Ensure a Strategic Merger of Practices Doesn’t Fail

Mergers occur when two or more physician groups create a new and larger business entity that combines the resources of the original practices. While physician group mergers can have a profound impact on the business, too often practices view the merger itself as the strategic end game. Successful groups, however, understand that the deal is a means to an end and not an end in itself. The process of merging physician groups can go off without a hitch, but this is not always the case.  Practices looking to combine their efforts may run into certain problems along the way, such as these:

Differences

One of the primary reasons that mergers sometimes fall apart before they can ever be completed is the differences between those attempting the merger in the first place.  Differences in opinion or management style may cause potential partners to fail to see eye-to-eye, causing the merger negotiations to break down.  This can happen for other reasons as well.  Differences in personality may cause two potential partners to part ways, even though it may be mutually beneficial to combine their efforts.

Culture

Differences in corporate culture from one organization to the next also can pose problems for physician groups looking to combine efforts and resources.  This is closely related to the differences seen between future partners, but applies to the entire organization as a whole, rather than the differences between those at the top of the “corporate” food chain.  The ability to combine two physician groups with seemingly polar opposite cultures requires both planning and a certain level of artistry.  Cultural differences can threaten the outcome of a merger.

Integration

One of the most significant problems that can occur is the post-merger integration that must take place.  Physician groups that combine their efforts and resources must learn to do so by bringing all of the constituent elements of their practices together.  This is easier said than done.  The amount of planning and negotiating required to bring this about is fairly significant and usually takes place during the merger process.  This integration planning is closely related to cultural issues because it requires those involved in the planning process to determine what the resultant culture will look like after the merger.

Synergies

Practice leaders often make simplistic and optimistic assumptions about how long it will take to capture synergies and how sustainable they will be. These synergies can come from economies of scale and scope, best practice, the sharing of capabilities and opportunities, and often the stimulating effect of the combination on the individual physician groups.  However, it takes only a very small degree of error in estimating these values to cause an acquisition effort to stumble. It is important to be realistic about timing. Persistent management attention is needed to capture them.

Diligent Planning

The most successful physician groups link effective strategic formulation, pre-merger planning, and post-merger integration. Having all three components is critical for success:

  • A vision, strategically formulated, for where the practice is going and how the deal fits.  Practices then identify the appropriate targets and get the deal done.
  • A pre-merger process that targets physician groups with the right capabilities, gets the deal done, and begins the integration through rigorous planning and building of trust among the players.
  • A post-merger process that seeks to capture well-defined sources of value and is led in a way that captures as much value as possible as quickly as possible.

The merger will work best if both physician groups agree on the vision for the overall practice going forward and where the acquisition fits into that vision. Unfortunately, for many physician groups, the vision and true strategy work is begun after the acquisition. Too often the transaction focuses on the numbers without regard to the hard work of creating market-disrupting strategies.  The result is an underperforming merger.

Mergers represent a challenging and risky strategic decision.  The decision to merge should be fully challenged before physician groups decide to go ahead, particularly given the average performance of the returns and the risk associated with the potential outcomes.  Even with thoughtful planning and preparation, best practices and focus, success is not guaranteed.  However, applying the best practices should enhance the chances of success and help avoid catastrophic pitfalls.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Joint Venture Pros and Cons

When engaging independent physician practices in strategic planning as well as succession planning, the topic of joint ventures sometime emerges. You might have a killer idea, but lack the resources, finance or specific knowledge skillset to deliver it. With the strong competitive forces in many areas, physicians sometimes contemplate a joint venture with another organization such as a hospital as a means to protect their practice without selling out entirely. Sometimes, collaborating with another business that is able to plug the gap can be the way forward, giving you credibility as you move into a new area.

There are of course many details to study when beginning to think about such an endeavor. Joint ventures are complex relationships and take many different forms. They also need careful planning to make them work. Moreover, the challenges and opportunities are unique to each market so you must not view a potential joint venture through the lens of what may be occurring elsewhere. Broadly speaking though, there are some advantages and disadvantages to consider when weighing the prospect of entering into a joint venture with another entity.

Advantages

There can be significant advantages in creating a joint venture. Some benefits include:

  • The ability to collaborate with other partners when making business decisions.
  • Entering related businesses that previously presented high barriers to entry.
  • Gaining access to expertise without the need to hire more staff.
  • Sharing the financial responsibility of capitalizing the business.
  • The parties can share risks and costs.
  • Leveraging existing technologies used by the other organization.
  • Establishing a presence in new, untapped markets.
  • It is only a temporary arrangement between the parties.
  • The parties have access to additional resources as they are coming together for a mutual and specific goal.
  • The parties can complete a project which they may not have had the finances or staff to complete on their own.
  • Increasing opportunities for growth of your business including financial growth.

Disadvantages

There can be, however, some pitfalls of entering into a joint venture. Some disadvantages include:

  • Setting unrealistic objectives that may not be completely clear in advance and not aligned to a common goal.
  • Coping with differing cultures, management styles, and working relationships that prevail in each organization.
  • Managing communication with physicians, senior managers and employees in both organizations so there’s a consistent understanding of the objectives of the joint venture.
  • Either of the parties making poor tactical decisions which may affect the desired outcome of the project. These are usually caused by a misunderstanding of the roles of each organization.
  • Lack of commitment to the project by any of the parties.
  • There are times when flexibility is restricted.

Forming a joint venture with another healthcare organization may be seen as a plausible solution. The success of a joint venture though, highly depends on thorough research and analysis of the objectives. There really is no such thing as an equal involvement and a variety of management structures is possible. Because different entities are working together, there is a great imbalance of expertise, assets, and investment.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Strategic Engagement of Recruiters

Undoubtedly, bringing on a talented physician or practice manager will help to ensure your medical practice operates more efficiently, is profitable, and has happier employees. Finding such an individual, however, can sometimes be challenging, since your practice is not the only one attempting to recruit that stellar candidate. So, if you like gambling in casinos and/or have plenty of time to spend interviewing countless candidates, you should put an advertisement in your local paper or online. Otherwise, your time and money would be better spent using a recruiter to find your ideal physician or practice manager who you will value for years to come.

A good recruiter will weed through the candidates and give you just a few (no more than three) who appear to be a good fit for you and your practice. Additionally, seasoned recruiters will do thorough reference checks and logistical coordination of interviews, which frees up your already tight daily schedule. They also are great at being the “go-between” when it comes to compensation negotiations, so after the hire is made there is no bad blood between employer and new-hire. Of course, when it comes time for the interview, there are several items you need to ensure are covered.

Top Characteristics

Here a few things that you should ensure the candidates have when you are conducting your interview:

  • Appropriate education level
  • Practice managers (Do they need a high school diploma? Specific type of college degree? Master’s degree?)
  • Physicians (Are they trained in the procedures that you currently provide? Are they trained in procedures that you would like to add to grow your practice?)
  • Business acumen
  • Practice mangers are your business person, so don’t skimp on this criteria. You are not hiring them to perform surgery; you are hiring them to keep the practice in order.
  • Physicians will most likely be partners someday, so while they don’t need to be business savvy from day one, they should at least have the interest in learning about the business side of running a practice.
  • Leadership capabilities (Are they motivating? Can they delegate? Do they communicate well? Are they empathetic? Do they have a sense of attention to detail?

Warning Signs

Recruiters should be interviewing candidates in great detail before they ever send them your way. Joe Ciaramitaro, President of CorpSearch Int, notes:

“The proper vetting practiced of candidates are being done by professionals that do this type of work the entirety of every day. You want essentially a short-term hiring partner here, where success is achieved and measured by the ability to work and trust the recruiters experience and shooting straight with the recruiter so they can trust and help you through the entirety of the process the most. It will be sometime an arduous journey to the end result of the successful hire you really want but timely and well thought out communications between presenter of your opportunity to the world of candidates out there, the recruiter and yourself, will ensure the greatest efficiencies and outcomes of your search.”

It is the job of the recruiter to be acute and to have a thorough selective process. Even the best of recruiters may miss something when they screen candidates, so here are a few red flags you should be on the lookout for when conducting your interviews:

  • Did the candidate ask about salary upfront? (Actually, when using a recruiter, the candidate should not even bring it up since the recruiter should have already covered the salary range, benefits, etc.)
  • Did the candidate ask about long hours?
  • Did the candidate slam their former co-workers?
  • Does the candidate appear to have poor people skills?
  • Does the candidate appear to miss the point about patient care? (This can sometimes be the case with practice managers if this will be the first job they have in a medical practice. Obviously, patient care is a priority. The candidate that does not get that will not do a job well since they will be unable to relate to the tasks the clinical staff perform on a daily basis. The manager does NOT have to have clinical experience to do a great job as a practice manager.)

A new physician or practice manager is a crucial member of your staff and critical to the success of your practice. Finding the right individual is not easy, but being open about your requirements to a recruiter can help to facilitate the search for a perfect fit. Engaging a recruiter as a trusted member of your strategic hiring needs will ensure they have a good grasp about the type of candidate that will be ideal for your particular practice.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Introduction to Medical Practice Valuation

At some point, there will come a time to sell your practice. It could be in part to a partner or as a whole to another group or hospital. In any case, the practice will need to undergo a valuation, which is a detailed and complicated process, oftentimes confusing because let’s face it, it is not like you sell your practice every year. One thing that can help you on your path is to understand some of the basic tenants of practice valuation.

Understanding Terminology

If you are considering selling your practice, make sure you understand terms and appraisal definitions. Oftentimes a physician will ask their accountant to appraise the business, but the physician may be surprised to find that the “book value” given by the accountant is far different than the “Fair Market Value (FMV)” that he could actually receive at time of sale. It is not that the accountant is incorrect at all. Rather, the accountant and the physician may be operating under a different set of terms and definitions, without knowledge of each other’s perspectives. Realizing that there is no absolute sales price is the essence of FMV. When determining valuation, look for a price range with a reasonable floor and ceiling.

Understanding Value

For starters, value isn’t an absolute number. A medical practice’s tangible and intangible assets can be grouped into two broad categories: physical assets and non-physical assets. Examples of physical assets include accounts receivable, leaseholds, medical equipment and furnishings, medical records, and real estate. Examples of non-physical assets include buy/sell agreements, goodwill, managed-care contracts, restrictive covenants, and staffing. Estimates of value differ significantly, depending on the purpose of the appraisal, the acumen of the appraiser, etc. Astute appraisers will consider a host of questions. What is the value of the practice for purchase or sale? What is the value of a practice for merger? What is the value of practice assets for joint venture with a corporate partner? What is the value to establish buy-in or buy-out arrangements for partners? What is the value of practice assets for purchase or sale, apart from ongoing operations? To answer these questions, physicians must understand how practices are valuated.

Informal Terms of Valuation

The “asking price” is often arbitrary and difficult to substantiate, and typically is reduced by a significant percent during negotiations. The “creative price” is derived by way of creative financing.  For example, the practice may provide the down payment. The “emotional price” may involve either a motivated buyer or seller, who pays an under- or overinflated price for the practice. The “friendly price” is reserved for associates, partners, or other colleagues. The “realistic price” is one that both buyer and seller believe is fair.

Formal Terms of Valuation

Practice appraisers use FMV as the standard to derive a reasonable value for a practice.  FMV means an arm’s length transaction between an unpressured, informed buyer and an unpressured, informed seller. The “business enterprise value” of a practice equals a combination of all assets (tangible and intangible), and the working capital, of a continuing business. The value of “owner’s equity” equals the combined values of all practice assets (tangible and intangible), less all practice liabilities (booked and contingent). The “working capital value” equals the excess of current assets (cash, A/R, supplies, inventory, prepaid expenses, etc.) over current liabilities (accounts payable, accrued liabilities, etc.).

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Entering Your Practice into Strategic Joint Ventures

A joint venture agreement is an agreement between two or more healthcare entities usually entered with a specific goal in mind.  Each party is invested in terms of capital contribution, the time devoted to the project, and the effort put forth to complete the defined tasks.  These business partners pool their resources and expertise to achieve a particular goal.  The risks and rewards of the enterprise are also shared.

The reasons behind forming a joint venture include business expansion, development of new service lines, or moving into new markets.  Each party who enters into a joint venture agreement will want to maintain their separate business/entity and  enter into the business arrangement with a strategic goal in mind.

Overview

Your practice may have strong potential for growth, with innovative ideas and services.  However, a joint venture could give you more resources, greater capacity, increased technical expertise, and access to established markets and marketing channels.  In a very broad sense, joint venture formation should consider legal, tax, business, and cultural issues.  Joint ventures may take the form of different legal structures, but beyond legal and tax considerations are a large number of broad business and cultural issues. As a start, you should carefully consider and/or define:

  • The purpose of the joint venture
  • Specific goals for the venture
  • The resources and value to be dedicated to the venture by the participants
  • The cultural “fit” between the participating entities
  • The specific responsibilities of the participants
  • Potential impact to your current practice’s reputation
  • The control mechanisms in place
  • How you will handle cash calls and personal guarantees if required

Assess Your Readiness

Setting up a joint venture can represent a major change to your practice. However beneficial it may be to your potential for growth, it needs to fit with your overall business strategy.  Consequently, it is important to review your business strategy before committing to a joint venture. This should help you define what you can realistically expect.  In fact, you might decide that there are better ways to achieve your business goals.  You may also want to look at what other practices are doing, particularly those that operate in similar markets or specialties to yours.  Seeing how they use joint ventures could help you choose the best approach for your business.  At the same time, you could try to identify the skills they apply to partner successfully.

You can benefit from examining the business of your own practice.  Be realistic about your strengths and weaknesses and consider performing an analysis to discover whether the potential joint venture entities are a good fit.  You will almost certainly want to find a joint venture partner that complements your own practice’s strengths and weaknesses.  You should take into account your employees’ attitudes and bear in mind that people can feel threatened by a joint venture.  It can also be difficult to build effective working relationships if your future joint venture partner has a complete different way of doing things.  If you do decide to form a joint venture, it may well help your business to grow faster, increase productivity and generate greater profits.  Joint ventures often enable growth without having to borrow funds or look for outside investors.

Due Diligence

Conducting due diligence on any potential partner is a top priority for practices considering joint ventures.  Before entering into agreements with another entity, check into the credentials of potential member(s), including the existence and availability of the resources, property, and human capital that potential partners bring to the joint venture.  The ideal partner in a joint venture is one that has resources, skills and assets that complement your own. The joint venture has to work contractually, but there should also be a good fit between the cultures of the two organizations.  Broadly, you need to consider:

  • Do you share the same clinical and business objectives?
  • Can you trust them?
  • How well do they perform?
  • What is their attitude to collaboration and do they share your level of commitment?
  • What kind of reputation do they have?
  • Do they already have joint venture partnerships with other entities?
  • What kind of management team do they have in place?
  • How are they performing in terms of clinical operations, marketing, personnel, etc.?
  • Are they financially secure?

Consulting with the proper legal counsel prior to establishing the agreements is of course crucial when deciding whether to pursue a joint venture.  Regardless of the length or breadth of the legal agreements you may use, if there is not a high degree of consensus and willingness to work through upcoming problems with your new joint venture partners, you may find yourself bogged down in unpleasant and costly disputes.  Try to make sure your new partners are a good fit with you and define the business as much as possible ahead of time.  An experienced consultant should be able to guide you.

Taking the time to fully understand the process, evaluating potential outcomes, and conducting due diligence on potential partners are three great first steps in moving forward with a joint venture.  While all of this may seem overwhelming, joint ventures, if executed thoughtfully and correctly, can lead to new revenue streams, shared resources, and incredible results.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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Strategic Diligence of Physician Practice Mergers

In recent years, there has been noticeable increase in practice mergers among physician groups.  Undoubtedly with the ever-evolving reform of the U.S. healthcare industry, there is a lot of uncertainty for private practice physicians.  Some practices are content with no organizational changes and some have decided to be acquired by hospitals. Others have gone the route (or are pondering) of merging with another private practice (either same specialty or different specialty).  The decision to buy, sell, or merge a medical practice is more complicated than ever, and determining a medical practice’s worth is just one element crucial to this process.  For those that are considering merging with another private practice entity, there are many things to strategize about and that’s assuming there will be a windfall of benefits by consummating a merger.

Physician owners must have a clear rationale for a transaction or truly understand a deal’s impact on their practice’s long-term financial future.  Too often, however, there’s a misguided sense of why the merger should take place at all, and there’s far too little time spent defining how the merger enables them to beat competitors and increase organizational value.   Those that fail to take this into account contribute to the failure rate of physician group mergers.

For many physician groups, the link between strategy and a transaction is broken during due diligence.  By focusing strictly on financial, legal, tax, and operations issues, the typical due diligence around a proposed merger fails to test whether the strategic vision for the deal is valid.  To do so, physician groups should bolster the usual financial due diligence with strategic due diligence. They should test conceptual rationale for a deal against more detailed information available to them after signing the letter of intent. They should also see if their vision of the future operating model is actually achievable.

A strategic diligence should explicitly confirm the assets, capabilities, and relationships that make a buyer the best owner of a specific target acquisition.  It should bolster the physician owners’ confidence that they are truly an “advantaged buyer” of an asset.  Advantaged buyers are typically better than others at applying their established skills to a target’s clinical and business operations.  They also employ their privileged assets or management skillset to build on things like a target’s practice reputation, patient experience, or relationships with referring physicians.  Naturally, they also turn to their special or unique relationships with vendors and the community to improve performance, leading to advanced synergies that go beyond what’s normal.

When change comes suddenly, it can turn strengths into weaknesses and sweep away dreams of success.  The aim of a merger should be to achieve mutually reinforcing advantages.  Michael Porter wrote that competitive advantages stem from how “activities fit and reinforce one another. . . . creating a chain that is as strong as its strongest link.”  By undertaking strategic diligence, physician owners will be able to not only define their main objectives, but also gain greater control over the desired direction of the new entity after the merger is consummated.  Some of the strategic diligence questions to ponder include:

  • What are the strengths of each practice?
  • What could our practice be doing better?
  • What opportunities exist as a result of this merger?
  • What threats do we face by completing this merger?
  • What is the current culture of each practice?

It is critical for physician owners to be honest and thorough when assessing their advantages.  Ideally, they develop a fact-based point of view on their beliefs — testing them with anyone responsible for delivering value from the deal, including physicians, physician extenders, clinical staff, and front and back office personnel.  Above all, when it comes to the merger of two physician groups, culture is a key decision criteria.  Culture should be evaluated and discussed prior to any financial considerations. In my experience this is of paramount importance for practice-to-practice mergers and is meticulously examined only through strategic diligence.

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Contact ABISA for healthcare consultancy support or speaking engagements.

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2016 Drug Trend Report

The topic of drug prices in the United States is a conversation of ever-growing frequency and intense debate.  Compounded with healthcare reform legislation and high-deductible plans, it is an issue of high importance to all Americans.  Although there are mountains of data regarding this topic, a study by Express Scripts summarizes the top 15 of therapy classes in an easy-to-follow format.  Express Scripts recently released its 2016 Drug Trend Report based on pharmacy claims from 30 million members of Express Scripts.  The report shows a 3.8% increase in drug spending and an 11% increase in list prices of brand drugs.  Here is a snapshot of their top 10 therapy classes, ranked by per-member-per-year (PMPY) spend (dollar amounts rounded):

  1. Inflammatory Conditions. With a PMPY spend of $118 and an average cost per prescription of $3,588, this class topped the chart.  These drugs are used to treat conditions such as arthritis, psoriasis, and Crohn’s disease.  The report states that this PMPY spend trend will continue at 30% year over year through 2019 and also noted that over 41% of patients are nonadherent.
  1. Diabetes. This class demonstrated a PMPY spend of $109 and an average cost per prescription of $126.  The report states that this PMPY spend trend will continue at 20% year over year through 2019 and also noted that over 37% of patients are nonadherent.
  1. Oncology. This class demonstrated a PMPY spend of $61 and an average cost per prescription of $7,891.  The report states that this PMPY spend trend will continue at 20% year over year through 2019 and also noted that over 35% of patients are nonadherent.
  1. Multiple Sclerosis. This class demonstrated a PMPY spend of $59 and an average cost per prescription of $5,056.  The report states that this PMPY spend trend will continue at 10% year over year through 2019 and also noted that over 24% of patients are nonadherent.
  1. Pain / Inflammation. This class demonstrated a PMPY spend of $52 and an average cost per prescription of $49.  The report states that this PMPY spend trend will continue at 3% year over year through 2019.  These medications include opioids and nonsteroidal anti-inflammatory drugs, and this class is prolific with generics and has a 95% generic fill rate.
  1. HIV. This class demonstrated a PMPY spend of $40 and an average cost per prescription of $1,556.  The report states that this PMPY spend trend will continue at 20% year over year through 2019 and also noted that over 24% of patients are nonadherent.
  1. High Blood Cholesterol. This class demonstrated a PMPY spend of $38 and an average cost per prescription of $36.  The report states that this PMPY spend trend will decrease steadily year over year through 2019 and also noted that over 36% of patients are nonadherent.
  1. Attention Disorders. This class demonstrated a PMPY spend of $36 and an average cost per prescription of $145.  The report states that this PMPY spend trend will continue at 3% year over year through 2019 and also noted that this class is dominated by generics with a 74% generic fill rate.
  1. High Blood Pressure / Heart Disease. This class demonstrated a PMPY spend of $35 and an average cost per prescription of $14.  The report states that this PMPY spend trend will decrease steadily year over year through 2019 and also noted that over 28% of patients are nonadherent.
  1. Asthma. This class demonstrated a PMPY spend of $30 and an average cost per prescription of $69.  The report states that this PMPY spend trend will eventually decline by 2019 due to oncoming generics and also noted that over 73% of patients are nonadherent.

The next five therapy classes shown in the report are:  Hepatitis C (#11), Depression (#12), Contraceptives (#13), Heartburn / Ulcer Disease (#14), and Skin Conditions (#15).  The 2016 Drug Trend Report can be found here.

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Contact ABISA for healthcare consultancy support or speaking engagements.  Follow on Twitter @ABISALLC