LUGPA was founded to advance and strengthen both the efficiency and value of the independent practice of urology mission while enhancing patient healthcare outcomes and choices. Providing our existing and expanding membership with real-world business and therapeutic educational resources, specific to the sustained success of their urologic practice, is of paramount importance to LUGPA.
In keeping with this vision, LUGPA recently published Practice Management for Urology Groups: LUGPA’s Guidebook, a 19-chapter “playbook” of invaluable information, written by LUGPA members and consultants with specific expertise. LUGPA’s Guidebook topics were selected to engage urology thought leaders who composed chapters detailing their reviews and learnings on a variety of important topics, including integral governance and operation of a urology practice, utilization of integrated service lines for expansion of patient access to care, establishing a urology-specific laboratory for healthcare and patient cost efficiencies, and initiation of local, state, and federal health political advocacy.
This inaugural publication will assist urology practices in navigating the rapidly changing, and often perplexing, healthcare environment. The LUGPA Board of Directors is extremely appreciative of the dedicated efforts of the LUGPA’s Guidebook editorial staff, which was led by Dr. Evan Goldfischer.
This month, we present an excerpt from Chapter 4 of the LUGPA’s Guidebook entitled, “Urology Practice Mergers and Acquisitions,” written by Dr. Peter Knapp, a cofounder of Indiana Urology, and previous LUGPA President. Dr. Knapp’s chapter synopsizes, in detail, the essential management expertise and advice required for the consideration of potential practice ownership changes, and serves as an illustrative example of the real-world practical value of the LUGPA’s Guidebook.
In early June 2017, a link to access the electronic version of LUGPA’s Guidebook was sent free of charge, as a member benefit, to individuals associated with LUGPA member practices. Print copies are currently available for purchase for $195. Visit http://lugpa.org for more information or contact Maureen Lyons at mlyons@lugpa.org to order.
Urology practices began merging in response to market pressures threatening the survival of smaller practices. They occurred on the heels of federal healthcare reform with the creation of the Medicare Resource-based Relative Value Scale (RBRVS) payment system and the emergence of managed care in commercial markets. Many regions saw hospital consolidation through hospital mergers and acquisitions and the employment of primary care physicians (PCP). Alignment of the PCP to a particular hospital threatened historical referral lines and limited patient access to non-aligned specialists. Managed care plans had a similar effect with the formation of HMO and PPO insurance products. HMOs and PPOs selected narrow panels of hospitals and physicians, which limited specialist access to some patients.
Urology practice mergers provided an answer to the limited access to patients generated by hospital consolidation, hospital PCP employment, and managed care insurance plans. Merged urology practices serving different hospitals, PCP networks, and managed care plans were now able to retain access to a larger number of patients while expanding urology practice service lines. Merged practices also discovered they were more able to purchase capital equipment and make facility investments to provide traditional facility-based services inside the larger practice. Over time, practices began adding ambulatory surgery centers, clinical and pathology laboratories, advanced imaging centers, and cancer centers with radiation therapy to their practices to provide higher-quality and more efficient care to their patients.
Urology practice mergers continue today as market pressures continue to incentivize large practice formation, and doctors work to improve the delivery of care to a larger number of urologic patients. Urology practice mergers, however, can be difficult, with many challenging obstacles to overcome before achieving success. Drawing on the experience of several large group practice mergers, this chapter will outline 11 steps to successful practice mergers and acquisitions (Figure) that can be helpful, whether considering a merger between two or more groups or an acquisition of a smaller practice. Progressing in an organized systematic fashion and putting first things first can keep the process moving forward in a timely manner while avoiding some of the time-consuming and costly pitfalls that can occur.
Ultimately, all practice mergers have potential good, bad, and ugly outcomes. The second section of the chapter will discuss the good outcomes of practice mergers that can be achieved, the bad outcomes to minimize, and the ugly outcomes to avoid.
In keeping with the LUGPA mission of preservation, growth, and collaboration of independent practices, this chapter will help practices build a comprehensive, integrated, independent urology group that provides improved patient care and service in the community.
Practices considering a merger need to create a shared vision. The shared vision will provide the needed motivational impetus to bring groups of physicians together and the incentive to invest needed resources to bring the merger process to completion. The vision can be developed by carefully examining the goals, objectives, and opportunities to be achieved with the completion of a practice merger. Establishing common goals and objectives will provide a guidepost for all subsequent merger discussions.
The goals and objectives need to be of significant value to justify the time, effort, and sacrifice necessary to successfully complete a merger. The goals and objectives should also be achievable in a reasonable period of time to keep all parties engaged and to avoid the member disappointment or dissension that can occur if the merger objectives are not achieved. The importance of the goals and objectives cannot be overemphasized. If they are meaningfully significant, all other obstacles become insignificant and negotiable. Goals and objectives can take two forms: Practice Growth and Solving Common Problems.
Growth goals can include capturing increased market share through improved geographical coverage, increased PCP referral base, expanded hospital coverage, or additional payer contracts. Growth can also be realized by the merged entity’s ability to invest in capital equipment and treatment centers that will provide additional integrated services in the practice, such as specialized centers of excellence, advanced imaging, radiation therapy, clinical and anatomical pathology services, ambulatory surgery centers, and equipment leasing enterprises. These growth objectives provide some of the most significant motivation for practice mergers as they increase top-line revenue opportunities that can be used to support improved patient care and service.
The second set of goals and objectives can be built around the merged entity’s ability to solve common practice problems better as a single entity than on its own. Common problems facing all independent practices include billing and collections, practice management, human resources, employee hiring and retention, physician manpower distribution, physician hiring, electronic health record (EHR) maintenance, and management of practice overhead. The combined resources of a merged entity often put the practice in a better position to hire experienced and talented managers to build an adequate infrastructure to support a large number of physicians and address these common problems. In some cases, capturing economies of scale and maximizing operating efficiencies are significant enough to provide the incentive needed to proceed with the merger.
Selection of merger goals and objectives to create a vision for the merged enterprise is essential at the outset of merger discussions. The time taken to carefully analyze and identify valuable and achievable goals and objectives will provide the incentive to stay on target through the merger process and minimize obstacles that will arise.
Successful mergers require the active involvement of physician leaders and senior management from every practice in the proposed merger. Physician leadership needs to be motivated by a shared vision and pathway to achieve the agreed-upon goals and objectives. Physician leaders also need to have the ability to build consensus within their respective groups to gain the necessary approval for the merger. In many cases, physician leadership develops a vision understood by other physician leaders but not appreciated or valued by physician members of their own group. It is essential that physician leaders recognize the internal obstacles or objections that may exist and attempt to reconcile them before proceeding down the merger pathway. It is also essential that physician leadership evaluate their counterparts from the other groups and access their ability to garner approval internally. It is in everyone’s best interest to be certain that the people at the table are representing the interests of their respective groups and can lead their group to merger approval before investing resources in the process.
In addition to physician leadership and management, it is also helpful to identify a merger facilitator to help keep the individual physicians, managers, and group entities focused on the goals and objectives as the inevitable challenges arise. The facilitator can be a mutually agreed-upon accountant, lawyer, or business advisor capable of working constructively to solve problems.
Once satisfactory goals and objectives are identified, and the merger discussion team has been assembled, three immediate legal considerations need to be addressed. First is execution of a confidentiality agreement. All practice entities possess important private financial and strategic information that needs to be protected by a nondisclosure agreement (NDA) before information can be exchanged. A carefully created document can protect all parties if the merger does not consummate and practices return to their separate independent status.
The second legal consideration should include an antitrust assessment from outside legal counsel. Practice mergers can cause fear and suspicion in the local healthcare community, including hospitals, payers, and competitors. During the antitrust evaluation, potential issues that could be raised by impacted parties should be carefully examined. It is helpful to prepare a white paper in advance to be used if objections arise. The antitrust evaluation can be formulated rather quickly and provide an outline of a defense to any antitrust charges, as well as provide an opportunity for legal counsel to advise the practice entities on proper behavior to avoid accusations of unfair business practices.
The third legal consideration is to identify and secure a name and corporate identity for the merged entity. The new name needs to be legally secured for a future URL, website address, marketing, and a tax identification number. Although agreeing to a new name can be time consuming and can be delayed to later in the process, it is an important legal checkpoint to be accomplished to avoid a post-merger name change that is confusing to the market and disruptive to the practice.
After completion of the NDA, practices need to disclose their financial information for the past several years. A disclosure of three to five years is adequate to provide appropriate practice trends in areas of billing, receipts, collection percentage, relative value unit (RVU) analysis, payer analysis, accounts receivable, and accounts receivable aging. The patient encounter information also needs to be examined carefully. New patient and consult trends over several years are very valuable to determine the health of the practice. Examining total patient visit trends gives insight into the market share held by each practice over time. The number of hospital consults, hospital admissions, and surgery volume should be examined to complete the clinical volume assessment. Fixed asset inventories, including office and medical equipment, should also be provided.
Other relationships including ownership in medical office buildings, capital equipment, and integrated service lines should also be completely disclosed. This disclosure extends to practice review, including the number of offices, locations, management structure, and manager responsibility. In addition, the number of physicians, age, compensation, and years to retirement should also be carefully reviewed.
Careful review of the financial information should provide needed visibility into each of the practice’s financial relationships and financial condition. The review can provide additional insight into future business growth and expansion opportunities, as well as opportunities to consolidate staff, offices, and managers.
It is also valuable to draft a preliminary business plan that includes the expanded goals and objectives, service line development, and integrated services planned for the new merged entity. A preliminary business plan can be helpful in explaining to individual group members the purpose and expected outcome of the merger as well as provide a roadmap of targeted accomplishments following completion of the merger. The business plan should be presented as a draft to allow future changes during the merger process and following closure of the merger.
Following identification of significant achievable goals and objectives and completion of the financial analysis due diligence, the merger team should create a term sheet. The term sheet should include the expanded goals and objectives developed during the due diligence process as well as details regarding practice structure, governance, and compensation that would be included in the operating agreement. The term sheet provides an opportunity for all parties to collectively agree on deal terms and justify further investment of time, energy, and legal cost moving forward. The term sheet also provides a useful vehicle to return to the membership of the respective groups for approval. As the merger team discusses the term sheet with the individual group members, they will have the opportunity to learn the internal objections that may persist and address and resolve any concerns early in the merger process. Approval of the term sheet can be memorialized by executing a mutual letter of intent (LOI) confirming each practice’s commitment to move forward.
Development of the operating agreement will require substantial time and effort on the part of the practice leadership and legal team. The operating agreements of each entity will need to be reviewed, and a common operating agreement will need to be developed. It will include identification of the practice corporate structure, contributed assets, covenants, compensation, member buy in and buy out, member additions and dissociations, non-compete, member disability, and practice dissolution and wind-up provisions. The operating agreement also provides an opportunity to determine the degree of practice integration that will occur in the merged group. Creation of practice divisions or creation of a common compensation model with sharing of revenue streams and expenses can be defined in the operating agreement.
Experienced legal advice is essential to achieve a fair and equitable arrangement for all parties and provide a process for the merged entity to conduct business in the long term. Consideration should also be given to include incentives to help the merger remain intact and create significant barriers to dissolution.
A difficult task in all practice mergers is to look forward and assess the future management needs of the merged entity. Most practices have integrated competent management leadership into their practice structure and rely heavily on their expertise and judgment in day-to-day operations, contracting, and personnel decisions. Practice mergers and acquisitions ultimately need to consolidate management structure as well. This can result in realignment of managerial positions, creation of new positions or, in some cases, departures from the practice. Identifying the best management team for the new entity moving forward is critical and can often be found within the existing collective pool of managers or sometimes by identifying a new manager from outside that is agreeable to all parties.
Identifying the management team, structure, and chain of command is essential for proper function of the future transition team, which needs to be in place and ready to function prior to the merger closure and go-live date. Selection of the management team is often a personal and painful process for the physician leadership in each practice but is a critical step to achieve proper practice functionality at the time of go-live, and into the future.
Once the practice entities have agreed to move forward with the merger, an appropriate merger timeline needs to be established, and a transition team needs to be identified to bring the merger to closure and full operation. The work of the transition team can be initiated upon completion of the LOI and confirmation of the management team and structure. The transition team needs to be led by the practice management team and should include staff from finance, billing, coding, accounting, human resources, and Information Technology (IT) as well as service line directors, including laboratory, imaging, radiation, and ambulatory surgery centers.
Senior management needs to carefully identify the role of each of the team members needed to bring everything into alignment prior to the go-live date. Emphasis should be on establishing the billing, coding, and collection department to ensure needed cash flow for the new entity. Invariably, one or several payers will delay payment to the new entity despite the best efforts to notify them in advance and obtain necessary provider number changes. It is essential that the practice establish a sufficient line of credit with a banking institution to enable cash withdrawals to maintain operations in the event of a delay in payments from insurers.
The transition team should also put processes in place to ensure proper patient and specimen flow to utilize the combined integrated services. Coordination of specimen flow to the laboratory and patient scheduling for imaging, subspecialty services, surgical procedures, and radiation therapy need to be in place in advance of the go-live date.
Following completion of the operating agreement, the merger teams need to return to their respective practices to receive final approval of all merger documents. This is often a formality if the respective practice leadership teams have followed best practices of regularly updating their practice members and seeking real-time feedback. Prior approval of the term sheet and the LOI will minimize any last-minute objections.
Preparation for the go-live date should have been in process for several weeks or months. Proper execution will require everyone to be prepared, and billing systems to be in place. Senior management will need “all hands on deck” to manage any unforeseen problems. As transition advisers begin to disengage, the new entity may consider hiring a third-party consultant to help with the integration process. Inevitably challenges will arise, and the involvement of a consultant may help overcome them.
The difference between a good and a great practice merger is execution. Realization of the planned goals and objectives is critical to success and can only be achieved through execution of the business plan. The management team and physician leadership need to create a realistic timeline to achieving each goal and work together to achieve them. Fulfillment of the goals and objectives through prioritization and execution are essential to realize the promise of the merger. However, post-merger integration is not the responsibility of management and leadership alone. The merged practice will be more successful if each member in the organization plays an active role in post-closing integration. Visible member support of the merger will accelerate practice integration and contribute to building a cohesive team.
