Considerations Before a Physician Practice Merger

by Nick Hernandez MBA FACHE December 13, 2017

With the ever-evolving reform of the U.S. healthcare industry, comes much uncertainty for private practice physicians. While 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). While the merger of two medical practices or the acquisition of one practice by another might appear logical and straightforward, there are a number of hidden pitfalls to be considered. For those that are considering merging with another private practice entity, there are many things to strategize about vice just assuming there will be a windfall of benefits by consummating a merger.

Rationale

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. For a merger to be successful, it is critical in the pre-deal phase to carefully identify, capture, and price the potential cost and revenue synergies. While valuing synergy requires assumptions about future cash flows and growth, the lack of exactness in the process should not be a deterrent. With due diligence, it is possible to obtain an unbiased estimate of value. Moreover, when assessing a deal’s assigned value (market value plus the premium), it is important to understand that pricing should be set based on the impacts that are both operational (e.g., cost savings and economies of scale) and financial (e.g., lower cost of capital, higher return on investment potential, and potential for a lengthier growth period from increased competitive advantages).

Talent and culture

Perhaps one of the biggest missteps I see when working with practice mergers is the lack of communication. Physician owners must identify and communicate the reasons for the merger to employees. Often employees see change as dislocating and upsetting. It is best to communicate effectively and openly with all employees throughout the transition. The blending of new personalities and management styles is always more significant than you thought it would be. The process of medical practice merger “decision making” is altered and can become a potential source of contention and unrest. The two practices will undoubtedly have different cultures. Consequently, you must anticipate cultural challenges and take steps to integrate the two cultures.

Cost-cutting

It is also important to understand synergies and valuation because there is a potential for reducing the cost of operations in many mergers. In general, it is much easier to cut costs than to attempt to increase the revenue of a practice on its own. When similar practices merge, they are presented with an opportunity to improve savings through expense reduction strategies like optimizing operations and lowering redundancies. Skillful cost-cutting measures and combining redundant departments can reduce training and turnover expenses while also helping to promote employee loyalty. Arguably the biggest error in planning mergers is overconfidence in projected revenue synergies. It is difficult to project revenue synergies because in most cases they are matters of speculation, and manifest themselves in so many different ways. Ideally, the merger should help improve market reach and better negotiations with payers. The new practice now encompasses a larger catchment area, where revenue increases can be realized by increased patient volume, which in turn can boost provider productivity in the long run.

Synergies

Despite these benefits, projected synergies must be carefully considered and priced before any transaction, as overly rosy visions of the combined practices’ future can lead both physician owners and managers astray. To be sure, there will always be uncertainty surrounding future synergies. However, qualified healthcare consultants should attempt to make the best estimate of how much value cost and revenue synergies will be created in any merger before advising the parties to proceed. Performing this synergy valuation is significant even though doing so requires the consultant and practice owners to make assumptions about an uncertain future. Failure to perform the lengthy due diligence will result in mergers that are dead on arrival, no matter how they are managed after the deal is complete. Realizing these future synergies requires significant management actions, and thus the core driver of a merger must be a marriage of sound management philosophy and the implementation of projected synergies. Without both, there is no foundation for the merger.

Without a thorough assessment of a potential merger, the two practices could overlook issues that may impact the strategic, cultural, operational, and economic integration of the resultant organization. For what could be the most important financial decision you’ll make, and one that most practice owners will encounter only once, having an experienced advisor can be invaluable in the merger of your business. Aside from meeting financial and clinical goals, you also need to ensure you are confident in the proposed merger. You want to not only structure the best deal, but also to ensure that the process is controlled. Careful consideration of the many facets of a medical practice merger will help to ensure these objectives are accomplished.

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