A Successful Marriage: Factors Both Sides Should Consider When A Physician Practice Is Acquired By A Hospital Or Health System

Healthcare

A Successful Marriage: Factors Both Sides Should Consider When A Physician Practice Is Acquired By A Hospital Or Health System

The current economic climate is making things tough in healthcare, let’s face it. Between healthcare reform changes, looming audits by regulatory oversight organizations, malpractice litigation and stiff competition in the marketplace, it is no wonder many physician practices are seeking opportunities with hospitals or healthcare systems for acquisition. Their hope is to find a good fit, thereby receiving subsidy from the hospital in terms of covering overhead costs and salaries, and also establishing a solid referral source for a continuous flow of new patients. The hospital, in turn, receives the specialized expertise or geographic location to fill a patient need, hopefully resulting in a new income stream. Successful physician-hospital alignment can and does happen, and assuming the proper due diligence has revealed a clean bill of health on both sides, the partnership should be looked at from three key perspectives, ensuring a good match for everyone involved.

STRATEGY FIT

In order to remain competitive and to serve the community as best it can, a hospital or healthcare system looking to acquire a practice might be seeking to fill a void whether in a service offering, geographic location, improved access to coverage, or to gain entrée to a different payment model, such as an ACO (accountable care organization). The doctors within a physician practice might be seeking access to more resources for growth, and/or to ensure he or she continues to practice in the area of medicine of which they are passionate. Both sides need to be up front about their vision and expectations of what the union would bring to the table.

FINANCIAL FIT

The financial impact of the union must be considered in two phases: 1) current value of the physician practice and 2) projected value of the revenue generated by the practice for the acquiring hospital or system. This requires thoughtful and careful consideration, analysis and assessment of historical data, the economic climate, state of the industry, financial position of the business, geographic location, budgeting and forecasts and other complex and variable factors.

Ensuring the strength of physician-hospital alignment is crucial in the success of an acquisition. Similar to a marriage, it is important for both parties to identify the positives each can offer the other in order to make an effective partnership, and address those issues up front which could develop into larger problems later on.

High-level factors may include:

  • What is the current net revenue of the practice to be acquired?
  • Will the hospital or system have to make any substantial investments in the practice regarding equipment, additional staffing, etc?
  • Is there currently a strong collections process in place?
  • What happens with current accounts receivables? Will the hospital fold them into its own, or with the practice look to resolve?
  • Will current salaries be affected? Will there be a change in compensation structure, such as pay based on performance? Are any of the current physicians within a few years of retirement?
  • Will the current staff in office be retained, or will there be cuts?

Leveraging the services of a professional who can provide an objective business valuation would be a prudent move to help answer many of these questions and more.

CULTURE FIT

With any business acquisition, the importance of a good culture fit is important. Will doctor-management personalities mesh or conflict? Does the hospital’s overarching vision for future growth and treatment of patients and personnel align with that of the doctors at the practice? What is the communication strategy between the hospital or system and the newly acquired physician practice? What are the expectations of the brand image to be portrayed to the community? These issues may seem minor compared to those of financial or strategic considerations, but they can be important in helping with staff morale and productivity. A story once heard regarded a newly acquired physician practice throwing a $12,000 holiday party for its staff, fully expecting the hospital to reimburse them for the expense as it was a long-standing tradition to have held this elaborate function (ultimately the dispute led to sour feelings between the practice and the hospital). People enjoy working with – and doing business with – people they like. Cultural considerations can certainly influence the success of the integration process.

Ensuring the strength of physician-hospital alignment is crucial in the success of an acquisition. Similar to a marriage, it is important for both parties to identify the positives each can offer the other in order to make an effective partnership, and address those issues up front which could develop into larger problems later on. Taking the right steps now will pay off in the long term, hopefully resulting in a successful, life-long relationship.

 

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