groups who have already had significant discussion or are very knowledgeable about each other, a Merger Retreat (typically 2 to 2 1/2 days) can be used to finalize agreements in principle. 

b. For groups who have the need for more in-depth discussion and negotiation, a series of meetings are held during which agreements in principle are made. During this effort other professionals (such as accountants, attorneys, benefits consultants, etc.) are involved as needed. 

Reach agreement in principle and execute Letter of Intent: Once most of the key decisions have been made, the groups execute a Letter of Intent under which they agree to merge under agreed upon terms unless certain events occur. This authorizes the groups to move forward with step 9. 

Create merger documents: Once agreements have been made, the attorneys will draft:

Merger Agreement (primary purpose is requiring each group to make full disclosure about its activities). 

New Entity Corporate Documents

New Entity Shareholder Agreement (Buy-sell)

New Entity Physician Employment AgreementsOther needed documents 

At the same time, the accountants will be developing the financial information needed to close the merger. 

Perform due diligence: During this effort, the attorneys and accountants review a number of practice related documents to identify any issue that might impact the merger from a legal perspective. 

Develop post-closing operational integration plan: The work I have discussed up to this point is focused primarily on the legal and organizational aspects of the merger. Once the groups are on track to merger an operational integration plan must be developed. 

Merge ("Day 1"): The day that the papers are signed and all are committed to move forward. 

Implement post-closing integration plan: The operational integration plan is implemented.

The Costs and Risks of Merging Physician Practices

While there are benefits to be gained, there are also costs/risks: 

-      Putting a merger together requires a significant amount of time from both the physicians and their administrative staff. Mergers often take six to twelve months to complete, and there are many issues to be discussed and decisions to be reached.

-      Professional costs (attorneys, accountants, consultants) are not insignificant. While professionals will seek to provide "ballpark" estimates at the beginning of the process, these estimates can change depending on the ability of the merger participants to negotiate and reach conclusions.

-      Many significant changes will (should) be required by all involved. It is not feasible to merge and keep everything the way that it was. Some level of operational integration will be required and this requires compromises by all involved.

-      It might not work. Anecdotal evidence indicates that 50% of all merger processes do not end in a merger. In some instances, this is a positive development as groups may not have the same long-term goals. In others, the lack of a disciplined effort to reach a decision results in people becoming frustrated with the lack of progress and dropping out.

-      External stakeholders might be uncomfortable with the merger. For example, hospital management may not be enthusiastic about a merger between hospital-based physicians. 

Even with these costs and potential negatives, many physicians have experienced that the benefits outweigh any risks. So move forward with your merger process and take control of your future.

Why Physicians Should Consider a Merger – A reposting

Since I’m up here in New York this week facilitating a merger between two orthopedic groups, this week’s posts will revolve around practice mergers. When I talk to the physicians this week, I’m going to be asking the question: “Why do you want to merge?” Although the specific benefits of merging are different for each different specialty, location and group, the following are some of the typical reasons groups seek to merge: 

• Job security, income stabilization.
• Increased negotiating clout.
• Additional coverage, specialties or sub-specialties to strengthen competitive advantage.
• Develop critical mass to initiate new programs.
• Continue to have access to patients where such access is threatened.
• Survival of the group in light of physician retirements.
• Secure system referrals.
• Attract capital.
• Improve ability to compete.
• First step in a plan for further integration.
• Economies of scale.

These are some of the answers I want to here this week. If I don’t, I will wonder where the “glue” is to create this new group. At the beginning, it is of key importance that all involved understand what the groups are trying to accomplish with the merger.

Questions every physician should ask before entering a practice merger

As the consolidation trend sweeps over the healthcare industry, many medical groups are considering strategic mergers with other groups in their region and/or specialty. In our experience, many physicians do not want their organizations to grow into larger entities (because of the increase in complexity, loss of autonomy, etc.). However, more and more groups recognize that in today's marketplace, bigger is often better in terms of providing cost-effective care and creating negotiating clout with managed care companies. 

Typically merger efforts begin with friendly and general discussions about shared interests and possibilities. Unfortunately, the merger effort often bogs down because either the groups do not know what to do next, or because of the lack of an organized effort. 

In order to be successful, physicians that embark on a merger effort should always make sure they get the answers to the following questions: 

• Why should we consider a merger?
• What are the costs and risks associated with merging?
• How does a merger process typically work?
• What are the key issues usually addressed in a merger process?
• Who participates in the merger process?
• How do we get started?