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.

Follow on Twitter @ABISALLC

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.

Follow on Twitter @ABISALLC

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