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When two become one: Understanding the ins and outs of physician practice consolidation

March 20, 2013

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Recently projected trends in health care provider reimbursement and regulation will likely motivate practice consolidations. Entering into a partnership with another practice may be one way to avoid selling out to a hospital. It might also help practices maintain autonomy while becoming a stronger force in the marketplace.

Combining forces is a solution midway between hospital employment and total independence in a small group practice. And it’s best pursued through a strategic planning process that follows a natural sequence of phases.

Consolidate, but remain functionally independent. Merging with another practice may not necessarily deprive you of continued autonomy. Physician group consolidations can take whatever form the parties choose. With competent advice, it’s possible to negotiate an arrangement that allows you to essentially remain a standalone practice but share certain elements with your partner practice to gain better leverage with payors and greater economies of scale.

Phase One

Most practice mergers occur when two sets of physicians become collegial and friendly, and then decide that it would be to their mutual benefit to practice as one. But a more businesslike and less risky approach is for one practice to decide it needs a strategic partner and then systematically look for good candidates.

The next step is to hold informal conversations between the potential merger partners, covering the business rationale for a consolidation and discussing whether combining forces would be a good fit for both organizations. As talks go on, the conversation should switch to developing a shared vision and goals, finding commonality among providers and specialties, maximizing the benefits of combining, and establishing high levels of trust and respect between the two entities.

If, after these talks, both sides commit to proceeding, the next step is to sign letters of intent and nondisclosure agreements.

Phase Two

There are several merger models that can take mini steps to a full merger.  All the models need to be explored.  You will need to review the impact on the revenue and the expenses.

Once both parties are comfortable with the merger, hire an advisor to help guide the group’s planning efforts. He or she should develop an action plan that includes a detailed timetable. Some of the tasks that must be performed include:

•    Gathering data and launching the due diligence process,

•    Determining the financial and tax impact of the group.  Preparing pro forma financial statements describing the combined entity after the consolidation has gone through,

•    Assessing the tax and accounting implications of the merger models,

•    Evaluate alternative legal structures and draft the documents,

•    Setting the terms of each physician’s buy-in to the new entity and their compensation model,

•    Setting the anticipated compensation structure, and

•    Polling the physicians to determine whether they wish to proceed with the consolidation.

Once the plan is approved, it’s time to implement the merger.

Phase Three

The merging parties must select a board of directors, officers and committee members. Their task will be to determine which facilities, equipment and other assets are redundant and should be eliminated. Most operational functions — billing and collections, on-call schedule, employee compensation and benefits, vendor relationships, patient relations, and referral source relations — must be consolidated.

The new practice will need to not only create a corporate and tax identity, but also find a malpractice carrier under which all physicians’ coverage can be consolidated. In addition, it must select a bank for the new entity’s checking account, line of credit and lock box. Other tasks that will need to be accomplished include:

•    Acquiring a practice management system, which may be accompanied by an EHR system,

•    Consolidating fee schedules,

•    Notifying Medicare, Medicaid and private payors of the change in the status and identity of the new entity, and

•    Announcing the new physician group to existing patients, referral sources and the public.

All of these tasks are essential to establishing a lock-tight, workable agreement.

As you can imagine, consolidating two entities into one can be challenging. But it is doable. Both parties must be willing to work together to form the union. As mentioned, it’s critical to bring in health care professionals that will work together to ensure the new entity is well constructed in accordance with state law.

Don’t want to consolidate? Alternatives are available

If your practice doesn’t wish to consolidate, there are other choices:

Focus on Quality & Improve Your Business Systems. Some physician groups have chosen to remain small but focus on efficient business systems such as some of the examples below.

Revenue Enhancement Programs

1.    Adding additional services.
2.    Coding education and coding reviews focusing on level of E&M coding.
3.    Monitoring and improvements in the revenue cycle (billing systems) such as ensuring no loss charges.
4.    Renegotiating the managed care contracts with the commercial payors to receive higher payments per CPT code.
5.    Loading the data tables in your billing system of the contracted payor amounts of what you are suppose to get paid from the payors insuring that when you post payments the payors are paying the correct amounts.
6.    Changing the office flow relationship between the EMR and the clinic support staff to shift the workload from the physicians to the supporting clinical staff for the purpose of increasing volume without increasing the worked hours per physician.
7.    Enhancing your patient referral program.

Expense Reduction Programs

1.    Bidding out medical and office supplies.
2.    Renegotiating the service agreements on selected equipment.
3.    Having your malpractice insurance re-priced annually by your agent.
4.    Reworking your health insurance plan.
5.    Consolidation of medical office locations.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.

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