Would a practice merger make sense for you?

By Vasilios J. Kalogredis, JD

There is a lot going on in the health care marketplace. Dramatic increases in malpractice insurance premiums (if such coverage is available at all) have caused many physicians to critically evaluate their situations and decide what alternatives are best.

Some physicians have decided to become employed or remain employed by larger institutions. Others have left the area entirely. Still others have gotten out of full-time clinical practice (to fully retire from medicine, to work in a part-time setting, to drop surgery, to drop OB, to go into research or teaching, and the like).

At the same time, other physicians have left (either voluntarily or involuntarily) their employment relationship with larger institutions (such as hospitals) and are returning to private practice. There is little doubt that it is getting tougher than ever to economically survive in a small, private practice setting.

Skyrocketing costs, increasing governmental regulations and legislation, managed care and other third party payors, and increased competition are all important factors which contribute to the drive towards larger medical groups. Innovative thinking and good business planning are necessary to meet the future challenges.

I believe that one strong option to be considered is for practitioners to become larger through merger. In that setting, the practice is owned and controlled by physicians. A physician in that setting is not employed by a for-profit entity, large hospital or other institutional organization.

Advantages of Mergers

If done properly, a well thought-out and organized merger will strengthen the practice’s negotiating position with hospitals, employers, third party payors and others. If a practice is large enough and important enough in what it offers to its community, some third party payors may be willing to better reimburse them, which would obviously benefit the practice and its physicians, from a bottom line standpoint. With proper planning, a stronger group will better be able to maintain, if not strengthen, its market share.

A merged practice would be better able to provide a more full-service type of care and a better continuity of care for patients, as well. For example, we know of orthopedic practices that have come together so that they would be able to provide the full range of orthopedic services to the community. This would include services such as spine, ankle and shoulder. In one case, a three physician orthopedic practice hired a spine surgeon. That addition expanded the group’s capabilities and allowed the practice to retain that business, which it had previously not been able to service.

Several of our family practices have merged with hospitalists. That has allowed the family doctors to focus on their office work and has provided a broader base of patients for the hospitalists.

Some ophthalmologists we know merged their practices recently. One of the doctors wanted to drop surgery and go to a strictly medical ophthalmology position. The merger allowed that doctor to accommodate his professional desires and added a cadre of patients to the others, which increased their surgical schedules.

Also, the opportunity would be there for increased financial resources becoming available for the purchase of major medical equipment; the recruitment of higher level management; the addition of ancillary services; the addition of more sophisticated computer systems; the recruitment of additional physicians, specialists, and ancillary personnel; group purchasing; better marketing; and the ability to more readily add additional office and/or hospital locations.

For example, a large practice made up of orthopedic surgeons, neurosurgeons and rheumatologists might be better able to afford MRI and other imaging and PT services than it could otherwise as smaller, independent entities.

It is not at all uncommon for two solo practitioners in the same community to be busier than they want to be alone, but not busy enough to each hire a full-time second physician in each practice. This has caused many in that situation to merge and then jointly hire a third physician in the new entity. It makes a lot of sense and has worked very well for many.

In a group practice setting, with proper forethought and appropriate planning and negotiated documentation, a good group practice may provide protection for its shareholders in the case of death, illness, disability and retirement.

A solo practitioner does not have this. We know of physicians who were absent from their practices for extended periods of time, due to disability. By the time they returned, their practices were decimated. That has caused some solos to merge with others to provide some cash flow protection while absent and the coverage to “maintain” the practice during such an absence.

A dermatologist we know, who is in his early sixties, has been in solo practice “forever.” As he has begun to seriously think about retirement and health issues, he is focusing on the fact that he does not have a ready-made buyer for his practice. I have advised him of the problems of a “distress sale,” which would greatly reduce his prospects for a reasonable buy out price on a “short notice” sale.

We are talking to a couple of practices close to his to pursue merger possibilities. One is a younger, solo dermatologist who is looking to expand her patient base and views this as an excellent way of doing so, while providing the more senior doctor with what he is seeking. The other option is a two-doctor practice whose two principals are in their forties. They view the opportunity of bringing the strong reputation and large patient base of the senior physician into their practice as a plus for all three of their futures.

Also, many solo practitioners are hesitant to take any extended vacation time off. They worry about the fact that no revenue is being generated, but the bills (rent, personnel, etc.) continue while away from the practice. This can make merger a viable consideration.

A “true group” practice has more opportunities for doing things appropriately with less chance of violating fraud and abuse, “Stark,” and antitrust restrictions. This is well-illustrated by some orthopods we know who merged into a larger (approximately 15-doctor) group. It gave them the critical mass with which to create an excellent P.T. Center and a top quality MRI facility. Their size and quality allowed them to negotiate with third parties to get these services reimbursed, as well. It is definitely something that they could not have done as smaller practices.

By having separate practices come together as one practice, one is able to avoid a duplication of services (for example, lab, billing, office management services, legal services and accounting services). Although it is not always the case, with proper planning, the overhead as a percentage of gross collections of the practice has the opportunity of being lower.

An example of this is a group of primary care physicians who merged together a few years ago. They were able to consolidate facilities (better utilizing the square footage spaciously and from a time scheduling standpoint) and personnel needs (for example, cutting down the number of receptionists by 50 percent). Also, those personnel savings allowed them to hire an MBA-type administrator who has been further able to monitor overhead and effectuate cost savings.

Disadvantages of Mergers

One of the tougher aspects of going into something like this is the lessening of control and autonomy that the various doctors would have if they entered into a larger organization. This is what causes many to not really want to do this.

While discussing coming together, it is important for everyone to be open about things. It is better not to merge than to merge and quickly realize that there are incompatibility problems. It is like the couple who rush to get engaged and married without openly addressing important issues (such as finances, children and religion, for example) which ultimately (sometimes quickly) cause the union to break up.

The various doctors in the group may have different reasons for wanting to practice and different goals as to what they are attempting to accomplish in their professional lives. This may cause some dissension when it comes to the types of patients they want to see, whether they want to work harder or less hard, etc. Also, the larger an organization becomes, the potential for incompatibility increases. The larger an organization becomes, the input and influence of any one physician is lessened. To make things work, a large amount of time, energy and money is needed and a true commitment to the process and its end goals is very important.

In closing, although becoming larger through merger is not the answer for everyone, it is certainly a viable alternative for many to consider as they face the challenges of the future.

Vasilios J. Kalogredis, J.D., is founder and president of Kalogredis, Sansweet, Dearden and Burke, Ltd., a boutique health care law firm in Wayne, Pa.