Practice Mergers Due Diligence is the Key to Success

Most physicians don’t need anyone to tell them about how the post-healthcare reform world is presenting many new challenges when it comes to managing and growing a medical practice.

In order to compete effectively in this brave new world, many doctors are exploring strategic mergers with other physicians and physician groups that will enable them to reach critical mass. Creating a larger group practice may enable physicians to share services and spread out the cost of new technology and equipment over a wider base.

Areas to Focus On

When executed properly, a strategic practice merger can increase economies of scale, enable the sharing of synergies across organizations, boost revenue, and improve the firm’s overall profitability. But not all practice mergers result in these benefits.

Most experts agree that one of the biggest keys to a successful practice merger is the performance of solid due diligence early on in the merger process. Due diligence efforts should be focused on the following five aspects of the merger:

  1. Projected practice cost savings - This is usually the biggest benefit to be derived from a practice merger, so it’s smart to dig into the numbers and try to make sure that cost savings are going to be realized. Start with projected savings from combining multiple facilities, redundant equipment and duplicate services (labs, billing, accounting, etc.) If these savings are realized, you should be able to reduce overhead as a percentage of gross collections.

    Keep in mind that it may take a little while for these savings to be realized. Give it up to a year for savings to start to materialize, since there are likely to be some merger-related bumps in the road during the first year after the merger.

  2. Projected sources of ancillary income - This is often another key reason practices cite for merging: the addition of new revenue by providing everything from imaging and lab work to lifestyle ancillaries (like cosmetic laser procedures).

    But be realistic about how much income the merged practice can actually generate from ancillaries like these. And don’t forget to factor in the investment in equipment and leasehold improvements that will be required to make this increased revenue a reality.

  3. Practice financial trends - You should look beyond just static financials to the trends in revenue and profits over the past few years of the practice. Are the overall numbers trending up or down? Just looking at one year’s financials in isolation can mask possible financial concerns.
  4. Tax impact of the merger - Even a relatively simple practice merger can result in complex and unintended tax implications that can offset projected cost savings and other financial benefits. If the practice is a C corp, for example, goodwill might have to be evaluated. It is wise to have a CPA who specializes in practice mergers take a close look at the potential tax impacts of the merger.
  5. Anticipated improved negotiation leverage - The higher volume of revenue generated by a larger practice should translate into more clout and negotiating leverage with payers. Your CPA can also help project the potential impact of this increased leverage on the practice’s finances by analyzing your payer mix and uncovering potential increases in reimbursements.

Pitfalls to Avoid

Unfortunately, many practice mergers that look great on paper end up failing, or at least not delivering all of the synergies and benefits that were anticipated. The primary culprits are often one of the following:

• Poor communication and integration - Don’t forget that mergers involve real people, with real emotions and often real fears about change. Don’t hesitate to over-communicate with staff about the changes they will experience as a result of the merger. Draft a detailed post-merger integration plan before completion of the merger and share this with staff to help decrease their uncertainties and anxieties.

• Incompatible practice cultures - There’s a lot more to a successful practice merger than just making sure all the numbers look good. Compatible practice cultures are a big component of successful mergers. This includes “softer,” but no less important, things like work ethic, values and integrity. If one practice emphasizes working long hours and maximizing income while the other emphasizes family-work balance and flextime, for example, a culture clash is likely inevitable.

• Incompatible physician compensation and practice expense allocation models - Practices may differ markedly in how physicians are compensated and expenses are allocated. For example, each physician may be a separate cost accounting center, being accountable for his or her own resource use, or all resource expenses may be shared equally. Draft a compensation and expense allocation integration plan as early in the merger process as possible and share it with all affected staff.

City National Bank has strong experience serving the healthcare industry. No matter the size of your medical practice, we offer a range of financing, collection, payment and cash management solutions to meet your needs. Let us suggest new ways to help manage and grow your practice.

City National Bank's Healthcare Services Team provides specialized lending, account and treasury management solutions to meet the unique needs of the healthcare industry. Give us a call at (800) 773-7100 or contact us and request that a Relationship Manager contact you.