Mergers & Acquisition for

Medical PracticesCharting a

Course for Safe Navigation

Daniel J Bryant, CPA, PSDaniel J Bryant, CPA, PS

1

Overview

Planning Change Impact Acquisition Process Legal & Tax Issues Negotiating the Deal Before Signing Implementation Case Studies

2

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

3

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

4

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

5

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 clients6

Planning - Complications

2nd Marriage with 2 sets of kids• 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

7

Planning - Issues

Mergers versus Acquisition• Similarities to buying and selling• Dissimilar Issues• New issues

8

Change

Why Change Change Process Communication Plan Implementation Plan Emotions of Change Power Shift Benefits

9

Change

Why - Reasons for Change• Negotiating Practice Efficiency• Customer Service Improvements• Identifying Best Strategies

10

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

11

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

12

Change

Implementation Plan Organization / reporting structure (Org

chart)– Reporting relationships– Department heads– Staffing levels

Processes & Systems– What will change– What remains the same

13

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 announcement14

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

15

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

16

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

17

The Acquisition Process

Acquisition Program• 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

18

Medical Alignments

Types of Merger/Acquisitions• Hospitals

Merging Buying medical practices

• Group clinics Merging Buying medical practices

• Medical Practices

19

Appraisal Role

Appraiser needs to be independent of both parties

Establishes a basis for starting negotiations

When Appraisals are beneficial• Hospitals to Hospitals• Clinics to Clinics• Practices to Practices• Practices to Clinics

20

Legal Land Mines

Antitrust Laws Federal Anti-Kickbacks Self Referral Restrictions Corporate Practice of Medicine

21

Legal Land Mines

Antitrust Laws• If significant decrease in competition • Price-fixing• Monopoly• Boycott

22

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

23

Legal Land Mines

Self Referral Restrictions• Stark Laws

Stark 1 Stark 2 Allowed referrals

24

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

25

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

26

Negotiating the Deal

Negotiating Model• List needs• Prioritize needs• Evaluating alternatives• Look for mutual satisfaction• Consider other consequence

27

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

28

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

29

Before Signing

Protective Covenants for Buyers Protective Covenants for Sellers Assuming Liabilities Fine Print

30

Before Signing

Protective Covenants for Buyers• 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

31

Before Signing

Protective Covenants for Sellers• Timely payments• Professional Autonomy for Patient Care• Length of Employment Contract• Length of Notice of Termination• Sharing of Information• Backing Out

32

Before Signing

Assuming Liabilities• Professional Liability Insurance• Staff Employment Issues

Can be critical part of change Benefit changes

– Vacation– Sick Leave– Retirements Plan– How secure is their job

• Reimbursement Issues

33

Life After the Deal How decisions get made

Blending cultures

Preparing for market change

Maintaining economic soundness

34

After the Deal - Integration

People Processes

Technology

35

After the Deal

Organization Structure• Governing Board & Committees

Policies Employment Issues Patient Policy Fees Contracts Capital Approval Purchasing Supplies

36

After the Deal

Blending Cultures• Understanding Mutual Needs• Understanding Differences between

Large & Small Orgs• Grieving Loss of Control• Identifying Issues of Common Destiny• Forming the New Team (org)

37

After the Deal

Preparing for Market Change• Information Systems• Practice Efficiency• Customer Service Improvements• Identifying Best Strategies

Maintaining Economic Soundness

38

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

39

Medical Practice Valuations

Factors affecting the value of physician practices• Changes in reimbursement for physician

services• The regulatory environment• Changes in the operating environment• Goodwill• Movement of the patient base

40

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)

41

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

42

Medical Practice Valuations

Information unique to medical practices• 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

43

Medical Practice Valuations

Information unique to medical practice• 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)

44

Medical Practice Valuations

Information unique to medical practice• Location - number of competitors• Sellers reputation• Average future scheduled appointments• Patient demographics

45

Case Study - 1

Hospital Merger• 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

46

Case Study - 2

Hospital Acquires Primary Care Provider (PCP)• 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

47

Case Study - 3

Hospital Acquires PCP with Ancillary Services• 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

48

Case Study - 4

Merger into Group Clinics• 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

location49

Case Study - 5

Merger of Group Clinics• 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

50

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

51

Questions & Answers

Contact Information

Dan Bryant, CPA/MBADaniel J Bryant, CPA, PS

(253) 471-0492Email: danb@danbryantcpa.com

52

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

53

Other Courses

CPA Leadership Institute Courses • Physician Practice (& Ancillary Business)

Valuation: Appraisal Theory and Applications (Randy Biernat, CPA/ABV

54