The first step in any integration decision is the strategic vision. Why are we doing this? How are all parties—physicians, the hospital/health system and patients—going to be better off with us together than apart? If you can’t answer these questions in a way that makes you want to keep moving forward, just stop. Integrations are tough enough. Attempting them in strategic darkness is just reckless.
Assuming that all parties are on board with the same vision, one of the first financial steps is to get the practice valued: How much are we worth?
First, the relationship between hospitals and physicians includes patient referrals. Because of this, Stark, Fraud and Abuse, Anti-Kickback and a host of other federal laws and state mandates have come into play. This makes selling a physician practice very different from an ordinary business or real estate and great care must be taken to abide by all the rules. Both parties are at risk if the transaction is challenged, and both should be equally diligent in keeping it compliant.
|How hospitals can jeopardize negotiations
The process of integrating a physician practice with a hospital or health system is typically stressful for both parties. This can be compounded—and even scuttle the process—when hospitals irritate the group with some classic, but avoidable, mistakes. Here are some of the most common.
Don’t dwell on future practice losses. Often, high revenue ancillaries like echo and nuclear are moved out of the practice and over to a hospital department, usually with a significant bump in reimbursement. To continue to treat the practice as a financial silo instead of as a valuable component of the larger, highly profitable service line is both offensive and demotivating to physicians. This mistake can be perpetuated for months or years after the transaction. Instead, promote the best financial performance possible within the practice, and if you continuously flaunt red ink to your most valuable assets, they won’t get the job done.
Back-dooring the ascribed negotiating team. Sophisticated groups will empower a negotiation team to lead the physician side of integration talks. Hospital executives who go around this team and attempt to cull other individuals from the herd do so at great peril. Hallway meetings or clandestine breakfasts always make it back to group leadership. When it does, trust is broken and the process falls back several paces. Stick with a designated team. Closing the transaction isn’t the end of the process; it’s the beginning of a new partnership.
Valuations aren’t cheap and they require a lot of data and time to complete—not just for the valuation firm, but for the group as well. Costs can range from $10,000 to $30,000, depending on the size of the group and its complexity. Often the hospital partner is willing to cover this cost, but with its significant price tag, the hospital may want to pick the firm and be in control of the process. There may be legitimate reasons why a practice would be uncomfortable with this. If you can’t negotiate past this, offering to pay half should get you an equal seat at the table. It will be a significant short-term distraction for your staff (or you, depending on the size of your practice), and may require additional expenses from outside accounting.
One component of the valuation that often gets short-changed by physician practices is the narrative. Take advantage of the opportunity to tell the story beyond the dollars and cents and tax returns. Cardiology practices typically have sophisticated infrastructures with sophisticated staff running them. There is value in this. Further, if you have outreach locations with market reach that extends beyond the front door of the practice, here too lies value.