Difficult economic times and the unpredictable consequences of health care reform are making an increasing number of solo practitioners and small private groups very nervous. Yet, many balk at the prospect of selling to private equity companies.
Merging offers many benefits: Better overall management, centralized and efficient billing and collection, group purchasing discounts, and reduced overhead, among others; but careful planning, and a written agreement, are essential. If you are considering such an option, here are some things to think about.
You should begin with an evaluation and comparison of the separate groups’ respective finances. This should include a history of production, collections, overhead, and liabilities. Basically, you want to locate and identify all assets and liabilities that will be combined into the new group. One area of immediate importance is Medicare participation. Which members now currently participate and which do not? Since the new group will need to have a single position, all of the physicians must agree on that issue.
Who will be in charge? Not every physician is a qualified manager. The manager should be the physician who is willing to spend the time it takes to sign checks, interact with the administrator, and ensure that other matters such as filing tax returns and approving minor purchases arc carried out properly.
What is the compensation formula? Compensation arrangements should be based on each physician’s current financial data and the goals of the practice. Will everyone be paid only for what they do individually, or will revenue be shared equally? I favor a combination, so productivity is rewarded but your income doesn’t drop to zero when you take time off.
Which practices have a retirement plan and which do not? Will you keep your retirement plans separate, or combine them? If the latter, you will have to agree on the terms of the new plan, which can be the same or different from any of the existing plans. You’ll probably need some legal guidance to insure that assets from existing plans can be transferred into a new plan without tax issues. You may also have to address the problem of physicians who currently do not have a plan who, for whatever reason, may not want to be forced into making retirement plan contributions.
The often-problematic issue of employees and their salaries needs to be addressed, to decide which employees will be needed in the new group, and to determine a salary structure. Each practice’s policies related to vacation, sick leave, and other such issues should be reviewed, and an overall policy for the new group developed.
Other common sticking points are issues related to facilities. If the practices intend to consolidate into one location, the physicians must decide which of the specific assets of each practice will be contributed to the new entity. Ideally, each party brings an equal amount of assets to the table, but in the real world that is hardly ever the case. Physicians whose assets are to be used generally want to be compensated, and those who have to dispose of or store assets are in a quandary. The solution to this predicament will vary depending on the circumstances of each merger. One alternative is to agree that any inequalities will be compensated at the other end, in the form of buyout value; that is, physicians contributing more assets will receive larger buyouts when they leave or retire than those contributing less.
Buyouts should be addressed in advance as well. You must decide when a buyout would occur – usually in the event of retirement, death, disability, or withdrawal (voluntary or involuntary) – how the buyout amount will be calculated, and how it will be paid. Then, you must agree on how a buyout amount will be valued. Remember that any buyout calculated at “appraised value” is a problem, because the buyout amount remains a mystery until an appraisal is performed. If the appraised value ends up being too high, the remaining owners may refuse to pay it. I suggest having an actuary create a formula, so that the buyout figure can be calculated at any time. This area, especially, is where you need experienced, competent legal advice.
Noncompete provisions are always a difficult issue, mostly because they are so hard (and expensive) to enforce. An increasingly popular alternative is, once again, to deal with it at the other end, with a buyout penalty. An unhappy partner can leave, and compete, but at the cost of a substantially reduced buyout. This permits competition, but discourages it; and it compensates the remaining partners.
These are only some of the pivotal business and legal issues that must be settled in advance. A little planning and negotiation can prevent a lot of grief, regret, and legal expenses in the future. I’ll discuss some other, more complicated merger options in my next column.
Dr. Eastern practices dermatology and dermatologic surgery in Belleville, N.J. He is the author of numerous articles and textbook chapters, and is a longtime monthly columnist for Dermatology News. Write to him at.