If you are considering a physician practice merger, this guide will provide you with essential information about the key elements and strategic considerations of a well-done due diligence process. 

While mergers and acquisitions can be an exciting part of physician practice transformation, however, it’s important not to get too far ahead of yourself as the next step in the process can be a lengthy one. That is due diligence.

The decision to buy, sell, or merge a medical practice is more complicated than ever. There are so many more elements than simply determining a medical practice’s worth.

For those considering merging with another private practice entity, there are many things to strategize about as a part of the due diligence process. Therefore, applying a systematic approach to strategic due diligence can yield huge returns to practices considering mergers. Let’s dive in.

What is due diligence in physician practice mergers and acquisitions? 

Due diligence is an important part of the acquisition process. It represents the orderly investigation of any matter pertaining to business dealings. Essentially, it’s about understanding how a business really works.

Since no two medical practices are the same, it’s important that a diligent effort is made in order to obtain any information that would be relevant in the sale or purchase of a physician practice and its assets.

In mergers and acquisitions, due diligence helps clients recognize any financial, legal, or operational risks that may not be noticeable from outside perspectives. A key aspect of due diligence is to examine the strategic positioning of the “target” medical practice.

Why does due diligence matter?

While due diligence may seem like it only benefits one party, the fact is that due diligence helps both the buyer and the seller in the acquisition of a physician practice.

It is the seller’s responsibility to provide buyers, investors, and potential business partners with the information needed to make an informed decision. Yes, it means turning over extremely sensitive corporate documents such as profit and loss statements, business plans, payroll records, payer contracts, lease agreements, and so on.

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From a buyer’s perspective, due diligence gives them peace of mind that they’re making the right deal and have all the information they need to make a good purchasing decision.

This information can include learning more about the practice’s existing patient base and referral relationships. It can either validate positive assumptions or warn of potential irregularities.

From a seller’s perspective, due diligence helps physician owners take a deeper dive into the financial integrity of their business and can also help them uncover the fair market value of their practice.

As valuations and acquisition prices are intertwined, it’s essential that physician owners, private equity firms, and management services organizations invest in quality due diligence reporting and services.

What’s included in due diligence reporting?

First of all, it is important to note that non-disclosure agreements (NDAs) are standard. If you are a potential seller and you are not offered an NDA by the potential buyer then this is a red flag right from the start. This is true whether or not you have chosen to work with a broker.

Every detail matters when during the due diligence process, including such things as,

  • patient volumes and catchment areas
  • existing relationships with referring physicians
  • the practice’s workforce
  • the competitive environment of the practice 

Good due diligence may validate your assumptions. More importantly, it can help alert you to any irregularities or possible issues in a business that may bring the value of a “target” medical practice down.

Ideally, any issues would be surfaced before the due diligence stage, but sometimes things slip through the cracks, or may not be fully considered in the right context.

More Content from this Author:
Buying or Selling a Medical Practice? Read This First.
Physician Practice Valuation: What You Need to Know

Key elements of due diligence

Financial Information  

Most buyers spend the majority of their due diligence looking at and confirming financial reporting. All documentation and accounting information should be up to date and accurately portray numbers that were disclosed during the deal-making stage.

Legal

Understanding if the business being acquired has any potential liabilities is another important consideration in due diligence. This includes looking into current partnerships and contracts in place to ensure there are no irregularities before moving forward.

Business sustainability

Cash flow management and long-term business sustainability are important aspects of due diligence. Careful analysis and previous years of data (e.g. patient volumes, procedures, billings, and collections, etc.) will help potential buyers diagnose trends and decide if their investment is worthwhile.

Assets

Buyers will want to validate what assets are in place and if they are in good working order. If not, they will have to make investments after closing. This may impact the value of the deal.

Be sure to review service agreements as well as any lease arrangements. Additionally, real estate (owned or leased) needs to be evaluated and discussed strategically with the seller.

Human resources

Contracts with physicians and any other employees may need to be redone. The  buyer will often have sensitive discussions with the seller during due diligence as it relates to those.

All other employee-related items (e.g. benefits plans, 401(k), COBRA continuations, etc.) should be readily accessible as these can take time to review and make determinations on post-transaction changes.

Finally, it is important to note that not all due diligence investigations are the same.  Expect surprises. This can greatly impact the length of the due diligence process as well as the time invested by all parties. And, if due diligence drags on for too long, one or both parties can lose interest in the potential transaction at stake.

Strategic considerations for the due diligence process

  • Seek validation

Is the strategic vision for the agreement valid? 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. Often there’s far too little time spent defining how the merger will enable them to beat competitors and increase organizational value. Those that fail to take this into account contribute to the failure rate of physician group mergers.

Unfortunately, the link between strategy and a transaction is often broken during the due diligence process. By focusing strictly on financial, legal, tax, and operations issues, the typical due diligence around a proposed merger fails to test whether the strategic vision for the deal is valid.

To do so, physician groups should bolster the usual financial due diligence with strategic due diligence. They should test the conceptual rationale for a deal against more detailed information available to them after signing the letter of intent. They should also see if their vision of the future operating model is actually achievable.

  • Seek confirmation

When analyzing a practice, looking at historic and current performance is relatively easy. But what about looking further into the future? What are the strategic issues ahead?

A strategic due diligence process should explicitly confirm the assets, capabilities, and relationships that make a buyer the best owner of a specific target acquisition. It should bolster the physician owners’ confidence that they are truly an “advantaged buyer” of an asset.

Advantaged buyers are typically better than others at applying their established skills to a target’s clinical and business operations. They also employ their privileged assets or management skillset to build on things such as

      • a target’s practice reputation
      • patient experience
      • relationships with referring physicians

Naturally, they also turn to their special or unique relationships with vendors and the community to improve performance, leading to advanced synergies that go beyond what’s normal.

  • Seek mutually reinforcing advantages

When change comes suddenly, it can turn strengths into weaknesses and sweep away dreams of success. The aim of a merger should be to achieve mutually reinforcing advantages.

Michael Porter wrote in his classic Harvard Business Review article, “What is Strategy,” (subscription required) competitive advantages stem from how

“activities fit and reinforce one another…creating a chain that is as strong as its strongest link.”

By undertaking strategic diligence, physician owners will be able to not only define their main objectives but also gain greater control over the desired direction of the new entity after the merger is consummated. Some of the strategic diligence issues to understand include:

      • The strengths of each practice
      • What the practice could be doing better
      • What opportunities exist as a result of this merger?
      • Are there threats that we face by completing this merger?
      • The current culture of each practice

As part of the process, you should also consider the scope for further growth, efficiency, improvement, and so forth. It is critical for physician owners to be honest and thorough when assessing their advantages.

Ideally, they develop a fact-based point of view on their beliefs—testing them with anyone responsible for delivering value from the deal, including

      • physicians
      • physician extenders
      • clinical staff, and front 
      • back-office personnel.

Above all, when it comes to the merger of two physician groups, culture is a key decision criterion. It must be meticulously examined as part of any due diligence process. Further, it should be completed prior to any financial considerations. In my experience, this is of paramount importance for practice-to-practice mergers.  

Final thoughts

The results from the strategic due diligence process provide the acquiring practice with the strategic information it will need to manage the target practice. Often, the seller knows more about the practice and its patients than the buyer. This asymmetrical knowledge can have long-lasting negative effects post-merger.

Strategic due diligence accelerates this learning process and expedites the achievement of the long-term goals. Of course, nothing in the future is certain but using a strategic and diligent approach provides a far greater understanding of the issues ahead. 

The due diligence process is a must, however, it is inherently filled with conflict. This conflict usually arises in the following circumstances:

  • A first-time seller is hesitant to turn over sensitive information.
  • The seller is untrusting of because the buyer is a competitor
  • The transaction was unsolicited by the potential seller.

These are keen reasons why it may be of interest for the seller to engage the services of an independent consultant.

I have assisted many entities (including physicians themselves, private equity firms, and management services organizations) with due diligence of physician practices. So, I can attest to the highly structured process of due diligence.

There are myriad items to review and question. These go beyond having a mere rough idea of what equipment is in the practice. Or whether there are any malpractice claims.

Due diligence is a critical part of mergers and acquisitions, particularly as the deal comes to a close. It’s important to understand what to expect from the process. That way, you’ll be able to provide accurate and timely reporting that increases the value of your medical practice. It can also help you identify and address irregularities ahead of time.

There are many reasons why physician practices merge or acquire other practices: increased market share, gaining new capabilities, diversifying a service offering, and more. It’s also no secret that mergers and acquisitions sometimes don’t go as planned. 

The importance of culture in practice mergers

In my experience, culture is the most common reason why mergers and acquisitions fail.  In my experience, the largest contributor to merger and acquisition failure has to do not with the business but with the people. More specifically, how we handle (or fail to address) the cultural differences between organizations, which are exacerbated by a lack of effective communication. Put another way, did leadership account for the culture or anticipate a potential culture clash?

When a physician practice is acquired or when practices merge, the decision is typically based on a physician fit or market fit, but employee differences are often ignored.

It’s a mistake to assume that employee issues are easy to overcome and physician owners that fail to recognize them, may end up regretting it.

During the process, it’s easy to treat a prospective transaction as purely a mechanical process. However, the people aspect of any deal is always critical. Culture fits can provide the assurance that combining two-physician practices makes sense.

To ensure your merger or acquisition has the greatest chance of success, it’s critical to make your employees’ experience painless (or at least less painful). Consider what’s at risk during such a transition, how you communicate with employees, and how to support them.

It’s especially important to focus on people and culture during an acquisition or merger. Be sure to communicate with employees, collect feedback to take targeted action for retention, and provide ongoing support.

Related Content by this Author:
The Post-Merger Integration Process – 4 Steps to Success
The Most Common Reasons for Failed Group Practice Mergers
Seven Strategies to Consider Before a Practice Merger

Anticipate potential roadblocks

There are a few things at risk during a merger or acquisition:

  • losing talented employees
  • disrupting the culture of your practice
  • missing opportunities to communicate with newly-acquired employees

To avoid having employees jump ship, speak with them, ideally before the deal closes. This will give you a better understanding of which parts of the practice are at the highest risk of turnover. The goal here is to reassure employees of job security and to thus reduce the risk of a mass exodus.

The culture will change after a practice merger

It’s inevitable that your physician practice culture will change after a merger or acquisition. There are three common ways to thoughtfully develop and shape a culture post-merger:

  1. Choose one business’ culture to be carried on
  2. Create a new culture that combines the best from both physician practices, or
  3. Create a completely new culture

Each path has its pros and cons. Whichever you choose, it’s important to communicate your decision, and your rationale, with employees.

During times of transition, communication often becomes increasingly siloed to top-level decision-makers, leaving the majority of employees in the dark. This disconnect causes rumors to spread and breeds distrust of leadership.

Rumors fill vacuums

Communicating with employees, empowering them, and creating a culture for them to thrive are all fundamental parts to integration.

Rumors fill mystery and vacuums, and employees are left asking questions. This lack of communication creates distrust and uncertainty in the workplace, leading to lower employee engagement levels.

Devise a communication plan before the deal is finalized and exercise it throughout the process. Being aware of the questions, concerns, and fears that employees might have. Proactively communicate answers as it will build transparency and trust, and help lead to a successful merger.

Prepare employees for the practice merger

Concerns about job security are top of mind for employees. They want to know how they will be affected:

  • Will their role will still be relevant? 
  • Are their past successes going to be recognized?
  • How will they be accepted as members of the new team?

Address their concerns and keep them updated on the process and timeline as much as possible. Also, communicate  information on the following in a timely fashion:

  • How and when benefits will transition
  • What their election options are
  • Details of the time-off policy
  • How you conduct performance reviews
  • When and how you review compensation

Addressing employees’ basic needs is crucial to establishing a foundation of trust and building confidence in leadership.

Proactively work to avoid employee turnover

Offering career path training pre- or post-merger is a great way to prepare and support employees. This way, even if there are layoffs or they opt to leave, they have an understanding of what their next step should be and where their strengths lie. 

During this delicate process, it’s essential to keep employee turnover low because business continuity is key to realizing the benefits of the merger.

Furthermore, there can be large financial implications from the cost of hiring new employees. What’s more, employee turnover can result in loss of knowledge and patient relationships.

Once the acquisition is complete, it’s a good idea to conduct onboarding for acquired employees, the same as you would for a new hire. This is a great way to make them feel integrated and welcomed as well as establish expectations.

  • Is there an actual orientation process?
  • Do they need to participate in any training or watch any videos?
  • Is there written material for them to read on their own?
  • Is there welcome swag?

Treat them like members of the team, because they are.

Final thoughts on managing culture during a practice merger

It’s difficult to quantify the human side to mergers. Typically, physician owners overlook this aspect because of the notion of being able to rehire employees and managers.

Passing judgment without taking the time to understand why a particular practice or culture exists can lead to major misunderstandings and resentment.

Remember, you don’t need to wait until things feel settled to collect feedback post-merger or acquisition. Soliciting employee feedback during times of transition will give you the data you need to take action and ensure employees’ voices are heard both now and in the future. 

Focus on what really matters and never forget that blending cultures takes time. Remain patient with cultural differences and participate constructively, without judgment, to explore which critical parts of the practice culture need to be aligned.

By adhering to these pointers, you raise the likelihood of immediate and long-term success for your merger or acquisition. You will also likely significantly reduce the inevitable anxiety that comes with such a significant effort. That’s a win/win for all involved!

 

Are you considering partnering with a Management Services Organization (MSO) instead of merging your practice with another or selling to a hospital? Recently more private practice physicians approach me about “selling” to private equity or “joining” an MSO. 

There is often confusion about how these two are related and exactly what it means to join an MSO. The structures of MSOs vary greatly, as well as the management services they offer. Furthermore, the laws related to these entities vary by state. This may further complicate the design structure. 

This article will attempt to give a high-level overview of two common structures of MSOs:

  • One that takes ownership (partial or full) of a medical practice
  • The other that provides business services without taking any ownership.

The acquisition

For starters, most MSOs are very particular about the practices they purchase. Aside from being specialty-specific, they have specific parameters when it comes to size, revenues, location, number of offices, and so forth. 

If your practice meets what they are looking for, you may be in a position to entertain offers from an MSO as well as independent buyers (i.e. other practices or hospitals).

  • The sale to an MSO is different from a traditional sale

You can expect a sale to an MSO to be different from a traditional sale in these main areas:

      • time frame
      • due diligence
      • financing (or payment of the purchase price)
      • transition structure

Established MSOs will have a team of individuals dedicated to acquiring practices. Their primary job will be to dissect all of your practice data to determine if your practice represents a sound investment for them. This process is often very time consuming and demanding on the seller and his or her advisors (consultant, attorney, and accountant).

  • Contingencies

In a traditional sale, it is common for the seller to be completely cashed out for the purchase price at closing. Full cash payment is less common in an MSO acquisition. 

Often the MSO will make a portion of the purchase price contingent on one of two conditions:

      • the seller stays on as a practicing physician in the practice for a period of time after the sale (an earn-out)
      • the performance of the practice for a period of time after the sale (a performance-based buyout). 

If so, it would be prudent for you to learn as much as possible about the company, including but not limited to:

      • its principals
      • the private equity investors
      • its history
      • performance. 

You should also speak with current and former selling physicians.

In most MSO acquisitions, the MSO will require the seller to stay on and work at the practice for two to three years or longer. These work-back requirements may be tied to a purchase price payout or cash penalty if the seller exits early.

Post-sale working arrangement

One of the first things you should consider is do you want to keep working after the sale? If so, for how long?

Another consideration of selling to an MSO vs. a hospital vs. merger with another practice is how well you deal with the loss of control. Some of these transactions may convert you to an employee, not an owner.

Therefore, the company may set your work hours and vacation schedule. It may even decide who will be on your staff. You may be required to change referral patterns or change a number of outside vendors. 

For some physicians, this does not matter. For others, it will cause endless aggravation. Before you sell to an MSO, find out what will change, and do some honest self–reflection.

Risk assessment

Finally, assess your risk tolerance, including when you need the money from the sale of your practice. 

MSO deals are often different. Be sure you know the answers to the following questions:

  1. How much will be paid at closing?
  2. What amount will be held in escrow?
  3. How much may be held back pursuant to some future earn-out?  

There is also another consideration for those MSOs that do have a holdback of some of the purchase price that is paid later. That amount is pursuant to a non-guaranteed earn-out that pays you a percentage of future profits or revenue. 

If revenue drops, the earn-out drops and you may not receive your full anticipated sale price.  If you are risk-averse, then that particular MSO arrangement may not be right for you.

If you are considering a sale of your practice to an MSO, be sure you do the following:

  • consider the requirements they make of you as terms of the sale,
  • make sure the numbers add up,
  • do your due diligence on the MSO,
  • measure your expectations and values against what they have to offer
  • and finally, seek professional advice.

Another type of MSO

There is another type of MSO that may provide business services without taking ownership of your practice. In this type of relationship, you would enter into a long-term contract with the MSO without giving up any ownership. Your practice would receive similar management benefits but you would not receive any cash payments in lieu of shares in your practice. 

Consequently, this type of arrangement can deliver outstanding assistance to your practice (depending, of course, on how the MSO is structured). However, it is in no way a form of succession planning nor an exit strategy. This is because you are not taking on an ownership partner.

Nonetheless, these steps arrangements can help your practice run better. Thus they may be more appealing to physicians looking to join your practice. Furthermore, without giving up any ownership stake, it allows for partnership paths for physician employees. 

One of the downsides to the other types of MSOs is that their buy-in at a certain point in time may prohibit or limit those physician employees who were on a path to partnership and partners who may not have yet become owners.

Related Articles from this Author:
Getting a Better Handle on Your Physician Practice Management Tasks
What Are the Best Options to Grow Your Practice?

Final thoughts on MSOs

The primary benefit of joining an MSO is to have access to management services and to gain the best pricing on supplies and services. As a particular MSO grows, it obtains economies of scale that allow it to obtain preferred pricing on a whole host of items that vary from specialty to specialty. 

Consideration of an MSO (either partnering with or selling to) is certainly nothing that should be taken lightly. When you begin contemplating this initiative, it is highly advisable to contact a consultant who has a lot of experience working with MSOs. Firstly, because that individual will be able to answer your questions as to the pros and cons. And, secondly, he will help you weigh whether or not this endeavor is a good fit for your practice. And who knows…you may even consider starting your own MSO!

It is important to evaluate whether you want to consolidate your medical practice’s position or find ways to grow your practice. If you decide that your priority is growth then you need to understand your growth options and plan carefully in order to succeed.

Growth has its risks, however, the right strategy can deliver stability, security, and long-term profits. Before you decide how to proceed, you need to assess the current strengths, weaknesses, opportunities, and threats to your practice. And you need to know how well it’s equipped to handle them.

Only after you thoroughly understand your practice’s current position, should you move on to the next stage: building a strategy for growth.

The importance of medical practice growth

Your medical practice’s focus changes as it moves beyond the start-up phase. Identifying opportunities for growth becomes a priority to ensure the practice’s sustainability.

You can measure growth by looking at your key statistics including,

  • revenue
  • profits
  • patient volume
  • market share

However, determining which measure delivers the most accurate picture of your practice’s performance depends on two things:

  • your specialty
  • what stage the practice has reached

In general, a combination of top-line revenue and bottom-line profit is the most balanced way to measure growth.

Where should you begin to assess your growth options?

Even if you are happy with your current performance, it is important to keep looking for ways to develop. If you don’t, you risk allowing your competitors the room to grow and take market share from you. This could seriously weaken your position. Going for growth may, therefore, begin with a consolidation of your current markets.

To devise a successful growth strategy, you need to know exactly what shape your medical practice is in. This will help you to ensure your practice is properly structured to make the growth strategy you choose a viable option.

Consolidate your existing performance

While you may be spending more time and resources on developing the practice, you need to be sure that the core of the business is still performing well. It is vital not to neglect your existing patient base as this will underpin your growth and provide the cash flow you will need during this phase.

Timing is critical to the success of any growth strategy.

Answers to the following key questions will help you judge if the time is right to embark on a growth strategy:

  • Could your practice cope with expansion or is it working at full capacity?
  • Do you have the resources and systems in place to carry on your existing practice while targeting expansion elsewhere?
  • If new initiatives are likely to disrupt existing performance, how will you ensure your patients don’t lose out?

You may have to consider one or more the following options:

  • adding additional staffing
  • refining clinical processes and equipment
  • outsourcing certain tasks

Having a robust practice infrastructure will give you the flexibility to pursue a growth strategy.

Options to Grow Your Practice

1. Increasing Market Share

If you’re looking to increase market share, it’s important to make sure your business is in good shape first. To increase market share, a medical practice has to take patients from its competitors or attract new patients. Achieving this requires a thorough understanding of both your own patient base and that of rival practices and hospitals.

Related article: How Competitive Analysis Can Help You Grow Your Medical Practice

Having the answers to the following questions will help you build a comprehensive picture of your market and your competitors and put you in a stronger position to win a bigger market share.

  • Who are your existing patients? Are there any other patient demographics that may require your clinical skills or services and that you haven’t targeted before?
  • What are your competitors’ strengths? Do you have these too? If not, why not – and should you have them?
  • Why do patients seek care from your competitors? What advantages do you have over your rivals that may attract their patients? How can you communicate so that your competitors’ patients seek care from your practice instead?
  • What is your unique selling point?
  • Are there patients who have stopped coming to your practice? Do you know why? If not, you may want to ask them.

2. Diversification

Many small medical practices grow by taking opportunities to diversify, although there are risks because of limited resources on all fronts. Practices should weigh the risks and costs of opting for growth carefully against the benefits.

Diversification can take several forms, including:

      • Adding new, related products or services to existing patients
      • Identifying new markets for existing services
      • Considering new services for new markets

Deciding how and when to diversify depends on you having:

      • Thorough market and patient research for the new product or service
      • A clear development strategy — including trying a new product or service for a short test period with prototypes and test marketing before totally committing to the new project
      • Efficient clinical and business operations that can cope with the added demands

Generally speaking, diversifying with similar services and selling them to a familiar patient demographic is less risky than creating a service for a completely new patient demographic.

3. Partnerships, Mergers, and Acquisitions, Joint Ventures

You can also expand your medical practice by joining forces with another physician group. This can create more shared decision-making and possible management and staff issues to resolve. However, there can be clear advantages.

Successful co-operation can deliver:

      • More resources
      • Sharing of the managerial load
      • Larger skills and talent base
      • A bigger pool of patients
      • Increase in the catchment area
      • Reduced risk

It is important to be very careful who you link up with.  An agreement defining the terms of the partnership or joint venture is essential and further legal protection is advisable.

The bottom line on the best way to grow your practice

Be sure your practice is structured in a way that will allow you to grow without jeopardizing the care experience of your existing patients. Then, do your homework so that you understand your practice’s strengths weaknesses and current market position. Only then should you systematically explore all of your options for the growth of your practice.

You can find all of Nick Hernandez’s articles on TDWI here.

 


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This article was originally published on 12/18/18. It was reviewed and updated for republication on 5/11/20

Most physicians who have been practicing for a few decades remember the days when private payer reimbursements dwarfed Medicare reimbursements. That dynamic has long since changed, starting with the 2008 recession. Further, reimbursements have been flat or have lost value from inflation while practice costs have seen double-digit increases.

Meanwhile, hospitals and insurance-owned health networks have seen reimbursements increase to 300% or more of Medicare in some cases. This is occurring even though it is not uncommon for some private practices to receive rates far below Medicare standards.

Ironically, even as COVID-19 disease is ravaging communities across the U.S., many physicians’ practices have seen their patient volumes decrease from 30% to up to 90% because of the pandemic. A significant number of them are closing their doors for now.

As states start to allow elective surgeries to resume in the coming months, some physician specialties will see increases in patient volume. However, I believe that the pandemic will have long-lasting repercussions for every practice and every specialty. 

With that in mind, let’s take a look at some examples from our consulting business in order to illustrate how the COVID-19 pandemic is affecting some specialties across the nation in real-time:

A solo physician primary care practice: an unsung hero of the pandemic

One solo physician primary care practice in southern Florida has been hit particularly hard by the pandemic. The physician owner took it on himself to create a separate ‘isolation’ intake entrance with safety gear and safety partitions. He went to these lengths so he could still see patients who might be COVID-19 positive without putting his other patients at risk.

It is noteworthy that every patient that this doctor sees in his clinic that is prevented from going to the emergency room with a false positive saves the system, and the payers, tens of thousands of dollars. Despite this physician’s efforts to do right by patients, none of these measures are reimbursable. Everyone can see just how unfair and intolerable that is, yet he refuses to stop seeing sick patients.

Our society has chosen to give the lion’s share of the revenue and resources to the hospitals, even though they are overwhelmed and unequipped for this sort of a pandemic.

Doctors like this one are the heroes of the pandemic.

Related Content:
Are We Prepared for Increased Healthcare Needs Post-COVID-19?
Greater Risk of Blood Clots in COVID-19 Patients

 

A creative podiatry practice

A podiatry group practice in New Mexico was also frustrated with the ever-increasing practice costs and narrowing margins caused by years of stagnant reimbursement rates. The owners decided to merge their practice with another group to find savings thus creating efficiencies, consolidating costs, and increasing patient volume.

As the pandemic hit, they saw their patient visits decrease by 65%. The practice had to furlough most of the staff. They then started the process of converting to a multi-specialty with Medicare and the payers to try to capture more revenue from more lucrative procedures. It was hoped that this would allow them to capture more revenue from more lucrative procedures.

They viewed COVID19 as an opportunity to diversify their services to better weather future disruptions. There is, however, no guarantee such a move will insulate their practice from further disruptions if the pandemic continues or sees another wave of outbreaks. But they want to invest in the future while they have the time to see the change through.

Related content: Strategic Planning for Physicians in the Age of COVID

A solo neurology practice calls it quits

A single physician Neurology practice was successfully operating in a fairly saturated marketplace in the Baltimore area for over two decades. As reimbursement rates stagnated over the last ten years, it became harder and harder to make the same revenue as each previous year. 

The physician owner cut costs and staff, outsourced billing, moved to a cheaper location, and even worked an additional day or two a month. She enjoyed running her own practice and practicing medicine the way she deemed fit. She valued her autonomy over a large income. 

In early March the owner saw the pandemic writing on the wall. She started preparation to close the doors to her practice for good. She had seen a 35% reduction in visits. This would not have been sustainable for more than a few weeks, let alone a few months.

She has resolved close her practice for good and is planning to go work for a local hospital or join a larger neurology group that had been recruiting her for years. 

An OB/GYN practice chooses to negotiate reimbursement rates

One gynecology and obstetrics practice in Chicago took yet another approach. There is no delaying visits and procedures for this specialty. Although they’ve had to make dozens of safety protocols and stretch resources and staff, they’ve kept their doors open.

They have been able to absorb the increasing costs because they decided to negotiate their reimbursement rates with their payers. The practice was being reimbursed an average of 16% below Medicare before the COVID-19 pandemic. They decided that the current rates were not sustainable and could not support the practice during disruptions. 

Although the payers might argue that increasing rates isn’t realistic during the pandemic, this is exactly the time for practices to use their leverage and hold the payers accountable.

4 strategies to overcome poor payer reimbursement

These four cases exemplify different strategies that practices are employing during this pandemic:

  1. Soldier on and hope for the best 
  2. Consolidate and change the focus of the practice to try to find new revenue streams
  3. Give up on owning and operating a private practice and consolidate or join a larger group 
  4. Negotiate your rates and hold the payers accountable

Most practices fall into category one or two, and very few have the option of category three as their resources are already at a breaking point. But, I believe that every practice should be employing the fourth strategy.

Negotiating with the payers to increase reimbursement rates is not only possible but maybe the only viable solution to saving many practices in the long term. Why should practices carry the burden of the pandemic when the payers are doing little to battle the pandemic or help physicians carry the financial and systemic load? 

Many physicians don’t pay enough attention to their contracts, even though fair paying contracts are fundamental to the long term success of a practice.

The bottom line for payer reimbursement in the Age of COVID-19

Practices can and should utilize their current time and resources to start negotiating their payer contracts.  Alternatively, they can retain an experienced contract negotiator to help them hold the payers accountable.

This is the simplest way for almost every specialty to find more revenue when the shutdown eases in the months to come. Remember, the payers aren’t returning their premiums even though overall healthcare encounters have plummeted. This means that, now more than ever, physician practices have the right to pursue proper and fair compensation.

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The COVID-19 pandemic has hit physicians’ practices hard. I have many physician clients that have temporarily closed their practices to non-urgent patients. Others have put most of their patients on telemedicine visits. The business of outpatient medicine may have slowed considerably but it has not stopped completely. As the world gets a better grasp on the virus, it is safe to assume that your clinic will once again be busy. Consequently, in this age of COVID-19, some physicians are taking this opportunity of decreased patient load and fewer clinic hours to focus on strategic planning and other business initiatives they have been putting aside.

What is strategic planning?

Strategic planning is the process by which practice leaders determine what the practice intends to be in the future and how it will get there. To put it another way, they develop a vision for the practice’s future and determine the necessary priorities, procedures, and operations (strategies) to achieve that vision.

Included in the planning are measurable goals which are realistic and attainable, but also challenging. The emphasis is on long-term goals and strategies rather than short-term (such as annual) objectives.

Strategic planning assumes that certain aspects of the future can be created or influenced by the practice. There is broad agreement among healthcare leaders that planning is a critical component of good management and governance.

Strategic planning helps assure that a practice remains relevant and responsive to the needs of its patients, and contributes to practice stability and growth.

It provides a basis for monitoring progress and for assessing results and impact. It facilitates new program development and enables a practice to look into the future in an orderly and systematic way.

From a governance perspective, it enables physician-owners to set policies and goals to guide the practice. And, it provides a clear focus for the practice administrator and staff for program implementation and management.

Strategic planning for physicians is an ongoing business process  

If you have not done strategic planning in the past two years, then your practice is long overdue. This is particularly important during and after the COVID scourge as it is anticipated that aspects of medicine and healthcare delivery may be altered, sometimes radically, as a result of the pandemic.

To be of long-term value, the strategic plan must be treated as an ongoing business process. It must evolve and change to reflect changing market and industry conditions.

As a physician owner, you have an endless to-do list, a full calendar, and many people to talk to. Sometimes it makes you wonder how you are going to get it all done.

However, as the practice grows and the healthcare environment becomes more complex, the need for strategic planning becomes greater. Creating a strategic plan and thinking strategically are not about doing more. They are about focusing on how you spend your time so that you are more effective in reaching your goals and getting to where you want to go.

That said, no physician practice has an unlimited amount of time, money, or people resources. Strategic planning can help you make the most of the resources you have, allowing you to have more enjoyment in your work while you are doing it.

Why you should have a strategic planning session now

Here are eight reasons for getting your team together (virtually, of course) for a strategic planning session:

1. Vision

You will create a clear vision for what success looks like in the future.  If you don’t know where you’re going, how are you going to get there?

2. Priorities

You can identify priorities for the short and medium-term. You know that you can not do everything at the same time. So focus on what needs to be done now and then do it well.

3. Alignment.

You will work to get alignment and buy-in around direction and strategy. Having these conversations will move your team from implicitly to explicitly being on the same page.  The clarity will energize the whole team.

4. Identify Challenges.

You will be able to create an opportunity to talk about key issues facing the business (competition, changing trends, etc.).  You want to ride the waves, not get smashed by them.  Being reactive throws off your plans, and takes your eye off your goals.

5. Direction 

You’ll create a clear roadmap for the rest of the organization. Your staff wants to know where the practice is going and how they can contribute. An engaged staff is 20% more productive than one that is neutral (or, worse, disengaged). Your staff wants to win and this is how you can help them.

6.  Open Communication

You’ll create space for people to share what’s going on with them and what they want to see as the future of the organization.  It will open lines of communication and improve teamwork.

7. Empowerment

You’ll empower others to take on tasks that will move the practice forward. As a physician owner, that means less firefighting and more focusing on what you do best: patient care, leading, and executing.

8. Values and Culture

You’ll create the culture, values, and behaviors that you want to foster within your practice. When your values are clearly articulated, your team will understand what you expect from them on a day-to-day basis. Culture and values are the glue that keeps a strategic plan together.

Planning in a changing environment

Most practices understand the need for annual program objectives and a program-focused work plan. Many find it practical to define objectives for a 12-month period and to design strategies and programs to meet them.

Longer-range planning (planning beyond the next year or two) often seems more difficult and less rewarding. With the healthcare industry changing so rapidly and with as yet unknown consequences as a result of the pandemic, how can we expect to develop plans that will remain relevant? With so little control over external events, how can we hope to influence them in a way that benefits our patients?

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In fact, planning is no less important in a changing and uncertain environment. It may well be even more important. Practices need to be very clear on community needs and then work to address them through similarly clear practice missions, priorities, and objectives.

The challenge of delivering patient care will probably become greater with changes in the healthcare industry related to the pandemic and its economic consequences. Because of this, strategic takes on critical significance for practices.

Planning is designed to help a practice define its vision for the future and then determine systematically how it will get there; understanding obstacles and figuring out ways to overcome them.

Strategic planning in a crisis

It is very difficult to plan in a crisis, and unrealistic to look five years ahead unless a practice has some confidence that it will exist next year and that most of its key staff and its physicians will continue to be affiliated with the practice. Leadership also needs time to plan. As I mentioned above, the “pause” we are experiencing in outpatient care right now may provide an opportunity to engage in this type of planning. 

Moreover, while planning provides increased practice definition, a sound base for planning should include consensus around a well-defined mission statement and/or practice goals. These must often be developed as a foundation for longer-term planning.

It is also difficult to plan if the practice is so young or its leadership so new that they do not have a good sense of the community and of the competition. Most new practices find that they do best by first attempting to reach consensus on a practice mission statement and then doing shorter-range planning, usually for a single year. Learning from that experience, they can begin a longer-term planning process.

Strategic planning doesn’t have to take a lot of time away from a physician’s practice

Strategic planning doesn’t need to take a lot of time away from the practice. The focus and the results will speak for themselves. 

Before the COVID-19 outbreak, we conducted a lot of strategy discussions with physicians onsite. Recently, we have shifted to doing these discussions virtually. 

The key is to have an outsider facilitate the meetings to avoid confirmation bias. Confirmation bias is a bias that involves favoring information that confirms your previously existing beliefs. For example, you believe that all medical visits must be conducted in person so you aren’t willing to consider virtual visits.

The facilitator will also ensure that your planning meetings stay focused. They make sure everyone has time to share their thoughts. And, their goal is ultimately to leave you with a clear plan on how to move forward.

Related Content: 
Poor Payer Reimbursement and Practice Viability during COVID-19
Getting a Better Handle on Your Physician Practice Management Tasks

Strategic planning can help physicians be better prepared for market changes

Medical practices that consistently apply a disciplined approach to strategic planning are better prepared to evolve as the local market changes and as the healthcare industry undergoes reform. 

The benefit of the discipline that develops from the process of strategic planning, leads to improved communication. It facilitates effective decision-making and a better selection of tactical options. It also leads to a higher probability of achieving physician owners’ goals and objectives.

Strategic planning can be a challenging process, particularly the first time it is undertaken in a medical practice. With patience and perseverance, as well as a strong team effort, the strategic plan can be the beginning of improved and predictable results for the business. 

At times when the practice gets off track, a strategic plan can help direct the recovery process. When strategic planning is treated as an ongoing process, it becomes a competitive advantage. It is an offensive assurance of improved day to day execution of the business practices.

Related Content:  Greater Risk of Blood Clots in COVID-19 Patients

Why use a consultant?

The use of a consultant can help in the process and in the development of a strategic plan. As an outsider, the consultant can provide objectivity and serve as the “devil’s advocate,” as well as a sounding board. 

In the end, however, the plan must have the authorship and ownership of the physicians and managers who must execute and follow the strategic plan. It must be their plan.

The bottom line for strategic planning for physicians in the age of COVID-19

The world is shifting before our eyes because of the COVID-19 pandemic. Physicians’ practices are unlikely to escape unscathed. This can be frightening but you can prepare for it by initiating a strategic planning process.

More from This Author:
What is YOUR Strategy for Long-term Success?
The Competitive Advantage of Strategic Planning

Strategic planning, when treated as a work in progress, rather than as a binder on a shelf, or a file in a computer, provides a medical practice with a real and lasting competitive advantage. A living strategic planning process will help direct the business to where you desire it to be. Strategic planning is your medical practice’s road map to your vision of the future – a world that is post-pandemic.

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First published on Jan. 19, 2017, as “Strategic Planning for Medical Practices in a Time of Change,” this post has been extensively revised by the author to reflect the challenges of the COVID Age.

As the owner of a physician practice, you work hard and sacrifice a great deal of time to make your business successful. As the practice grows, so does your workload. You start on the front lines driving clinical treatments and referrals. Then you move to the back office supervising daily, often obligatory, physician practice management tasks just to keep the practice afloat.

It is clear that you are needed to keep the business running. However, you want to make sure the practice continues to operate efficiently even if you aren’t around.

Physician practice management: Freeing up time for yourself

Here are four steps you can take to replace yourself in the day-to-day management of your physician practice in order to free up more time for yourself:

1. Delegate responsibilities

Responsibilities can really weigh you down as they become more detailed and more time-consuming. When responsibilities start to detract from the things you love, it’s probably time to consider delegating some of those responsibilities.

Being a successful leader means learning to prioritize your duties and assign those tasks to someone who you can trust to perform well.  Be aware that finding the right individuals to delegate responsibilities to can be time-consuming. You need to be sure whoever is assuming those duties can perform at your own level of expertise.

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If you have a management team in place, reach out to your best employees and teach them how to do the tasks that take up a lot of your time. Alternatively, or in addition to training staff, considering finding a partner who can complement your business. As you consider delegation, don’t forget the principles of division of work.

When too many people share responsibilities, it wastes time and resources. When the staff is stretched thin, tasks are not completed on time. By referring to an organization chart, each person in the practice can determine what his or her responsibilities are. And, because of this, the medical practice functions more efficiently.

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2. Outsourced help

Some tasks may be better completed by outsourcing rather than hiring and training new employees. Back office assignments, such as billing and collections, can be sourced out if you aren’t in need of full-time help. It is more important to free up your time for other, more heavyweight projects.

For example, if your time is spent on resubmitting denied claims rather than long-term planning, you could miss out on taking your practice to the next level of its potential.

Keep in mind, however, that if you choose this route that it can get costly, especially if a lot of duties are being replaced by outsourcing. Additionally, quality is a concern to consider as well if you choose this route. Will the quality be to your standard and will your practice be a priority for the vendor like it is for you?

3. Consider bringing on a partner

Perhaps you want to take a bigger step back than just simply passing off some tasks to someone else. You want to grow your practice, but you don’t want to do it alone.

You can see the bigger picture, and you know a partner is necessary. A physician partner can help you get to the next level by bringing a complementary skill set to the table. Having a physician partner will allow you to spend more time doing the things you love outside the practice and focus on the things you have a passion for within the practice.

A good physician partner will want to see the practice succeed because of the synergistic elements the two of you bring to the practice. Physician partnerships are often a great idea providing you give thought to how you will structure one and why you wish to create a partnership.

Sometimes physician partnerships aren’t so successful — so it is crucial to choose your partner well.  If you do decide to add a physician partner, there are many things to consider, which I have addressed in previous articles.

Related Content: 
The Post-Merger Integration Process – 4 Steps to Success
Managing Cultures During Physician Practice Merger
How to Choose the Right Physician Partner for Your Practice

4. Consider a gradual complete exit

Maybe your aim is to retire completely from your practice. Or maybe you love your practice, but you’re drained and need to get out or move on. Perhaps your priorities in life have shifted but you don’t have a way to step back.

This is the road to succession planning. A new owner could be your best bet. Whether that’s a physician partner or another acquiring entity, you can work to create a transitional period after the sale.

Your practice is a financial investment for some buyers, so if you can illustrate the value your employees bring to your business, you can advocate for their continued employment. After all, if you are going to leave your practice, you want to make sure you leave your employees in a good place.

When it’s time to replace yourself, it’s important that you provide a secure environment for those you leave behind. Additionally, a gradual transition out of your practice will give everyone who works with you a chance to get used to the changes, and it will retain their respect for you.

Succession planning is one of the most important decisions a physician owner will face —when and how to retire from practice. Yet many physicians neglect to plan their exit. 

All too often, they think they can wait to sell the business when they’re ready to retire without realizing they need to have their practice well positioned and ready to hand off ahead of time.  Preparation can be the difference between success and failure.

Related Content: Buying or Selling a Medical Practice? Read This First.

Planning ahead 

Planning ahead allows you to focus on the best fit for the practice, first and foremost. Once you find the best fit that will respect the legacy of the practice and your employees, then it is very likely you will also find the greatest value.

Remember too, that transparency is crucial both internally and externally. Proactive communication about leadership changes alleviates the normal fears associated with change and uncertainty. Plan for this.  Poor management of this process shakes organizational credibility and effectiveness. 

The bottom line is that transitioning from a practice takes time and preparation. There are a variety of issues that must be considered, which is why it requires education and adequate planning to ensure the handing over of your practice is seamlessly executed.

The bottom line

Physician practice management tasks can be overwhelming. But there are specific steps that you can take to free up more time for yourself.

More by the author: Physician Practice Valuation: What You Need to Know

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Succession planning is one of the most important decisions a physician owner will face. It addresses the critical issues of when and how to retire from your medical practice.

Yet many physicians neglect to plan their exit. All too often, they think they can wait to sell the business until they are ready to retire. They don’t realize that they need to have their practice well positioned and ready to hand off ahead of time. Preparation can be the difference between success and failure.

There are many tried and true steps physician partners can take to facilitate the smooth transition of ownership. While succession planning has some science behind it, it is also an art.

There are indeed any number of variables that must be taken into consideration in specific situations. Perhaps one of the biggest is the physician owner’s personality. This is because it could play a significant and unexpected role in determining how the future plays out for the practice.

Personality and style can impact succession planning

Physicians who start private practice are usually very strong people who took a lot of risks to achieve success. It is not realistic to expect the next generation of ownership to fit their exact mold.

A better strategy is to determine the roles and responsibilities that give their probable successors the best opportunity to showcase their skills. Then, step aside and let them flourish using their own style.

It can come as a big surprise to some physician owners that their incoming partner’s style, even if different from theirs, is a big hit with patients and staff members.

For instance, it may represent a welcome change to move from an emotional, passionate, frenetic physician to one who is calm, thoughtful and never panics. What should never be lost, however, are the aspects of style that have made the practice successful. Responsiveness and excellence in patient care must be non-negotiable.

Squash the desire for clones

In working with numerous practices over the years, I have encountered many physicians who believe their successors must be clones of them since their way of operating has brought the business to where it is today. 

This mentality is shortsighted, however. The most important thing is to align values and use unique styles of individuals to achieve these values.

Too many physician owners get frustrated if their junior partners don’t emulate them. What the owners really should be doing is taking the time to talk with them, hear their perspective, and even learn something from them. Physicians who are stuck in an unworkable model may be getting their practices stuck as well

Related content: 7 Reasons to Create Physician Partnerships

Be realistic about succession planning

When talking to others about succession, realism must be your foundation. This is no time for wishful thinking, hoping that an uninterested or incapable physician will suddenly become full of passion and business skills.

Objectively evaluate (ideally with the help of knowledgeable outsiders) physician candidates for their experience and potential.

After this tough decision, take the systematic steps to pass the reins of leadership. This may take some time, but remember, the best successions are those that end with a clean and certain break.

In other words, after you give up the reins, get off the wagon. Again, seek outside help. Even if you would never use an outside adviser for any other decision, consider the value that a qualified consultant can bring to this important event.

Don’t ignore succession planning. By obtaining help from a professional, you’ll be working to reap the rewards of succession in a different and smarter way.

Leadership transitions require advance planning

Leadership transitions are risky times for medical practices. When the departing lead physician has had a strong run, there is concern about his successor’s ability to maintain the momentum. When he has performed poorly, there’s anxiety about whether and how fast his successor will be able to correct the course.

Physician owners are responsible for ensuring that the practice continually has high-quality operations and employees. One of the most important elements necessary to meet this responsibility is to conduct successful succession planning.

Having a strategic plan that clearly conveys the practice’s mission and current strategic priorities is essential. The plan should include specific actions that detail who is going to do what and by when in order to address each priority.

Succession planning isn’t something you can do once and forget. It is also advisable to have at least annual meetings with key employees regarding succession planning. They should include a discussion of how to manage effectively during a transition.

Take the time to plan ahead

Succession planning can be contentious or it can be orderly. The difference depends on all participants involved in the process being willing to put the practice first and work toward the common goal of long-term sustainability.

Smart physician owners will take the time to uncover what other partners bring to the table, even if it looks different from the status quo. When values are aligned and owners back down from the belief that their way is the only way, the transition will be smoother and the future quite bright.

Succession planning gives you time to train up your successor, show them the ropes, make sure that they really understand your business.

Remember too, that transparency is crucial both internally and externally. Proactive communication about leadership changes alleviates the normal fears associated with change and uncertainty. Plan for this. Poor management of this process shakes organizational credibility and effectiveness.

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Succession planning tactics for your medical practice

A smooth succession requires, first and foremost, the ability to be honest with yourself about your goals and desires for both your practice and your life after leaving the practice. Once you have a clear and honest vision established, it’s time to implement a detailed plan that will help succession go as smoothly as possible.

Here are four succession planning tactics to consider:

  • Increase lines of communication

Communication is at the center of any medical practice succession plan. Always be open and always be painfully honest.

Lack of communication can cause rifts among valued employees and can cause resentment to grow. Establish increased lines of communication among all stakeholders and draft conflict resolution parameters. This will help nip issues in the bud and lead to a smooth succession.

  • Develop a governance structure

Lack of information and direction can sabotage a practice from the inside. In the period leading up to your succession, there will likely be confusion and fear about the future of the practice.

Long-term employees who have been instrumental in the success of your practice for many years will wonder where they fit after your departure. Some will hold strong beliefs about the future direction of the practice.

Creating a governance structure as part of your physician partnership pathways is a must. Do this years before your departure. It will eliminate confusion and clarify the practice’s structure going forward.

  • Create a mission statement

Much lip service is paid to having a mission statement for a business. However, as you plan to hand over the reins of the practice, a mission statement can help lay a framework. Even if you have chosen a clear successor, others may want to have their opinions heard, and often, visions will clash.

The best way to rectify business disagreements is to have a mission statement that clearly lays out the goals of the practice. This mission statement can be used as a guide to steer all decisions towards achieving the shared goals, rather than satisfying personal desires.

  • Establish monthly meetings

True, open and honest communication isn’t an event, it’s a fundamental practice to successful physician partnerships. Information changes, feelings change and unforeseen events happen.

That’s why it’s a good idea to establish a standing monthly meeting among physician partners. This will allow you to address concerns, communication initiatives, and deal with issues as they arise.

It will also give everyone a scheduled, open forum in which to speak their minds. When establishing a succession plan for your practice, communication should be at the center of your strategy.

The more openly and honestly you communicate your intentions, the easier your transfer of power will be. Also, it will contribute to the success of your practice (and your legacy) going forward.

  • Take the time to do it right  

Succession planning is a serious business. You can’t just sit in a meeting for two hours and then close the book and go back to your clinic hours. Poor management of this process shakes organizational credibility and effectiveness.

Physician owners who fulfill their responsibilities and are accountable stewards take a proactive approach to succession planning. Preparation can be the difference between success and failure.

More information from this author:
Strategic Planning for Physicians in the Age of COVID-19

The bottom line for succession planning

The bottom line is that transitioning from a practice takes time and preparation. There are a variety of issues that must be considered. This is why it requires education and adequate planning to ensure the handing over of your practice is seamlessly executed.

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In order to be successful, a merger must be followed up with a detailed course of action. Once the deal is signed on the dotted line, it’s “make or break” time for merging two medical practices. The good news is that if you get the post-merger integration process right, your success rate will soar.

Here are several specific areas where physician groups routinely stub their toes when merging.

1. Have a post-merger integration plan for people

Mergers succeed or fail based on the quality and dedication of the people who execute them. Start with your leadership team. Determine the composition of the new management team as far ahead of time as possible. This helps mutually ensure physician owners that the integration process is beginning to unfold both smoothly and sensibly. 

Then, identify those individuals (and occasionally teams) who are outside the leadership realm but still essential to retain. Develop specific strategies to keep them engaged during the transition.

Be proactive and make opportunities. If your strategic intent calls for headcount reductions, do not rely on “natural attrition.” That is just abdication in the name of kindheartedness.

Similarly, even if reductions are not a big part of your plan, people expect them. Use the acquisition as a time to do a little constructive pruning if need be and consider the possibility of offering severance packages.

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2. Pay attention to your patients throughout the merger process

Attention to patients should seem like a priority at all times, but it is particularly true during periods of change and uncertainty. Because mergers are times of great internally-focused thinking and activity, an outward focus on patients can suffer during this time.

Competitors will seize any open opportunity to lure your patients away, and practice upheaval is one such door. They may spread misinformation and regale your key referring physicians with the dangers of your merger and the glory of their own practice. Do not let that happen.

Be proactive and convincing. Take the show on the road. All physicians must actively outreach and proactively engage referring physicians. Keep them in the loop with frequent communication. Walk them through what you are doing, if and how it will benefit them. State clearly how they can get in contact with any questions or concerns throughout the process. In addition, provide physician liaisons clear language about what they can (and cannot) say to a referring physician practices.

Keep referring physicians informed and make sure to spend time listening to their concerns. This might even be a good time to probe what they like and don’t like about your existing relationship or services you offer.

If there is a weakness in their mind, it’s better to open that door proactively with an eye toward solving it in the integration/transition process than let a competitor open the door with an eye toward leveraging it.

3. Culture mismatches won’t just “work themselves out” during the post-merger integration

Culture is woven into the fabric of a workplace over time. That makes it difficult to see and even more difficult to change. The list of deals that have famously failed because of mismatched cultures is epic.  

The first, and perhaps most important, rule in dealing with culture during a post-merger integration is to compare the existing cultures and see how they will be combined. Do not downplay the culture as something that will work itself out. It won’t.

Here are some questions to ask yourself:

  • How are decisions made within your practice, unilaterally at the top or based on data and recommendations from employees?
  • Are decisions made on the spot or only after thorough consideration?
  • Is senior management dictatorial or consultative?
  • Is junior management jaded or motivated?
  • Is innovation a catchy tagline or a true religion? (Ditto collaboration.)
  • Is success seen as a team effort or the result of a few star performers?
  • Is the practice’s technology investment driven more by opportunity or obsolescence?

The second rule in merging cultures is to know thyself. It is not possible to integrate two cultures based on an understanding of only one of them. Culture assessment should begin way before staring down the path of a merger—and well before the demands of a deal set in.

4. Good communication is essential during post-merger integration

In medical practice mergers, good communication is by far the simplest and cheapest way of reducing uncertainty and stress—two of the biggest causes of dysfunctional deals. Good communication can:

  • ease or shorten the inevitable periods of reduced productivity;
  • build trust with stakeholders;
  • prevent the loss of key staff, patients, and valued referring physicians;
  • clarify objectives and unify focus;
  • ensure preparedness for expected changes; and
  • pre-empt or deflate competitive rumors and disinformation.

Start by being up-front and direct about the rationale behind the deal. Don’t assume that its logic and benefits are self-evident to employees or others. To the greatest extent possible, have clear and concise answers to the one question at the top of everyone’s mind: “All that sounds fine, but how will the merger affect me?”

Here are some hints and guidelines for how to proceed with compassion and respect:

  • Do not be an information cheapskate. Be open and transparent. Share more than you are comfortable sharing.
  • Communicate the extent to which the practices will be integrated. Explain how that will affect employees’ jobs, benefits, reporting lines, information flows, and culture.
  • If integration issues or actions have yet to be decided, be clear about an expected timeline for when they will be.
  • Tailor your communications to different audiences. However, make sure all your messages are consistent by tying them back to the overall strategic intent of the deal.
  • If there is no news to report, report that there is no news.
  • Manage expectations and mood. Listen for concerns and questions, then address them straight on.
  • As the responsibility for communication trickles down the hierarchy, be very clear about what people should say and not say. “I don’t know, but I’ll find out” is always a better option than just winging it.
  • Identify and engage staffers who can exert a positive influence over others. Conversely, if there is a person or group who proves to be the source of recurring rumors or discontent, resolve their issue or get rid of them.
  • Do not hide or shy away from bad news. Identify problems as they occur and seek to rectify them.
  • Do what you say you will do. Nothing crushes morale and erodes productivity like a stream of empty promises.

Related Content:  The Most Common Reasons for Failed Group Practice Mergers

The bottom line

The phases prior to a merger, e.g., strategic planning and due diligence, are indeed essential, but the integration that occurs post-merger is by far more important to the deal’s overall success—or failure.

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If you are buying or selling a medical practice, read this first. It is critically important that you understand that buying or selling a medical practice involves challenging and risky strategic decisions.

Let’s look at these decisions one-by-one.

Acquiring a medical practice

There are three main legal structures for acquiring a medical practice:

      • asset purchase
      • stock purchase
      • merger

All three of these structures are different types of acquisitions. A merger is a type of acquisition that has a particular legal meaning. Physician owners must have a clear understanding of the legal structure of the potential transaction.

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  • Asset purchase

In an asset purchase, the buyer purchases specific assets of the target practice that are listed within the transaction documents. Buyers may prefer an asset purchase because they can avoid buying unneeded or unwanted assets and liabilities.

Generally, no liabilities are assumed unless specifically transferred under the transaction documents. Because the liabilities remain within the selling practice, buyers can eliminate or reduce the risk of assuming unknown liabilities.

Further, buyers typically receive better tax treatment when purchasing assets as opposed to stock. Buyers may also be able to reduce their taxable gain or increase their loss when they later sell or dispose of the assets.

Risks of an asset purchase

The main risk to buyers in an asset purchase transaction is that a buyer may fail to purchase all of the assets that it needs to effectively run the practice.

There are also various aspects of an asset sale that can be time-consuming and drive up transaction costs, such as listing specific assets and determining their value.

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For some assets, third-party consent may be required before the assets can be transferred to the buyer. The manner in which the title of an asset is passed to the buyer will vary depending on each kind of asset.

Finally, there is always the risk that the seller could retain sufficient assets to continue as a competing going concern. This risk is usually mitigated by requiring that the seller enters into a covenant not to compete with the buyer.

Sellers disfavor asset transactions

Sellers generally disfavor asset transactions because the seller is left with potential liabilities without significant assets it could otherwise use to satisfy those liabilities.

Also, the tax treatment of an asset sale is generally less favorable to sellers than a stock sale. The practice and its shareholders can each potentially incur taxable income, which could result in double-taxation of the sale proceeds.

Entities that have pass-through taxation such as partnerships, LLCs and S corporations can avoid the problem of double taxation. Thus, they may be more likely to accept an asset purchase structure.

  • Stock Purchase

In a stock purchase, the buyer purchases the stock of the target practice directly from the target’s shareholders. The practice remains an existing going concern after the purchase. Its business, assets, and liabilities are unaffected by the transaction.

A stock purchase may be preferred if the buyer wishes to continue operating the target practice after the purchase. Further, absent unusual circumstances, consent from third parties would not be needed to approve the transaction. However, the buyer may be exposed to unknown risks by buying the entire practice, assets, and liabilities.

Reducing the risk of a stock purchase

Buyers can reduce their risk by holding back some of the purchase price in escrow to satisfy any liabilities that arise after closing.

Obtaining approval for a stock purchase can be problematic if the target has a large number of shareholders. Unless there are agreements in place before finalizing a deal, buyers cannot force shareholders to sell.

Thus, a holdout shareholder could refuse to sell to the buyer. This result can be very undesirable for buyers. It could ultimately cause the deal to fall apart.

Buyers may have less preferential tax treatment in a stock purchase. However, in certain circumstances, buyers can elect to treat the stock purchase as an asset purchase, thus securing a desirable tax treatment.

  • Merger

In a merger, two separate legal entities become one surviving entity. Under state law, the assets and liabilities of each are then owned by the new surviving legal entity.

Forward merger

There are several structures that mergers can take. The simplest is a forward merger, whereby the selling practice merges into the purchasing practice. The purchasing practice survives the merger.

Related content: The Reasons Why Medical Practices Merge

Sometimes, buyers will wish to keep the target practice as a separate legal entity for liability reasons. In this case, the buyer will instead merge the target into a wholly-owned subsidiary corporation of the buyer.

Forward triangular merger

This is called a forward triangular merger. When complete, the subsidiary survives the merger, holding all of the assets and liabilities of the target practice.

Both a forward and a forward triangular merger generally require consent from third parties. This is because the target practice ceases to exist after the merger and all of its assets are owned by the surviving entity.

Reverse triangular merger

A reverse triangular merger is similar to a forward triangular merger, except that the target practice is the surviving entity instead of the wholly-owned subsidiary of the buyer.

How a merger is taxed depends on its structure. Generally, forward and forward triangle mergers are taxed as asset purchases while reverse triangular mergers are taxed as stock purchases.

Corporate approvals

In terms of required corporate approvals, mergers generally require approval only of the seller’s board of directors and a majority of its shareholders (absent other requirements in its charter documents). This lower threshold is particularly appealing when a target practice has multiple shareholders.

However, shareholders who vote against the merger will generally have appraisal rights under state law. Appraisal rights, or Dissenters’ Rights, enable dissenting shareholders to petition a court to obtain the fair market value of their shares. This can complicate transactions and increase the buyer’s costs.

Related Content:  Seven Strategies to Consider Before a Practice Merger

Clearly, medical practice transactions can be complicated.

Consequently, it is imperative that physicians have an experienced and competent team consisting of a consultant, accountant, and attorney who help you review all of your options and choose the option that ensures your practice’s continued success.

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I work with many physician entrepreneurs with great ideas who want them to come to fruition. These physicians are often curious as to what would make their startup successful. You could argue that many ingredients go into a successful startup, and luck is undoubtedly one of them.

However, there are additional elements that are necessary for success. Physician leaders must be innovators to navigate their practices into and through the era of healthcare reform.  True physician entrepreneurs take charge of change and continuously scan the outside environment for new and fresh ideas.  They search for opportunities for ways to do what has never been done before.

The history of modern healthcare will continue to be filled by practices that no longer exist because their leaders refused to adapt and change until it was too late.  Consequently, you must always be actively looking and listening to what is going on around you for even the most remote signal that there is something new on the horizon because today’s innovations can come from just about anywhere.

5 critical elements that are sometimes missing when beginning a startup

1. No strategy

Unfortunately, most startups—like many medical practices—do not have a strategy even though they claim that they do. Rather, these physician entrepreneurs often have mission statements or goals.

For example, they may say: “Our strategic goal is to grow 20 percent per year in revenues and profits over the next five years.” These are not strategies. These are aspirational goals or wish lists.

A strategy is a coherent set of analyses, concepts, policies, arguments, and actions that respond to a significant challenge or opportunity. A strategy should be described very simply, often with an analogy or metaphor. Arriving at this succinct conclusion, however, takes many hours of work.

2. No evidence-based business model

Sometimes a startup will have a “business plan” that describes the company and how it plans to reach target numbers in their five-year financial pro forma. The problem is that this narrative consists mostly of assumptions and judgment calls.

Business models should first start with the idea (solution and opportunity). Models should then show how each critical element of the business ecosystem works together with all the other elements to achieve repeatable, sustainable sales. Each significant assumption needs to be tested and verified so potential investors are confident of the startup’s success.

3. No compelling story

In my experience, very few physician entrepreneurs know how to craft and tailor their story to all of their audiences. Telling your story includes infographics, presentations, and most importantly, answering questions.

A standard one-size-fits-all presentation does not work. Every audience has different levels of experience, expertise, and interests. I find most of the pitches are presentations with a text-filled slide deck and a rambling list of product features.

They don’t show the bigger picture or how their idea will solve a problem. A persuasive story must take people from Point A (uninformed or skeptical) to Point B (knowledgeable and committed).

The story must also be filled with benefits that relate to the specific persons addressed.

4. No fundraising plan

Most physician entrepreneurs leave fundraising until the end of the development process. Raising funds is hard work and takes lots of time away from nurturing the business. But, you have to start early and do each of these things:

      • identify when you will need additional funds
      • how and from whom you are going to raise these funds
      • outline a process to reach your goals

It is challenging to “sell” investors on a high-risk venture. It is better to get investors involved as early as possible and let them “sell themselves” along the way.

5. No CEO

A critical component in the company’s success can be attributed to the CEO and the leadership team. For many investors, the CEO and team’s capabilities are the first, and often most important criterion, they evaluate.

Founders with a great idea are not automatically great CEO’s. It takes a person with vision, know-how, focus, and a growth mindset.

The CEO must have the ability to make decisions under stress and uncertainty and know-how to keep score (revenues and profits). A great CEO knows the development phases of the business and is able to adjust herself and the team to meet the challenges of each phase. A talented CEO and team determine the success of the company.

These are not the only ingredients of a successful startup

These five elements are important but by no means the only ingredients. Just as in baking, a successful startup requires careful calculations, precise measurements, and fine-tuning.

With the right guidance and structured thought process, physician entrepreneurs can run their existing medical practice and also nurture that next budding idea that they have.

Good is rarely good enough. And opportunities for improvement are never lacking.  Physician entrepreneurs should expect and accept disruption and resistance to change. They should also never lose sight of the fact that costs are high when change efforts go wrong. 

Even the most groundbreaking practices can get stuck and fail to see the possibilities in evolving because success is comfortable. It is often too connected to the past. 

Physician entrepreneurs can be characterized by having an attitude of wanting to change the business-as-usual environment. They recognize that there is no single solution to any problem and accept that not everyone will see their vision. They keep focus and balance as they push to change, understanding that there is no “one size fits all” approach.

To be a true innovating physician entrepreneur means you must be in a constant state of awareness. No one can survive without focusing in their own way on what matters and drives their medical practice. 

Therefore, you must relentlessly focus that ownership on what drives your practice, create a culture that reflects who you are and stay grounded as you make things happen. Too often we focus on what matters to survive now because those are the highest-value targets. 

As you push to evolve your practice, remember that nothing is ever going to be perfect, so don’t be embarrassed about the mistakes you make or the actions you take. Losses may hurt but they won’t kill the practice. You can recover as long as you have a plan. 

Failing to stay connected and see things from all angles though, is a clear sign that you are losing perspective.

Other Content by this Author:
What is YOUR Strategy for Long-term Success?
Seven Strategies to Consider Before a Practice Merger

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Unless you start your own practice after training, you will be signing an employment contract. The contract is critical in bridging the expectations of you and your employer. It also gives you the chance to lay out what you want from your employment.

Your contract is composed of a number of important clauses and provisions, and it is possible that not all of them will work in your best interest. If you see any of these 8 concerning contract items when reviewing your contract, it is probably time to negotiate.

8 physician employment contract items you need to know about

1. Unclear work expectations

There are many potential pain points in any working relationship. They include:

      • work schedules
      • office locations
      • call obligations
      • patient allocation
      • research time

In many cases, the contract will have ambiguous parameters for your actual hourly work expectations. It may state something as simple as “full-time” or give a minimum hourly range per week.

Like many contractual clauses, these hourly/shift expectations should be clearly outlined with objective parameters in your contract. You do not want to be blindsided by shifts that last four hours longer than you originally expected. And you don’t want to be required to work on holidays when you planned to have those days off.

Work expectations may seem basic. That is why they often go overlooked and why they deserve to be given close consideration.

Related Content:  Occupational Burnout: What Is It And Who Is At Risk?

2. Unreasonable non-competes

Most physicians who have been through the employment contract negotiation process have been warned about non-compete clauses. A non-compete restricts you from working within a certain geographic area after your contract terminates.

A typical radius would be anywhere from 2 to 50 miles. However, this will be highly dependent on the setting of your place of employment (i.e. rural vs. urban). If a non-compete restricts you from practicing within a large radius (50 to 100 miles), especially in a densely populated area, then you should consider negotiating these terms.

Also, the duration and scope of restriction should be reviewed to ensure they are in line with market standards. Some states have prohibited non-competes on physicians. In that event, the non-compete should be removed from your contract entirely.

3. Delayed benefits

Benefits are a huge part of what draws many physicians to an employed position. In your contract, an employer should offer you a benefits package that includes all or most of the typical components, including:

      • health insurance
      • disability insurance
      • paid leave
      • a retirement plan

These benefits should take effect when you begin your employment, but, in some cases, there can be a delay before you are eligible for certain benefits. Going without insurance coverage for any span of time can be incredibly risky therefore COBRA costs should be a topic of negotiation.

Related Content:  How Much Disability Insurance Do Doctors Really Need?

4. Where is the tail coverage?

There is a chance you will get sued after the termination of your employment for an incident that occurred while you were employed with the same organization. If your former employer did not offer you tail coverage in your contract, it is your responsibility to pay for this insurance.

The cost of tail coverage will vary depending on specialty.  However, many times, it is more valuable than a signing bonus and should be reviewed carefully as part of the compensation package.

5. Unrealistic incentives

Most employers use some variation of a production bonus structure to reward your productivity. Production bonus systems can be based on the following:

There are pros and cons to each of these systems. It is important, however, to ensure that the targets provided are attainable and fair. Having access to market data is extremely useful when negotiating these terms.

6. Termination language is unclear

Every contract will feature a termination section that will spell out potential causes for the termination of your employment. This section should not be so extensive as to overwhelm you with what might get you fired. However, it should provide a realistic view of the reasonable causes.

This sets a clear expectation for how you should practice within the organization’s framework. And, in the event of your termination, it may be useful in filing a wrongful termination suit. The contract should provide termination procedures for both parties to be equitable.

7. Indemnification clauses

An indemnification clause is a contract clause where one party is responsible for losses incurred by another party – in this case, the organization employing you. Indemnification clauses are important. They should be reciprocal for both parties in the contract.

Your employer will not want to be responsible for losses caused by your negligent actions. And, you should not assume the risk for their negligence either.  Try to negotiate your way out of a one-sided indemnification clause which may make you responsible for damages which your malpractice insurance cannot cover.

8. Intellectual property

Do you have an interest in developing intellectual property?  What about creating a social media following? Your contract terms should be clear about whether the employer has any right to the ownership and revenue derived from the creation of intellectual property by you during the term of your employment.

Related Content:  Healthcare Recruiting in the Age of Technology

The bottom line

Whether you are negotiating your first employment contract or your 10th, it is important to read the fine print of the contract and seek expert legal advice if any part of it is unclear.


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This post was first published on March 8, 2017. It was updated by the author on September  13, 2019.