The Acquisition of Physician Practices Continues at Warp Speed

By: Helen Hadley, Founder & CEO of VantagePoint Healthcare Advisors and Xhemil (John) Koliani, CPA 

 

The volume of activity for physician practice acquisitions by hospitals has certainly increased from the late 1990s and has been moving at warp speed in the past year. Hospitals are struggling to maintain market share as patient care continues to shift from an inpatient setting to an ambulatory setting. Physicians are exhausted with the political bureaucracy of both governmental and private insurance carriers. Both are worried about the impact of health care reform on their business. Technology has become an overwhelming prospect for those who have not keep equipment and software updated. Consequently, both physicians and hospitals are rushing to the table to best position themselves for what's ahead.

 

In the 90s hospitals purchased medical practices and expected that the combined mass would result in negotiating power with managed care plans. They expected referrals from purchased groups to flow to the hospital, anticipating that they would be able to manage physician practices more efficiently and enjoy increased revenues from doing so. The model failed. Hospitals lost millions of dollars. Many released the physicians and practices back into the community divesting themselves of these financial burdens.

 

Wherein the past hospitals were the drivers of these transactions and many physicians left private practice reluctantly, today is somewhat different. In the current marketplace, a significant number of small practices have at least one senior partner looking for an exit strategy over the next five years.Additionally, younger physicians are not seeking partnership in the traditional sense. Rather, they are seeking employment in large private practices or in integrated hospital-based health care systems. Combine these two factors with the challenge of managing a practice, decreasing reimbursements and the anticipated cost of implementing electronic medical records technology, and you have physicians lining up at the front door of the hospital.

 

Today, hospitals and physicians - together - may have an opportunity to change the health care delivery model. But, a lot has changed in the way physicians are being brought into the hospital system.

 

Hospitals are choosing to employ physicians but not purchase their practices. Employment agreements range from one- to five-year terms. There is little to no value being placed on goodwill. Relying on "Fair Market Value" for all transactions is necessary to ensure compliance with the Stark law, which prohibits physicians from having a direct or indirect financial relationship with a health care entity, like a hospital. Further, the law states that the financial arrangement (i.e., compensation, value for the practice, etc.) must be at arm's length and must not take into consideration any benefits (such as referrals) received by either the hospital or the physicians. Additionally, physicians who own their office space are faced with the fact that most hospitals are not interested in buying real estate, and the physician then becomes a landlord to the hospital. The value in a practice, therefore, is often limited to the hard assets.

 

It is important for the hospitals to understand physicians' motivations when they are approached. Are the managing partners overwhelmed or tired of running a practice? Are they looking for an exit strategy, or are some of the physicians nearing retirement? Are they burdened by real estate? Is the practice experiencing cash flow issues? Has the practice recently lost a provider and associated revenues? Conducting a practice evaluation during the due diligence process may uncover a variety of reasons or hidden problems as to why the physicians are interested in a change.

 

Methods for developing compensation packages have changed. Historically, collections and expenses were the only factors considered when compensating physicians. The packages being offered today vary but do have some common themes. Relative Value Units (RVUs), number of patient encounters, quality measures, expense containment, patient satisfaction, and participation in committees are some of the components that can be used to calculate a provider's annual compensation.

 

The fast pace of acquisitions, mergers and development of large physician groups will continue at an unprecedented rate for the next few years. We hope that all parties have learned lessons from the past and understand what is necessary to successfully bring hospitals and practices together.

 

Seek the advice of experts who have worked in both the hospital and physician setting to help craft the model that will best suit your market and long-term strategic goals. 


 

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About the authors:

 

Xhemil (John) Koliani, CPA, is a Partner at CohnReznick. He holds CPA and ABV distinctions. Reach him at John.Koliani@cohnreznick.com or 860.678.6023.

 

Helen Hadley is Founder & CEO at VantagePoint HealthCare Advisors, with locations in Connecticut and New York. Reach her at hhadley@vantagepointconsult.com or 203.288.6860 

 


 

 


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