Trends in healthcare medical group practice – bigger can be better and smarter

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With ongoing consolidations and mergers in the healthcare industry, and the inherent benefits that those mergers can provide, physician practice leaders may be tempted to aggressively enter into a transaction without performing the requisite due diligence. Thorough due diligence doesn't just identify "red flags" that could jeopardize a transaction. It also uncovers opportunities to create synergies between the merging practices and mitigate issues before the transaction is consummated.

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Trends in healthcare medical group practice – bigger can be better and smarter

  1. 1. 1 | P a g e Trends in Healthcare Medical Group Practice – Bigger Can Be Better and Smarter With ongoing consolidations and mergers in the healthcare industry, and the inherent benefits that those mergers can provide, physician practice leaders may be tempted to aggressively enter into a transaction without performing the requisite due diligence. Thorough due diligence doesn't just identify "red flags" that could jeopardize a transaction. It also uncovers opportunities to create synergies between the merging practices and mitigate issues before the transaction is consummated. Merging two or more existing physician practices can offer considerable benefits. Some post-merger benefits include: • Sharing expensive, upgraded resources such as electronic health record and billing systems and highly trained, degreed, and proven professional management personnel; • Efficiently pooling capital and financial resources; • Efficiently utilizing physician extenders; • Achieving economies of scale in purchasing supplies to generate cost savings; • Increasing attractiveness for recruiting the best professional talent; • Improving professional lifestyle through shared patient on-call coverage and hospital rounding; • Leveraging favorable payor agreements across broader patient population and geographic areas; and • Increasing value leading to a higher return on investment. An important part of a successful transaction is due diligence -- the method and process used by a potential acquirer to evaluate a target company and its assets for either acquisition or merger. An effective merger requires an ongoing successful partnership that starts with effective due diligence.
  2. 2. 2 | P a g e The due diligence process can help answer questions such as: • How should the transaction be structured? • What is the deal worth to each party? • How do each party’s goals coincide or conflict with the other party’s goals? • How much interest will we each own and how much overall value will be created? • Is the target company in full compliance with all relevant laws, regulations and licensing, and if not, what are those potential costs and effect on value? • What post-merger synergies and efficiencies exist or can be created? • How can you provide top-quality care to your patients in the most cost effective manner after the deal closes? • Can you maintain or improve your personal and professional lifestyle and work-life-balance while maintaining your organizational goals? Due diligence can encompass: • Structuring the deal, including identifying optimal solutions for both the buyer and seller; • Establishing value of the overall deal and for tangible and intangible assets; • Understanding value drivers and normalizing adjustment findings, while factoring those potential effects into post-transaction analysis, financial modeling and projections; • Identifying integration costs; • Identifying integration risks and ways to mitigate them; • Identifying potential synergies both in revenue enhancement and cost savings; • Investigating current practices or processes, policies and strategies to successfully integrate cultures; • Identifying potential gaps and best practices; • Determining the optimal tax structure for merged entity; • Devising tax planning strategies; • Identifying other beneficial tax services, such as cost segregation studies, state and local tax planning, and federal and state tax credits and incentives; • Effectively coordinating with legal professionals; and • Analyzing various characteristics of the buyer and seller, including: o Organizational metrics, e.g., accounts receivable, billing and collection efficiency, revenues, payor contracts, information systems; o Performance assessments benchmarked against industry standards; o Legal compliance, including anti-trust and anti-kickback laws, income allocation for STARK, e.g., physician self-referrals; o Separate financial performance of professional and technical components; o Human resources and employment issues including worker classification; o Fringe benefits; o Fair market value compensation; o Incentive pay and effect on behavior; o Insurance and liability coverage; o Debt instruments and covenant compliance; o Commitments and contingencies; o Foreign relationships;
  3. 3. 3 | P a g e o Governance; o Investor return on investment; o Tax effects for buyer and seller; and o State and local income sales and property tax considerations. A recent example of due diligence paying off involved a potential merger of healthcare specialty groups and the material normalizing net income adjustments that a consultant identified as a result of consolidated due diligence efforts. One of the entity members had his own medical billing company, which was owned by some of the physicians who were also owners in the medical practice. The other parties to the merger billed and collected, using their in-house employees, and costs were included in their overall practice’s financial statements. The cost of billing varied from 4% to 10%. Thus, a material normalizing adjustment that affected valuation was identified post-merger. As a result, the parties were able to implement best practices and consider consolidated staff reduction. Another example of a normalizing adjustment included a situation where costs were on the practice’s books in the form of salary and other benefits to family members, but would not be incurred post-merger. Similarly, reasonable management and provider compensation, and related party real estate costs and tangible property relationships may also require net income adjustments. Such relationships should be evaluated and properly implemented at fair market values. Other examples include owners’ benefits, such as key man insurance, personal term or whole life insurance, retirement plan contributions, fringe benefits such as automobiles, gas cards, car insurance, home office reimbursement, expensive CME travel, meals and entertainment, and other typical non-shared expenses paid by the company. Worker misclassification can cost the group practice as well, both in benefits and taxes, and audits in this area are on the rise. Additionally, workers may notify agencies if they disagree with their employer’s classification. With the increased cost in providing benefits to employees, employers have a tendency to treat their workers as independent contractors, a classification which may not stand up against audit scrutiny. Some practices establish separate equipment leasing companies and charge the practice rent for use of the equipment. In some jurisdictions, sales tax may be due on rents that have remained unreported and unpaid, with no statute of limitations affording protection from the unpaid taxes, penalties, and interest. This cumulative amount can have a significant impact on the value of the deal. In another example of valuable due diligence, a merging group projected synergies which resulted in a material potential revenue enhancement post merger via a “black box” analysis. The due diligence consultant analyzed major procedures among the practices in detail by payor contract, location, and modality, and extrapolated the results to determine potential post-merger volumes and applied optimal contracted reimbursement rates to determine estimated synergistic revenue. The parties to the merger were not exposed to the transparency of their fees paid by procedure code in detail, which would have violated payor contracts. Identifying best practices and standardizing practices and procedures in billing and collection can reduce the complexity, and thus, the costs of billing and insurance collection task for groups. Also, having the ability to acquire robust EMR (electronic medical records) and practice management systems that can capture desired data can simultaneously lead to increased top-line results and reduced labor costs. Those practices that are able to demonstrate positive quality care and efficiency outcomes to payors and patients can increase their market share. These practices will also be positioned to benefit from joint ventures and participation in shared risk models.
  4. 4. In the area of employee benefits, post-merger transaction planning for a merged group practice included an analysis of a self-funded healthcare plan compared to a captive insurance plan, as well as an opportunity for implementing a wellness program, to reduce overall group medical costs. Group health plan and other benefit offerings, such as disability and life insurance, likely can be obtained at more attractive premium costs over time, and products offered are enhanced due to larger consolidated group size. Other planning opportunities include an actuarial analysis of the impact on employer’s healthcare premiums, potential penalties, and fees resulting from enactment of the Patient Protection and Affordable Care Act. Upon further analysis, the consultant identified an opportunity for implementing an optimized consolidated retirement plan to provide benefits for employees and providers, thereby enhancing retention. There are pitfalls inherent in waiting to perform due diligence when an acquisition or merger is possible. For example, we have seen groups that have formed entities and relationships with other providers for group purchasing power of supplies and equipment. These relationships, if not structured properly for operational and tax purposes, can actually turn out to be costly for the parties involved. Small groups planning to merge have found it smart to upgrade and hire experienced, national professionals to help them prepare operational information, analytics and metrics to highlight the value of their business, respond promptly during negotiations and elevate their professionalism in the eyes of other parties to the merger. Financial service providers generally lack the depth and breadth of knowledge of specialized national healthcare resources to bring to the transaction table. CBIZ has experts in healthcare due diligence, tax, valuation, mergers and acquisition, human resources, payroll, benefits and insurance, and retirement planning, and the added benefit of having the ability to draw upon the operational, practice management expertise of CBIZ KA Consulting Services, LLC. The CBIZ transaction team functions cohesively, effectively and efficiently to deliver state-of-the-art quality service to knowledgeable clients with cutting edge strategies in mind, as they endeavor to succeed in this complicated, ever-changing and highly competitive healthcare market. Contact your CBIZ MHM professional today if you or your practice is contemplating a business combination. - Zandra O'Keefe, CPA 4| P age Zandra O'Keefe, CPA CBIZ MHM of Phoenix (602)650-6204 zokeefe@cbiz.com

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