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Mistakes to avoid when acquiring physician practices: Operations and integration

In a previous post, we discussed five mistakes commonly made by healthcare organizations when acquiring physician practices. Here we add another five challenges and missteps associated with acquisitions and alignments.

Not analyzing potential CPT coding issues: Proper coding is critical to maximizing revenue within a physician practice. In most transactions a coding audit or revenue cycle analysis is ideal, but in the absence of one of these more robust analyses, a basic understanding of coding practices is necessary. As an example, a practice may engage in aggressive coding for E&M CPT codes, which may be inflating practice revenue. Conversely, overly conservative coding may leave revenue opportunities on the table. While rare, HAI has exposed CPT coding practices that could result in a significant liability to an acquirer.

Acquiring a physician practice’s net working capital: Working capital includes the current assets and current liabilities held by the practice, including cash, accounts receivable, inventories, accounts payable, and accrued expenses. Most physician practices report their financials on a cash basis, and accordingly, most working capital categories are excluded from practice balance sheets. Due to the lack of visibility to many of these accounts, working capital assets and liabilities are excluded from most transactions. When acquired, an audit should be performed to test inventory levels, analyze doubtful accounts, and validate payables.  Generally, inventory on-hand is the only working capital asset most health systems seek to acquire when purchasing a physician practice.

Not optimizing operations: During the due diligence phase of physician practice valuations, practice administration and support staff involved in the process may be apprehensive of potential changes that may occur to the practice post-acquisition. Typically these apprehensions are related to staffing and personnel, as well as apprehensions related to operational changes related to building space, medical supply vendors, and equipment investment. In attempts to smooth the process, health system officials may attempt a diplomatic approach of assuring practice leadership that concerns are unwarranted, and that the practice will continue to run virtually uninterrupted post-acquisition. Making comments such as these at such an early phase of the process may lead to regret, especially if material changes to the staffing or operations of a practice are warranted.

Overly grandiose plans: When acquiring a physician practice, health system developers may have overly optimistic plans on how they will utilize the physicians of the practice, or what the practice and its physicians will contribute to the health system immediately following an acquisition. Many physicians operating in an independent practice have been in that setting for their entire career, and there will most certainly be growing pains associated with moving from an owner/operator role to a role as an employee. This is in addition to financial, operational, and logistical issues that may arise from the merging of previous independent operations. Additionally, the reasoning behind a health system acquiring a practice may be predicated on one or more unrelated transactions taking place – a risky proposition should the unrelated transaction not occur.

Systems integration issues: Many major health systems have undergone significant information technology upgrades to implement electronic health records. For large systems, these upgrades involve millions of dollars and thousands of hours to implement. While a physician practice is a much smaller operation than a health system, there will virtually always need to be a substantial amount of resources consumed when integrating the systems of a physician practice with those of an acquiring health system. Proper analysis must be completed of not only the costs of physical equipment and wages for those integrating the systems, but lost revenues from training physicians and staff.

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