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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