8 Things to Note From the Physician Practice Mergers Webinar

January 6, 2015

  1. 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.
  2. 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 2013.
  3. 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.
  4. 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.
  5. 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.
  6. Why choose a consolidated practice? Physician groups may choose the practice consolidation route for a variety of economic reasons, including the following:
    1. 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.
    2. 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.
  7. 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:
    1. 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.
    2. 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.
    3. 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 equitable manner.
    4. 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.
  8. 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 steps:
    1. Decision. The physician group will typically identify other practices to target for consolidation.
    2. 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.
    3. 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.
    4. 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 building lease.
    5. Closing. At this stage, the parties exchange relevant documents and any transfer of money or equity interests occurs.
    6. 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 [email protected] or Scott Downing at 312-750-8910 and [email protected].