Physiatry Practice Management Resources

Romance isn't the only area of life that can lead to a wedding. In business, groups with compatible goals and interests often decide to wed.

In other words, they merge.

Physician practices are no exception to this rule. Although physician practice merger activity has slowed slightly over the past few years, physician practices accounted for 19% of all merger and acquisition activity in the health care industry last year, according to Irving Levin Associates Inc.'s Physician Medical Group Acquisition Report.

But before two or more physician groups begin the lengthy and costly merger process, it's important for the groups to determine if a merger is really in their best interests, stress experts on physician practice mergers.

The more research that the physician groups do before starting the formal merger process, the more likely it is that the groups will make the right decision on whether to merge and avoid a painful, costly breakup a few years down the road.

"The No. 1 thing is that the groups have to have a clear, absolute understanding of why they want to do it. They need to test that and ask if their expectations are appropriate and can they achieve them [by merging]," said Darrell Schryver, a managing principal with the Medical Group Management Assn.

Physicians, especially ones who work in small practices, often want to merge their groups because they think it will help them achieve more leverage in their negotiations with managed care plans, said Reed Tinsley, a CPA with Reed Tinsley and Associates in Houston and co-author of the AMA Press book Physician Practice Mergers.

While larger groups often do have more negotiating leverage than smaller ones, that shouldn't be the only reason for the merger, he said.

Small groups also consider merging with other groups to achieve economies of scale and cut overhead, said Joey D. Havens, a shareholder with the Horne CPA Group in Hattiesburg, Miss., and co-author of Physician Practice Mergers. However, he noted that groups that merge should not expect to achieve those cost savings immediately because the groups first have to recoup their merger costs.

Groups also are attracted to merging because larger groups offer a better balance of work and personal life than small practices, Havens said.

"If you've got more partners to do call coverage, you are going to have a better lifestyle," Havens pointed out.

Small physician groups also are attracted to merging because bigger groups can invest in more sophisticated medical equipment, such as CT scanners, Tinsley said.

But even though there are several advantages to merging with another physician group, there are several disadvantages, too, experts say. They stress that any group that is considering a merger should go through a thorough due-diligence process to discuss all issues involved in the merger.

"Due diligence is the fact-finding process that establishes the framework of the merger itself. It is all about getting to know each other and evaluate the operational issues and to identify the deal-killers on the front end because a merger is so expensive," Havens said.

According to Physician Practice Mergers, a few of the many questions that the physicians in the groups considering a merger must address in the due-diligence process include:

• What is the primary benefit of this merger?
• How would this merger benefit patients?
• What are the short-term and long-term goals of the groups?
• How compatible are the work hours and patterns of the groups?
• Are there major differences in compensation methods among the groups and how will differences be worked out?
• Who will lead the group during the merger process and after the merger?

During the due-diligence process, which can take anywhere from a few months to a year, the interested groups should answer these questions and others, as well as identify any potential deal-breakers.

In many cases, it is helpful to hire an objective third party to facilitate the due-diligence process, experts say.

Issues that can break a merger deal, the experts say, included unresolvable differences over who will lead the merged group, conflicts regarding which staff will take on which responsibilities in the new group, "lone rangers" in the group who clearly want to go their own way, and disputes over physician compensation and retirement benefits.

For example, Schryver said, he recently worked on a merger deal that fizzled because one of the two groups couldn't compromise on the issue of who would lead the group.

A merger deal also can fall apart if the physicians in the two groups aren't both equally committed to the merger, Tinsley said. "People say they want to merge, but they want to stick their toes in the water, instead of diving in the pool. ... Everybody has to commit" for the merger to succeed.

"Go signals" for mergers include "common goals and visions," Havens said, "plus synergy between the physicians."

If the physician groups decide to go ahead with the merger, Tinsley said, the next step is to draw up the contracts and proceed with the regulatory and legal issues of closing the merger.

Julie A. Jacob

Other resources

AMA Press, to order Physician Practice Mergers (http://www.amapress.org/)

Irving Levin Associates, to order "The Physician Medical Group Acquisition Report" (http://www.levinassociates.com/publications/par/pardescription.htm)