According to a 2012 American Medical Association study, hospital employment of physicians has increased 32% since 2002, with 17.3% of all physicians now directly employed by hospitals or health systems. In a 2013 Jackson Healthcare study, physicians reported how they were employed.
- By a hospital: 26% reported this status in 2013, up by 6% from 2012.
- Ownership stake in a practice: 22% reported this status in 2013, down by 1% from 2012.
- Have a solo practice: 15% reported this status in 2013, down by 6% from 2012
- An independent contractor: 8% reported this status in 2013, down by 1% from 2012.
According to an October 2011 study from Moss-Adams, there has been a doubling of mergers, acquisitions, and private equity investments in specialty physician practices between 2008 and 2012.
A 2014 study by the Physicians Foundation found that only 35% of physicians describe themselves as independent practice owners, down from 49% in 2012 and 62% in 2008. Moreover, in 2014, 53% of respondents in the Physicians Foundation survey describe themselves as employees of a hospital or medical group, up from 44% in 2012 and 38% in 2008.
The results from these studies show that practice sales and mergers are occurring with increased frequency. Even though nephrology practices have not been at the forefront of the sale activity to hospitals, physician practice management companies, and health systems, we are seeing more nephrology practices contemplating a sale to health systems and other players (like dialysis organizations) in addition to merging with other practices in the community.
Assessing your options
Nephrologists have two options when looking at merg ing their practice: 1) decide to stay a small independent group and become leaner and meaner or 2) consolidate with another practice and becoming a larger group. It can be a difficult decision. We put together a list of reasons to consolidate and a list of reasons to avoid consolidation. Each group must match its own desires and abilities in making its decision.
Why consolidate and grow you nephrology practice?
- Access to capital to grow needed infrastructure (e.g., purchase an electronic health records system). Without a sophisticated EHR, practices will not be able to demonstrate their value to payers as pay-for-performance grows.
- Gain market share and increase physician pay. Both of these are crucial to recruiting and retaining quality physi cians and physician extenders.
- With an increase in physicians and physician extenders, this bigger bench allows full call coverage.
- With a larger revenue stream comes additional flexibility to grow sub-specialties and ancillary services which, in turn, enhances revenue.
- As a larger group, the practice will have contracting power with payers and vendors to even out the negotiating leverage.
Why avoid consolidating your nephrology practice?
- There is a potential that your practice’s culture will change and become a place at which you do not want to practice.
- As a group grows it becomes less flexible operationally with a larger bureaucracy and stricter policies that must be followed by all.
- As a group grows, its clinical operation becomes more standardized and there may be less flexibility in the clinical decisions made. It may make it difficult for experienced physicians to adjust to these new practices.
- Members of every practice must ask themselves, “Will the new model be sustainable long-term?”
Know your potential suitor
In addition to thinking through the considerations for and against consolidation, a physician practice group should compare the possible acquisition models (as compared with growth in a truly private practice model).
Hospital as acquirer/employer
Hospitals offer the following benefits and drawbacks:
- Access to referral networks
- Access to payer networks
- Potentially additional security with respect to base salary and longevity of employment situation but less upside potential
- There has been a shift (to the positive) in philosophy and general physician psychology about hospital employment / hospital animosity
- Potentially less flexibility/freedom in day-to-day clinical and operational actions.
Physician practice managemeny (PPM) company as acquirer/ employer
PPM companies offer the following benefits and drawbacks:
- Potential front-end high purchase price, especially if your practice is a new platform for the acquirer
- Potentially more flexibility in day-to-day operations and clinical decisions since clinical leadership will likely remain in place
- Opportunities for expansion and leadership in PPM company and practice
- In some instances, more management/ administrative functions are available as the PPM company ramps up and needs help
- Typically less local referral source / purchasing/ payer contracting power
Issues to consider once consolidation is selected
Once a practice has decided to merge or otherwise consolidate with another practice, the two (or more) practices should discuss the following issues:
- How will the new practice be governed? Will there be a board and executive management made up of members from both practices? What powers will the board have? What powers, if any, will be reserved to the owners?
- How will physicians be paid? Will each receive a base salary plus a bonus? Will all compensation be equal for each owner or will there be an “eat what you kill” structure? How will ancillary revenues be shared (medical director, vascular access, labs)? How will non-owner physician employees be paid?
Physician shareholders, employment, and termination
- How will owner employment agreements be drafted? What are the basic employment terms for each owner? How will the buy-in and redemption pricing for practice ownership be determined? How can a physician quit the new practice or the new practice terminate an owner?
Allocation of pre-merger liabilities
- What liabilities from the existing practices will be assumed by the new practice?
Practice office locations and staffing
- The physicians will need to make decisions regarding continuation /termination of each office and staff member.
- Will there be a non-compete? If so, what will the scope and duration be?
Unwinding the consolidation
- Will some subset of all the physicians have the ability to unwind the new practice and go back to their old practice structure? If so, how long will this right last?
Name and branding of practice
- What will the new practice be called?
Practice cultural comparison
- How do the physicians currently practice? Are the two groups compatible or is one group willing to conform to the other group’s practice methods?
Transition to EHR systems
- How will the two practices’ EHR systems be combined? This is very technical and can be costly. Experts need to be consulted early.
Outside joint ventures
- Does either practice or its physicians participate in a dialysis facility joint venture business? If so, what restrictions will be placed on the noninvesting physicians?
What opportunities will there be for the other physicians to co-invest? If physicians from both practices have investments, how will the merger impact the two competing ancillary businesses?
Impact on dialysis providers
- The combination could be stalled or prohibited by a medical director agreement or a joint venture agreement non-competes. These documents must be reviewed closely to determine what effect, if any, they have on the new practice.
Interventional vascular access center(s)
- The new practice may be large enough to expand into this service line. Is this feasible or desirable?
- With a larger practice, chronic kidney disease programs may be more viable and the new practice’s ability to track and grow this pre-ESRD practice is vital to long- term success.
How to effectuate your consolidation
We have identified six stages to successfully effectuate a consolidation.
- Determine if staying truly private is right for your practice. Identify other practices for consolidation.
- Access the right fit of the practices.
- Discussions with the target practices regarding culture, basic financial aspects, non-compete restrictions and the other issues mentioned above.
- Accounting analysis of each practice to make sure each is financially secure.
- Sign Letter of Intent (“LOI”). An LOI is typically a non-binding agreement containing the following key terms.
- Key consolidation plan and timetable.
- Key terms discussed above to which the parties agreed.
- Exclusivity period in which neither practice will discuss a sale or consolidation with any other party.
- Commitment to expend funds to further investigate and negotiate consolidation documents.
- Perform diligence and document
- Mutual practice diligence, including billing and coding audits to know what each prac tice is buying.
- Benefits comparisons must be done and a decision made on what benefits to offer going for ward and how to terminate cur rent benefits.
Document negotiations. The parties must negotiate the following key documents:
- Merger/consolidation agreement
- Operating/shareholders agreement
- Form of owner physician employ ment agreement
- Form of owner non-physician employment agreement
- Third party negotiations with land lords, lenders, and vendors (amongst others) must take place to make sure these relationships are either transferred to the new practice or treated in a way that does not break any agreement with such parties.
- Physicians must get credentialed with payers and hospitals in their capacity as owners/employers of the new practice.
- Close the consolidation on a set date and time to make sure you have an agreed upon effective date and start of the new practice.
- Work on post-closing transition issues to ensure a smooth transition for each physician to begin practicing through the new practice.