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Wednesday, March 21, 2012

Brace Yourself for the Next Wave of Practice Consolidation

In the health care reform law, downward pressure on physician reimbursements and the need for capital are all driving an anticipated next wave of physician practice consolidation. Although some doctors have avoided these problems by accepting employment with a hospital, many others are exploring the option of merging with or acquiring other physician practices.

When combining two or more practices into one, the goal is typically to create an entity of greater value and with more potential. It should also lead to revenue-generating and cost-saving opportunities. Let’s take a closer look at the potential advantages and roadblocks of these arrangements.

Negotiating Power
Typically, the more physicians that are gathered into a single practice, the more clout that practice will have when negotiating with health plans over contract terms and reimbursement rates. Such power can also extend to hospitals over access to the OR and block scheduling.

Bargaining power is heightened further when the merged practice represents a significant proportion of the area physicians in a particular specialty. There are exceptions to the rule, however. In a large market area, doubling in size from five to ten physicians won’t make a big difference, though such a group might be dominant in a smaller market.

Bargaining power also depends on the number and size of payors and hospitals. Greater influence doesn’t mean that the merged practice can compel agreement with its demands. Rather than insisting on higher reimbursement rates, the physicians may have to settle for no rate cuts.

Economies of Scale
Being large produces some significant benefits, but not always everything you might expect. Before and after a merger, physicians will require about the same amount of office space and same number of support staff. That won’t change. What will change? The legal and accounting costs to service the larger practice will actually be higher.

When merging several practices, it’s best when all or most of the physicians relocate to a single location. Only then will it be possible to make better use of exam rooms, diagnostic equipment and revenue-generating assets such as ancillary services. Moreover, there will likely be less waste because all supply ordering will be done through one office.

In spite of these economies of scale, geographic centralization need not be an “all or nothing” proposition. You may want to bring most of the merged practices together under one roof, while leaving several at strategic locations within the market area.

Operational Efficiencies
Larger practices also have the advantage of assigning specialized roles to employees, thus allowing them to develop greater expertise. A good example is your billing staff. Merging two or more practices won’t reduce the number of people needed to process claims, but doing so will enable individual billers to concentrate on just a few payors or on certain providers in the group.

The result is an improved, more efficient billing process. Other functions within the practice are also amenable to the same approach.

A Good Fit
Once the benefits of a merger make sense, you need to identify one or more candidate practices and begin the planning and negotiation phase. You can find candidates through professional contacts and associations, trusted legal and financial advisors, and practice vendors.

Also do Internet research on your competitors, and examine local market surveys of physician practices. When choosing candidates, look for a cultural fit and compatibility with your practice’s strategic goals. Also perform due diligence on the prospective merging firm’s financial, legal and operational statuses.

If all looks good, then it’s time to bring together the partners from all practices considering the merger. To help allay everyone’s natural anxieties and to avoid any hint of bias, bring in a neutral, trusted financial professional to:

  • Describe the financial benefits of the merger,
  • Project the profitability of the new entity,
  • Analyze the tax implications,
  • Go over buy-sell issues,
  • Recommend governance options, and
  • Resolve possible fringe benefit issues, including retirement plans.

Another issue that you’ll need to deal with from the start is the loss of individual autonomy that comes with a merger. If this is an overbearing issue with some of the merging physicians, consider leaving those practices at their existing locations and allowing them to operate as profit centers. But require them to adopt your compensation program, patient billing system and internal accounting methods.

Is It Time?
When weighing the pros and cons of merging with one or several practices, keep in mind that a large and thriving practice is a magnet for new doctors as well as professionals required to manage the operation. A larger group also has greater resources to devote to quality improvement and patient satisfaction activities. And it can generate more capital for investment in new technologies and marketing initiatives.

Yet, as mentioned, there are still plenty of pitfalls that can make a merger difficult — if not downright untenable. Is it time for your practice to give it a try?


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