Today's healthcare news is ripe with medical service consolidation. With the changes to healthcare legislation, more small orthopedic practices are choosing whether to become employed by hospitals or merge with neighboring practices to form bigger groups.
"There is so much fear and uncertainty right now related to healthcare reform," says Dave Wold, CEO of Health Information Services, who played a critical role in eight successful mergers to grow Illinois Bone & Joint Institute. "You see physicians wondering if the complexity of running their medical practice might be too much. Others want to remain independent and they emphasize coming together with other groups for strength in numbers. Fifteen physicians have more influence when dealing with hospitals and payors than four or five."
Mr. Wold and Wayne J. Miller, Esq., a healthcare transaction and regulatory attorney and founding partner of Compliance Law Group in Los Angeles, Calif., discuss 10 things every orthopedic group should know for a successful merger.
1. Devise a core committee of leaders from both groups. Whether you are merging two practices of equal strength or a large group with a smaller group, talks should begin among a small core group of physician leaders on both sides. Bringing all physicians into the initial discussions can become unproductive because there are so many voices in one room. Instead, the core group of leaders can represent each side and iron out intricacies of the agreement more efficiently.
"Start with a negotiating committee that has representatives from each group," says Mr. Miller. "In these committee meetings, talk about goals of the practice, operational issues, legal concerns and how you want the merging process to happen — where do you want to end up?"
If you are two smaller groups of equal size merging into one bigger group, you should discuss whether there will be one surviving organization or a whole new entity will be created.
2. Begin with the end in mind. In the initial meetings between the two groups, there are several aspects of the merger each side should recognize and discuss. Here are a few questions the surgeons, as a large group, should consider:
• Why do we want to merge?
• Are there due diligence issues we should address?
• Is either side facing a big event, such as entering into a hospital partnership or the departure of a senior surgeon?
• What do we want our merged group to look like?
• Where will there be room for growth in the future?
"Asking these questions is part of how you will structure the practice after bringing both parties together," says Mr. Miller. "In some cases, orthopedic group leaders know if they want their group to survive, they need to become larger because there is power in numbers. They may not be able to afford a capital investment, such as an electronic medical record system or leasing a bigger space, without the larger group. In other cases, there might be a legal issue, such as an audit or malpractice lawsuit, that could be an incentive for moving forward."
It's important to understand at the beginning how each group will benefit from the merger and baggage from either side. If one group has legal or financial concerns going into the merger, the groups may decide to draw up an agreement showing the second group isn't responsible for the first group's financial obligations. On the other hand, the groups may decide they will deal with the financial obligations together, but it will impact the responsible group's compensation more heavily going forward.
3. Seek expertise from an adviser. The biggest mistake orthopedic groups make when deciding to merge is signing on the dotted line too quickly without consulting an outside adviser. "Typically, you want to work with a confident adviser before officially merging together," says Mr. Wold. "You need to walk through and form a business plan to see where there might be potential issues."
One of the first thing groups should do is put together a decision-making tree and governance structure to resolve contentious issues as they arise. Another aspect of the practice structure that must be reviewed in the early stages of the agreement is physician review. "You need to have processes in place for peer review and dealing with inappropriate physician behavior," says Mr. Wold. "Discuss this protocol in advance. If you can get these issues ironed out early on, it increases the probability for success."
4. Discuss how the merger will impact existing contracts. As separate entities, each practice has its own managed care, payor and hospital contracts which will change after the merger. Both groups must understand their individual contracts and how the third party will view a potential merger. The third party could view the merger positively, because a bigger group will be more effective, or negatively because a larger group equals stiffer competition.
"If each group has contracts already, figure out which group has the best terms and determine how easy it will be to include the merged group into those contracts," says Mr. Miller. Sharing this information among former competitors sometimes makes group leaders squeamish, but will be necessary for the merger to succeed. Both groups can sign a confidentiality agreement before any information is exchanged, which serves to prevent any sensitive information from leaving the group.
5. Sign a confidentiality agreement. Confidentiality agreements between the two groups are crucial, even if the merger is between groups with a history of friendship. This agreement will allow both groups to share the information necessary for entering into a trusting relationship that ends in a merger between two former competitors.
"You might have some reticence about sharing information because you don't want your competitor knowing what you do," says Mr. Miller. "The confidentiality agreement will give both sides incentive to speak openly and negotiate exclusively with each other for a period of time. The agreement may state that once the letter of intent is signed, both groups are bound together. If one group decides to leave after that time, there will be a financial penalty."
The financial penalty for either side leaving after confidential information has been shared incentivizes both groups to have serious intentions of moving forward with the merger, but allows the groups to separate if the deal does fall apart.
6. Decide how ownership and management will be distributed. In any situation where groups are coming together, each shareholder in an equity agreement will receive a smaller percentage of the larger company. If the group goes from five to 10 physicians, the five physicians previously held 20 percent of the practice; after the merger, they hold only 10 percent of the larger practice.
"You have to figure out whether holding a smaller piece of the bigger pie will make you more successful," says Mr. Miller. "You must also discuss leadership within the new group so everyone knows who will run the show."
7. Devise a management structure. In most organizations, one person becomes the elected leader of the group. There are practices with co-leaders — or one governing leader and one medical leader — but these can be difficult situations.
"Typically, I see one physician — the champion physician — who has the vision for a larger group and is a rainmaker among his fellow partners, becoming the driving force of the merger," says Mr. Wold. "This person is also likely to become the leader of the larger group. There is always one rainmaker who is respected, well-known and the catalyst of for moving forward."
When a leader or co-leaders are identified, the group should create a governing board with representation on each side. If the groups are of equal size, the board might be of equal size as well. However, if a group with 10 physicians merges with a group of five physicians, the larger group may have two people on the board to the smaller group's one.
"Even when you have a combined governing board, it can take a while to decide how the board will be structured," says Mr. Miller. "If you have both merging groups evenly represented, the board could be deadlocked on a controversial issue. One group may need to have more representatives so they can ultimately decide a disputed issue."
8. Integrate the culture of the group. It's important for both groups to have similar cultural values so they can work together. "The biggest challenge I see in practices coming together is merging the different personalities and cultures," says Mr. Wold. "I can sit down with a group of 20 physicians from three or four different practices and they'll become excited about the savings they could accomplish through a merger. But at that point, they don't trust each other. Every group has their own personality and culture."
In these situations, Mr. Wold often suggests a merger model where practices come together as one corporation but still exist as separate entities — or divisions — of the main group. This structure also allows surgeons from different groups to maintain overhead preferences for running their practices. Some groups may want to use RNs, others want medical assistants; some want to spend more on granite countertops, others prefer cost-saving tile.
"Under this model, a group will come in and you allow that division to have a tremendous amount of control and autonomy for decisions that effect the day-to-day operations of their practices," says Mr. Wold. "These decisions are made by the physicians in that group. You can even provide separate accounting for each division and allow the divisions to split profits on their own. This arrangement creates the best of both worlds because you have the cost savings of group purchasing, but in your daily operations there isn't significant change."
Note that, as Mr. Miller indicates, the combined group must have a minimum level of integration to meet Stark law and other regulatory requirements.
9. Bring operational systems together. Beyond just the culture, both groups must decide how to integrate billing systems, medical records and staff procedures. "One group's systems and methods may be better and will be used following merger, but in other cases the merged group may decide to purchase a whole new software or computer system," says Mr. Miller. "Don't expect major economy of scale savings right away if the merged group finds that it needs all new billing, EMR and computer systems. Further, all existing information must be transferred to the new systems and the group must decide how to store old records."
If one group does need to purchase all new systems, funding for those projects should be factored into the final agreement. This is one area where mergers could initially be an extra cost instead of a cost savings. However, there are other options as well.
"I see a lot of groups struggling to merge their billing departments decide to outsource the service all together," says Mr. Wold. "After outsourcing the billing department, the old offices can be converted into additional examination rooms or house ancillaries. In this situation, we typically see better overall collections because the group is able to afford a better level of business structure."
10. Look for regulatory red flags of your potential partner. When your group merges with another, you may take on the responsibility for the other group's actions unless you contractually provide otherwise. "At the end of the day, from a legal perspective, you are all partners," says Mr. Wold. "If you don't feel comfortable philosophically with the group who wants to merge with you, don't move forward. I've seen physicians who have expressed concerns about quality of care and ethics issues, and those agreements don't tend to work well."
Be wary of federal regulation compliance as well. If the other group hasn't taken steps to fully comply with Medicare billing regulations or the Stark Law, this could be a red flag for potential problems and ultimately failure in the future. "Regulatory issues may not be evident just from looking at the financials or at contracts," says Mr. Miller. "If an earlier audit identified problems but further regulatory action is pending, this information may not be easily found by due diligence. You may need to interview practice partners to figure out whether there are any hidden issues."
Another place to look for compliance is with the group's ancillary services. There are specific requirements physician groups must meet when they own ancillary services, such as physical therapy or imaging, and a potential partner not meeting these standards could spell trouble.
"If you review the other group's financial information and it doesn't seem like there is compliance or the documentation is lackadaisical, that's a red flag," says Mr. Miller. "In other cases, their records may be vague and it's difficult to tell whether they are compliant. Look at their claims history as well as demand to see the results of audits or compliance reviews."
After the completed merger, it may not be necessary for all individual office locations to provide the same ancillary services. "When we consolidate ancillary services — such as a rehabilitation center — they are more likely to flourish," says Mr. Wold. "On the other hand, a group of three or four surgeons may not have been able to afford an MRI before the merger, but after coming together they can strategically acquire one."
Related Articles on Orthopedic Practices:
8 Upgrades for Orthopedic Practices This Year
15 Statistics for Orthopedic Surgeon Compensation by Demographic Location
How to Grow an Orthopedic Practice: 4 Business Principles of DISC Sports and Spine Center
"There is so much fear and uncertainty right now related to healthcare reform," says Dave Wold, CEO of Health Information Services, who played a critical role in eight successful mergers to grow Illinois Bone & Joint Institute. "You see physicians wondering if the complexity of running their medical practice might be too much. Others want to remain independent and they emphasize coming together with other groups for strength in numbers. Fifteen physicians have more influence when dealing with hospitals and payors than four or five."
Mr. Wold and Wayne J. Miller, Esq., a healthcare transaction and regulatory attorney and founding partner of Compliance Law Group in Los Angeles, Calif., discuss 10 things every orthopedic group should know for a successful merger.
1. Devise a core committee of leaders from both groups. Whether you are merging two practices of equal strength or a large group with a smaller group, talks should begin among a small core group of physician leaders on both sides. Bringing all physicians into the initial discussions can become unproductive because there are so many voices in one room. Instead, the core group of leaders can represent each side and iron out intricacies of the agreement more efficiently.
"Start with a negotiating committee that has representatives from each group," says Mr. Miller. "In these committee meetings, talk about goals of the practice, operational issues, legal concerns and how you want the merging process to happen — where do you want to end up?"
If you are two smaller groups of equal size merging into one bigger group, you should discuss whether there will be one surviving organization or a whole new entity will be created.
2. Begin with the end in mind. In the initial meetings between the two groups, there are several aspects of the merger each side should recognize and discuss. Here are a few questions the surgeons, as a large group, should consider:
• Why do we want to merge?
• Are there due diligence issues we should address?
• Is either side facing a big event, such as entering into a hospital partnership or the departure of a senior surgeon?
• What do we want our merged group to look like?
• Where will there be room for growth in the future?
"Asking these questions is part of how you will structure the practice after bringing both parties together," says Mr. Miller. "In some cases, orthopedic group leaders know if they want their group to survive, they need to become larger because there is power in numbers. They may not be able to afford a capital investment, such as an electronic medical record system or leasing a bigger space, without the larger group. In other cases, there might be a legal issue, such as an audit or malpractice lawsuit, that could be an incentive for moving forward."
It's important to understand at the beginning how each group will benefit from the merger and baggage from either side. If one group has legal or financial concerns going into the merger, the groups may decide to draw up an agreement showing the second group isn't responsible for the first group's financial obligations. On the other hand, the groups may decide they will deal with the financial obligations together, but it will impact the responsible group's compensation more heavily going forward.
3. Seek expertise from an adviser. The biggest mistake orthopedic groups make when deciding to merge is signing on the dotted line too quickly without consulting an outside adviser. "Typically, you want to work with a confident adviser before officially merging together," says Mr. Wold. "You need to walk through and form a business plan to see where there might be potential issues."
One of the first thing groups should do is put together a decision-making tree and governance structure to resolve contentious issues as they arise. Another aspect of the practice structure that must be reviewed in the early stages of the agreement is physician review. "You need to have processes in place for peer review and dealing with inappropriate physician behavior," says Mr. Wold. "Discuss this protocol in advance. If you can get these issues ironed out early on, it increases the probability for success."
4. Discuss how the merger will impact existing contracts. As separate entities, each practice has its own managed care, payor and hospital contracts which will change after the merger. Both groups must understand their individual contracts and how the third party will view a potential merger. The third party could view the merger positively, because a bigger group will be more effective, or negatively because a larger group equals stiffer competition.
"If each group has contracts already, figure out which group has the best terms and determine how easy it will be to include the merged group into those contracts," says Mr. Miller. Sharing this information among former competitors sometimes makes group leaders squeamish, but will be necessary for the merger to succeed. Both groups can sign a confidentiality agreement before any information is exchanged, which serves to prevent any sensitive information from leaving the group.
5. Sign a confidentiality agreement. Confidentiality agreements between the two groups are crucial, even if the merger is between groups with a history of friendship. This agreement will allow both groups to share the information necessary for entering into a trusting relationship that ends in a merger between two former competitors.
"You might have some reticence about sharing information because you don't want your competitor knowing what you do," says Mr. Miller. "The confidentiality agreement will give both sides incentive to speak openly and negotiate exclusively with each other for a period of time. The agreement may state that once the letter of intent is signed, both groups are bound together. If one group decides to leave after that time, there will be a financial penalty."
The financial penalty for either side leaving after confidential information has been shared incentivizes both groups to have serious intentions of moving forward with the merger, but allows the groups to separate if the deal does fall apart.
6. Decide how ownership and management will be distributed. In any situation where groups are coming together, each shareholder in an equity agreement will receive a smaller percentage of the larger company. If the group goes from five to 10 physicians, the five physicians previously held 20 percent of the practice; after the merger, they hold only 10 percent of the larger practice.
"You have to figure out whether holding a smaller piece of the bigger pie will make you more successful," says Mr. Miller. "You must also discuss leadership within the new group so everyone knows who will run the show."
7. Devise a management structure. In most organizations, one person becomes the elected leader of the group. There are practices with co-leaders — or one governing leader and one medical leader — but these can be difficult situations.
"Typically, I see one physician — the champion physician — who has the vision for a larger group and is a rainmaker among his fellow partners, becoming the driving force of the merger," says Mr. Wold. "This person is also likely to become the leader of the larger group. There is always one rainmaker who is respected, well-known and the catalyst of for moving forward."
When a leader or co-leaders are identified, the group should create a governing board with representation on each side. If the groups are of equal size, the board might be of equal size as well. However, if a group with 10 physicians merges with a group of five physicians, the larger group may have two people on the board to the smaller group's one.
"Even when you have a combined governing board, it can take a while to decide how the board will be structured," says Mr. Miller. "If you have both merging groups evenly represented, the board could be deadlocked on a controversial issue. One group may need to have more representatives so they can ultimately decide a disputed issue."
8. Integrate the culture of the group. It's important for both groups to have similar cultural values so they can work together. "The biggest challenge I see in practices coming together is merging the different personalities and cultures," says Mr. Wold. "I can sit down with a group of 20 physicians from three or four different practices and they'll become excited about the savings they could accomplish through a merger. But at that point, they don't trust each other. Every group has their own personality and culture."
In these situations, Mr. Wold often suggests a merger model where practices come together as one corporation but still exist as separate entities — or divisions — of the main group. This structure also allows surgeons from different groups to maintain overhead preferences for running their practices. Some groups may want to use RNs, others want medical assistants; some want to spend more on granite countertops, others prefer cost-saving tile.
"Under this model, a group will come in and you allow that division to have a tremendous amount of control and autonomy for decisions that effect the day-to-day operations of their practices," says Mr. Wold. "These decisions are made by the physicians in that group. You can even provide separate accounting for each division and allow the divisions to split profits on their own. This arrangement creates the best of both worlds because you have the cost savings of group purchasing, but in your daily operations there isn't significant change."
Note that, as Mr. Miller indicates, the combined group must have a minimum level of integration to meet Stark law and other regulatory requirements.
9. Bring operational systems together. Beyond just the culture, both groups must decide how to integrate billing systems, medical records and staff procedures. "One group's systems and methods may be better and will be used following merger, but in other cases the merged group may decide to purchase a whole new software or computer system," says Mr. Miller. "Don't expect major economy of scale savings right away if the merged group finds that it needs all new billing, EMR and computer systems. Further, all existing information must be transferred to the new systems and the group must decide how to store old records."
If one group does need to purchase all new systems, funding for those projects should be factored into the final agreement. This is one area where mergers could initially be an extra cost instead of a cost savings. However, there are other options as well.
"I see a lot of groups struggling to merge their billing departments decide to outsource the service all together," says Mr. Wold. "After outsourcing the billing department, the old offices can be converted into additional examination rooms or house ancillaries. In this situation, we typically see better overall collections because the group is able to afford a better level of business structure."
10. Look for regulatory red flags of your potential partner. When your group merges with another, you may take on the responsibility for the other group's actions unless you contractually provide otherwise. "At the end of the day, from a legal perspective, you are all partners," says Mr. Wold. "If you don't feel comfortable philosophically with the group who wants to merge with you, don't move forward. I've seen physicians who have expressed concerns about quality of care and ethics issues, and those agreements don't tend to work well."
Be wary of federal regulation compliance as well. If the other group hasn't taken steps to fully comply with Medicare billing regulations or the Stark Law, this could be a red flag for potential problems and ultimately failure in the future. "Regulatory issues may not be evident just from looking at the financials or at contracts," says Mr. Miller. "If an earlier audit identified problems but further regulatory action is pending, this information may not be easily found by due diligence. You may need to interview practice partners to figure out whether there are any hidden issues."
Another place to look for compliance is with the group's ancillary services. There are specific requirements physician groups must meet when they own ancillary services, such as physical therapy or imaging, and a potential partner not meeting these standards could spell trouble.
"If you review the other group's financial information and it doesn't seem like there is compliance or the documentation is lackadaisical, that's a red flag," says Mr. Miller. "In other cases, their records may be vague and it's difficult to tell whether they are compliant. Look at their claims history as well as demand to see the results of audits or compliance reviews."
After the completed merger, it may not be necessary for all individual office locations to provide the same ancillary services. "When we consolidate ancillary services — such as a rehabilitation center — they are more likely to flourish," says Mr. Wold. "On the other hand, a group of three or four surgeons may not have been able to afford an MRI before the merger, but after coming together they can strategically acquire one."
Related Articles on Orthopedic Practices:
8 Upgrades for Orthopedic Practices This Year
15 Statistics for Orthopedic Surgeon Compensation by Demographic Location
How to Grow an Orthopedic Practice: 4 Business Principles of DISC Sports and Spine Center