Evaluating a Practice Merger

Veterans will confirm that there is no perfect practice merger, but by following the signposts and avoiding the pitfalls, it is possible to craft a merger that works well for both parties. Nicole Palmer, CPA, has shepherded dozens of practice mergers in her role as client support for Management Services Network, Charlotte, NC, and she shared the good and bad reasons to merge, preevaluation suggestions, and merger pointers and caveats at the recent RBMA conference, Physicians and Administrators: Managing a Radiology Business from the Top, February 23, 2008, in San Francisco.

Before getting started on a merger evaluation, it is imperative for the practice administrator to have physician involvement from the outset, Palmer advises. She offers the following components of a successful merger.

• Have a clear vision of what the new practice will be, whether it is a larger regional player or a teleradiology provider.
• Avoid dissonance over compensation, including salaries, bonuses, vacation, time off, and accountsreceivable buyouts. “If a group agrees to something they are not happy with, you are probably not going to succeed,” she says. Two merging groups should achieve compensation parity within 12 to 18 months into the merger, she cautions.
• Create a working governance structure. “You are probably going to adopt one of the groups’ governance structures, but be sure to get it resolved in advance,” Palmer says.
• Appoint a strong physician leader. It is not always the larger group that has the better leader, Palmer notes. This could be a reason, in itself, to merge.
• Seek a similar or shared culture. Dramatically different practice cultures are a prescription for failure.
• Maximize integration. Palmer recommends that imaging-center operations, billing, and administration all be merged. “Devise an integration plan before the merger,” she advises.

There are both good and bad reasons to merge, and if one of the following is the motivating factor, Palmer suggests passing: less night call, no night call, higher salaries, savings on benefits, a hospital directive, and fear of offending a larger suitor.

The Good and the Bad

Good reasons to merge include revenue diversification (a key strategy in dealing with reimbursement cuts) and diversification of hospital contracts. If a small group has just one hospital contract, it is in a vulnerable position. Other good reasons are improved ability to handle night call effectively and access to better technology. “Many groups have radiology information systems that are 17 years old,” Palmer notes. A merger could give a group access to better information systems and imaging technology.

The ability to compete with subspecialized teleradiology groups and difficulties recruiting radiologists in a tight labor market can be compelling reasons to merge. She also cites physician/administrative leadership because strong leadership is clearly a differentiator in this marketplace.

In a highly disorganized market such as the Northeast, Palmer notes, market dominance can be a good reason to merge. “In a highly disorganized market, you have a real possibility for market dominance,” she says. A merger of hospital systems is also a good reason; “If your hospitals merge and the groups do not, there are going to be problems,” Palmer predicts.

Pointers and Caveats

Palmer recommends initiating a merger discussion at a joint social event, preferably at one of the physicians’ residences. A slow response to your initial overture is not a good beginning, but an immediate call back from the physician leader bodes well. Once talks have begun, ask for a yearend billing report. If it takes more than three weeks, the merger invariably does not work out, Palmer says.

Subjects that should be off limits include compensation, fees, and insurance contracts. Do not leave the negotiations to attorneys, though, and be sure to include the business manager in the process. Palmer advises against including only those shareholders who favor a merger on the committee to review the proposal. She also suggests that each party retain an outside advocate, such as an attorney or a CPA.

Be sure to identify the goals and the deal breakers early in the process, Palmer advises. Be realistic about the merger timeframe: It probably will take a year.

On the other hand, if the process is moving slowly and there is a clear lack of excitement about the merger’s prospects, these are signs that the practice is wasting its time, Palmer notes. If the parties cannot get past the deal breakers and, worse, the practice is holding back on a growing number of significant decisions, it is clearly time to cut bait.