Achieving exponential gains from medical practice mergers

With the acceleration of hospital-physician integration activity, including practice acquisitions, physician employment and the development of narrow provider networks for accountable care initiatives, there is little discussion about the activity in medical practice consolidation.

However, the pace of medical practice mergers has picked up and large, well-run groups have tremendous potential to shape how healthcare is delivered. With the history of failed hospital-physician employment likely to reprise, the possibility of antitrust enforcement, and hospital losses per employed physician approaching $175,000 per year, the safest haven for physicians may still be the medical group practice. 

When a hospital or health system acquires a practice, the primary objective continues to be to secure volume or market share, which comes in the form of referrals. Increasingly, however, these transactions are driven by the need to improve quality, care coordination, and patient satisfaction results in a pay-for-performance environment.

When medical practices consolidate through a merger or acquisition, they do so today for the same reasons they did 20 years ago. Among them are more favorable call frequency, economies of scale, leverage in contracting, purchasing power, market dominance, volume for new business lines, access to capital, and more sophisticated management.

Today, however, the stakes and investments are higher and there is tremendous pressure for the newly merged entity to achieve synergies that provide exponential economic and strategic returns. While the returns are realized after the merger, three essentials must exist before the merger to make the returns possible.

Physician leadership
Anyone familiar with the management of medical groups knows that the practice cannot exist without a capable physician leader. The identity of medical groups, like most accounting and law firms and other businesses offering personal services, is inseparable from its majority owners who have name recognition outside the group and human capital inside the group. This makes leadership selection and succession planning critical to the long-term viability of the practice.

When two groups with their respective physician leaders merge, one inevitably will continue as the practice leader and the other will take a secondary role. Making the merger successful requires the leadership skills of both through the transition and beyond. Medical groups with strong physician leaders can survive and thrive.

Stakeholder buy-in
If you are an officer or director in a medical group, you are a stakeholder. If you are a shareholder in a medical group, you are a stakeholder. If you are an employed physician in a medical group, you are a stakeholder. In fact, the stakeholders in the group include the practice manager and all employed staff, as well as financial institutions and other organizations to which the group has contractual obligations or liabilities.

Any consultant, accountant or attorney who works in mergers and acquisitions will tell you that getting the buy-in of stakeholders is essential to the success of the merger. While this advice doesn’t prescribe a democratic process where employees must sign off on the deal, it does call for a thoughtful, professional process that includes communication and education beyond the merger committee members well in advance of the merger. The degree to which stakeholders’ expectations are aligned with reality is directly proportional to the success of the merger.

Shared culture
When two medical groups merge, they don’t just combine their financial statements. Facilities, equipment, supplies, personnel, schedules, practice patterns and many other elements of the two entities must come together. As difficult as it may be to join the two, the merger of medical groups is made even more complex by the presence of those who are the owners and the means of production – the physicians.

Physicians bring to the merger their clinical skill, talent and intellect, a commitment to the profession, and, most often, an excellent work ethic. They also bring with them their egos, strong opinions, unique ideals, and, occasionally, emotional baggage or behavioral issues and an inability to function well with a team.

All that they bring is fine as long as they are like-minded in their view of medical practice. If one group is about quality and the other about volume, there is no fit. If one group values employees and the other does not, there is no fit. Neither exceptional physician leadership nor the complete buy-in of all stakeholders can overcome divergent cultures. The corporate culture must be shared from the start.

Medical groups considering merger as an option should be mindful of their potential to realize those returns as evidenced by the strength of their physician leadership, the buy-in of the stakeholders and a common culture. With these three essentials, medical practice mergers can deliver returns that are more than the sum of their parts.