Why Merge Medical Practices

September 19, 2007

To download this article, click here: Why Merge Medical Practices

Somewhere in a physician’s professional career in private medical practice, there will likely be the opportunity to merge, acquire and/or sell his/her medical practice with another entity.  In fact, most physicians in private medical practice will encounter numerous opportunities for some type of merger or acquisition in the course of their careers.  The unstable and rapidly changing environment of health care has again intensified the interest of physicians to merge with other physicians who might share a common vision (Remember the merger activity of the mid to late 90’s?).  This is again leading to a resurgence of consolidation activity.

However, with this activity has also come the many examples of group disagreements, improperly planned mergers physician distrust, incompatibility, poor communication, lack of physician leadership, and contrasting visions, which in turn have led to demergers. Most of these pitfalls and eventual demergers are the result of inadequate due diligence by the groups prior to merging operations, management and leadership.  A demerger is one of the most expensive propositions a medical group can be involved in – at least twice to three times more expensive than a well-planned merger, and that is without considering the impact of lost revenues from decreased production and inefficient operations.

With horror stories like this, why should physicians even consider merging at all?  Actually, there are many benefits to a merger for all of the participants.  A well-planned merger can not only improve the financial performance of a group of physicians; it can also help secure its future in the market place.  Let’s examine some of the benefits that can be derived from a well-planned and executed merger.

One of the greatest benefits derived from a merger of independent medical practices is the increase in negotiating leverage.  One of the best types of leverage with insurers, payors, hospitals and suppliers is size.  As medical practices increase in size (and many times in geographic locations), their ability to utilize this network to their advantage in negotiations becomes quite evident.  The larger medical practice will generally find more opportunities for joint ventures, partnerships and affiliations.  In fact, many times hospitals and other organizations that did not formerly do business with the practice will come knocking on the door as new suitors.  As payors try to meet the consumer’s demand broader provider choices; larger clinics will be early targets for enrollment and will generally have the ability to negotiate more favorable contractual terms with the payor.

Another benefit to consider for a merger is the barrier it may present to competition for entry into the market.  Smaller groups and solo practitioners will think twice before opening a medical practice in a market that is already adequately covered by a larger group of physicians.

The most frequently discussed benefit of a medical practice merger by physicians is economies of scale.  The theory is that the combined groups can reduce duplicative expenses by using their size as leverage – for instance, negotiating larger volume discounts from supply and equipment vendors because of their anticipated higher usage.  Professional fees also are generally less per physician when shared in a larger group.  Additionally, many merger plans include the intention of eliminating redundancy and the costs associated with duplication of facilities, equipment and staff training Typically included is a plan to eliminate some of their full-time equivalent (FTE) employees once the merger is completed.  However, keep this in mind – It has been my experience that, due to the cost of a merger and the complexity of actually combining cultures and operations of two or more practices, even a well-planned merger might not realize significant economies of scale in the first year.

As patients (consumers) have more and more choice about their physicians and the related health care they receive, marketing has returned to importance for medical groups.  A larger group can usually afford a more comprehensive and extensive marketing campaign, which generally results in a greater return on its invested dollars if done well.  Although raising capital has not traditionally been a big issue for physicians, it is a pressing need for medical groups today.  Progressive medical groups need capital to invest in new partners, new markets, new revenue streams, medical practice management systems, sophisticated clinical equipment or new facilities (i.e. ambulatory surgery center or medical office building).  Simply put, to be successful today, medical practices need access to more money.  Larger groups obviously can pool their resources to be more effective at  these and other strategic but capital-intensive activities.

In today’s business environment, medical practices must have strong physician leadership.  Quite often medical groups will reach a point in their lifecycles when their internal physician leadership wanes.  A merger offers the opportunity for a group in this position to merge with a group of similar culture can provide good strong physician leadership to the new entity.  And not only do medical groups need strong physician leadership but they also need a strong qualified management team.  Mergers allow groups the opportunity to attract talented management teams and place them into challenging areas where they can perform to the best of their abilities.

Good medical practice management and EMR systems clearly are the lifeblood for cash flow and strong financial operations of a physician practice.  An increasingly complex business environment requires medical practices to invest in medical practice management systems that will provide continuing functionality to meet the demands of this volatile marketplace.  For larger groups, purchasing and upgrading these systems is more cost effective on a per doctor basis, since the total cost can be spread over more investors.  Also, as technology continues to evolve, larger medical groups will have the advantage over smaller groups in researching, investing in and implementing these state-of-the-art practice management systems, as they become available.

The following are other advantages to a physician practice merger: (a) As physicians are able to move into larger groups and share that call coverage, their quality of life improves; (b) When the practices merge, the combined entity is able to utilize physician extenders to their maximum capacities; (c) A successful merger generally infuses new synergy into the entire group, typically leading to a stronger united group practice that is better equipped to deal with the competitive pressures in today’s health care business environment; and (d) Practice mergers provide the participating physicians with new partners whom  they can count on to assist them personally, financially and probably most importantly, clinically.  A strong partnership has the ability to share knowledge and experiences and to learn from one another while on a mission with the same purpose.

I firmly believe there will continue to be an explosion of group practice consolidation with mergers of small and larger practices on a regular basis.  It is very evident that physicians who want to survive and be successful in health care in upcoming years must make structural and cultural changes that allow them to incorporate with other physicians.  Physicians will need to adapt, manage and even lead the transition in health care. I believe that many groups will meet these new challenges by committing to the required due diligence and then successfully implementing medical practice mergers to secure their future in the market place.

To download this article, click here: Why Merge Medical Practices

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