- The market is trending toward consolidation. According to an
October 2011 study from Moss-Adams, there has been a doubling of mergers,
acquisitions and private equity investments in specialty physician practices
between 2008 and 2012.
- More physicians are being employed by hospitals. A 2013 Jackson
Healthcare study revealed that 26 percent of physicians surveyed reported
being employed by hospitals — up from 20 percent in 2012. A 2014 Physicians
Foundation study found that 53 percent of physicians surveyed describe
themselves as employees of a hospital or medical group — up from 44 percent in
- Fewer physicians are in solo practice. A 2014 Physicians Foundation
study found that only 35 percent of physicians surveyed describe themselves as
independent practice owners − down from 49 percent in 2012.
- Physician practices must first decide how important independence is to
them. In the current market, many physician groups need to make a choice
between selling their practices to a hospital or other non-physician-owned
business, or staying independent but becoming more powerful and leaner. It is
becoming very difficult for practices to stay small without cutting costs and
becoming more efficient, and even those practices that choose to stay
independent are looking seriously at consolidating multiple independent
practices for a variety of reasons.
- For physicians choosing to stay independent , when does
retaining the small practice make sense? Some physicians choose to remain
both private and small, but seek leanness and other means of survival out of
fear that a large, consolidated practice would force physicians into a more
structured and less individualized environment. Practice consolidation can
result in standardized practices with some risk of eroding physician autonomy,
choice and culture. Many physicians prefer to handle the challenges of a small
practice in order to retain ongoing autonomy.
- Why choose a consolidated practice? Physician groups may choose the
practice consolidation route for a variety of economic reasons, including the
- The practice consolidation route may enable large-scale investments. As
one common example, it is becoming increasingly important and expensive for
physician groups to adopt more sophisticated electronic health information
infrastructures. Practice consolidation allows physicians to raise the
necessary capital to build these infrastructures and gives their practice
the size to take advantage of the capital investment.
- Bigger practices typically can lock down better vendor and payor rates.
Practice consolidation usually gives physician practices more negotiating
power and allows greater bulk purchasing, enabling them to negotiate these
better rates with vendors.
- Consolidated practices pose new challenges for physician groups. If
a physician group chooses to pursue the practice consolidation route, it must
consider a bevy of new issues that were not present in the small practice
setting. Here are a few issues to consider:
- The physician group must plan out how the practice should be governed.
The physician can no longer make unilateral decisions or come to agreement
with a small group of known and trusted associates. Instead, the physician
group must create procedures for electing members of a governance board and
officers to carry out the day-to-day governance duties. These procedures
must be spelled out in a written agreement.
- The group should spend extensive, thoughtful time considering and then
contractually determining how the new compensation structure, including that
of ancillary revenues (e.g., DME, imaging, outside joint venture
investments), will be shared.
- The physician group must allocate premerger liabilities. Each party to
the merger may not know or be able to identify what potential liability the
consolidated practice will face from actions that predate the merger, and
the physician group must contract to distribute that financial risk in an
- The physician group must prepare for the possibility that some
physicians may choose to leave the consolidated group, or that the
consolidation as a whole doesn’t work out, and thus should consider whether
to include noncompete clauses for physicians who leave as well as
contractual provisions for unwinding the consolidation.
- Taking the plunge − what does the consolidation look like from a
legal perspective? After a group determines that consolidation is right
for that group, the practice group will ideally work through the following six
- Decision. The physician group will typically identify other
practices to target for consolidation.
- Assessment. The physician group will typically engage in
discussions with the target group regarding culture, basic financial
aspects, noncompete restrictions and basic market goals. The physician group
should also ideally engage an accounting analysis to better understand the
relative values, liabilities, etc., of the consolidating practices. Another
critical consideration during this stage is analysis of the various
physicians’ restrictions to consolidate, such as those arising from any
noncompetition covenants present in past sales or joint venture documents.
- Letter of intent. Often the parties will sign a letter of intent
memorializing key terms of the consolidation plan, defining the exclusivity
period, and expressing a commitment to expend funds to further investigate
and negotiate consolidation documents.
- Diligence and documentation. Both parties are well-advised to
conduct additional due diligence on each other’s practice to discover any
potential risks or liabilities that may be at issue on closing or otherwise
should be addressed in the documentation. A key part of this is a billing
and coding audit. During this stage, the parties typically negotiate and
draft the relevant documents, including the merger/consolidation agreement,
the operating/shareholders agreement, any physician employment agreements
and any nonphysician employment agreements. Parties must also analyze and
negotiate third-party agreements relevant to the consolidation, such as a
- Closing. At this stage, the parties exchange relevant documents
and any transfer of money or equity interests occurs.
- Post-closing. During this final, critical stage, the consolidated
group will deal with new issues of practice and governance in the new
entity. This may involve transitioning to new facilities or infrastructure,
communicating any changed information to patients to ensure a smooth
transition for them, and appointing leaders. Typically, the most successful
practices are the ones that think about these issues long before closing and
are well-prepared by the time all documents are signed.
Note: Physician groups are faced with many options when deciding to pursue a
practice consolidation, and each situation poses its own unique set of issues
and challenges that can be difficult to foresee on your own. If you are
interested in speaking with us further, you can contact Amber Walsh at 312-750-3596 and firstname.lastname@example.org or Scott
Downing at 312-750-8910 and email@example.com.