Leveraging the timing of a deal, negotiating smartly, and making sure the practice financials mesh well are all as important as strategic fit, experts say. Details that seem small during negotiations can magnify quickly when learning to live with a new arrangement. And then there are the surprises that somehow didn’t come up during the due diligence that can doom any merger’s success. Despite all the unknowns, however, physicians are still buying and selling at a healthy pace, says Stephen Curtis, JD, regional manager of Bank of America’s Western Medical Division in San Francisco, which finances about 2,300 physician practice acquisitions each year. He says the pipeline of practice startups also is full.
“There was a big fear in the industry that physicians weren’t going to be starting up practices anymore [because of healthcare reform requirements], but we haven’t felt it, and we also haven’t seen any increase in the last five years in defaults or late payments,” Curtis says. Low default rates and expectations of only a modest uptick in interest rates should keep borrowing costs low and deals flowing, he says. Are direct-to-consumer ads helpful or harmful?
Irving Levin Associates tracked 78 large acquisitions of physician medical groups in 2015, up from 60 in 2014, for a total value of $2.3 billion, says Lisa Phillips, editor of the Health Care M&A Report. Next: Timing is (almost) everything
In a separate survey by Jackson Healthcare internal medicine, family medicine, and cardiology were the three most common acquisition targets by hospitals. Southern, warmer climates continue to attract deals, but other factors are important, one veteran business appraiser says.
“Most buyers are picking locations based on personal reasons rather than profitability,” says Keith Borglum, CHBC, CBB, a healthcare business broker and appraiser and Medical Economics editorial consultant.
However, discerning whether buying or selling a practice is right for a particular group takes more than just a good borrowing climate.
Timing is (Almost) Everything
“I sold one practice recently to a physician who was active in mountain biking and wanted to be near the mountains. Another one I sold to someone who was relocating to be closer to aging parents to help take care of them, which is a common one now,” Borglum says. “So when you have a personal reason to want to be in a particular area, you have to look at the market and decide if you really want to start a practice yourself. Many times, it’s a lot easier just to buy one.” How to manage technology overload
Finding a buyer with a stake or interest in the geographic area makes a world of difference in pricing power compared with buyers evaluating several different markets, so being able to wait for the right candidate can have a significant impact, Borglum says.
“If someone has a reason to be in your market, a strategic interest, then finding a way into that market can be worth more to the buyer than it would be” for someone looking at a variety of locations, he says. Next: negotiate, negotiate, negotiate
Generally, he says, practices that are being purchased today are going for about 1.5 times dividends, where dividends are defined as practice income after salary and other overhead costs are removed. Top 12 worst and best paying states for internists
When dermatologist Matthew Elias, MD, a client of Borglum’s, heard a Fort Lauderdale, Florida dermatologist was interested in selling his practice a few years ago, he and his brother and practice partner, Merrick Elias, MD, moved fast to lock in a deal.
“My brother saw an ad for the practice and knew it had an amazing reputation, so we called [the buyer’s agent] right away,” says Matthew Elias. “The physician wanted out quickly, but didn’t want to sell to a huge group and wanted the practice to operate largely like it had before, so he was happy to talk with us and was very reasonable. It all happened very fast.”
Negotiate, Negotiate, Negotiate
Taking advantage of timing isn’t the only financial consideration, however. Not married? Protect your finances stat!
When the brothers considered buying a second practice with a more complex payer mix, they spent more time bargaining to get to a purchase price that better reflected the future value of the practice, Matthew Elias says.
“We looked at a lot of practices that we ended up determining with Keith were significantly overvalued,” he says. One mid-career physician was carrying about $900,000 in debt, mostly from big purchases of medical equipment, he recalls. Next: Preparing your practice
“It kind of looked like he was trying to get out from under all these purchases and start over. Keith told us this guy should be paying us to take the practice,” Elias says. Not surprisingly, the brothers passed on that deal. 7 indicators to optimize your practice's revenue
The deal they ultimately consummated ended up providing smaller patient volumes than they initially anticipated because they had to streamline and eliminate some payers. But having negotiated heavily on the price initially, they still got value out of the deal, he says.
Preparing your practice
Physicians considering selling to a larger group should keep detailed financial metrics in mind, says Sheri Bodager, vice president and executive director for Asante Physician Partners in Medford, Oregon.
Because Asante has been on the acquisition trail more aggressively since 2013, Bodager says she’s been surprised at the number of physicians who don’t consider the cost of their medical malpractice tail insurance until the very last minute in negotiations, for example. “It’s a common ‘Oh-my-gosh, what about this?’ moment, when they realize they need another $25,000 to make the deal work,” she says. Navigating 2016's reimbursement challenges
Some physicians also figure out late in the game that their expensive electronic health records (EHR) system will likely be useless to an acquirer because they’ll be joining the larger organization’s system, she says. In some cases, buyers will pay for an extra year of the EHR while the practice transitions its patient records, but it’s a point to negotiate sooner rather than as an afterthought, she says. Next: Consider the seller Continuing medical education is another point to negotiate early, Bodager says. And don’t forget about continuing staff time. Typically, buyers don’t take over accounts receivable, so practices need to budget in six to eight months of staff time to handle the conclusion of the old billing cycle.
Looking forward, physicians must consider carefully the financial metrics they’ll be required to hit under a new employment contract. “We’ve listened to our physician partners and tried to create production measures that are flexible depending on someone’s practice,” Bodager says. Some newly acquired physicians are on an RVU system, but others are under contract based on hours worked or numbers of patients seen in a day. Also, physicians typically are signing four-year agreements, which provide more stability than hospital contracts, which tend to have shorter terms.
Many agreements have been restructured in recent years to allow physicians more autonomy in various practice management functions, from hiring medical assistants to making referrals, Bodager says. “We have a board of directors and a finance committee so they have direct input and a structure that keeps [physicians] in the loop” of operations, she says. Flashback: What physicians need to know when negotiating a medical practice sale or merger
Last year, Bruce Yager, MD, agreed to sell San Benito Pediatrics, the practice he founded 27 years ago near Hollister, California, to West Coast Health Foundation Inc., a non-profit that is building a network of primary care sites.
Yager and his practice manager and wife, Kathleen, say their emphasis on practice financials and staff qualifications over the years helped the practice appear desirable to buyers. “Then the second thing was an alignment of values” with the buyer, Bruce says, which included a similar emphasis on patient care and a shared desire to retain existing staff.
Consider the seller
Making sure a practice is appealing to the widest pool of buyers is critical to achieving a sale, experts say. Some buyers will want to see a host of ancillary providers and multiple revenue streams, while others might be interested in some of the practice’s equipment, and others are interested only in its individual human capital.
“In our case we have all the ancillaries we need, so that’s just a duplication of what we already have,” Bodager says. “Sometimes we look at buying a practice building if it’s in the right area and we do buy exam tables, EKG machines, and waiting room furniture.”
Doctors thinking of retiring, however, should think about diversifying away from all that human capital, Borglum advises. In other words, maximize the revenues coming from ancillary staff. “If you’re wanting to sell for the best price and are looking to slow down and retire, you want to start maximizing the practice income while reducing your personal work hours,” he says.
If a provider’s appointment waiting list is more than two or three weeks, he says, there is room to hire non-physician providers. As these ancillary providers form relationships with patients, physicians can transition more and more patients to them, Borglum says. Next: Making it work
“You want to transition as much patient load as possible so you can bring down that waiting list to under two weeks and now you have an income stream that’s not dependent on your personal work hours,” Borglum says. “Then you can add as many ancillary services that aren’t already contracted out.”
Making it work
Financing. Take the time to solicit competing offers for financing, Borglum says. Check a local credit union or community bank, and compare rates and terms with major players in medical practice financing, such as Bank of America Practice Solutions and Wells Fargo Practice Finance, he says.
Some smaller lenders will push physicians into Small Business Administration loans, which can be cumbersome and time-consuming to deal with, he says, so pay attention as much to the terms as the interest rates charged. And don’t go in hat in hand, he says. “Practices are a desirable account because they churn a lot of cash,” so go in expecting a great deal, he advises.
Digging into the numbers. As for due diligence, appraiser Monica Kaden, MBA, ASA, a director at accounting firm Marks Paneth LLP in Parsippany, New Jersey, looks for at least five years worth of tax returns and supporting documents, making sure they match with original documents such as patient log sheets and accounts receivable records. “You want to look at actual reports from the billing company to get a sense of gross charges,” she says.
Maintain an exit strategy. Sellers should keep Medicare provider ID numbers and other pertinent credentials current if they’re joining a larger group, and be crystal-clear about the details of any subsequent non-compete agreements, she says.
Sellers shouldn’t expect a windfall, Borglum adds. “You’ll always make more money by working a practice rather than selling it. A sale is really only an exit strategy” for retiring, relocating or divorcing physicians, he says. Selling a practice for $1 and the obligation for the buyer to assume and maintain patient records is not uncommon, he says.
Know your value. On the other hand, don’t discount a practice’s potential value to an acquirer if it has something that sets it apart from other providers, suggests Peter Valenzuela, MD, MBA, chief medical officer for Sutter Medical Group of the Redwoods in Santa Rosa, California. He practiced family medicine before earning a business degree and taking on administrative roles.
“You want to ask yourself if there’s a reason they might want you in particular,” he says. “You want to know your unique value to an acquirer.
“There are a lot of strategic decisions going into these acquisitions,” he adds. For example, a practice might serve a particular ethnic group in the community, or have an established relationship with a payer that the acquirer doesn’t, he says.
It also helps to come into the new practice in a position of responsibility, Valenzuela says. As his own group has acquired other practices, he says, physicians have joined the new organization as board members with a strong voice, which has helped smooth the transition and kept new physicians engaged. Next: The rewards of independence
The rewards of Independence
Keeping buy-in costs low and communication channels open proved the key to a relatively smooth merging of six practices in the Tampa-St. Petersburg, Florida area over the last two years, says Robert Swiggett, MD, president of OrthoCare Florida. The 55 orthopedic surgeons involved in the practices were also motivated by the idea that they could control their destiny more together than by individually selling to a hospital, he says.
“Our experience with colleagues was they would became unhappy with hospital contracts and end up doing something else as soon as they could,” he says. “There was enough fear there that there was a good impetus to get together. Then it was about meeting every month and talking and realizing we should get together. Also, the buy-in was fairly low, so that was an incentive.”
Flexibility was also key, as the practices maintained much of their own compensation systems while merging retirement plans and some other functions, he says.
Ultimately, finding the appropriate patient mix and practice size that can take advantage of pricing clout without creating an onerous management structure is a top priority for the Elias brothers as they build their futures, Matthew Elias says.
“Our goal is to be a little larger in the future—not with 20 offices but maybe five or six so we can get economies of scale and hedge our bets against what’s happening for the future of healthcare and for negotiating power with the payers,” he says.
Elias recently heard from a patient’s husband that the physician’s transformative work had improved his wife’s outlook on life. The experience defined the value of remaining an independent physician.
“Her husband came in to see me later, just to thank me and to tell me what a difference it had made in her confidence. That would have been great either way, but when things like that happen, it’s especially gratifying if your name is on the door,” he says. “It’s worth everything in the world.”