The number and value of physician medical group transactions has been on the rise over the last five years, and as healthcare networks become the norm under pressure from healthcare reform, the conditions will remain ripe for a continuation of that trend said a group of experts during a webcast sponsored by research and publishing firm Irving Levin Associates.
While private equity investors are getting in the game, the largest buyers of physician medical groups are hospitals and health systems, the panel of experts said.
[See also: Affiliation mania ]
Hospitals and health systems want to buy physician medical groups to take market share away from competitors or to keep competitors from taking market share, said Kenneth Hawkins, senior vice president of acquisitions and development at Community Health Systems, which has 135 hospitals in 29 states and 650 clinic locations.
And physician medical groups, even successful ones, want to align with hospitals and health systems because they are worried about the narrowed networks being created by healthcare reform, said Bill Gil, vice president and chief executive officer of Providence Southern California Medical Foundations.
Even though there are physician medical groups that want to be bought and there are hospitals that want to buy them, acquisition deals are not smooth sailing.
One issue is keeping physician expectations in check.
A handful of large deals with big dollars involved has raised the expectations of many physicians as to the value of their own medical group practice, said Jason Ruchaber, partner in the Colorado office of HealthCare Appraisers, Inc.
“It’s hard to convince them that as a two- or three-physician practice in rural Iowa they may not command the same price as a 200-physician-plus group with a national presence,” he said. “It’s just not the same metric.”
That said, physicians as individuals do bring a lot of value to the table, Ruchaber said, and that does need to be factored into the purchase price.
Aside from the value brought to the practice by the physicians, a practice’s value is usually determined by examining future earnings capacity or by measuring the value of underlying assets and/or the cost to replace or re-create those assets, he said.
But focusing on just price alone is where deals can hit rough waters, cautioned Gil. “A lot of the dialogue is about price or about income guarantees and not about life the morning after,” he said.
Instead of having vague conversations during the sale process, talking about governance post-deal should be critical, Gil said.
“I have seen far too many deals that were sloppy not on the pricing side but on the strategic dialogue side because it’s a difficult conversation,” he said. “When you’re trying to buy a medical group, you want the polite conversation. … you’re likely to lose a lot of deals, but the ones you make are going to stick if you have a tough strategic dialogue along with the pricing conversation.”