Brace Yourself for the Next Wave of Practice Consolidationconsolidation
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ISSUES & INSIGHTS 's 's In the health care reform law, down- ward pressure on physician reim- bursements and the need for capital are all driving an anticipated next wave of physician practice consoli- dation. 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 phy- sician practices. When combining two or more prac- tices 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 advantag- es and roadblocks of these arrange- ments. 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 reimburse- ment rates. Such power can also ex- tend to hospitals over access to the OR and block scheduling. Bargaining power is heightened fur- ther when the merged practice repre- sents a significant proportion of the area physicians in a particular spe- cialty. There are exceptions to the rule, however. In a large market area, doubling in size from five to ten phy- sicians won’t make a big difference, though such a group might be domi- nant 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 reim- bursement rates, the physicians may have to settle for no rate cuts. Economies of Scale Being large produces some signifi- cant benefits, but not always every- thing you might expect. Before and after a merger, physicians will re- quire about the same amount of of- fice space and same number of sup- port staff. That won’t change. What will change? The legal and account- ing costs to service the larger practice will actually be higher. When merging several practices, it’s best when all or most of the physi- cians 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 Brace Yourself for the Next Wave of Practice Consolidation © 2012 Armanino McKenna LLP . All Rights Reserved.
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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.
Transcript of Brace Yourself for the Next Wave of Practice Consolidationconsolidation
ISSUES & INSIGHTS's's
In the health care reform law, down-ward pressure on physician reim-bursements and the need for capital are all driving an anticipated next wave of physician practice consoli-dation. 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 phy-sician practices.
When combining two or more prac-tices 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 advantag-es and roadblocks of these arrange-ments.
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 reimburse-ment rates. Such power can also ex-tend to hospitals over access to the OR and block scheduling.
Bargaining power is heightened fur-ther when the merged practice repre-sents a significant proportion of the area physicians in a particular spe-cialty. There are exceptions to the rule, however. In a large market area, doubling in size from five to ten phy-sicians won’t make a big difference, though such a group might be domi-
nant 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 reim-bursement rates, the physicians may have to settle for no rate cuts.
Economies of ScaleBeing large produces some signifi-cant benefits, but not always every-thing you might expect. Before and after a merger, physicians will re-quire about the same amount of of-fice space and same number of sup-
port staff. That won’t change. What will change? The legal and account-ing costs to service the larger practice will actually be higher.
When merging several practices, it’s best when all or most of the physi-cians 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
Brace Yourself for the Next Wave of Practice Consolidation
© 2012 Armanino McKenna LLP. All Rights Reserved.
ISSUES & INSIGHTS's's
© 2012 Armanino McKenna LLP. All Rights Reserved.
be an “all or nothing” proposition. You may want to bring most of the merged practices together under one roof, while leaving several at strate-gic locations within the market area.
Operational Efficiencies Larger practices also have the advan-tage of assigning specialized roles to employees, thus allowing them to develop greater expertise. A good ex-ample is your billing staff. Merging two or more practices won’t reduce the number of people needed to pro-cess claims, but doing so will enable individual billers to concentrate on just a few payors or on certain pro-viders in the group.
The result is an improved, more effi-cient billing process. Other functions within the practice are also amenable to the same approach.
A Good FitOnce 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 pro-fessional contacts and associations, trusted legal and financial advisors, and practice vendors.
Also do Internet research on your competitors, and examine local mar-ket 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 pro-spective merging firm’s financial, le-gal 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 anxi-eties 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 is-
sues, including retirement plans.
Another issue that you’ll need to deal with from the start is the loss of in-dividual 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 compen-sation program, patient billing sys-tem 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 gen-erate more capital for investment in new technologies and marketing ini-tiatives.
Yet, as mentioned, there are still plen-ty of pitfalls that can make a merger difficult — if not downright unten-able. Is it time for your practice to give it a try?
If you need additional information regarding this article, contact Bill Brause at 925.790.2624 or email [email protected].
