Look before you leap onto practice merger bandwagon
From the October ACP Observer, copyright © 2007 by the American College of Physicians.
By Stacey Butterfield
A decade ago, David N. Harvey, MD, was just beginning to feel the impact of managed care on his Warner Robins, Ga. practice. Seeking economies of scale in billing and business management, he decided to merge his small pediatrics group with several other primary care practices in the area.
David N. Harvey, MD, (shown with site manager Shelia Mead of Pediatric Associates of Warner Robins, Ga.) merged his small practice to get help with business management.
Dr. Harvey's thought process was a common one in the 1990s, according to Atlanta health care attorney Patrick M. Connolly. The pressures of managed care, the need for expensive new equipment and the costs of running an office were all factors in a trend of physician practice consolidation.
The merger movement lost popularity after several national practice management companies unraveled, he said. But now, like polo shirts and low-fat diets, practice mergers are back in style.
According to a study released in August by the Center for Studying Health System Change, physicians in solo or two-physician practices decreased from 40.7% in 1996-97 to 32.5% in 2004-05, while the proportion who practice in groups of six to 50 grew from 13.1% to 17.6%.
"A lot of the pressures that led to consolidation in the first place really still exist and in fact have accelerated," said Mr. Connolly. "Pooling resources is a very attractive if not necessary thing for many physicians to be able to afford all the accouterments that modern practice requires."
"A lot of the pressures that led to consolidation in the first place really still exist and in fact have accelerated."
—Patrick M. Connolly, JD
Although almost all internists face the pressures, such as the cost of upgrading diagnostic equipment and the need for electronic medical records, that entice physicians to merge, Mr. Connolly advises merger candidates to look carefully before they leap. "It's important to not get caught up in just the idea of joining a trend," he said.
Mr. Connolly and other legal and physician experts agreed on some crucial advice for physicians considering a practice merger.
Choose compatible partners
Successful mergers generally occur between physicians or groups with similar values and work ethics, said Mr. Connolly.
"One of the biggest sources of conflict when groups come together is that some physicians might think that physicians from the other group aren't as motivated as they are to work hard. Some are more interested in having balanced lives, others are interested in making as much money as they possibly can," he noted.
Administrative and support staff, as well as physicians, need to be compatible, said Philadelphia attorney Bruce D. Armon. "Make sure they can all work together as a team and are not viewing themselves as employees of Practice A or Practice B."
Because of the need for compatibility, single-specialty mergers are often easier to accomplish than multidisciplinary ones because the physicians involved are more likely to have similar attitudes, said Mr. Connolly. "Pediatricians tend to be more laid-back than orthopedic surgeons, for example."
Look for hidden liabilities
Different specialties, or even different practices within the same specialty, can have widely varying levels of cost and profit, another issue that should be thoroughly investigated before a merger, noted Mr. Armon.
"You can have two practices that are generating similar annual revenues and the physician take-home pay could be very different depending on the respective expenses," he said.
Other, harder-to-uncover issues can also affect the success of a merger. "You need to do some due diligence to make sure the other group doesn't have hidden liabilities such as malpractice exposure," said Mr. Connolly.
Have realistic goals
As well as researching each other's practices, merging physicians should look at their communities to make sure that a merger will really provide the expected benefits.
"For example, if you think merging is going to give you greater market share and greater managed care contracts, you need to take a look around the marketplace and see who the managed care companies are," said Mr. Connolly.
Dr. Harvey learned that lesson the hard way. His practice merger failed to reap the increased reimbursements he'd sought. "The benefit has been in moving pieces of the pie around, but we've gotten no larger pie," he said.
Practice mergers can increase physician payments, but it takes more than sheer numbers to see the money, according to John MacKeigan, MD, vice president of medical affairs for Michigan Medical P.C., a multispecialty group of more than 300 providers.
"You don't come together for leverage or income from insurers or hospitals. You come together to partner with those people to make it win-win on both sides," he said.
Find the right size
A huge practice group like Dr. MacKeigan's has an easier time partnering with payers, but with every increase in size comes new challenges, noted Mr. Armon.
"There's some speculation that if you're a group of 15 physicians versus a group of three you might have some more latitude in negotiations with a third-party payer. There's been some thought that bigger is better. But once something becomes bigger, the administrative challenges become more difficult," he said.
"The more people, the more voices they have, the more cumbersome the administration," agreed Howard A. Miller, FACP, a Philadelphia internist who merged his practice into the Drexel University system.
Dr. MacKeigan believes practices of 20 to 50 physicians are the hardest to handle. "Sometimes political pressures and lack of sufficient revenue and overhead costs are difficult. Once you get beyond 50, the economies of scale start to make it increasingly worthwhile," he said.
Expect some problems
Of course, the bigger a merged practice becomes, the more likely it is that at least one of the partners will either have or cause problems.
Dr. Miller suggests merger participants plan for how large groups will make difficult decisions, address a changing marketplace or deal with an unproductive partner.
It is also worthwhile to consider the worst-case scenario, that the merger will have to be disbanded, said Mr. Armon. "If it doesn't work out, how do you untangle what was put together? Where do the patients, the staff, the records go?"
Dr. Harvey wishes he had thought more about how to untangle himself from his merger. As he approaches retirement age, he has looked into selling out but found that debt he accrued during the merger hurt the appraisal of his practice. Merging at age 60 didn't leave him enough time to work off the debt and reap the benefits of the merger, he said.
"I think the idea is good. Where we lacked was that we didn't go through the proper training of ourselves or we all didn't come into it for the same reasons, even though we thought we were."
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