By Vasilios J. Kalogredis, JD

Published October 2007

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With the medical marketplace environment continuing to be ever changing and competitive, we are discussing with many of our clients whether or not they should consider becoming "bigger" in order to improve their lot.

One alternative that is being seriously considered by many practitioners today is to merge with others and become part of a larger, independent, medical group practice. By doing so, they hope to gain the advantages of size while continuing to be involved with a medical practice owned and controlled by physicians. Many greatly prefer that scenario as opposed to being employed by a large hospital or hospital system, for-profit entity, or other non-physicians controlled entity.

Many who are considering such a step do so in hopes of strengthening their negotiation position with hospitals, employers, payers, suppliers and others. Obviously, one must be careful not to become "too big." One wants to avoid the specter of anti-competitive activities, which may cause problems. However, most of those with which we have been involved do not really have that issue, from a pure size and power standpoint.

If properly planned out, organized and implemented, a merger may indeed result in a larger group which would be stronger as one unit than the individual practices were prior to them coming together. This generally results in a least maintaining, if not increasing, the total market share of the doctors involved.

It is not uncommon to be able to implement certain cost savings. Group purchasing of things like supplies, hard assets, malpractice insurance, and the like can indeed result in substantial dollars being saved.

In addition, a larger group is more likely to be able to afford more "high powered," perhaps MBA level managerial help. It is also not uncommon for a much better billing system to be put in place. A larger group is more likely to afford this.

Depending on one’s specialty, a larger practice should be able to provide a fuller spectrum of services and better continuity of care. For example, in dermatology, several general dermatologists may decide to come together and join with a MOHS surgeon. These general dermatologists could more efficiently schedule things and provide good coverage while all serving as sources of work for the MOHS surgeon in the group. As a general rule, a larger group is more easily able to add a subspecialist within it, which would make sense for its clientele. For example, in orthopedics, it is not unusual to bring together orthopods with different specialty bents (for example, knees vs. shoulders vs. hands vs. spines).

Also, for those physicians who are less inclined to be involved with the business aspects of the practice of medicine, a larger unified group would provide them with the opportunity to focus even more on the clinical side of medicine.

Another example has involved primary care physicians joining together and bringing in hospitalists. This allows the primary care physicians to focus on the office side of practice and have the hospitalists handle all of the inpatient aspects.

We have often been involved in circumstance whereby two or three solo practitioners in a specialty are busier then they each want to be individually, but not busy enough to bring in a full-time new doctor. For example, we had assisted two solo gastroenterologists come together. They then jointly hired a third gastroenterologist. This made good sense. It allowed the addition of a new doctor to take place in a way that worked out nicely for all three parties.

A major negative as a solo practitioner is a lack of protection if death, disability, illness, or "quicker than expected" retirement occurs.

By developing a group practice situation (whether it is by merger or otherwise) and agreed-to terms, with executed and appropriate legal documents, the physicians are much better protected.

I recently spoke with a 60-year-old pediatrician who was really concerned about this. He has seen too many of his friends lose the value of their practices and have to deal with the hassles of medical records and the like when they were out for an extended period of time due to disability, or passed away without a clear plan for transitioning the practice in a reasonable fashion. This, too often, has caused the practice to be diminished from a number-of-patients and financial viability standpoint. The value of a long term asset can quickly turn into a liability for that physician or his heirs if things are not properly planned out.

For this reason, many solo practitioners (the above pediatrician was one of them) have decided to merge with others to provide that cash flow protection during any absence, and also to provide a ready-made buyer upon any departure from the practice.

Many physicians are beginning to realize the difficulty of a "distress sale." We have assisted many in that circumstance to talk to others regarding the possibility of merging or otherwise coming together. That includes possibly having to buy the doctorpractice out and employing that doctor.

One doctor we recently assisted was a primary care physician. He joined together with a younger solo primary care doctor who was attempting to expand her patient base and viewed this practice as an excellent way of accomplishing that. It provided the more senior doctor with the protection and benefits he was seeking. The other option under consideration was to merge the senior doctor’s practice into a local two-doctor primary care practice in the vicinity whose two principals where in their 40s. They were intrigued by the possibility of bringing in a doctor with a strong reputation and the large patient base of my client into their group as a truly positive thing for all of them.

An entity set up as a "true group," with one federal employee identification number, provides a greater opportunity for structuring things in the light of fraud and abuse and "Stark" restrictions.

One example involved independently practicing orthopedic surgeons to merge into a larger group of about a dozen. It provided them with a critical mass necessary to be able to afford, create and develop a surgery center, physical therapy center, and a high quality MRI facility. The clout and size gave them the opportunity to negotiate with third-party payers to get the services reimbursed on a reasonable basis. It was something they would not been able to accomplish as smaller independent practitioners.

If properly structured, bringing separate practices together as one bigger and stronger one provides the potential to arrange things so that services are not duplicated. Examples are personnel, billing, office management and legal and accounting services which may be consolidated.

Every merger does not necessarily result in cost savings.

We recently advised a very large group that was looking to possibly consolidate seven practices to become one practice of over 40 doctors. In that particular scenario, when everything was factored in and all the numbers were looked at, the costs for the first couple of years of the new venture were going to be larger then they were prior to its start. There were many reasons for this. One of them was that they were not looking to consolidate facilities at all. They wanted to maintain their respective present office locations. In addition, some of the doctors already had expended substantial sums of money on billing systems. They all recognized that, to maximize the benefits of coming together, they should all be in one system. That was going to be unnecessarily costly for some of the doctors.

To maximize the benefits of a true merger and avoid unnecessary personnel and other expenditures, one must be willing to seriously consider giving up at least some of one’s own staff, facility and other things.

A good example of how this may work involved the merger of some cardiologists a few years ago. Once a consolidated facility was in place, better utilization of space allowed for increased efficiencies and better use of personnel. They were able to avoid having the same number of receptionists they had before and, with proper scheduling, were able to save money by being more efficient. These savings allowed the new group to hire a qualified administrator who was able to continue to be on top of the practice and cause the practice to save substantial dollars down the road.

One of the biggest downsides to the merger or sale of a practice is the physician’s fear of having less control and autonomy. Not being able to satisfactorily address this concern is often a determining factor in the final decision.

It is crucial that all involved in merger discussions and negotiation be open and honest. This includes communicating why a merger is being considered and what each hopes to achieve by such a step. Rushing into things does not make any sense. In many situations, we recommended the doctors not merge because we saw major issues that would have caused great difficulty if they came together. It is akin to a couple that rushes to get engaged and then married without openly and frankly addressing important issues (such as children, finances and religion) that may later cause the union to fall apart.

Obviously, a very important part of the process is a willingness to share the finances of the respective practices with each other. It is crucial that all parties sign Confidentiality Agreements, as well as other documents setting forth how fees and other costs regarding the evaluation process would be split among the participants. Once people start discussing and have to put up dollars, it is pretty easy to determine who is serious and who is not. Many times, large percentages of those in on the early discussions (before a dollar commitment to fund the process is required) back out once a money commitment is required.

There may obviously be many different reasons why doctors consider coming together. This is why good facilitation meetings and open discussions are very good. The parties should discuss why they want to do these things and what they hope to gain by coming together. That helps to show everyone what the respective goals are, but also provides an opportunity to see how the prospective partners interrelate. It makes it easier to determine whether they could become a solid, decision-making, compatible group. Among the issues that may come into play and ultimately have the merger fall apart before it evens starts are matters such as how much money each doctor is willing to invest into the practice, what kind of risks they each are willing to take, how the group should be managed, what sort of buy-in and buy-out should be involved, governance issues and overall economics.

It is also true that the larger the organization is, the more dramatic the potential for growing incompatibility and disagreement. There are just more people with whom one will be interfacing. In addition, the influence of one doctor is greatly diminished in comparison to a solo or small group practice. Many physicians cannot get over this barrier, unless the advantages are so overwhelming that they are willing to move pass that.

Depending on the size of the prospective merger and the number of parties involved, it can take many months (and perhaps a year or more) from the start to the end to get a merger implemented. There should be many meetings. A lot of time, energy, commitment and money is required by all for the process to be effective and the goals to be properly achieved.

It is clear that becoming larger through a merger is not the ultimate solution for every medical practitioner. However, it is clearly a viable one to consider in light of the challenges doctors face professionally in today’s world.

Vasilios J. Kalogredis, J.D., CHBC has advised doctors as a healthcare attorney on a full time basis since 1974 and is founder and a shareholder of Kalogredis, Sansweet, Dearden and Burke, Ltd. in Wayne, Pennsylvania.