Whether you are considering combining your otolaryngology practice with another group or with a multi-specialty practice, a merger can provide significant and long-term benefits if it is well planned and strategically executed. Before you become engrossed in the initial excitement of a merger, you must first address a number of difficult decisions and legal issues.
After these decisions are identified and considered, the prospective merger sometimes dissolves as the perceived difficulties and uncertainties of actually implementing the plan eclipse the initial excitement. Do not fear a merger that makes sense from a personal and business standpoint, however, because the ultimate benefits frequently outweigh the challenges. This article will address some of the key benefits, frequent sticking points, and common issues that should be considered by an otolaryngology practice contemplating a merger.
Some of the benefits that can come from merging two or more existing practices, whether single specialty otolaryngology practices or multi-specialty groups, include the following:
- Improved lifestyle through shared on-call coverage and patient rounding;
- Increased attractiveness to recruit physicians;
- Additional utilization of physician extenders (e.g., physician assistants and nurse practitioners);
- Greater utilization of expensive resources (e.g., electronic health records system, medical devices, newly hired associate physician salaries, physician extender salaries, and office staff salaries);
- Greater leverage with payers;
- Expanded referral source opportunities;
- Cost savings through economies of scale (e.g., volume discounts on supplies); and
- Pooling of capital and financial resources.
Considerations and Issues
Mergers can fall apart almost as quickly as they are formed if the parties have not carefully crafted a comprehensive plan. Too often, a merger closes and the physician partners later realize that they have fundamental differences regarding key components of the post-merger relationship, or, worse, there is so little coordination that few, if any, of the potential benefits of a merger are achieved. The following are some of the key considerations that should be addressed prior to the closing of a merger:
Generally, there are two legal structure options for combining practices. The first option is one practice (Practice A) merging into the other practice (Practice B), with the later practice (Practice B) as the post-merger surviving entity. In that case, Practice A ceases to exist, and the owners of Practice A exchange their ownership interest in Practice A for an ownership interest in Practice B. Practice A’s pre-merger assets and liabilities are assumed by Practice B, and Practice B holds the assets and liabilities of both Practice A and Practice B.
The second option involves Practice A and Practice B merging into a new entity formed for the purpose of the merger (let’s call this new entity Anytown Medical Institute). In this scenario, Practice A and Practice B each retain their own liabilities. The owners of Practice A and Practice B then transfer or lease the assets to the new entity, Anytown Medical Institute. The attractiveness of this option is that it provides a cleaner break between the old and the new in terms of past reimbursements, malpractice, and so forth. With this approach, the owners of Practice A are less concerned with the contingent claims of Practice B (and vice versa), such as tax issues, employment-related claims, and payer audits. While there are advantages from a liability standpoint, and the new entity offers both practices a “fresh start,” the creation of a new entity may create additional planning and cash flow considerations. For example, provider numbers will need to be obtained for the new entity, possibly causing initial cash flow delays. As is usually the case, the risks and benefits of each strategy must be analyzed before the partners agree on an approach.
Post-merger governance is an important issue that should be established pre-merger. Who will make the key decisions on behalf of the post-merger practice? Will there be decision-making committees (e.g., board of directors, executive board), with seats filled by an equal number of physicians from Practice A and Practice B? How much post-merger autonomy will each physician have?
Noncompetition and Buy-Out Provisions
In general, either all or none of the parties to a merger should be subject to a noncompetition clause. Absent extraordinary circumstances, it would not be fair for physicians from one practice to be subject to a noncompetition clause if physicians from the other practice are not. A less restrictive alternative to a noncompetition clause is a limitation on future buy-outs. The departing physician may have the right to leave and compete—at the disincentive of a reduced buy-out price to the departing physician. This type of restriction acts as an incentive for physicians to remain with the merged practice.
Initial Exit Plans
Parties sometimes want a “bail out” clause, which permits a merging party to reverse or “unwind” the transaction within an initial period of time—typically no more than 18 months—if a party feels that the merger is not working out as intended. This helps place both groups as close to their pre-merger state as possible. Remember, after the merger closes, there will likely be assets that have been acquired as well as duplicative assets that have been discarded. A bail out clause should address these matters by allocating assets fairly between the parties in the event of a “de-merger.”
These types of exit plans are difficult to administer from a business prospective, because returning to the pre-merger status quo often involves untangling a complex web. Great care and realistic expectations must be taken if the parties wish to include an unwind clause in the merger agreement.
Other Key Items
Other items important to address are employee benefit plans (typically one of the practices’ plans survives), participating or nonparticipating status with Medicare and other payers, malpractice insurance, prospective buy-ins (what a new physician to the group must contribute in order to become an owner), Stark law issues (Medicare and Medicaid patient referrals to a facility in which the physician has a financial interest), and antitrust concerns.
This article highlights some, but not all, of the key issues that need to be addressed in a medical practice merger. A medical practice merger can be a rewarding endeavor for physicians and practices if crafted carefully and thoughtfully with the right business partners on both sides of the table.
Steven Harris, Esq. is a nationally recognized healthcare attorney and a member of the law firm McDonald Hopkins, LLC. He may be reached at firstname.lastname@example.org.