Exploring medical practice consolidation

Whether it’s a partnership, a joint venture or the acquisition of one company by another, consolidation remains a hot issue in the healthcare industry. Medical practice leaders have always considered joining forces because of the potential benefits. But the current climate invites these discussions even more, as hospitals look to develop integrated care by purchasing physician practices and Medicare moves away from the traditional fee-for-service model.

To determine if consolidation is the best path, medical practices need to address a few critical questions honestly. Is your group attractive to a hospital interested in adding another group of doctors? Are you strong enough by yourself to compete for the best pricing and access to patients or to resist an attempt at being bought? Can you meet the goals of an accountable care organization (ACO) with your own practice through adding other experienced physicians, equipment or services? The answers to these questions can help practice leaders explore the potential benefits of consolidation.

First, there is economy of scale. A larger practice has greater needs, but a buyer who comes to a vendor prepared to make a big purchase has an advantage over someone buying for a smaller practice. Vendors have a strong incentive to make favorable deals with those who are buying more, but a combined practice also decreases the number of customers in that particular area. Therefore, a sale to the combined practice becomes even more crucial. That buying power extends to members of the combined practice, especially for any product or service that has a single customer as its end user. Within the larger practice, one doctor may be able to influence many other doctors, meaning the vendor must make the best offer to all the doctors.

Consolidation also offers the potential for better arrangements with other providers. A larger practice has an advantage not only with pricing for new equipment but also for services that can help make the practice stronger, such as training and certification in new techniques that can translate into more referrals. This type of strategic planning by newly-combined practices can translate purchasing power into increased market share or domination of a specialty in a region.

Cutting costs is another benefit, as redundancies in the back office often can be eliminated. Initial cuts provide some savings, which can grow in subsequent years when wages and the cost of insurance otherwise would likely increase. Similar savings are possible from combining facilities, technology platforms and other systems, and equipment, as well as training – for instance, scheduling a single training session instead of multiple sessions in different locations.

Given these benefits, consolidation may seem an easy decision. But medical practices also must prepare for multiple challenges in mergers or acquisitions, and follow well-conceived consolidation plans to avoid disaster.

Seeking the help of experts is a good place to start. Attorneys, accountants and consultants who have been through the process before can provide objective, independent advice and counsel to make sure the resulting practice is agreeable to everyone. This also avoids the temptation to rely on handshake agreements and assumptions based on prior relationships.

One of the biggest pitfalls may be the potential culture clash between practices. The style and habits of individual physicians and staff can become so ingrained that it may be hard to understand why anyone would suggest doing things differently. That’s why it’s important to devote time and energy to agreeing on crucial issues and establishing a consistent culture.

Key governance questions include spending approvals, policy votes and decisions on hiring new staff. Doctors and administrators also will want to determine financial compensation, weighing such factors as who generates the most income, who has the most seniority and who has invested the most in the practice. Related, physicians should have similar discussions about expectations for the number of patients seen and the overall amount of patient contact.

Other financial matters should be addressed before consolidation is completed. Will expenses be evenly divided among partners, or could some use a disproportionate amount of resources? Which practice’s malpractice insurance makes the most sense for the larger organization? What about benefits and retirement packages?

Ultimately, all parties need to have a clear picture of the diverse challenges as well as when the benefits will be realized. That allows expectations to be managed realistically amid the initial excitement about combining practices. Few mergers and acquisitions happen quickly and cheaply. But by preparing and acknowledging that major changes are coming, doctors and administrators can create a new, stronger practice in which everyone can take pride.

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