5 factors to consider before acquiring a medical practice
Due to the increased risk and more time and money that is necessary for regulatory compliance, more and more hospitals and healthcare groups have acquired smaller, physician-owned practices in the last 10 years.
Physicians once owned two-thirds of all U.S. medical practices noted Brian Kerby, director of the transaction services group at Crowe Horwath, a public accounting and consulting firm, but many have since decided to sell their practices in exchange for employment stability and a steady paycheck.
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"When physician practices are faced with the prospect of having to devote more time and money to regulatory compliance, while enduring reductions in Medicare and Medicaid reimbursement rates, they become increasingly receptive to selling their businesses. With the doom and gloom of healthcare reform, this provides the opportunity to let someone else run the practice," said Kerby.
However, there are a number of factors to keep in mind for both physicians and hospital systems when it comes time to buy or sell a practice, said Kerby.
"Buyers may find sellers all too willing to listen to their pitches, so hospitals and private equity firms need to look carefully beyond the numbers when assessing and negotiating prospective acquisitions," he said.
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What should buyers and sellers consider before an acquisition occurs? Here are five recommendations from Crowe Horwath:
1. The seller's motivation
Physician practice groups can face looming costs for employee benefits, malpractice insurance and required innovations like electronic health records. Does the practice have the resources to cover these expenditures, or does the group need a capital infusion? Does the group need help developing a transition plan because one or more of its principal members is nearing retirement? Staying up-to-date with information technology, third-party billing and changing pre-authorization requirements can also overwhelm some practices.
2. Non-financial factors
Is there a chance that any physicians or key staff members are unhappy and would leave if the deal were to go through, potentially taking patients with them? How will the compensation physicians make as employees compare with what they are making as practice owners? Do the compensation structures provide performance incentives that align with desired outcomes? Is there any history of fraud in the practice, and would any of those liabilities extend to the buyer?
“Buyers don’t want to bring unhappy doctors into their organizations,” Kerby said. “You’ll want doctors with good track records from a compliance and billing standpoint, and doctors that will embrace what the buyer is going to be offering them.”
3. Primary care or specialty practice?
Some buyers prefer to add primary care practices to provide their hospitals and specialists with additional sources of patients. Others look to augment their capacity in medical specialties, which tend to have higher reimbursement rates. The acquisition of primary care or specialty medical practices may become part of a larger strategic decision when multiple hospitals consider forming an accountable care organization (ACO).
4. Post-merger integration
Most hospitals have an individual or team dedicated to serving as a liaison between physician practice groups and the rest of the organization. This administrator or team needs to be able to work on behalf of both the hospital and the physician practices and be able to negotiate issues effectively and fairly. Buyers looking at the deal should consider who could fill this role.
5. Cash-flow considerations
Buyers should be prepared for possible cash-flow delays, depending on whether the acquisition is structured as a stock or asset purchase. In a stock purchase, buyers typically assume the tax ID or provider numbers of the physicians, which allows them to start billing under those credentials immediately. However, when making a stock purchase, buyers also assume all risks associated with the practice, including hidden liabilities and past fraud. In an asset purchase, on the other hand, buyers typically have to "re-credential" the physicians, which requires obtaining new billing numbers from Medicare, Medicaid and other third-party payers. However, these buyers rarely have to assume responsibility for any liabilities or past fraud. Conducting detailed due diligence on the acquisition can help a buyer structure the deal in the most beneficial way.
“The selling physicians will want to understand and expect what the buyers’ expectations are. The seller will want to know the quality and technology level of the buyer. Will they have access to everything? Will the buyer be financially supportive? Will the buyer implement a sort of clinical care system for the doctor? The physician will want to feel like they have a part in the decision-making process,” said Kerby. “With the reduction of administrative burdens and a change in compensation structures, physicians will get to do what they do best, which is focus on care rather than run a business.”
