Key trends in physician compensation and practice acquisition: 4 questions with Kyle Tormoehlen

Independent physicians across the country are deciding whether to sell their practices and become hospital employees, affiliate with other independent groups or remain solo practitioners.

Kyle Tormoehlen, Principal at Sullivan, Cotter and Associates, examines the practice acquisition and how physicians can optimize the value of their practices.

Q: What is the biggest trend you're seeing in physician practice transactions today? Are you seeing more interest in acquisition by hospitals? Do you expect that to continue?

Kyle Tormoehlen: Practice acquisitions are becoming increasingly complex as the remaining independent practices tend to be larger (greater number of full time employees) with stronger financial fundamentals. These practices therefore have greater negotiating leverage with potential buyers. It is also becoming more common for physician practice transactions to have additional components such as an ambulatory surgery center or real estate.

We have observed deal saturation in some of the more mature markets where the acquisition trend started 10 or more years ago. However, practice acquisition deal flow remains strong as hospitals and health systems continue to utilize practice acquisition as a preferred method for physician alignment. We believe that we are a minimum of five years off before we will see practice acquisitions slow down nationally.

Q: How can physician practice leaders ensure they're creating a fair compensation program as the practice evolves? What could change after an acquisition?

KT: Practice leaders that solicit input from physicians and actively incorporate that input into their compensation model are more effective in fostering a greater sense of transparency and collective strategy throughout the practice. In conjunction with regular compensation assessments and comparisons to prevailing market benchmarks and trends, an evolving practice must create a flexible incentive structure that promotes common organizational objectives in quality and efficiency and also rewards outstanding individual efforts.

Post-acquisition, physicians often lose their autonomy to make certain decisions and may feel disconnected with the new compensation philosophy. It is important for hospitals and health systems to have open communication with members of the acquired practice and provide a platform for physician input on compensation structure and goals.

Q: What are the biggest mistakes you see physicians make as they prepare to sell their practices? Are those mistakes similar between small and large groups?

KT: It is a common mistake for independent groups not to retain legal advisors and valuation experts. Hospital and health system buyers have access to buy-side experts such as transaction attorneys, business appraisers and C-suite level executives with significant experience in acquiring physician practices. Potential buyers will require an intensive due diligence review whereby the practice will be asked to disclose detailed financial and operational data. There can be a sense of uncertainty from physician owners on what data to provide and how to best answer follow-up questions. This can stall a transaction or lead to a lower offer. Legal and valuation advisors understand the sale process and how buyers assess practice value. They have the requisite experience to navigate a transaction and maximize purchase price and/or post-acquisition compensation within the parameters of fair market value.

Q: Where do you see the biggest opportunities for independent physicians to maximize the value of their practices today?

KT: Independent physicians should seek opportunities that increase the available cash flow to the acquirer in order to maximize their practice value. These opportunities may include: (i) the utilization of advanced practice clinicians; (ii) capturing ancillary revenue streams; and (iii) reductions to direct practice expenses and overhead. It is important to understand that cash flow available to the buyer must include fair market value compensation for practice providers. Accordingly, it is important that the physician group perform the necessary diligence to determine whether they are better off with a higher purchase price or greater post-acquisition compensation. However, this determination can be further complicated by internal practice dynamics such as physician age and years until retirement.

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