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Physician groups are turning to mergers and acquisitions in an attempt to ensure sustainability and growth in an environment of rapid change.

Medical Group Mergers: The Pursuit of Survival

  • 12/1/2012

Medical Group Mergers: The Pursuit of Survival

by Mitchell Gerstein and Anthony Werner

Physician groups are turning to mergers and acquisitions in an attempt to ensure sustainability and growth in an environment of rapid change. They are hoping new partnerships will help them maintain their independence and create greater stability during a time of uncertainty.

The number of changes facing medical groups is mind boggling for many private practice physicians. Some of the most dramatic adjustments prompted by the Patient Protection and Affordable Care Act will come from payment reform, which focuses on increasing value and lowering total costs. Bundled payments, total cost of care (TCOC) models, or payments to accountable care organizations (ACOs) that then control the payments to partner organizations, are intended to drive costs down. Other challenges for medical groups include increased documentation, requirements to purchase expensive electronic medical record technology, and the possibility of takeovers by larger groups or hospitals.

As commercial payers shift financial and insurance risks, medical groups will also be required to shoulder a greater portion of clinical risks. In addition, public policymakers and self-insured employers are changing policy designs, leading medical groups to take on responsibility for population health management by improving clinical performance for specific diseases.

In order to survive, medical groups will have to invest significant capital in technology, improve operational efficiencies, and collaborate with other physicians. Groups that become larger through growth or mergers naturally have greater ability to decrease expenses, negotiate better contracts, and influence payments for professional services. For some, joining with other providers and pooling resources to grow the practice is the most sustainable way to fuel investments and streamline operations.

Benefits of mergers and acquisitions

A merger or acquisition allows a medical group to manage change, enhance services, and improve efficiencies. Medical groups that successfully make this transition benefit from:

  • Greater sub-specialization
  • Economies of scale on purchasing
  • Revitalization of morale
  • Stronger physician recruitment
  • Increased efficiency by reducing duplication of services
  • Income stability
  • Increased leverage in negotiating contracts
  • Job security
  • Improved access to capital
  • A stronger business position to resist a takeover
  • Better business infrastructure

The list of benefits is impressive and attractive, but anyone who has gone through a merger will attest that the process is complicated, emotional, and challenging, and that the inherent risks in the process have to be considered as well.

Costs and risks of mergers and acquisitions

Most mergers take a great deal of time and effort, and statistically, as many mergers fail as succeed. The majority of attempted mergers fail because of cultural differences. Carefully choosing a partner for long-term collaboration is a key decision. The leaders and managers must negotiate, develop new structures and strategic plans, perform robust due diligence, make substantial financial investments, manage expectations and cultural/personality differences, plan for contingencies, and skillfully communicate throughout the process. Ultimately, partners must objectively determine that the organizations are a good fit for one another.

A potential partnership generally requires several processes to be conducted in succession with overlap along the timeline. Merging groups will need to form a merger committee with heavy involvement from administrative management. Due diligence leads the process followed by discussions of the merger framework, relationship management, and communication strategies usually over a period of 6 – 18 months. The parties will need to compromise on everything from governance to employee benefits. Experienced attorneys and accountants are heavily involved throughout the process. Internally, resources required for the merger directly compete for the attention of physicians and administrative staff. A merger distracts from normal business, but there is no way around devoting significant time and energy to the process.

External stakeholders add another dynamic to an already difficult process. Partner hospitals may be concerned that the business relationship will change, and payors may be concerned about payment rates. A comprehensive communications plan for internal and external constituents should include a clear strategy for promoting an understanding of the corporate vision and address the concerns of internal and external individuals, as well as partnerships. If employees and others affected by the merger do not understand why it is taking place, chances for success are greatly diminished.

On the other hand, when rigorous due diligence takes place up front and clear communication is made a priority, medical groups may be able to enhance their services, improve efficiency, and position themselves for success despite a challenging future.

Information in this article was originally printed in the November 2012 issue of St. Louis Medical News.

Mitchell Gerstein, Health Care Tax Partner or 267-419-1622

Anthony Werner, Health Care Manager or 612-397-3061