The More You Know: What to Consider When Determining Whether to Merge with Another Physician Group

Physician group consolidation hit another record in 2018 with nearly 250 transactions completed, compared to 168 in 2017. Some of the top transactions included United Health’s OptumHealth and Summit Partners’ acquisition of Sound Inpatient Physician Holdings; KKR’s acquisition of Envision Healthcare Corporation in October 2018; and OptumHealth’s acquisition of DaVita Medical Group. There were also numerous transactions in ophthalmology, dermatology and orthopedics. In fact, this consolidation continued in 2019 with six transactions completed in ophthalmology alone in the first month of the year.

The driving factors behind most physician group mergers typically include the desire to increase back office efficiencies, obtain access to more capital, improve the patient experience and gain scale. While these are sound reasons to consider merging, the question of how and when to start the process is often a challenging proposition for providers. For groups considering their future growth strategy, here are a few of the most important steps to take:

Take a hard look in the mirror

Before deciding if affiliating or merging with another group is right for you, it is important to truly know the strengths you bring to the table, weaknesses that could be a hindrance and what it is you hope to achieve through a potential sale or merger. Together with your advisors, take a hard look to understand:

• Your practice’s strengths and weaknesses. What are the key areas that would benefit from a partnership?

• Your group’s strategic goals over the next three to five years. Does a potential partnership help accelerate the achievement of those goals? Are these goals aligned with your potential partner?

• Any risks that your practice is facing that could derail a potential partnership.

• What are the key elements that your physician group wants to retain?

• Does this partnership make you stronger and more resilient in uncertain times ahead?

• Are there economic reasons for considering a potential partnership?

Understand what the combined group culture will likely be

As the old saying goes, “culture eats strategy for breakfast.” Culture is one of the most critical components to the success of any merger. It is often the number one reason a merger or affiliation fails.

Honest and ongoing discussions about things like leadership philosophy, commitment to quality care, ability and history of recruiting top talent, importance of data and analytics, infrastructure and assets, potential future needs, patient experience and more are critical. So too is agreeing upon strategies for preserving the best elements of each culture. This is especially true as the combined organization seeks to bring on new talent. With the United States facing a shortage of between 40,800 and 104,900 physicians by 20301, culture is often just as important as pay and benefits when recruiting and retaining key employees.

It is critical to design a partnership that not only works for the next 5 years but will be successful for the next 50 years.

Audit information technology capabilities

Technology plays a critical role in the success of any merger, far more than many physician groups might expect. It is essential both parties are aligned on the vision and roadmap for technology over both the short- and long-term horizon. Some of the key questions to ask include:

• Does the partner bring superior technology or personnel that will add value?

• Is the goal to move all physicians to a common clinical workflow platform? What will it take to move onto one consistent platform?

• What is the roadmap for implementing applied analytics, including artificial intelligence, big data and machine learning? How will the cost of these applications be covered?

• What is the strategy toward patient engagement? Is there a vision for telehealth?

• How is the practice going to measure quality and are there tools in place to assist?

Align economic incentives

In order to ensure the success of the merger for years to come, physician groups should determine each partners’ economic goals and align culture philosophies and practices in order to continue attracting top talent. Ideally there is a structure that allows both parties to benefit economically from economics of scale as the practice grows. This allows both sides of the transaction to benefit from practice growth in the future. What are the economic incentives in this merger for current physicians? What economics will be in place to reward future physicians?

Many physician groups are deciding that the time is ripe to consider a merger or an affiliation. But it must be the right combination at the right time with the right strategic partner to guarantee success. With so many considerations and potential issues (along with opportunities!), having a trusted advisor who has been through this process dozens, if not hundreds, of times can be the difference between success and failure. Be sure you’re working with someone who has the experience to help you navigate through all of these complex issues. But also be sure you work with someone who is honest, transparent and willing to share the hard truths. While many mergers are successful and provide dividends for years to come, some should have never happened. Work with an advisor who is not afraid to tell their client to walk away from a bad deal.

Andrew Colbert is a managing director and founding member of Ziegler’s Healthcare Corporate Finance Practice. Colbert has completed numerous affiliation/merger transactions for physician groups and specializes in advising on strategic and financing alternatives including merger and acquisitions, capital raising transactions and partnership development.

1 Mann, Sarah. "Research Shows Shortage of More than 100,000 Doctors by 2030.” Association of American Medical Colleges. March 14, 2017.