Amerger of medical practices can provide significant and long-term benefits to a rheumatology practice. However, before becoming engrossed in the potential synergies and desire to expand your patient base, there are a number of difficult decisions and legal issues that must first be addressed. After these decisions are identified and considered, the prospective merger sometimes fizzles—the perceived uncertainties and difficulties of actually carrying out the merger eclipse the initial excitement. However, do not fear a merger that makes sense from a business and personal standpoint. This article will address some of the key benefits, frequent sticking points, and issues that should be considered by any physician group contemplating a merger.
Benefits
Merging two or more existing practices can offer considerable benefits to all parties involved. Among the benefits are:
- Better utilization of expensive resources (e.g., electronic health record system, the newly hired associate physician’s salary);
- Expanded referral opportunities (however, there are legal limitations);
- Increased attractiveness to recruit physicians;
- Pooling of capital and financial resources;
- Greater leverage with payers;
- Cost savings through economies of scale (e.g., volume discounts on supplies);
- Improved lifestyle through shared patient rounding and on-call coverage; and
- Improved utilization of physician extenders (e.g., physician assistants, nurse practitioners).
Considerations and Issues
Mergers can dissolve almost as quickly as they are formed if the parties have not carefully composed a cohesive plan of merger. The prospective partners should sit down and discuss the subtle details of the merger up front. It is too often the case that the deal closes and the partners later realize that they have fundamental disagreements on important details—or worse yet, there is so little coordination that few, if any, of the potential advantages of a merger are realized. Here are a few of the key details to be discussed and agreed upon before the merger proceeds.
Legal Structure
Should the new entity be a limited liability company (LLC), professional corporation (PC), or other entity type? Regardless of the form of entity (and being slightly overly simplistic), there are two primary options when considering combining practices. Let us use the hypothetical example of a proposed merger between Acme Rheumatology and Acme Medical Center to outline the two options. The first option is for Acme Rheumatology to merge into Acme Medical Center, with Acme Medical Center as the surviving entity (or vice versa). Acme Rheumatology ceases to exist and the owners of Acme Rheumatology exchange their ownership interest in Acme Rheumatology for an ownership interest in Acme Medical Center. The premerger assets and liabilities of Acme Rheumatology are assumed by Acme Medical Center. Thus, Acme Medical Center holds the assets and liabilities of both practices.
Alternatively, the two practices could merge into a newly formed entity, Medical Institute of Acme. In this scenario, Acme Rheumatology and Acme Medical Center distribute their assets (while the practices each retain their respective receivables and liabilities) to their respective owners. The owners of the two practices then transfer the assets to Medical Institute of Acme. The appeal of this approach is that it provides a cleaner break between the old and the new in terms of past reimbursements, malpractice, and so forth. With this approach, the owners of Acme Rheumatology are less concerned with the contingent claims of Acme Medical Center (and vice versa), such as tax issues, employment-related claims, and payer audits. However, the new entity may not shield the owners from past claims where Acme Rheumatology or Acme Medical Center are empty “shell” entities. Another concern with this approach is that provider numbers will need to be obtained for Medical Institute of Acme (possibly causing initial cash-flow delays). Additionally, this new entity approach may trigger taxation at both the entity and individual levels. While there are advantages from a liability standpoint, the creation of a new entity likely creates additional planning and cash-flow considerations. Conversely, the new entity approach may be more advantageous from a liability and “start fresh” perspective.
Governance
Another matter to address is how much autonomy each practitioner will have postmerger. Who will make the key decisions on behalf of the practice? Are there decision-making committees with members from both Acme Rheumatology and Acme Medical Center?
Noncompetition and Buyout Provisions
In general, either all or none of the parties to a merger should be subject to a noncompetition clause. A less restrictive alternative to a noncompetition clause is a limitation on future buyouts. The departing physician may have the right to leave and compete, but it comes at the disincentive of a reduced buyout price to the departing physician. Such a provision acts as an incentive for the physicians to stay with the merged practice.
Initial Exit Plans
Parties often want a “bail out” clause, which permits a merging party to reverse or “unwind” the transaction within an initial period of time (typically no more than 18 months) if a party feels that the merger is not working out as intended. This helps place both groups as close to their premerger state as possible. Remember that after the merger closes there will likely be assets that have been acquired as well as duplicative assets that have been disposed. A bail-out clause should address such matters by orderly allocating assets between the parties in the event of a “de-merger.”
These types of clauses are difficult to administer from a business prospective. Great care must be taken when creating the contract language and merger plan if such a clause is the preference of the parties.
Other Key Items
Among the other items of importance to address are employee benefit plans (typically, one of the practices’ plans survive), participating or nonparticipating status with Medicare and other payers, malpractice insurance, prospective buy-ins (what a new physician to the group must contribute in order to become an owner), Stark law issues (Medicare and Medicaid patient referrals to a facility in which the physician has a financial interest), and antitrust concerns.
This article is by no means an exhaustive list of the topics of discussion that should take place when planning a merger. Nonetheless, a medical practice merger can be a very rewarding endeavor for physicians and medical practices if crafted carefully and thoughtfully with the right business partners.
Steven M. Harris, Esq., is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins, LLC. He may be reached at [email protected].