The following are five questions hospital executives should consider before acquiring a physician practice, provided by Rudd Kierstead of DGA Partners.
Hospitals across the country are continuing to acquire physician practices in their markets. An acquisition and employment arrangement can benefit both the hospital and the physician practice — physician practices, facing growing financial and administrative pressures, get the support of a hospital; the hospitals gain closer alignment with area physicians. In fact, many physician practices have begun approaching hospitals, looking to be acquired and become employees because of the attractiveness of a salary and potentially simplified management demands. Many practices also need help purchasing electronic health record systems and maneuvering through the new demands of healthcare reform.
While acquiring a practice may be in vogue and seem attractive to many hospitals, there are some important aspects of an acquisition to consider before signing a letter of intent to acquire a practice. Here, Rudd Kierstead, a director at DGA Partners, shares five questions hospital executives should ask before acquiring a physician practice.
1. Is the acquisition part of a larger strategy? When hospitals begin considering an acquisition with a physician group, executives need to be sure the transaction fits within a larger strategy — and preferably isn't just opportunistic. "Everyone wants to respond to physicians who come to them, but it's important that there be a larger strategy," Mr. Kierstead says. Acquisition initiatives can be an important part of population health management initiatives, any new revenue models and clinical integration strategies.
In addition to considering an acquisition in terms of overall strategy, it is also important to consider how it will work with other acquisitions the hospital has already made, ones that could come in the future and those that don't fit into your strategy according to Mr. Kierstead.
2. Is this acquisition really needed? Sometimes, acquisition and subsequent employment is the best option for both the hospital and the physician group. But hospitals should consider what it wants to get out of an acquisition, since that may not be ideal for their desired outcome. For example, if a hospital is looking for a quality improvement initiative, Mr. Kierstead says it may be able to pay physicians to provide leadership and develop guidelines or strike a service line agreement, instead of acquiring a whole group.
On the other hand, if a hospital is looking to better manage the health of a population, acquisition may be useful. "It's important that whatever step you're taking fits into your strategy, rather than the other way around," he cautions.
3. Did we assess the practice? Mr. Kierstead says it's critical for hospital leaders to become familiar with the physician practice before talks move too far down the line. Hospitals should begin identifying any surprises before they derail a deal. These can range from “protected” low performing physicians, untenable coding practices, or real estate problems, for example. "It doesn't have to be exhaustive, but before the transaction gets too far down a path, you should know what you're getting into."
In addition to doing its own assessment of the practice, hospitals are likely to scrutinize the practice for compliance issues to catch them early on. Hospitals are also likely to use one or more independent, third-party valuation firms to assess the potential purchase price of the practice. Mr. Kierstead encourages hospitals to make sure the physician practice understands the hospital's legal and capital constraints that drive this process to open communication with the physicians and minimize frustration.
4. What are the acquisition's potential side effects? "Physicians, like anyone else, talk. There will be side effects" to an acquisition, Mr. Kierstead says, such as other practices in the area approaching the hospital for a possible transaction, or physicians getting upset with the hospital for partnering so closely with another practice.
In order to mitigate negative side effects, Mr. Kierstead recommends hospitals engage their range of physicians — from the employed to other referring physicians in the community. "Keep talking to them, [and] explore their needs and your needs together."
5. Will the physician enterprise be adequately supported? Acquiring a physician practice can be seen as a business investment. The employment that follows from an acquisition needs to be adequately supported to achieve both the hospital's and the physicians' desired outcomes. "The acquisition is a price tag, but employment is something much more," Mr. Kierstead says. "The effort doesn't end when the ink is dry on the contract."
For instance, hospitals may need to make a further investment in electronic health record systems, support the practice's operations, or develop an effective physician governance structure dictated by a chosen strategy.
Overall, with the proper consideration of these questions and the legal issues surrounding physician acquisition, hospitals can acquire a physician group and both parties can reap the benefits of a well-planned transaction.