5 Considerations for Successful Physician Acquisitions

In reaction to healthcare reform, there has been a high level of interest among hospitals to acquire physician practices. Physicians who seek the stability of hospital employment have also been interested in hospital acquisitions. Hospitals stand to improve patient outcomes, gain clinical and specialty services and protect their referral stream by acquiring physician groups. However, physicians in practices have to adjust to the idea of selling their business and working more closely with a hospital. Often times there are many different viewpoints, which can complicate the acquisition and transition of physician groups into hospital operations.

Governance is a big issue for hospitals acquiring physicians or physician groups. During the early stages, there needs to be lots of detail concerning the governance structure of a deal between a hospital and a physician group. The detailed discussion is important for guaranteeing everyone is as happy as possible. Once a transaction is processed and all the documents are signed, it is extremely difficult to rewrite terms.

To improve the acquisition and transition process for hospitals and physician groups, aligning long-term objectives and clearly communicating governance structure is key. Therefore, a detailed discussion of the following five issues is one of the most important best practices for a hospital acquiring a physician practice.

1. Physician autonomy.
Whether a hospital will allow the physicians to make decisions autonomously or whether the hospital will expect the physicians to follow a designated chain of command needs to be clearly discussed. "Both parties need to be on same page with governance structure and expectations," says Curtis Bernstein, CPA/ABV, ASA, CVA, MBA, director at Sinaiko Healthcare Consulting, reimbursement and advisory services of Altegra Health in Miami Lakes, Fla. "It can become a big sticking point later." Mr. Bernstein explains that many times physicians believe they will have the same level of control over their practice moving forward, but the hospital does not have the same idea. The adjustment from autonomy in a physician group or practice to the bureaucracy of a hospital can be a hard transition for a physician.

2. Purchasing process. Mr. Bernstein recommends discussing the structure of  purchasing decisions. For instance, if a physician accustomed to a group setting wanted to replace an exam table or get new radiology equipment they would have conducted such a purchase independently in the physician group. However, after a hospital acquisition, the independence in decision-making may no longer be there. A hospital may require approval of purchases from a higher level and the physician could be unused to such a process, says Mr. Bernstein. Whether the physician prefers making the decision independently or not, if they are unaware of the new protocol, a conflict could arise and hurt the hospital-physician relationship. "I cannot stress enough that physicians need to understand all terms and changes involved in the deal," says Mr. Bernstein.

3. Compensation structure. Clear, straightforward communication is a best practice in this area as well. Some physicians may be used to a certain compensation model where a certain number of surgeries, visits or consultations placed them in a productivity range that guaranteed a certain monetary amount of compensation. A hospital should share its compensation arrangement with the physician group and ensure all physicians comprehend any differences between the hospital's structure and the physician group's structure. If a hospital does not have a set compensation structure already, physicians should be actively included when it is developed.

4. Productivity metrics.
Big issues may arise with physicians if their historical compensation rates are higher than the compensation rates offered by the hospital. To avoid confusion and disappointment, hospitals need to ensure physicians understand what their productivity level would need to be, under the hospital's structure or a new joint structure, to make their historical compensation, says Mr. Bernstein. "Physicians will not want to take a reduction in pay as part of a transaction, or at least not a large reduction. Make sure the compensation related to benchmarks is consistent with market value and that enough compensation is at risk so that physicians are motivated to achieve the hospital's goals," says Mr. Bernstein.

Mr. Bernstein remembers one instance with a client where a competing health system purchased a cardiologist group in market and offered a bonus compensation plan to the physicians. Unfortunately, the details were not discussed and the physicians signed the plan under the impression they would make more money. "The compensation plan was high and practically unachievable for the physicians — they were not receiving the compensation to which they were accustomed," says Mr. Bernstein. The physicians ultimately filed a lawsuit. Mr. Bernstein's example reiterates the importance of discussing not only compensation structures but also, productivity metrics. An avoidance of discussions during planning stages could hurt the hospital-physician relationship down the road. "I have seen deals done where the purchase price for the practice and the compensation plan for one health system were higher than a competing health systems," says Mr. Bernstein. "The physicians went with the lower initial purchase price because they liked the governance and compensation structure more," says Mr. Bernstein.

5. Operational culture. A final element of the governance structure is the culture of the hospital operations. The culture of a physician's previous group could differ from the acquiring-hospital's culture. "For example, a physician may be accustomed to operating in an ASC-based outpatient surgery setting. Transitioning to a hospital-based outpatient surgery setting could require a different mindset," says Mr. Bernstein. "Efficiencies and driving patient throughput may have been critical performance drivers for the physician practice, but in a hospital, everyone needs to accept the designated performance drivers and be pulling in that direction to achieve success," says Mr. Bernstein. Cultural differences can cause tension in a physician's work environment and eventually a physician's relationship with a hospital. Forgetting to discuss cultural aspects of the hospital could be just as detrimental as not conferring on productivity metrics.

Hospital executives and administrators looking to successfully acquire physicians and physician groups cannot overly discuss governance structure issues and expectations. The day-to-day operations, real estate, compensation, productivity metrics and cultural aspects of governance must be communicated clearly — all parties need to be thoroughly briefed. Many physicians value their autonomy, independent decision making and generous compensations. Hospital executives and administration need to be upfront and clear to avoid clashes down the road.

Without transparent detail upfront, hospital's acquiring physician groups may run into problems that threaten their referral streams, clinical and specialty services and improved patient outcomes.

More Articles on Physician Acquisitions:

MemorialCare in California Adds 400 Physicians, Acquires Management Company

Marin General in California Acquires 6 Physician Practices in 18 Months

Hospitals Buying Physicians: 10 Recent Transactions

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