Do you have the urge to merge?

July 10, 2011

Despite today's uncertain economic climate, two recent, surprising reports show that mergers and acquisitions are on the upswing.

Key Points

Remaining independent does, admittedly, enable physicians to exercise maximum control over the day-to-day operations of the practice. Unfortunately, many of these practices will be hard-pressed to make the substantial investments in technology, including electronic health records, e-prescribing systems, and information systems required in today's world.

On the other hand, the economy, the still unknown impact of healthcare reform, weak earnings, and the aging physician population create great buying opportunities.

Typically, the process of consolidating practices takes one of two forms: an acquisition, in which a medical practice folds another practice into its existing operations, or a merger, where both practices are dissolved and a new practice entity is created.

For small medical practices, merging can be a way to cut overhead costs, increase purchasing power, and operate more efficiently. Many M&A transactions are undertaken in the belief that a profitable, better managed practice can get more out of the assets of an underperforming practice than can its current management.

Most small medical practices tend to grow organically, that is, by slowly adding patients, new principals, employees, new services, equipment and/or physical space. Others grow by merging with or acquiring another practice, or by being acquired. In fact, an economic downturn often creates greater opportunities for buyers to take advantage of depressed business valuations, providing an opportune moment to do a deal.

THE PROS AND CONS OF ACQUISITIONS

Often, buying an existing practice is less risky than starting from scratch. When a practice is acquired, usually it is already generating cash flow and profits. What's more, the acquired practice has an established patient base and reputation, as well as employees who are familiar with all aspects of the operation.

On the downside, buying a practice is often more costly than starting one. Fortunately, it is easier today to obtain financing to buy an existing practice than funding to start a new one. Bankers and investors generally are more comfortable dealing with a practice or business with a proven track record.

Being bigger may make a practice more attractive to third-party payers, and therefore able to negotiate more favorable reimbursement rates or contract terms. Bear in mind, however, that merging for the purpose of better controlling the payer market could run afoul of federal law.

The Sherman Anti-Trust Act prohibits mergers for the purpose of restraining trade and makes it unlawful for any business or professional practice to monopolize trade or commerce. Another federal law, the Clayton Act, forbids mergers and acquisitions where the effect may be to lessen competition or create a monopoly.

More of a threat to a smaller medical practice merging with or acquiring another practice is the so-called Stark statute. This law prohibits a physician or an immediate family member of the physician from making a referral to an entity with which the physician or family member has a financial relationship, including an ownership interest.

Stark also applies to the furnishing of "designated health services," such as physical therapy, diagnostic imaging, or lab services for which payment may be made under Medicare or Medicaid. This prohibition applies to referrals by a physician within his or her own medical practice unless the physician's ownership relationship with the practice falls within one of the statute's exceptions.

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