By Kate Hickner
This article was originally published in the Fall 2019 issue of Communique.
The healthcare industry has been experiencing a wave of integration for years. On a daily basis, we hear about health systems and large independent national and regional practices acquiring smaller practices. This is especially true in the anesthesia space. Just because consolidation is trendy does not mean that it is necessarily the most desirable course of action for your group.
Factors Driving Practices to Sell or Not Sell
There are several reasons why independent anesthesia groups sell to larger practices. One driving factor is the constant increase in operating costs. Small practices are especially burdened by the increasing cost of employee health insurance and other benefits as well as the cost of technology that is needed to comply with federal regulations and maintain competitiveness in the industry. They are challenged by demands from physicians and mid-level providers for greater work/life balance and schedule accommodations that are more difficult to coordinate when the pool of providers is relatively small. Another driving factor is the desire to have more negotiating leverage with payers. Some small practices also desire to merge with multi-specialty groups to seek a greater market share in ancillary service lines. Perhaps most commonly, practices realize that they will need to align with others in order to thrive under the changing reimbursement landscape that increasingly focuses on value-based payments. To summarize, larger groups often have advantages when it comes to economies of scale, generous staffing and technology resources, greater bargaining power and the ability to better coordinate care and implement quality and efficiency initiatives.
In addition to the economic reasons described above, some hospital-based groups, such as anesthesiology practices, face political pressure to integrate with larger groups. For example, health systems sometimes prefer that their various hospitals be staffed by a consistent provider with which the system has had a positive experience. Larger groups are sometimes viewed as more sophisticated and trustworthy from a financial and compliance perspective. They are also sometimes viewed as better strategic partners for dealing with a challenging and changing healthcare reimbursement and delivery environment.
There are also compelling reasons for remaining independent. Although there are advantages to being part of a larger organization, many physicians, especially those who are more entrepreneurial, strongly value autonomy. To some, it is the presence of this factor that makes them feel most secure. They appreciate having control over their careers and the day-to-day operations of their practices. Further, physicians in smaller groups often enjoy just as much, if not more, compensation than they would with a larger group. This is true for younger anesthesiologists who often receive less compensation as employed anesthesiologists of larger national groups than they would if they were physician owners of a smaller practice. Others oppose acquisition by a larger group because they are simply resistant to (or very cautious of) change.
Evaluating and Negotiating a Potential Acquisition
Because of the tensions created through the various competing interests just described, smaller groups that are considering a potential integration transaction need to be thoughtful. In order to conduct the proper cost/benefit analysis, groups need to consider the factors driving them towards a potential acquisition, factors weighing against the transaction and the relative importance of those considerations. Whether to integrate with a larger group needs to be the group’s decision based upon its unique circumstances.
The first step for any practice that is considering being acquired by a larger practice is to define the goals and underlying purpose of the transaction. The group should understand what it wants, what it can compromise on, and what it can’t give up.
The factors driving a group towards an acquisition may sometimes be addressed without selling the entire practice to a larger firm. There are many ways for physician practices to align with other providers without selling their business in its entirety. For example, some groups will address staffing insufficiencies by entering services or staffing relationships with other groups or by garnering the support of hospitals through physician recruitment arrangements. Some groups will address rising expenses by leveraging greater economies of scale through relationships with group purchasing organizations or management companies. Some align themselves with physician organizations, physician hospital organizations, accountable care organizations and clinically integrated networks to better thrive under new a reimbursement regime that focus more on paying for quality and efficiency than it ever has before.
When evaluating a potential acquisition or other integration, it’s imperative to carefully consider the key terms of the deal. For example, will assets, contracts, leases and provider numbers be transferred and, if so, how? Will clinical or non-clinical personnel be terminated? What will be the post-closing or post-integration compensation, governance and management structure? Will pre-existing liabilities be addressed through escrow funds or another mechanism? How will preclosing accounts receivables be treated? Are there non-competes, non-solicitation provisions or other restrictive covenants to consider? How will the pension and other benefit plans be impacted? Do the parties share a similar culture and trust each other? Can the parties unwind the acquisition or integration if they have difficulty working together?
Once a potential acquisition or other integration transaction is identified as potentially desirable, it’s important to involve legal advisors and consultants early in the process. Healthcare attorneys can advise clients on how to mitigate risk through financial, legal, regulatory and reputational diligence and various legal structures. Attorneys can also assist the group to better understand what is, and what is not, permissible in this space.
Financial relationships that are permissible in any other industry are often not permissible in the healthcare industry. The state and federal healthcare laws govern the manner in which each acquisition and integration relationship described above may be structured. The regulations at issue include federal and state anti-kickback laws, state fee-splitting laws, the federal Stark law and parallel state self-referral laws, civil monetary penalty laws, state corporate practice of medicine doctrines, federal and state patient privacy laws, tax exempt laws, federal anti-trust laws, state and federal securities laws, state licensure requirements, state certificate of need laws, state insurance laws, reimbursement laws and regulations and contractual requirements, and many more. As an aside, it is interesting to note that the federal government is currently reviewing ways in which the federal Stark and antikickback regulations may be modified to afford even more flexibly to parties that desire to align with each other to embrace various value-based initiatives.
Once a physician group has identified the desired business terms and confirmed regulatory perspective, healthcare attorneys are also crucial in protecting the group during discussions with the other party. The first step is often to enter an agreement to protect the confidentiality of the information shared with the other party. The next step is often to enter a letter of intent or memorandum of understanding setting forth the proposed business terms. Although these agreements are typically non-binding (except for confidentiality and no-shop provisions), they promote efficiency by ensuring that the parties are on the same page from a business perspective before time and money is spent draft and negotiating transaction documents. Healthcare attorneys can also assist in navigating sensitive issues, for example, whether the group’s agreement with the hospital requires the hospital to consent to the arrangement and selecting a valuation consultant who will determine whether the proposed agreement is within the range of fair market value as required by the federal healthcare regulations.
Each physician group contemplating an acquisition or other integration transaction should have a strong negotiating team that has the support of the group’s leadership. Because acquisitions require the approval of a majority or super majority of the practice’s equity holders, it’s important that those leading negotiations understand the position of, and communicate with, the practice’s equity holders. It is unfortunate when a subset of practice leadership pursues a potential transaction after heavy negotiation but then does not garner the corporate approvals necessary for it to move forward.
When the physicians within a group disagree whether it is advisable to proceed with an acquisition or another type of alignment, it’s important for the group leadership to ensure that it is complying with the group’s governing documents in such regard. The group’s Articles of Incorporation, Bylaws, Operating Agreements, Shareholder Agreements, Buy- Sell Agreements and similar documents often address what needs to occur. If the governing documents are sparse, the manner in which the group proceeds may be dictated by the underlying governing corporate law set forth in statutes and case law.
The current healthcare reimbursement and delivery environment is challenging for small physician groups. Now is a great time for practices to carefully consider how they will position themselves for success in the future. They should thoughtfully consider their own unique circumstances and various factors weighing for and against an acquisition or other integration options. Many practices are realizing that it is not necessary to take the dramatic step of selling to larger practice in order to survive. Sometimes bolstering integration in a less extreme manner through one of the options outlined above is the best way to go.
If you have any questions or would like to discuss further, please reach out to Kate Hickner at keh@kjk.com or 216.736.7279, or contact any of our Physician Advisory professionals.
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