Transcript Document
Mergers & Acquisition
for Medical Practices
Charting a Course for
Safe Navigation
Daniel J Bryant, CPA, PS
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Overview
Planning
Change Impact
Acquisition Process
Legal & Tax Issues
Negotiating the Deal
Before Signing
Implementation
Case Studies
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Overview
60-70% of mergers don’t meet expectations
• How to plan for realistic expectations
• In the M&A process the business valuation is only one element of
the process (a critical element but still only one)
Clients need help navigating through the process
• This may be their first M&A
• Explain that it’s not a first time marriage
It’s a second marriage
With children on both sides
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Planning
Discuss M&A process in annual client discussions
Does Client want a tree house or a dream house
Need for a project manager
• Provides a detailed & summary plan of the M&A
• Lets client know what is coming around the corner
• Allows you to inform the client what information is needed and from
whom
• what decisions the client will need to make and when
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Planning – Project Mgr
Phases of Planning
Criteria for partnering
Identify potential partners
Acquisition / Merger plan
Negotiating plan
Announcement / Communication Plan
Training plan
Implementation Plan
Client / Employee feedback
Forecast / Realistic Expectations
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Planning – Take Time
Building a tree house in stead of a dream house
• Need for a project manager
Provides a detailed & summary plan of the M&A
Lets client know what is coming around the corner
Allows you to inform the client what information is needed and from
whom
what decisions the client will need to make and when
• Reason for annual discussions with clients
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Planning - Complications
2nd Marriage with 2 sets of kids
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Not the same as starting from scratch
Even if the new owners get alone what about each staff
At least the kids aren’t voted out of the family
What processes and systems will remain & which will change
Will there be a new organization structure
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Planning - Issues
Mergers versus Acquisition
• Similarities to buying and selling
• Dissimilar Issues
• New issues
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Change
Why Change
Change Process
Communication Plan
Implementation Plan
Emotions of Change
Power Shift
Benefits
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Change
Why - Reasons for Change
• Negotiating Practice Efficiency
• Customer Service Improvements
• Identifying Best Strategies
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Change
Change Process - Effect
• Not the normal time to adjust
No time for resisting, denial, acceptance, getting on board
• Requires plans to be in place on day one
Communication Plan
Implementation Plan
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Change
Communication Plan
When more than one office-clinic-location is involved then the formal
announcement needs to be made on the same day and time
Announce only decisions that have been made
Be honest, open and communicate
– Lack of communication can cripple an organization
– There will always be questions asked that haven’t been addressed
– When change is done in stages explain the stages and timing
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Change
Implementation Plan
Organization / reporting structure (Org chart)
– Reporting relationships
– Department heads
– Staffing levels
Processes & Systems
– What will change
– What remains the same
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Change
Emotions always exist
A loss has occurred even in a merger but especially
in an acquisition
A loss has taken place
• A business has died
• A Loss of control and independence
Allow feeling to be expressed
Doctors don’t always want to make the announcement
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Change
No longer king of the mountain
Can’t call all the shots
Need to get buy-in
May no longer be involved in the decision making
process
Frustration
Setting expectations helps
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Change
Growing the breadth of the practice
• Expanding patient base
• Administrative consolidation
• Common systems & processes
Growing the Depth of the Practice
• Offering broader range of services
• Bringing outsourced services in-house
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The Acquisition Process
Need to define the process in advance rather than
reacting to an opportunity
Two plans
• Acquirer
• Acquired
Need to identify objective
• Allows for a criteria based evaluation
• Not a gut feeling
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The Acquisition Process
Acquisition Program
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Establish policy responsibility
Develop an acquisition plan
Define acquisition criteria
Identify potential candidates
Establish contact
Perform Due diligence
Negotiate based on previous established benefits
Ensure effective follow-up integration
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Medical Alignments
Types of Merger/Acquisitions
• Hospitals
Merging
Buying medical practices
• Group clinics
Merging
Buying medical practices
• Medical Practices
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Appraisal Role
Appraiser needs to be independent of both parties
Establishes a basis for starting negotiations
When Appraisals are beneficial
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Hospitals to Hospitals
Clinics to Clinics
Practices to Practices
Practices to Clinics
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Legal Land Mines
Antitrust Laws
Federal Anti-Kickbacks
Self Referral Restrictions
Corporate Practice of Medicine
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Legal Land Mines
Antitrust Laws
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If significant decrease in competition
Price-fixing
Monopoly
Boycott
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Legal Land Mines
Federal Anti-Kickbacks
• Illegal to pay for referrals of patients whose services would be
reimbursed under Medicare or Medicaid
• Prohibits solicitation or reimbursement for:
Referring patients
Purchasing, leasing and ordering or recommendation of such
• Safe harbor rules
DHHS
OIG
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Legal Land Mines
Self Referral Restrictions
• Stark Laws
Stark 1
Stark 2
Allowed referrals
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Negotiating the Deal
Negotiating is as important as the Appraisal
What to Negotiate
Negotiating Concepts and Myths
Negotiating Skills
A Model for Negotiating
Success negotiating is based on trust
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Negotiating the Deal
What to Negotiate
• Price & Terms
• Terms of employment of the physicians after transition
• Decision making process & authority
Concepts & Myths
Negotiating Skills
• Listening
• Self management
• Creativity
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Negotiating the Deal
Negotiating Model
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List needs
Prioritize needs
Evaluating alternatives
Look for mutual satisfaction
Consider other consequence
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Tax Issues
Objectives
• Buyers
Shift toward to Capital Gains rather than ordinary income
• Sellers
Structure sale to avoid IRS audit
• Determine tax effect
After value has been agreed to
Before allocating to specific parts
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Tax Issues
Future Considerations
• Physician compensation when transitioning to employee
Pay
Bonus incentives for:
– Future growth
– Retention of workforce
– Productivity improvement
Double taxation for C-Corp
Other tax issues
Retirement plans
Single versus Periodic payments
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Before Signing
Protective Covenants for Buyers
Protective Covenants for Sellers
Assuming Liabilities
Fine Print
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Before Signing
Protective Covenants for Buyers
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Full Disclosure
Maintaining License, Insurability and Privileges
Physician’s Full Effort
Production Standards
Accountability
Non-Competition
Length of Employment Contracts
Length of Notice of Termination
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Before Signing
Protective Covenants for Sellers
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Timely payments
Professional Autonomy for Patient Care
Length of Employment Contract
Length of Notice of Termination
Sharing of Information
Backing Out
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Before Signing
Assuming Liabilities
• Professional Liability Insurance
• Staff Employment Issues
Can be critical part of change
Benefit changes
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Vacation
Sick Leave
Retirements Plan
How secure is their job
• Reimbursement Issues
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Life After the Deal
How decisions get made
Blending cultures
Preparing for market change
Maintaining economic soundness
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After the Deal - Integration
People
Processes
Technology
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After the Deal
Organization Structure
• Governing Board & Committees
Policies
Employment Issues
Patient Policy
Fees
Contracts
Capital Approval
Purchasing Supplies
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After the Deal
Blending Cultures
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Understanding Mutual Needs
Understanding Differences between Large & Small Orgs
Grieving Loss of Control
Identifying Issues of Common Destiny
Forming the New Team (org)
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After the Deal
Preparing for Market Change
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Information Systems
Practice Efficiency
Customer Service Improvements
Identifying Best Strategies
Maintaining Economic Soundness
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Medical Practice Valuations
Mergers & Acquisitions – Clinic / Practice
• Managed care services are more popular in certain areas
• Primary care physicians targets in acquisitions
Gatekeepers of healthcare services
Identify need for specialists
CPA role in M&A
• Appraiser
• Facilitator
• Consulting services
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Medical Practice Valuations
Factors affecting the value of physician practices
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Changes in reimbursement for physician services
The regulatory environment
Changes in the operating environment
Goodwill
Movement of the patient base
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Medical Practice Valuations
Regulatory Environment
• IRS position is that acquisitions must meet Community Benefit
Standard (arm’s length)
• Tax-exempt organizations must pay fair value
• IRS prefers – income approach to valuations
• OIG prefers valuation based only on tangible assets (contrary to
IRS)
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Medical Practice Valuations
Changes in Operating Environment
• Increased operating expenses
• Mid-level providers (NP, PA & MW)
Require supervision
May generate additional revenue
• Goodwill
• Patient based payers
Physicians
Managed care providers
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Medical Practice Valuations
Information unique to medical practices
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Payer mix
Total active patients
Average number of patient visits per day
Average number of new patients per month
Average hospital admissions
Gross charges for CPT codes
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Medical Practice Valuations
Information unique to medical practice
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Fee schedule - how do they compare to the average
Medical specialty of physician & mid-level providers
Listing of all participation agreements
Listing of all fixed-fee arrangements
Description of billing procedures
Relative Value Unit (RVU)
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Medical Practice Valuations
Information unique to medical practice
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Location - number of competitors
Sellers reputation
Average future scheduled appointments
Patient demographics
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Case Study - 1
Hospital Merger
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Large multi location hospital
Growth in patients in outlying areas
Local hospital in outlying area need capital
Similar cultures
Impact of Change
Executive Perspective
Employee Perspective
Patient Perspective
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Case Study - 2
Hospital Acquires Primary Care Provider (PCP)
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Large multi location hospital
PCP has high overhead
PCP needs to upgrade technology
PCP not run efficiently
Hospital willing to pay for assets only
Physicians sign 5 year employment contact
Physicians need to increase productivity
Impact on PCP employees
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Case Study - 3
Hospital Acquires PCP with Ancillary Services
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PCP has radiology facility
Ancillary services valued different from rest of PCP
Physicians sign 5 year employment contact
Future pay based on productivity
Impact on PCP employees
Reassigned to hospital organization
Released due to overlapping of personnel
Need retraining to hospital processes & systems
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Case Study - 4
Merger into Group Clinics
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Which physician will be in charge
May need to setup a governing board for policies
Need to establish common compensation packages
Staffs are not similar in number
One clinic moves to newer systems
Maintain 2 locations or combine into one location
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Case Study - 5
Merger of Group Clinics
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Create mega-groups
In response to new government requirements/oversight
Alternative is to remain same or join hospital
Less likely to give up location and staff
Allows for possible sharing of technology
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Summary
Educate the physicians or hospital administration
Each M&A is unique
This may be their first time
Help with planning
Don’t forget the human issues
Set realistic expectations
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Questions & Answers
Contact Information
Dan Bryant, CPA/MBA
Daniel J Bryant, CPA, PS
(253) 471-0492
Email: [email protected]
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Reference Material
“Buying , Selling & Merging a Medical Practice”
by Kenneth M Hekman
“The CPA’s Guide to Medical, Dental and Other
Healthcare Practices”
by Lucy R. Carter, CPA and Sara S. Lankford, CPA
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Other Courses
CPA Leadership Institute Courses
• Physician Practice (& Ancillary Business) Valuation: Appraisal
Theory and Applications (Randy Biernat, CPA/ABV
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