Physician Practices: The Art of The Merger

ConferenceHealthcare transactions are usually between a smaller to middle physician practice and a larger entity like a hospital health system or another similar form.  In these larger scale transactions, there has been much coverage on the reasons behind the moves and how to navigate their structure.  While these transactions are important, there are also physician practice to physician practice mergers going on in the market.  The Ambulatory M&A Advisor examines the frequency of these types of deals, why owners make this move, and the challenges that come with physician to physician mergers.

Structural Differences

When discussing the structural differences between physician to physician mergers and larger mergers Geoff Cockrell, partner with McGuire Woods LLP says that there are many reasons for businesses to make this move.  Cockrell says that he sees a lot of consolidation in the provider arena for a number of reasons.

“In no small measure on account of scales, giving them opportunity for more contracting power with payors in particular, but also other purchasing power like the ability to have scale, to be able to afford higher level of information, technology, resources,” Cockrell says.

“The scale benefits of being bigger are often very attractive, but between that and other types of mergers…in various forms, those elements would be present, but I think the contracting power and IT resources have become more and more important, and expensive to make it harder for smaller practices to become competitive in those regards.”

Thomas Baker, shareholder with Baker Donelson says there are many differences between physician practice mergers and other health industry.

”For example, institutional provider mergers (like hospitals, skilled nursing facilities, ambulatory surgery centers, and home health agencies) provide one core service.  For medical practices, each physician is a provider.  Consequently, future productivity is tied to performance by a number of individuals.  Also, distribution of revenue from ancillary services such as radiological imaging and physical therapy is controlled by the Stark Law, and there are myriad ways that Stark regulated revenue can be distributed.  In that regard, it is possible to allocate Stark revenue to divisions of the medical practice that consist of five or more physicians, but there must be at least five physicians in each pod.  Last, there are many operational issues, such as taking call and coverage at hospitals, how to deal with aging physicians, admitting new owners, and determining how to deal with private insurance contracts since payor agreements are attached to specific tax identification numbers,” Baker says.

Norman Winland, an urgent care consultant with 24 years of experience in the industry, says the primary goal in these types of deals is to gain market share and increase revenues quickly as opposed to slower de novo growth.  Acquiring clinics in a neighboring and complimentary market serves to expand the footprint of influence and name recognition in the community is key, he says.

“Another goal is to gain expertise that the acquired company may have.  For example, if you are an organization that doesn’t provide occupational medicine but the acquired company does, then the synergies and expertise obtained through the acquisition reach much further than simple market share.  The skills and talents of the personnel as well as the systems and processes obtained as a result of the acquisition are often times just as valuable as the additional locations.” Winland says.

A good example of added expertise through M&A is revenue cycle management.

“If the target company being acquired has an efficient in-house revenue cycle team and the buying company outsources it, then the acquisition provides a good foundation for bringing revenue cycle processes in-house after the transaction.  Making the acquisition gives the buyer an experienced team in which to build upon instead of starting from scratch.’ Winland says.

It should be noted that physician practices and urgent care fall under the same category, and that urgent care is a retail delivery channel for medical care.  Therefore, the acquisitions seen are typically intended to increase the reach of the retail footprint by adding additional locations.

Transaction Frequency and the Pull of the Deal

Cockrell says that these types of transactions and mergers are actually common in the field and take a number of forms.

“There are whole segments of physician practices that are in the midst of consolidation.  Many of them are of the more retail variety, meaning less hospital based practices like Dermatology, or Ophthalmology.  Those are often private equity backed rollups where the value proposition is a combination of things of scale being worth a higher multiple of their EBITDA, so that you can buy smaller things at a lower EBITDA and sell them for a higher EBITDA multiple and arbitrage that difference,” Cockrell says.

“Also, they tend to be the type of areas where centralized management over these diverse multi-site types of sectors, can offer significant efficiencies like centralized billing, purchasing, scheduling, things like that; where the consolidation, regardless of the multiple, could make the businesses more valuable.”

Cockrell says that these businesses tend to be multi-site practices where de novo opportunities can be significant like opening new Dermatology practices within an area or more urgent care centers which are also structurally practice based.

“In my space, where I do a lot of private equity work in healthcare, there has been an intense amount of investment in this consolidation of a number of these multi-site type practices.  There has been an intense amount of investor activity in funding management companies that are supporting and connected to these practices,” Cockrell says.

Baker says the common place of these deals depends on local market conditions.  In general, inefficient markets consolidate, so there is more activity in markets where the medical practices have limited bargaining power.

“In general, we see more horizontal mergers (creating larger medical practices in a single specialty) than vertical mergers (creating multispecialty groups).  As more and more medical practices are acquired by hospitals and health care delivery systems, I expect that we will see more independent medical practice mergers, particularly horizontal mergers,” Baker says.

Aside from creating medical practice protection and value, Baker says the pull for these types of deals is the benefits.

“The benefits are greater bargaining power in compliance with antitrust law and, if done properly, economies of scale with respect to administrative overhead.  Also, the health care economy is changing from a purely “fee for service” economy to an economy with coordinated care payment models that involve closer management of patient health and merit and performance based compensation, and, to some degree, there is “safety in numbers.”” He says.

Cockrell says an urgent care business is itself a physician practice, structurally; an ASC is not a physician practice, and gets compensated on facility based fees.

“Alongside that, you may have a physician practice that supports the ASC, maybe even owns the ASC, or there is an overlapping relationship between the practice and the ASC.  Practices are usually acquired by either hospitals or other practices.  I think the main reason for doing a similarly sized merger would be to achieve those economies of scale for purposes of payor contracting, information technology and other areas where scale helps avoid duplication of those efforts that they were encountering when they were separated, or limited negotiating power that they had with payors when they were separated,” Cockrell says.

Challenges in the Merger

When discussing the challenges that these mergers create, Cockrell says the payor contracting itself can be challenging to navigate.  Depending on the specialty, the politics of a number of strong personality physicians that may be in sectors where they do quite well to begin with can be a challenge.  Structural challenges relating to limitations on corporate practice of medicine, and then typical regulatory issues can arise around billing or coding, Stark or Anti-kickback rules finding that one side of that has issues in those areas.  The issues are not always things that they have done wrong, but closer calls that they have made.

Baker says that in addition to the challenges identified above, some of the greatest practical challenges come from determining a new governance structure that satisfies each party’s need for managerial control and identifying voting and approval rights for acts such as investing in capital items.  From a purely legal perspective, there is the challenge of complying with antitrust law because the discussions are typically between competitors in the market and there are strict rules for sharing price information.

Discussing legal areas in these deals, Cockrell says that often, depending on the nature of the parties involved, navigating corporate practice of medicine is always a challenging issue that parties often navigate very carefully.

Baker adds that regulatory compliance, due diligence and structuring involves the Stark Law and the federal Anti-Kickback Statute and antitrust law.

“There may also be state law issues, such as application of the “corporate practice of medicine” doctrine and state laws governing physician referrals,” Baker says.

If you would like to learn more about the concepts covered in this article, want to sell your business or discuss how Ambulatory Alliances, LLC might be able to help you out, contact Blayne Rush, (469)-385-7792, or

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