Is a Practice Merger or Sale in your Future?

Depending upon the competitive environment, malpractice insurance climate, and reimbursement situation in a particular locale, many smaller practices are having a more difficult time than larger practices.  Indeed, with the proper planning and forethought, larger practices are more capable of instituting efficiencies that will bring them economies of scale.

Back in the 1990s, many physicians – particularly those in primary care – sold their practices to hospitals, healthcare systems, practice management companies, and similar organizations.  The sellers would then often become employees of the acquirer.  After a few years, many of them reverted back to private practices.

A strong option considered by many practitioners today is to become part of a larger, independent medical group through a merger.  In that circumstance, the medical practice is controlled and owned by physicians.  The physicians, therefore, are not employed by a for-profit entity, large hospital or hospital system, or other non-physician-controlled institutional organization.

Advantages of a Merger

When properly analyzed, organized, and executed, a merger may strengthen the physicians’ negotiating position with hospitals, employers, third-party payers, suppliers and other vendors.  If a practice is large enough and important enough in what it offers in a particular community, some payers might be willing to provide better reimbursement, obviously benefiting the practice and physicians from a bottom-line standpoint.

Sound planning, effective marketing, and new efficiencies can indeed make a larger group stronger and, therefore, able to at least maintain if not strengthen its market share. The whole may indeed become larger than the sum of its parts.

A larger practice should also be better equipped to provide a fuller spectrum of services and better continuity of care.  For example, in a primary care setting, it is possible that a group might have some physicians working only in the office and others working solely in the hospital providing inpatient services.  A merged practice might also be able to provide better service by having physician care available for more hours during the week.

By having more doctors involved, the opportunity is there for increased financial resources.  That can translate into a variety of advantages:  new purchases of major medical equipment; added ancillary services; more sophisticated information technology; recruitment of higher-level lay management staff, additional physicians, specialists (such as general dermatologists being able to add a dermatopathologist), ancillary personnel, and physician extenders such as physician assistants and nurse practitioners; group purchasing; increased marketing capabilities; and the ability to more readily add space, offices, or hospital locations.

Joining Office-Based MDs with Hospitalists

We have seen situations where primary care physicians merge with hospitalists.  Such a move has allowed the primary care physicians to focus on their office practice while providing a broader base of patients for the hospitalists.

Merging Solo Practitioners

We’ve often seen a situation where two solo practitioners in a community are busier than they want to be by themselves, but not busy enough to each bring on a full-time second physician.  This may result in a merger of the two, who then jointly hire a third physician for the newly formed entity.  This makes good sense and has worked very well for quite a few practitioners.

For many solo or very small groups, one negative aspect is the lack of protection in the event of death, illness, disability, or retirement.  By developing an appropriate group (through merger or otherwise), proper forethought and appropriate negotiated documentation can provide the shareholder physicians with built-in protections.

Obviously, a solo practitioner does not have that luxury.  Unfortunately, we have seen too many physicians who are absent for extended periods due to disability and, in some cases, they pass away without a clear plan of practice transitioning in place.  In many circumstances, their practices were decimated from greatly reduced volume and economic standpoints.  What had been an asset becomes a liability for that physician or his heirs. This has caused some solo physicians to merge with others to provide the cash flow protection while they are absent and the manpower coverage to allow the practice to be “maintained” during any such absence.  It also provides a ready-made buyer upon death or retirement.

We recently advised a general internist in her early sixties who had been in solo practice “forever.”  She was beginning to experience some health issues and was seriously beginning to think about retirement.  She was also concerned because she did not have in place a buyer for her practice if something were to happen to her.  I advised her of the problems of a “distress sale,” which greatly reduces the chances for a reasonable buyout on a “short notice” sale.  We talked to a couple of practices in the area regarding the possibility of merger and/or their buying out her practice right now.  One option involved a younger solo internist who was looking to expand her patient base and viewed this as an excellent opportunity of doing so, while providing the more senior doctor with the protections and benefits she was seeking.  The other option was a two-doctor internal medicine practice whose two principals were in their forties.  They viewed this opportunity to bring the strong reputation and large patient base of my client into their practice as a truly positive thing for all three of their futures.  These are good illustrations of what drives some of these merger considerations.

Many solo practitioners are hesitant to take any extended vacation time off.  The concern is that no revenue will be generated but the bills will continue.  This is obviously another benefit of having more than one doctor in a practice with proper planning with proper planning, this can work out very nicely.

Other Benefits of a “Group”

A “true group” practice has increased opportunities for properly structuring things in light of the fraud and abuse, “Stark,” and anti-trust restrictions that are out there.  An example of this involved some independently practicing orthopedic surgeons who merged into a larger (approximately 40 physicians) group.  The merger provided them with the critical mass with which to develop a physical therapy center, a surgery center, and a high quality MRI facility.  Their size and quality allowed them to negotiate with third-party payers to get the services reimbursed as well.  This is something they could not have done as independent practices.

With proper planning, having separate practices come together as one provides the potential for the avoidance of duplication of services.  For example, personnel, lab services, legal and accounting services, and the like may be consolidated.

A Look at Overhead

It is not always true that the merged entity’s overhead as a percentage of gross collections of the practice will be lower than it was in the aggregate among the prior independent practices.  Often it takes a period of digestion for this to happen, since many of the practitioners do not want to have to give up – at least at the start – their own staff, facilities, and the like.

An illustration of this involved a group of internists who merged together a few years ago.  They ultimately were able to consolidate facilities (and, hence, better utilize available square footage as well as to reduce the number of receptionists by 50%).  Those personnel savings allowed the new group to hire an MBA-type administrator who has been further able to continually monitor the overhead of the practice and realize sound cost savings, as well as take a leadership role in the practice’s planning and growth.

Issues to Consider

A major deterrent to merging or selling a practice is the physician’s concern about having less control and autonomy.  Being a part of a larger organization is not appealing to many physicians.  This concern should not be discounted.  What will make one doctor happy may not work for another doctor.

It is imperative that everyone involved in merger discussions and negotiations be open and upfront.  This includes communicating why they are considering such a situation and what they hope to obtain.  Mergers should not be rushed into.  Indeed, it’s much better not to merge at all than to merge quickly and then realize there are major incompatibility problems.  This would be comparable to the couple that rushes to get engaged and married without openly and honestly addressing important issues (such as finances, children, and religion) that could cause the union to fall apart.

Included within the openness is a willingness to share the finances of the respective practices with others.  It is important that before doing this, all parties involved sign Confidentiality Agreements as well as documents that clarify how the fees and other costs regarding the evaluation process are to be split among the participants.  The Confidentiality Agreements help to protect against competitors going on a fishing expedition to obtain data on a practice without being serious about pursuing an amalgamation.

The various physicians involved may have very different reasons for considering such a step.  They may be at different stages of their professional careers.  They may have quite different goals regarding what they wish to accomplish in their professional lives going forward.  These differences may cause serious disagreements when it comes to the type of patients they wish to see, how hard they want to work, how much money they are willing to invest into the practice, and how they believe the practice’s net income pie should be divided.

It is indeed true that the larger an organization, the greater the potential for incompatibility and disagreements – if for no other reason than because more people are involved.  At the same time, the input and influence of any one physician lessens.  This is a barrier which some physicians have a tough time climbing over.

Committing to the Process

To increase the chances for success in a merger, it takes a substantial amount of time, energy, and money as well as a genuine commitment to the process and its end goals.  Although getting larger through a merger is not the best solution for every medical practice, it is clearly a viable alternative for many to consider as they face the challenges of how the healthcare environment will impact their future professional lives.

Vasilios “Bill” Kalogredis has been advising physicians, dentists, and other health care professionals and their businesses for over 40 years.  He is Chairman of Lamb McErlane PC’s Health Law Department.  He can be contacted by email at; by phone, 610-701-4402; or fax, 610-692-6210.