6 things hospitals and private equity firms think about when trying to acquire your practice

There was a time when physicians dominated in the arena of medical practice ownership, laying claim to approximately two-thirds of all such entities. But according to the public accounting and consulting firm Crowe Horwath LLP, times — and the hands that hold the reins — have changed.

The past decade has beckoned a recycled business fad to the forefront of healthcare; factions of hospitals and private equity firms are absorbing physician practices as a means to further their reach across the medical spectrum whilst simultaneously assuaging physician desires for stability during a wispy economic climate. Buyers are fixing to fulfill their roles while physicians are weighing their sacrifices, contemplating what morphing from owner to owned means on both the individual level and the practice platform. Brian Kerby, director in Crowe's Transaction Services group, remarked that for most docs, the comfort of merger makes the switch worthwhile.

“Physicians are selling their businesses, at the end of the day, in favor of a steady paycheck, better benefits and really the looming prospect of healthcare reform,” Kerby said. “They’re tired of being business executives and this provides them the opportunity to have someone else run the practice. So the shift in ownership stake means that the physicians are giving up control, [and] most of the physician’s administrative burdens will decrease along with a change in their compensation structure. At the same time, buyers will be giving these doctors access to capital and technology to hopefully help them gain competitive advantages over their competitors.”

Data released by Irving Levin Associates in June revealed that during the second quarter of 2012, 21 physician practice mergers and acquisitions occurred to the tune of $4.2 billion — a large leap from 2011 figures compiled during the same quarter. Additionally, 27 deals went down with a total value of $416 million. What’s more, analysts believe this is only the beginning.

“You’re going to be seeing more hospitals buying physician practices to control referral sources and to have a better and bigger say in quality as they start to get penalized for readmissions,” Stephen M. Monroe, editor of the company’s Health Care M&A Report, told amednews.

"The market for the acquisition of physician practice groups is robust. As more medical groups are bought out, the price for those remaining on the market may increase, especially as hospitals and private equity firms compete for a shrinking pool of talent," Ron Ralph, a partner in Crowe's Audit practice, added in a news release. "Buyers that treat targets fairly throughout the acquisition process, and especially during negotiations, stand a good chance of achieving their goals and improving their competitive position for the years ahead."

Alongside such “happy” thoughts, Kerby listed five other things buyers think about when usurping a physician practice:

• The seller's motivation. Physician practice groups can face looming costs for employee benefits, malpractice insurance and required innovations like electronic health records. Does the practice have the resources to cover these expenditures, or does the group need a capital infusion? Does the group need help developing a transition plan because one or more of its principal members is nearing retirement? Staying up-to-date with information technology, third-party billing and changing preauthorization requirements can also overwhelm some practices.

• Nonfinancial factors. Is there a chance that any physicians or key staff members are unhappy and would leave if the deal were to go through, potentially taking patients with them? How will the compensation physicians make as employees compare with what they are making as practice owners? Do the compensation structures provide performance incentives that align with desired outcomes? Is there any history of fraud in the practice, and would any of those liabilities extend to the buyer?

• Primary-care or specialty practice? Some buyers prefer to add primary-care practices to provide their hospitals and specialists with additional sources of patients; others look to augment their capacity in medical specialties, which tend to have higher reimbursement rates. The acquisition of primary care or specialty medical practices may become part of a larger strategic decision when multiple hospitals consider forming an accountable care organization (ACO). The purpose of an ACO is to provide a continuum of medical care to Medicare patients while achieving cost savings and maintaining quality standards. Under the federal healthcare law passed in 2010, healthcare providers can receive financial incentives for forming ACOs.

• Post-merger integration. Most hospitals have an individual or team dedicated to serving as a liaison between physician practice groups and the rest of the organization. This administrator or team needs to be able to work on behalf of both the hospital and the physician practices and be able to negotiate issues effectively and fairly. Buyers looking at the deal should consider who could fill this role.

Cash-flow considerations. Buyers should be prepared for possible cash-flow delays, depending on whether the acquisition is structured as a stock or asset purchase. In a stock purchase, buyers typically assume the tax ID or provider numbers of the physicians, which allows them to start billing under those credentials immediately. However, when making a stock purchase, buyers also assume all risks associated with the practice, including hidden liabilities and past fraud. In an asset purchase, on the other hand, buyers typically have to "re-credential" the physicians, which requires obtaining new billing numbers from Medicare, Medicaid and other third-party payers. The process can take months. However, these buyers rarely have to assume responsibility for any liabilities or past fraud. Conducting detailed due diligence on the acquisition can help a buyer structure the deal in the most beneficial way.

When prompted about the physician mindset, Kerby cited compensation as the top doctor contemplation during merger situations.

“The physicians need to ensure that the compensation post-acquisition will meet their expectation,” he said. “Although in lieu of giving up their administrative burdens, [physicians will] be asked to be more productive and achieve certain quality measures. As a result, they will earn a stable and reliable paycheck with proper incentives without having to worry about all of the regulatory changes that are coming down the pike.”

Continuing down the ramp, Kerby added that preparation is a two-way street and therefore both parties must do their part to account for all the mileage.

“Not only is the buyer doing due-diligence on the selling physician practice, I think that the selling physicians will want to do their diligence on the buyer, to make sure that they understand what they should expect and what the buyer will expect. The seller will want to understand the quality of the facilities and the technology capabilities. The buyer will want to understand the seller’s access to the information technology.”

Moreover, “the buyer will want to make sure that physicians will be loyal and engaged, be cost-effective, provide high-quality care, embrace new technology and be professional,” Kerby said.

Kerby emphasized a need for physicians to follow four codes of proper merger conduct to fit the seller bill:

(1)Be a professional; (2) make sure you cooperate; (3) be honest and forth-coming during the due diligence process; (4) and don’t expect this big payday when you sell your practice.”

While the acquisition trend often operates cyclically — “I think this trend of acquiring practices and then being independent has come full circle a couple of times. In the 90s, physician practices were integrating with mostly hospitals and then they split off, and now the physicians want back in” —merger may be the only path for smaller practices to follow.

“I think that physician practices, the smaller primary care ones, will continue to integrate in with hospitals. I don’t know how they’ll survive otherwise,” Kerby said.

Despite acquisitions not being supported by everyone in the medical community, Kerby concluded that for those physicians who do take the plunge, a return to their origins awaits.

“The physicians are allowed to concentrate on patient care again and that’s what they’re good at,” he said.