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What you should know about practice mergers

By Mark D. Abruzzo, Esq..

Medical practice mergers are becoming increasingly popular today for various reasons, including:

• The failure, generally, of IPAs to generate managed care contracts for their constituents, or even increased leverage in the managed care contracting process.

• The desire of practices to share practice costs in the face of diminished reimbursements.

• The desire of practices to increase market share and power.

Furthermore, while it is becoming more evident that physicians do not need to affiliate with health systems or practice management companies to survive, it is just as apparent that, except for certain subspecialty practices, the small one- or two-doctor practice cannot thrive under a managed care system. Consequently, merging seems to be the logical and fashionable response in markets dense with managed care.

As a prerequisite to commencing merger discussions, however, there are several things that practice owners must know about the merger process and merging in general before getting involved. The merger process is that period beginning when parties commence serious discussions and ending with the culmination of merger. Discussions become serious after the parties determine that a merger can be beneficial and they begin to consider the terms of a merger and their resulting co-ownership.

The Stark II Proposed Regulations take clear aim at loosely affiliated merged groups. They require the owners of merged groups with several offices to share all expenses, rather than just central office. Furthermore, income from designated health services cannot be tracked by referral, essentially prohibiting a particular office from retaining 100 percent of revenues from designated health services generated at its site.

A salient feature of the “Merged Group Practice Without Walls” concept has for many been the measure of autonomy that the independent practice sites can retain—in terms of management, operation and income division. In light of the Proposed Regulations, however, practice owners must be prepared to relinquish a significant amount of autonomy to the merged group.

The merger process is typically a long and difficult grind that requires the discussion and resolution of many issues. Too often, parties harbor the misconception that their merger can be accomplished in one to two months. In reality, the merger process will take at least three months and, commonly, the better part of up to a year. The legal filings and resulting agreements can usually be drawn up fairly quickly after the parties agree to the terms of merger. However, the arriving at an agreement requires both extensive discussion and many difficult decisions.

Two things need to happen if these decisions are to be made: The parties need to meet regularly and they must demonstrate an ability to make resolutions. If the parties are not dedicated to meeting in a scheduled fashion, preferably not less than once per week, momentum will be lost, the process stalled and the merger may collapse. Just as important, if one or more parties cannot demonstrate a willingness to understand opposing perspectives or compromise on issues where appropriate, then the merger process will be stalled and prospects for the merger are jeopardized.

The parties’ commitment to meet and their ability to agree not only determines the duration of the merger process, it determines the cost as well. Legal fees for the preparation of the required state filings and resulting agreements are fairly predictable. However, the facilitator (often the lawyer or consultant who ultimately prepares the documentation) often plays the most important role in the merger process. The facilitator sets the meeting times, provides agendas of issues to be resolved, takes minutes and mediates on difficult issues. The bulk of advisors’ fees are incurred in connection with the facilitator’s services. These fees can be significant when discussions become protracted over issues that are difficult to resolve.

The issues incident to a merger are, for the most part, the same in kind and amount regardless of the number of parties involved. However, as a general tenet, the greater the number of parties to a merger, the more difficult, costly and lengthy the merger process because issues are more easily resolved by a lesser number of decision-makers. Hence, while it might seem more practical to merge four practices at one time, a reorganization is almost always more efficiently accomplished in a piecemeal fashion, i.e., by merging the two practices sharing the most important attributes first, with subsequent mergers coming one at a time thereafter. When mergers occur in this way, issues that are determined on the ground floor become precedent and a merger model is created.

Another common misconception is that practices will create economies and efficiencies simply by merging. This will not happen by virtue of the merger alone. It can happen over time, but only if the merged group owners are committed to becoming more economical and efficient as a group. And, for the most part, this can happen only if the owners are committed to central governance and physical integration to the extent feasible.

Without central governance and physical integration, a merged group is nothing more than a collection of independent practices whose collective expenses will ultimately be greater than the sum of the individual practice expenses. A loosely affiliated collection of practices may perhaps generate some savings through increased purchasing power, but any savings will be outweighed by the administrative costs incurred to link the practices, i.e., a central administrator, centralized systems, etc. The real efficiencies and economies are generated by reductions in payroll and physical plant, by far the two most significant items of overhead in medical practice, which can achieved only through physical integration. If a party is not truly committed to the concepts of central governance and physical integration, then they must reconsider the merits of merging and, more appropriately, the group must reconsider that party’s involvement.

Merging your practice may be a logical, prudent choice. However, even the most successful merger can be described best as a “one step back, two steps forward” proposition. If you are not truly prepared to invest time, money and effort into the process, your chances of seeing a merger to fruition are slim.

Mark D. Abruzzo, Esq., is a partner in the law firm of Wade, Goldstein, Landau, Abruzzo, Mackarey & Davidson, P.C. in King of Prussia, PA.

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