Like every long-term relationship, it’s imperative that physician group mergers happen for the right reasons. When two practices hold a strong position in their respective arenas, a merger aimed to enhance their position in the market or capture a larger share makes perfect sense.
Practices, however, often fail to realize this. Many physicians only consider mergers as a last-ditch effort to save their flagging position.
Physician owners must have a clear rationale for a transaction or truly understand a deal’s impact on their practice’s long-term financial future. Too often, however, there’s a misguided sense of why the merger should take place at all.
There’s far too little time spent defining how the merger enables them to beat competitors and increase organizational value. The combining of forces can augment their footing in the market and lead to a successful merger.
1. Practice mergers require a tolerance of risk
A merger is an extremely significant move for each physician group involved. It is a tightrope walk. Even a small slip can pour millions of dollars down the drain. Timely identification of weaknesses, risks, and threats, whether internal or external, can save huge costs and efforts.
Internal risks can include
- cultural frictions
- potential layoffs
- low productivity, or
- power struggles at the helm.
External risks may include
- low acceptance of service lines through combined synergies
- a sudden change in market dynamics
- regulatory changes (and more).
Although it is not possible to be impeccably far-sighted, precision in dealing with such potential risks is a must.
2. Cultural compatibility is essential
While absolute cultural congruency is not always possible, it is advisable to find the closest fit while planning a merger. Both physician groups must recognize their similarities and more importantly acknowledge their differences. Only then they can they strive to create a new culture which reflects the core beliefs of the practice.
The creation of a brand new identity with employee support leads to a sense of belongingness and continued efforts towards a shared goal. This allows the staff to become engaged in a new culture, new goals, and a new future.
3. Leadership is required
Leadership is required to identify the correct reasons for a merger. It is also required to retain the correct people after the merger.
The success of a merger hinges on a seamless transition and effective implementation. Many physician groups take too long to put the key leadership in place, thus creating confusion and apprehension.
Choosing whom to retain and whom to let go is a dicey game, but this is where leadership, judgment, and skill play a role. If the pillars of each physician group are retained judiciously, the path becomes easier. However, if employees feel out of place since the beginning, they may drift apart leaving a big vacuum in the newly-merged practice.
4. Open communication is foundational
Studies have proven that management of the human side of a merger is an important factor to maximizing the value of the deal. Effective employee communication and culture integration are the most difficult to achieve but have maximum importance in the success of the merger.
Conveying the decision to merge at the appropriate time helps to reduce a lot of uncertainties both in the pre and post-merger stage. Uncertainties lead to speculation and weaken trust. Grapevine conversations only result in loss of productivity. The more open the communication, the better it is.
5. Post-merger implementation is critical
Life comes full circle during the post-merger implementation. While pre-merger tasks are crucially important, it is actually the post-merger implementation that decides the fate of the deal. It is how the newly formed relationship is nurtured.
There will be performance stress in core-business areas amid changed circumstances. And, time pressure is tremendous. Unlocking synergies quickly and obtaining support from key personnel is critical at this juncture.
6. Synergies must be captured
For a merger to be successful, it is critical in the pre-deal phase to carefully identify, capture, and price the potential cost and revenue synergies.
It is important to understand these potential synergies because they can yield the probability of reducing the cost of operations in many mergers.
Arguably the biggest error in planning mergers is overconfidence in projected revenue synergies.
It is difficult to project revenue synergies because in most cases they are matters of speculation, and manifest themselves in so many different ways. To be sure, there will always be uncertainty surrounding future synergies. However, qualified healthcare consultants should attempt to make the best estimate of how much value cost and revenue synergies will be created in any merger before advising the parties to proceed.
7. Be skillful at cost cutting
In general, it is much easier to cut costs than to attempt to increase the revenue of a practice on its own. When similar practices merge, they are presented with an opportunity to improve savings through expense reduction strategies like optimizing operations and lowering redundancies. Skillful cost-cutting measures and combining redundant departments can reduce training and turnover expenses while also helping to promote employee loyalty.
Economies of scale are the soul of most businesses. When two physician groups are in the same specialty, it makes perfect sense for them to combine locations or reduce operating costs by integrating and streamlining support functions. This becomes a large opportunity to lower costs. The math is simple here. When the total cost of patient care is lowered with increasing volume, total profits are maximized.
The bottom line
Physician group mergers must take place for strategic reasons, such as improving competitive capabilities, expanding footprints, achieving economies of scale, increasing patient base, testing new geographies, enhancing brand equity, rather than superficial reasons like tax benefits or to save oneself from market risks. Failure to perform the lengthy due diligence will result in mergers that are dead on arrival, no matter how they are managed after the deal is complete.
Realizing these future synergies requires significant management actions. Thus the core driver of a merger must be a marriage of sound management philosophy and the implementation of projected synergies. Without both, there is no foundation for the merger.
Physician group mergers must be considered as a means to fulfill far greater strategic outcomes rather than mere ends in themselves.
Nick Hernandez, MBA, FACHE
Nick Hernandez, MBA, FACHE is the CEO and founder of ABISA, a consultancy specializing in strategic healthcare initiatives.
Since founding ABISA in 2007, his emphasis has been on developing and maintaining a strong relationship with physicians and identifying areas for business opportunity and support. The company’s client list includes physician groups, hospital systems, healthcare IT organizations, venture capitalists, private equity firms, and hedge fund managers.
Nick is a graduate of the United States Naval Academy and a former Captain in the U.S. Marine Corps. He holds MBA degrees in both Operations Management and Information Technology & E-Business Management from Wake Forest University. He is Board Certified in Healthcare Management and has been named a Fellow of the American College of Healthcare Executives.
He is a frequent guest lecturer and is often quoted in the national media. He has consulted with clients in multiple countries and has over 20 years of leadership and operations experience. Nick is a Subject Matter Expert in business strategy, practice management, telemedicine, health IT, and oncology.