Gut checks, culture, and playing nice in the sandbox…all sound far afield from balance sheets, venture capital, and mergers and acquisitions. Yet, say some orthopedists who have spent time in the financial trenches, these are exactly what you need to look at when considering merging your practice with another.
Choose Your Friends Wisely
The process begins by looking in the mirror. Dr. Frank Kolisek, President of OrthoIndy, a musculoskeletal organization with 14 locations in Indiana, advises, “Begin by assessing what it is you are trying to accomplish. Are you attempting to get a foot in the door at more hospitals that are outside your primary market area? Are you trying to be larger in a small area so you have more clout when negotiating managed care contracts? Do you want to have one or two major hubs with small satellites or several major hubs spread out all over the state and region? Is your aim to expand income opportunities? Asking the right questions will help you establish—and get—where you want to go.”
While a late night campfire session isn’t necessarily called for, it is important to have a couple of in-depth powwows to ensure that both practices are on the same page. An adamant Dr. Kolisek notes,
You can’t look at the business model first—you’ve got to find out if the two groups can ‘play nice in the sandbox.’
The primary task is to get acquainted with those at the practice, making sure that you understand their basic philosophy and mission statements. Everyone must have the same goals—there should be no cutting corners in order to maximize income. The fundamental issue is, ‘Do the cultures match?’ Are they seriously dedicated to patient satisfaction? How to do they demonstrate that? How is power distributed in the practice and what are the expectations on this issue should the merger go forward? Do they have 48 people voting on something or is there a senior physician making all the decisions? You will have to meet with representatives from the other practice at least twice in order to evaluate all of these issues.”
Eyeing the other practice means asking basic questions. Perhaps the most rudimentary, says Dr. Kolisek, is, “If they are doing well, why do they want to merge? If a practice is desperate to merge then the relationship is probably not going to work out. You will find yourself thinking, ‘Why in the world would they let themselves get into that position in the first place? Do they have their heads in the sand? Are they not proactive?’ A practice in a state like this will tell you a lot about the thought process and strategic planning (or lack thereof) of the management.”
“The point is, ” continues Dr. Kolisek, “you need to determine why exactly they want to merge. Also ask, ‘Why are you interested in our practice, why should we be interested in you, what skill sets can you bring to the table?’ Find out if their locations are where you need to be, or are they a duplication of your services? Is it a situation where the two practices are in direct competition and you’re winning such that if you take them on then everybody loses?”
And what about the red flags? “If they say, ‘We’re not doing well, our income is decreasing, and we don’t know what to do, ’ then you’ll have to say, ‘Well, what would you bring to us?’ During this process each group signs a nondisclosure agreement and then looks at the other’s numbers, including, for example, how much surgery is being performed. While volume doesn’t necessarily dictate success, it does mean that their surgical indications may be less stringent. Or, they are just not that busy. You may find out that a lot of patients don’t like them and are going outside the area for care.”
“Other metrics to examine, ” says Dr. Kolisek, “are patient visits, as well as the frequency and nature of lawsuits. Keep in mind that being sued doesn’t have to mean someone did a bad job. It may be that the patient and doctor didn’t get along well. Or perhaps the surgeon is not technically proficient. Perhaps they lack empathy or have poor communication skills. In any case, lawsuits are a red flag.”
At all costs, advises Dr. Kolisek, avoid the “my compensation is bigger than your compensation” scenario. “Pay doctors fairly, with no sweet deals carved out for certain surgeons. Those not being compensated as well will find out and it could very well be the end of the practice.”
“Go over their business model thoroughly and see where there is the potential for growth. Perhaps neither practice does MRIs now but if the merger goes through, then you could both order enough tests to justify an MRI machine. Maybe neither of you has an outpatient surgery center. But taken together, how many cases did you do last year? You may be able to make a two room surgery center profitable.”
In the end, ” says Dr. Kolisek, “you almost have to throw medicine out the window. The fundamental issue is, ‘Can you get along?
Reasons to Merge
Also advocating for donning the cultural anthropologist hat is Dr. Dan Murrey, an orthopedic surgeon and CEO of OrthoCarolina in Charlotte, North Carolina. Dr. Murrey, who holds a Masters Degree in Public Policy, says, “Years ago there were a number of small orthopedic groups in town; over the years we gradually combined ourselves and are now OrthoCarolina—800 employees strong. We would not have been able to achieve such growth if our cultures were not compatible.”
“The general assumption, ” continues Dr. Murrey, “is that you should merge in order to be better positioned for insurance contracting. Not so.
The most important thing in choosing a partner is ensuring that you have sympathetic cultures, including a common understanding of attitude toward service to the community.
If you have a group that is predominantly a safety net provider for the community trying to link up with a group that’s a niche practice heavily focused on finances then they will have a hard time getting on the same page. Service to the field, a common understanding of compensation and how partners share risk, equity and the work (call)…all are critical. But nothing is as much of a dealbreaker as the two ‘Cs’—compensation and call. Those are what break up practices.”
But back to the softer side of bone work: “Practices have a personality, ” states Dr. Murrey. “In our area one group had been affiliated with a residency and fellowship programs, covered a safety net hospital and trauma center, and focused on subspecialty practice and research. The other group historically had more community orthopedists and generalists and was engaged in less research and education. Over time things evolved so that the more academic group got community orthopedists and the other group built strong subspecialty centers that started doing more research and teaching. As the cultures and values became more similar, the regional footprint of the practices was also growing together, so the option of merging made more sense.”
Maintaining a Healthy Merger Relationship
Post-merger strategic options and stability may depend on the governance and operating structure you establish beforehand. “It is imperative to look closely at what kind of business structure you want. There are essentially two models: federated and integrated. The federated model simply involves sharing a business office, but running each of the practices independently. You’re billing under the same tax ID number, but each site has autonomy in determining their compensation formula, call system, and to some degree their strategic growth plan.”
“In an integrated model, ” explains Dr. Murrey, “the groups are fully merged, sharing a compensation formula, call system, governance and strategic planning. If you have geographically distinct areas then the federated model works well and is less challenging to set up than the integrated model where everyone must agree on the same governance, call, compensation, etc. But if the geographic areas of the groups overlap, it can make strategic planning, growth and marketing more challenging when one group wants to expand into another’s territory or hire more specialists to draw patients from the other group’s area. One group may feel that the other is alternatively infringing on their territory or holding back their growth. The integrated model is more work on the front end, but it can make it easier to make strategic decisions together in the future. It also can mean better long term sustainability because it’s harder to walk away from.”
“Joining with another group can give you long term stability and security so that hospitals can’t make threats and jeopardize your practice, ” says Dr. Murrey. “It is not unusual for hospital systems to pit two groups against one another. That happened to us. But at the end of the day, we realized that our interests and goals were better aligned with other orthopedic surgeons than they were with the hospital. Although our interests may align with the hospital on many things, a hospital will do what’s in its best interest and not necessarily what’s in the doctors’ best interest. We want to be part of the larger system of care, but we want to make sure we have a seat at the table on decisions that are critical to doctors and our patients.”
And, you should be prepared to toss a bucket of reality onto Pollyanna if necessary. “You need to go into a merger with the idea that you are in it for the long haul…and you should shed any preconceived notions about what it’s going to look like at the end. Many people go into a merger thinking, ‘We’ll take this group in and they’ll accommodate themselves to our ways of working and we won’t have to change.’ But the reality is that everyone has to make room for one another’s ideas and work styles. You all have to be ready to make some changes no matter how well you thought your group was working prior to the merger. The new organization will be inherently different than either predecessor.”
The best motivation for merging? Dr. Murrey: “You have two groups with a certain level of collegiality, similar strategic goals, and visions that are trying to create the same type of patient experience or community presence.”
On the all-important compensation issue, Dr. Murrey concludes, “At the end of the day doctors just want to be treated fairly. Sure, no one wants to make less as a result of a merger, but most don’t have a certain minimum salary number in mind…they just don’t want the other guy making more for the same work.”
Paying Attention to Detail
With a view from the apex of the business world, John Martin, CEO of OrthoIndy, is vastly familiar with the nuances of merger politics. Much like OR work, the goal (at least from the surgeon’s standpoint) is minimal invasiveness. He says, “There tends to be three different philosophies about how doctors and hospitals are trying to align. Some hospitals are employing doctors; others are creating huge multispecialty groups to house their doctors (who will be employed by the group, not necessarily by the hospital); others are undertaking an affiliation approach, asking, ‘Are there ways we can work together on different things?’ Every hospital I have observed is using a hybrid of these three approaches. As for doctors, they are looking for the most safety they can get for the least invasiveness.”
Another way that doctors can find themselves dealing with the encroachment issue is in the know-how department. John Martin: “It is important that the skill sets of the practices are complimentary. If there is a bit of overlap of skills and/or subspecialties then the question is, ‘How can we use this to build a bigger practice so we can reach out to the surrounding areas?’ One of the goals of any merger should be to spread out geographically so as to ensure you’re not competing for the same patients.”
It’s 1PM on a Tuesday and there goes Dr. X again…polishing his golf clubs. Let the resentment begin. “Cultural mismatches are a real problem in mergers. For example, you want to make sure that the work ethic of both groups is in alignment. If the doctors in one group only take five or six weeks off each year and merge with a group where the partners are not spending as much time in clinic or the OR, then there will be a significant problem to deal with. Then there is the issue of quality. Most groups have certain clinical standards that they expect of doctors. You want to determine if the physicians in the other group meet the normal criteria you would use if you were hiring someone into your practice.”
As for the nuts and bolts of the business side of things, Martin recommends, “There are two primary things you should consider from a business standpoint. You need to look at how each practice is positioned from a cost perspective. And you must assess whether there are substantial differences in the culture of the two practices.”
Is there one group that is heavily dependent on medical assistants and other non-physicians, while the other practice doesn’t use as much staff? How will you integrate these things? Are the practices using different billing platforms? In order to ensure you’re getting a good level of efficiency, you must decide whose electronic medical record system, etc., you will use. These, as well as many other details, should be hammered out prior to signing on the dotted line.
So have a clearly defined vision of where you want to go. Ask all the right questions…and make sure you don’t mind spending 14 hours a day with the other kids in the sandbox.
