Six Considerations When Acquiring a Physician Practice
For many years, physicians owned two-thirds of all U.S. medical practices. In the past decade, however, hospitals and private equity firms have increased their ownership stake of medical practices as physicians seek to exchange the risks and rewards of entrepreneurship for the stability of employment. Crowe Horwath LLP, one of the largest public accounting and consulting firms in the U.S., examines factors that hospitals and private equity firms should consider before making their next acquisition.
According to Brian Kerby, director in Crowe’s Transaction Services group, one of the factors behind the rise in hospital ownership of physician practices is the growing complexity of healthcare regulatory compliance. “When physician practices are faced with the prospect of having to devote more time and money to regulatory compliance, while enduring reductions in Medicare and Medicaid reimbursement rates, they become increasingly receptive to selling their businesses,” said Kerby.
“Buyers may find sellers all too willing to listen to their pitches, so hospitals and private equity firms need to look carefully beyond the numbers when assessing and negotiating prospective acquisitions.”
According to Kerby, in addition to the regulatory environment, buyers should consider the following factors:
The seller’s motivation. Physician practice groups can face looming costs for employee benefits, malpractice insurance and required innovations like electronic health records. Does the practice have the resources to cover these expenditures, or does the group need a capital infusion? Does the group need help developing a transition plan because one or more of its principal members is nearing retirement? Staying up-to-date with information technology, third-party billing and changing preauthorization requirements can also overwhelm some practices.
Nonfinancial factors. Is there a chance that any physicians or key staff members are unhappy and would leave if the deal were to go through, potentially taking patients with them? How will the compensation physicians make as employees compare with what they are making as practice owners? Do the compensation structures provide performance incentives that align with desired outcomes? Is there any history of fraud in the practice, and would any of those liabilities extend to the buyer?
Primary-care or specialty practice? Some buyers prefer to add primary-care practices to provide their hospitals and specialists with additional sources of patients; others look to augment their capacity in medical specialties, which tend to have higher reimbursement rates. The acquisition of primary care or specialty medical practices may become part of a larger strategic decision when multiple hospitals consider forming an accountable care organization (ACOs). The purpose of an ACO is to provide a continuum of medical care to Medicare patients while achieving cost savings and maintaining quality standards. Under the federal healthcare law passed in 2010, healthcare providers can receive financial incentives for forming ACOs.
Post-merger integration. Most hospitals have an individual or team dedicated to serving as a liaison between physician practice groups and the rest of the organization. This administrator or team needs to be able to work on behalf of both the hospital and the physician practices and be able to negotiate issues effectively and fairly. Buyers looking at the deal should consider who could fill this role.
Cash-flow considerations. Buyers should be prepared for possible cash-flow delays, depending on whether the acquisition is structured as a stock or asset purchase. In a stock purchase, buyers typically assume the tax ID or provider numbers of the physicians, which allows them to start billing under those credentials immediately. However, when making a stock purchase, buyers also assume all risks associated with the practice, including hidden liabilities and past fraud. In an asset purchase, on the other hand, buyers typically have to “re-credential” the physicians, which requires obtaining new billing numbers from Medicare, Medicaid and other third-party payers. The process can take months. However, these buyers rarely have to assume responsibility for any liabilities or past fraud. Conducting detailed due diligence on the acquisition can help a buyer structure the deal in the most beneficial way.
“The market for the acquisition of physician practice groups is robust. As more medical groups are bought out, the price for those remaining on the market may increase, especially as hospitals and private equity firms compete for a shrinking pool of talent,” said Ron Ralph, a partner in Crowe’s Audit practice. “Buyers that treat targets fairly throughout the acquisition process, and especially during negotiations, stand a good chance of achieving their goals and improving their competitive position for the years ahead.”