About ABISA, LLC

CEO of ABISA, LLC a consulting company specializing in healthcare strategic growth initiatives.

Physician Group Post-Merger Integration

Closing the deal is a major milestone, but it’s the post-merger integration process where the real value is created. It may be difficult to believe, but the post-merger integration can be even more complicated than the deal itself. Communication is critical during the post-merger integration process, and the two groups need to share documents easily. Information must be transitioned seamlessly throughout and the whole integration process has to meet physician owners’ expectations for key timelines and capturing synergies in growth and costs.

Conducting post-merger integration at a high speed is one of the most critical elements to a deal’s success. Taking proactive action within the first 100 days post-closing can significantly realize deal synergies. Practice administrators working in concert with a seasoned consultant must develop a well-structured plan for their post-merger integration efforts to vastly improve their odds for a successful outcome.

The complexities of integration

Many physician owners spend months of time and effort closing merger transactions but stumble when it comes to integration. Oftentimes, buyers significantly underestimate the level of involvement in a successful integration effort. Common mistakes include:

  • Failing to properly assess the resources to integrate and operate two businesses
  • Not addressing “people issues” and cultural differences of the physician groups
  • Losing focus after the signing of a deal
  • Not acting promptly, allowing key personnel to leave both organizations
  • Overloading management with integration responsibilities outside their scope of expertise

These mistakes lead to a lack of synergies and a significantly slower integration effort. This lack of speed during integration tends to compound the mistakes.

Speed is of the essence

Physician groups that move slowly during the integration process are vulnerable both financially and competitively. The announcement of a merger between two groups creates uncertainty among employees of both organizations and fuels anxiety-filled discussions about who will stay and who will be let go. Without proactive and effective communications, employee morale will suffer. Even worse, those key employees that you hope to keep may jump ship to competitors or other organizations.

The turbulence of an announced merger can give competitors a perfect opportunity to call on your referring physicians and even patients. The community at large can spread all kinds of unconfirmed “alternative facts.” A slow response to retention initiatives (retention of employees, patients, and referring physicians) during a merger can leave competitive doors open too wide for too long. Decision-making must be streamlined for the integration effort to move forward. The completion of a few “quick win” integration tasks will bolster confidence in the team leadership and keep the process moving forward. For example, one of the first things to accomplish is a staff meeting to discuss key human resource issues such as payroll schedule and benefits transition.

A plan of action

Strategic integration decisions should be put in place prior to the completion of due diligence because these strategic decisions may influence the deal terms and structure. It’s important to identify these details and include them into the deal agreement before closing. Ideally, a 100-day integration plan is implemented when the deal closes. This should include identifying tasks to be completed, known issues, milestones, and planned timelines for completion.

Following the deal’s closing, detailed planning sessions should begin with functional department members of both practices. In the beginning stages, joint meetings are essential to establish relationships between representatives of both practices. Once initial on-site discussions are completed, subsequent discussions leveraging virtual meeting technology can take place. The two together will result in more efficient time utilization and reduced travel costs.

If you think of a physician group merger as a marriage, then you can see there is still a lot of work left to do after the wedding date, or day 1. Yes, it’s the day in, day out effort of the marriage that takes patience and thoughtfulness—and also tends to get messy. Compared to a marriage, the wedding is easy. Post-merger integration is critical to realizing the value of a deal. It’s also highly complex, taking place under severe time pressure, and happens in parallel to running the core business—making it one of the most challenging initiatives physician owners and practice administrators will ever undertake.

What’s the secret to post-merger integration success? Focus on the strategic objectives of the deal, accelerate synergies, and build a high-performance medical practice.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Women and Healthcare

The Women’s Heart Alliance surveyed over 1,000 women, ages 25 to 60, to learn about barriers and opportunities regarding cardiovascular disease. Per the Journal of the American College of Cardiology (2017;70(2):123-32), the survey revealed:

  • 45% of the women were unaware that cardiovascular disease is the leading cause of death in women
  • 71% of the respondents indicated they had almost never raised the issue of heart health with physicians

Here are some other noteworthy statistics regarding women and healthcare:

  • 80% of healthcare decisions are made by women (Fast Company, Apr 13, 2015)
  • 77% of surveyed women say they don’t do what they know they should do to stay healthy; 62% claim they just don’t have the time (The Power of the Purse: Engaging Women Decision Makers for Healthy Outcomes)
  • 70%-80% of all consumer purchasing is driven by women (Forbes, Jan. 21, 2015)
  • 43% of surveyed women passed a health literacy quiz (The Power of the Purse: Engaging Women Decision Makers for Healthy Outcomes)
  • 35% of surveyed women don’t fully trust their physician (Harvard Business Review, May 28, 2015)

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Understanding Valuations

Valuation nomenclature has changed over the years. Practice values used to be referred to as a percentage of collections, but today’s most common reference point is a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA). Traditionally, a solo practitioner thought of earnings as the total remuneration from the business in a given year. The reality, however, was that a portion of those earnings was compensation for the physician providing clinical care, and a portion represented profit generated from the business. Historically, valuations were largely considered the total earnings of the owner, whereas investors focus on the profits of the business as a basis for valuation. Further, investors consider the actual cash flow of the practice on a debt-free basis as the best predictor of their return on investment. This has led to the focus on EBITDA as a measure of a practice’s performance, and this is how most other businesses are valued.

What is the right multiple?

There is no easy answer to that question because the multiple is meant to assess the opportunity of the investment and its relative riskiness as well as provide a reasonable rate of return for investors. There are many factors that influence multiples, including location, trained staff, stable or growing revenue stream, payor mix, condition of the facility, mix of services, patient demographics, and profitability.

For group practices, although having a pipeline for future growth is important, the most significant influence on the multiple is historical growth. It is also important to recognize that the higher multiples are applied to those businesses that have a qualified management team in place to support continued growth and ensure replicable earnings, as well as documented policies and procedures to scale the business.

Business owners often focus exclusively on the multiple and don’t recognize that equally as important as the multiple is the number the multiple is being applied to – the EBITDA. The traditional valuation of a solo practitioner’s office is based on historical performance of the business as a predictor of future performance. The typical adjustments applied to the historical financials are to: 1) bring owner compensation to fair market value, and 2) account for nonrecurring and discretionary expenses.

In contrast, the valuation of a group practice is typically done on a prospective basis, which involves forecasting the performance of the business, in addition to making adjustments for owner compensation, nonrecurring expenses, and discretionary expenses. The purpose of forecasting for group practices is to help a prospective investor see the true investment opportunity, which may not be reflected in the historical financial performance. For example, if a group acquired a practice partway through a given year, the historical financials only reflect that partial additional impact on revenue and EBITDA. The EBITDA adjustment in this example is to show the prospective investor the impact of the acquisition for a full year.

The other nuance in today’s marketplace is the different perspective on earnings from different types of buyers. A private equity firm is generally looking to make an investment in a business or partner with the founder of the business and therefore will want to keep as many members of the management teams in place as possible to operate the business and drive performance. However, they may make a downward EBITDA adjustment if they feel additional management team members are needed to continue to grow and support the business.

Conversely, strategic buyers (those who have existing group practices and experience in the industry) may make upward EBITDA adjustments for synergies, including duplicative management team members or third-party vendors, more favorable lab and supply contracts, and more favorable payor contracts. Generally speaking, a private equity firm will likely pay a higher multiple but on a lower EBITDA, whereas a strategic buyer will likely pay a lower multiple on a higher EBITDA.

If you are considering a transition, aside from the valuation of your business, it is critical to understand the other terms necessary to close a transaction. In many cases, there are legal provisions that can have significant economic consequences and therefore should be considered when looking at the “value” of the business. Using an experienced consultant will ensure that you negotiate the best price and transaction terms for your given situation.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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How To Study Your Medical Practice Competition

No matter how new or old your medical practice is, it is important to identify your competitors and evaluate their strategies to determine their strengths and weaknesses relative to those of your own. Understanding the competition is a crucial business activity for any physician owner. Some practices hire professionals to track competitors and assess the competitive landscape on a regular basis. But it doesn’t always have to be a complicated, time-consuming, and expensive process—particularly given the new wealth of data that can be assembled using the internet. By investing even a small amount of time, physician practices of any size can develop a framework for making competitive assessments, gather intelligence on rivals, and understand how to position their own brand, services, and practice in the community. Not only can you learn best practices from competitors, but you can also learn to avoid the mistakes they make. I often tell physicians that keeping track of who your competitors are, what patients and referring physicians are saying about them, and what they are saying themselves can help you differentiate your practice and stay ahead of trends that could impact your business. Staying smart on the competitive landscape helps you make very practical decisions around what services you offer, who you hire, what your messaging is, and where you fit in the brand landscape.

Benefits of competitive research

Conducting a competitive assessment should be an ongoing process, one in which you continue to deepen your understanding of the strengths and weaknesses of your competitors. There are a series of business benefits you can gain by having insight into the competitive landscape. The following are potential business benefits from conducting competitive research:

  • Understanding your catchment area (this is the geographical area from which your practice draws patients)
  • Better targeting patients
  • Forecasting the potential for your catchment area
  • Figuring out how local forces (economic and political) impact your specialty and even your catchment area
  • Understanding what competitors are offering
  • Determining offerings in ancillary services
  • Finding new patients

A competitive analysis is a critical part of the marketing plan for your medical practice. With this evaluation, you can establish what makes your practice unique, and therefore what attributes you play up in order to attract your target market (patients and referring physicians).

Analyzing your catchment area

Evaluate your competitors by placing them in strategic groups according to how directly they compete for a share of the patients within your catchment area. For each competitor, list their providers and services, their estimated profitability, growth pattern, marketing objectives and assumptions, current and past strategies, organizational and cost structure, strengths and weaknesses, and size (in patient volume) of the competitor’s business. Answer questions such as:

  • Who are your competitors?
  • What services do they offer and/or what equipment do they have?
  • What is each competitor’s market share?
  • What are their past strategies?
  • What are their current strategies?
  • What types of media are used to market their practice (their physicians, their services, and their equipment)?
  • What are each competitor’s strengths and weaknesses?
  • What potential threats do your competitors pose?
  • What potential opportunities do they make available for you?

A quick and easy way to compare your physicians or services with similar ones in your market is to make a competition grid. Down the left side of a piece of paper, write the names the physician groups that compete with yours. To help you generate this list, think of where your patients would go for care if you were not around. Across the top of the paper, list the main features and characteristics of each practice. Include such things as target market, providers, size, relationship with referring physicians, and patient volume. You may also want to list services offered, strength of their marketing efforts, and other features that are relevant. A glance at the competition grid will help you see where your physician group fits in your particular catchment area.

Impact of properly understanding the competition

Gaps in our knowledge of the competition are a natural and unavoidable characteristic of operating within the healthcare industry. We must remember though that a competent study of the competition can help reduce some of that uncertainty and help pave the way for strategic planning and business operations within your practice.

Physician owners must be keenly aware of what competing practices are doing. Practice management requires a firm focus on the competition; identifying its strengths and vulnerabilities is crucial. Since managing a successful practice requires decision and action based on situational awareness, identification of your competition’s expectations and preparations is important. Because the healthcare landscape is changing so rapidly, accurate and timely information regarding what competing practices are doing is a prerequisite for success.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Announcing the launch of our new website

We’re excited to announce that our new and refreshed website is live at www.abisallc.com.  Our goal with this new designed website is to create a user-friendly browsing experience for our trusted and valued clients.  The updated site includes changes to navigation, with dropdown menus for both mobile and desktop versions. We’ve also improved the structure of our content, so you’ll get more from a quick read. There’s a whole host of smaller but impactful changes, all to make your experience of the ABISA site that much better for you.

website

We are sure that in the new website you will find all the information that you need.  For any questions, suggestions, feedback or comments, please Contact Us.

3 Common Mistakes of Physician Group Mergers

Acquiring another practice can be a powerful tool for your group to achieve growth and build long-term value. There are, however, a few key mistakes that are often made which could be avoided with more thoughtful reflection.

  1. Failing to define a visionbefore the integration occurs.
    Crafting a vision that clearly spells out the opportunity inherent in the transformation ahead should, but often doesn’t, start long before a deal is pursued. Drawing from an “expanded due diligence” process that explores quantitative metrics, like physician group operations and financials, as well as the people and culture of the merged entity, is key.

    Leaders must build and communicate a vision of success that is understandable, tangible, and compelling to employees throughout the ranks of both practices. Factoring in in the value of the people, assets, and cultural elements of each practice will empower leadership to look beyond the basic additive advantages of the deal and construct a more holistic vision—inspired by both head and heart—for the opportunity ahead.

  2. Forgetting to ask, “What more could we become together?”
    The single biggest pitfall that derails successful transactions occurs during the actual integration process. Those involved often focus too heavily on ensuring the tactical aspects of the deal are covered, including technology integration, financial reporting, operations, and merging organizational structures.

The real power of any physician group merger comes from both practices challenging each other to ask, “What more could we become together?” How can each practice learn from the best of each respective practice and let go of old biases? This will build the two parts into a better whole. Viewing the integration process through this lens will help build collective urgency and alignment around shared goals and generate excitement among employees for the new entity’s future.

  1. Underutilizing your people to drive change.
    Throughout the merger integration process, leaders at each practice should deliberately involve staff from throughout the practice to help facilitate change. The practices should empower employees at all organizational levels to join and lead a volunteer army to accelerate the transference of ideas and inspire the desired culture of the new combined practice.

With so many moving parts throughout the process, empowered employees working as informal networked groups can work with agility and adaptability to help the two physician groups gradually become one.

One simple but effective way to ensure a successful acquisition is to study why others have failed and do something different. Here are nine common root causes of failed acquisitions.

  1. Strategy: Poor strategic logic or fit. No strategy used to determine goals of integration.
  2. Synergy: Overestimation of potential synergies, or underestimation of synergy complexities or timetable to delivery.
  3. Culture: Fundamental incompatibilities (including buyer’s lack of self-awareness), ineffective integration, or squelching positive attributes of target’s culture in name of uniformity.
  4. Leadership: Weak leadership, delays in appointing new leadership team, loss of key talent, insufficient participation in the transaction and integration process, ego clashes, or failure to deliver on pledges.
  5. Transaction parameters: Overpaying, inappropriate deal structure, or endless negotiations which bleed both practices dry.
  6. Due diligence: Insufficient investigation (especially little or no strategic and operational due diligence), or failure to translate findings into actions.
  7. Communications: Failure to communicate with sufficient transparency, awareness, depth or frequency, failure to take key messages to appropriate stakeholders, failure to address the concerns of each group with targeted yet strategically consistent messaging, or making empty promises.
  8. Key talent: Failure to identify key personnel or failure to act swift enough to retain them.
  9. Technology: Failure to identify fundamental incompatibilities (poor due diligence) or underestimating complexities or time required for system integration.

So, how can you avoid these problems? Successful acquirers embrace the process of integration as the single-most powerful value creation tool available, and view their investment in integration as one of the elemental costs of doing a deal. And, they understand that integrating and operating are two different processes, with unique objectives and requiring separate attention and separate skills.

Running a practice is an ongoing process aimed at optimizing an existing set of circumstances. Merging two physician groups is a temporary process aimed at changing those circumstances. Running a practice is a recurring evolution. Acquiring or merging is a finite revolution. The two have different objectives and require different approaches altogether.

Ideally, integration insight is woven into virtually every step of the acquisition process. It is incorporated into the strategic thinking and target identification, into the due diligence and the valuation process. It plays a huge role during the months before and after closing. And it carries on long after the deal is done and the bankers and lawyers have all gone home. Thinking about integration at every step in the deal process will help physician groups avoid transaction failure.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Identifying the Right Reasons for a Practice Merger

Like every long-term relationship, it’s imperative that physician group mergers happen for the right reasons.  When two practices hold a strong position in their respective arenas, a merger aimed to enhance their position in the market or capture a larger share makes perfect sense.  However, practices often fail to realize this.  Many physicians consider mergers as last ditch effort to save their flagging position.  The combining forces can augment their footing in the market and led to a successful merger.

Have an Eye for Risks

A merger is an extremely significant move for each physician group involved.  It is a tight ropewalk and even a small slip can pour millions down a drain.  Timely identification of weaknesses, risks, and threats, whether internal or external, can save huge costs and efforts.  Internal risks can include cultural frictions, potential layoffs, low productivity or power struggles at the helm.  External risks may include a low acceptance of service lines through combined synergies, sudden change in market dynamics, regulatory changes, etc.  Although it is not possible to be impeccably far-sighted, precision in dealing with such potential risks is a must.

Cultural Compatibility

While absolute cultural congruency is not always possible, it is advisable to find the closest fit while planning a merger.  Both physician groups must recognize their similarities and more importantly acknowledge their differences.  Then can they strive to create a new culture which reflects the core beliefs of the practice.  The creation of a brand new identity with employee support leads to a sense of belongingness and continued efforts towards a shared goal.  Thus the staff can be engaged in a new culture, new goals, and a new future.

Maintaining Leadership

As much as it is required to identify the correct reasons for a merger, it is also required to retain the correct people after the merger.  The success of a merger hinges on a seamless transition and effective implementation.  Many physician groups take too long to set the key leadership in place, thus creating confusion and apprehension.  Choosing whom to retain and whom to let go is a dicey game, but this is where judgement and skill play a role.  If the pillars of the each physician group are retained judiciously, the path becomes easier.  However, if employees feel out of place since the beginning, they may drift apart leaving a big vacuum in the newly-merged practice.

Communication is the Base

Studies have proven that management of the human side of a merger is an important factor to maximizing the value of the deal.  Effective employee communication and culture integration are the most difficult to achieve, but have maximum importance in the success of the merger.  Conveying the decision to merge at the appropriate time helps to reduce a lot of uncertainties both in the pre and post-merger stage.  Uncertainties lead to speculation and weaken trust.  Grapevine conversations only result in loss of productivity.  The more open the communication, the better it is.

Successful Integration is Critical

Life comes full circle post-merger implementation.  This article shows how to identify things at the pre-merger stage, but that is just one side of the coin.  Actually, it is the post-merger implementation that decides the fate (I will address this in next month’s article). It is how the newly formed relationship is nurtured.  There is stress of performance in core-business areas amid changed circumstances and the time pressure is tremendous.  Unlocking synergies quickly and obtaining support from key personnel is critical at this juncture.

If you are considering merging your practice with another group, make sure you are doing so because it’s the right thing to do.  Physician group mergers must take place for strategic reasons, such as to improving competitive capabilities, expanding footprints, achieving economies of scale, increasing patient base, testing new geographies, enhancing brand equity, rather than superficial reasons like tax benefits or to save oneself from market risks.  Physician group mergers must be considered as a means to fulfill far greater strategic outcomes rather than a mere ends in themselves.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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