Healthcare M&A is here to stay — 7 key thoughts for medical practice owners

Laura Dyrda -

Medical practice acquisition and integration is becoming commonplace in healthcare. Independent physicians, faced with regulatory changes, find advantages in joining a larger group or becoming employed by the hospital.

The health services sector merger and acquisition activity increased 25 percent in the first quarter of 2015 when compared with the same period last year. Disclosed transactions are up 19 percent, with the value up 92 percent overall, according to a PwC report.

The physician medical group sector saw strong interest from outside companies in the first quarter, and there was nearly $3.2 billion spent on physician groups last year, according to the "2015 Health Care Services Acquisition Report." There were 100 transactions in the hospital sector.

Last year, 60 percent of the ASC company respondents to HealthCare Appraisers' ASC Valuation Survey reported they planned to purchase one to five ASCs in 2015; another 25 percent said they'd purchase six to 10 ASCs this year. Most of the companies would be willing to pay a premium for ASCs in certificate-of-need states.

"Right now we are seeing quite a bit of activity in the market," says Stephen Rosenbaum, CEO of Interventional Management Services. "I see the transactions and consolidations trends continuing for a while."

The key factors driving consolidation in healthcare include:

• Lower reimbursements for procedures
• Increasing overhead
• Electronic medical record purchase
• Narrow networks/accountable care organizations
• Providers taking on more risk

"The way the landscape is shaping out, there is strength in numbers," says Gaylon Willis, VP of Business Development for Interventional Management Services. "It's difficult to survive as an independent practitioner without representing a larger number of patient lives. It's hard to have the leverage you need for a sustainable practice. It can be done, but there is strength in numbers which helps the physicians to be able to withstand the ups and downs of reimbursement changes and to subsequently enjoy a better quality of life."

There are more hospitals today acquiring physician practices and extending employment contracts to physician owners. But hospital employment isn't the only option; more entrepreneurial-minded physicians are joining larger physician practice networks or corporate entities.

There are multiple companies and models available among corporate partners, including Interventional Management Services, which acquires interventional pain-focused practices and integrates the physicians into the larger organization.

"In our business, physicians are integrally involved in how the business works. They have a say in how they run their business," says Mr. Rosenbaum. "Our preference is to partner with the physicians. Once the physicians join our group, they have access to a certain scale where they can take advantage of new opportunities and mitigate risk. Physicians are more engaged when they are partners in the business."

There are some hospitals and management companies that purchase 100 percent of the surgery center, but that isn't always the right situation to keep the ASC efficient. "If a physician is a meaningful part of the surgery center, we feel that being an owner is the responsible thing to do" says Mr. Rosenbaum. "Their mindset is changed because the staff, equipment and supplies are now theirs."

Here are seven key points for independent physicians to consider before making a sale:

1. Does the larger organization involve physicians? It's often a challenge for physicians to lose control of their practice after an acquisition, but if they're able to participate in the decision-making process as part of the larger organization, the transition is smoother.

2. What is the larger organization's philosophy? The larger organization should fit with the individual physician's culture and philosophy. "It's not just about the price; the company's philosophy is extremely important to consider," says Mr. Rosenbaum. "Be mindful of that going through the process."

3. Can you see yourself embedded in the organization's workflow? Take time for an onsite visit of the larger organization and consider the workflow. Spend a day at the practice or center to see how the days would flow after the sale, and ask employees about the organization.

"The employees will tell you a lot about the practice," says Mr. Willis. "Additionally, speak with the other physicians offline. You won't be the first person who has done a transaction with the organization, and there even may be other physicians in the same specialty who have been through a transaction. Speak with them about their experience."

4. What information systems are they using? The practice may need to purchase or incorporate new information management systems depending on what the larger organization uses. The systems change could have a huge impact on the ASC's workflow and organizational management during the integration.

5. Is the larger organization open to new best practices? Are you? The integration process requires both the larger organization and individual physician to examine current workflow and consider best practices for becoming one. Sometimes the larger organization has a more efficient process; other times the individual practice has better best practices.

"The acquirer has to keep an open mind," says Mr. Rosenbaum. "Sometimes there are processes that are better and when you apply your scale it can make a huge difference."

The integration will have an impact on the organization's staff as well as the physician's staff. "You can't underestimate that impact," says Mr. Willis. "Make a decision about which best practices to use before completing the acquisition."

6. Do you have good representation? "The best thing a physician can do before a transaction is hire a good banker to represent them in the process," says Mr. Rosenbaum. "I'm more attracted to deals where the physician has a representative. It's the banker's job to manage the process."

Hire independent representation apart from the buyer's representatives, and even apart from the representatives hired to manage both sides of the deal. Network with colleagues who have been through the process to find a good representative, or connect with corporate partners for a strong recommendation.

"If the representative won't put a book together for you, don't continue talking to them," says Mr. Willis. "They need to truly represent you and put a full book together to present your practice and to minimize the arduous back and forth that can occur during the vetting process. That shows how much they're willing to work for you."

7. Will there be a fair compensation plan? The independent physician's practice profitability drives his or her financial success; as part of a larger organization, the physician needs a fair and comprehensive compensation plan.

"It's about having a reasonable base salary and fair compliant incentive plans," says Mr. Rosenbaum. "You also have to make sure the incentive plan is compliant. There are some incentive plans that make sense and do a great job at motivating, but they might not be compliant. That's a huge issue for physicians."

This article is sponsored by Interventional Management Services.

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