Make Your Practice Successful Despite Today's Challenges: Join, Merge, or Sell Your Practice to a Hospital?

; Jay Sanders, CPA, CHBC, CVA

Disclosures

January 27, 2010

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Leslie Kane: Welcome to this Medscape Web Presentation entitled, "Make Your Practice Successful Despite Today's Challenges." My name is Leslie Kane. I'm Editorial Director of Medscape's Business of Medicine site. I moderated a roundtable discussion at the National Society of Certified Healthcare Business Consultants in October 2009 in Washington, DC. Three medical practice management experts gave advice on different areas that doctors can address to help boost their practice profitability.

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Our second speaker was Jay Sanders, CPA, CHBC, of Professional Business Consultants, in Oak Brook, Illinois. Jay will talk about the potential profitability of joining a group if you're a solo practitioner, or perhaps merging with a larger group, or selling your practice to a hospital. Let's listen to Jay now.

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Jay Sanders, CPA, CHBC: Should you sell your practice to the hospital, or should you possibly join a group? I think one thing that is very clear in our market with my clients, with a few exceptions, is that typically the larger the practice, the better the physicians do financially because access to ancillary services is the key. We in Chicago see that the hospitals are back in the market. It is interesting -- a client of mine said, "You have got to sell my practice to the hospital because we missed the last wave and these guys are going to give us all a pile of money and we have got to take advantage of it." We actually, right as we speak, are doing evaluations on 4 different hospitals or health systems, and, yes, most of them are primary care, but we have seen purchases of cardiology practices and we have seen purchases of, I represented one of the largest neurosurgery groups in the Midwest and their sale to a hospital over the summer. That was a matter of: we are paying so much for call now and neurosurgery, as you know, if you are going to come in and operate on Medicare patients in the middle of the night, a lot of neurosurgeons can't generate as much money in private practice as they can just being paid by the hospital. Compensation is the key. You have got to make more money working for the hospital than in private practice. Under the right circumstances with the right compensation, do it.

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Secondly, if you are going to work at the hospital, have a reimbursement structure that doesn't take into account the efficacy of billing or payer class because the last go around, the lesson we learned was that doctors became disenchanted, and hospital CEOs were telling me, "I bought Dr. Smith's practice and all I got was an overpaid postal worker." I would talk to Dr. Smith and he would say, "Well, they screwed up my billing every which way till Tuesday, so no wonder I am not covering my salary. To me, you pay them on a system, and whether or not they do a good job or bad job billing is out of the equation and whether they want you do see more Medicaid, public aid, or underinsured it is out of the equation as well.

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I think another thing, and certainly when I was dealing with the neurosurgeons, what about sharing some ancillary revenues, what about in a Stark-compliant way? That is always the big deal -- well, if you are going to come work for the hospital, you can't have your own lab and you can't have your own x-ray, you can't do this and you can't do that. The tide is changing. The hospital administrators are listening and saying, "If you want guys of this caliber and you want this practice to grow, well if we can't offer them ancillary within our cardiology practice and every other private practice in the area and the cardiologist makes $200,000 per guy off of our ancillary, then how are you going to attract the next round of physicians?" Another benefit is EMR [electronic medical records]. It is a huge undertaking, huge cost, and all of our clients are scared to death of it and I am scared to death of it because when my clients want to buy EMR and they are all excited about it and the computer vendor tells them it is going to cost them $50,000 and it costs them $300,000, and they don't cut staff, they add staff, and then somehow at bonus time it is Jay's fault, but we all know that that is a train that is definitely leaving the station, and at some point, like it or not, they are going to have to be on it.

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Then, if they are going to be employed by the hospital, what is the relationship with hospitalists? A lot of my clients like the fact that they don't have to go to the hospital. They think they can generate far more revenue, especially if they have ancillary in their office, than they can driving to 3 different hospitals and spending a half hour with each patient. I have other internists who say that is when my patients need me the most, that is when they are the sickest, and that is a continuum of care that I have to be a part of, so again I would leave that to them as a point that you want to bring up.

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Our firm has done a lot of work in the merger area. Most of our merger work has been in the area of single specialty in urology, orthopaedics, and dermatology. We are now doing GI. The idea is that we come together and get the ancillary services business more efficiently. I got a call once from a general surgeon and he said, "I and the 5 most successful general practice surgery groups in the county, which is outside of Chicago, want to merge together. Could you help us?" I said, "Doc what kind of ancillaries are there in general surgery?" I kind of knew the answer, but I wanted him to come to the conclusion. We don't really have any ancillaries. I said, "Doc, I am going to be real frank. If you merge together, you will pay the lawyers more, you will pay the consultants more, you will pay the accountants more, which I am all for, and you are going to have 2 or 3 more meetings a month, and you are going to make less money, but when can we get started merging you together?" I think the key is we won't merge a group together unless we know that by them coming together they are going to earn more money

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In Chicago, we have this group that is 300 physicians. I am not working for this big goliath organization where it is all kinds of true top-down management, but rather we are going to have all of these different what we call strategic business units. For each strategic business unit, you are going to have your own comp formula and your own call schedule and you maintain the autonomy. That is a much less threatening way when you merge people together than if you immediately say we are completely integrated from day one. Plus, the flipside of that, the Office of the Inspector General (with the US Department of Health and Human Services) makes it very clear they don't like clinics without walls. The idea that people will come together and we will slap an LLC and tax ID number over all of us and we will get in the ancillary business, but we really have 4 different billing departments and we have 4 different accounting firms and 4 different banks, that doesn't apply. So our challenge is to balance what I call legal autonomy, the autonomy physicians want in their individual clinics vs whether you have met everything from a legal perspective, which we will talk about in a bit, and also a practical aspect. How do you manage a business when everyone can do anything they want?

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I always tell my clients that we have all of these doctors up on top as the owners, what type of management structure is that, and draw the pyramid. I say in business we always learned that the 2 most efficiently run organizations in America are the military and the mob because everyone knows who they report to and everyone knows the consequences for noncompliance. Well, here you have an animal that looks like this, and all of the sudden you have got 20, 40, 90 doctors across the top who can do whatever they want, and they have all got nurses. I have met a nurse who said, "My doctor told me I didn’t have to do that." So it has to start at the central level.

So the model structure is, again, we have corporate and federal government and the single practice unit. As we talked about at the individual level, the federal vs state, and we decide what are we going to centralize and what we can keep at the practice level. We talked about ancillaries and multispecialty and other things you can do.

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Integration summary, there is financial integration, and you have to have one common tax ID number. You have to have a common fee schedule. You have to have consolidated legal and accounting. You have to have consolidated financials. The bankers are going to want financials on a quarterly basis, typically, and you are going to have to use one bank. Again, getting the docs a little bit out of their comfort zone because, boy, I really like my accountant or, boy, I like my bank. Human resources and one payroll vendor and one health insurance, which is always a problem because you are merging these groups together and they have such disparate benefits. You have got to consolidate the billing, which is always the biggest challenge, right, because no one can do the billing as good as I can. Then strategic planning and positioning and name branding, which is always a real benefit of bringing the groups together, and strategic planning positioning.

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So what stays the same: Clinical autonomy, utilizing the practice name for a while, site manager, overhead structure, and compensation plan.

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With an insurance exchange, we usually get a better discount with them because of the size of the group; and, number two, how it works in Illinois is you have to have corporate policy, and your corporate policy is typically 15% of the highest 5 doctors premiums that they pay, which means the corporate policy for a 5-doctor group and a 50-doctor group is the same, so there is a real benefit there with regard to malpractice insurance. Economy is a scale. They may buy their medical supplies a little less expensively, but they are going to give it back to the lawyers and the accountants, and I am clear about that with the docs. You have to buy the paper on the exam tables, then control of your destiny. I think that is a very valid benefit of merging together. You definitely have more control at the hospital. My 90-man orthopaedic group gets treated a lot differently at the hospital they go to, which is dependent on them, from other small orthopedic groups. Achieve economy when they can with the EMR, PQI, and e-prescribing. We talked about managed care contracts and also marketing. You run an ad on a talk radio show in Chicago and you are spreading that cost over 90 physicians and not 5 physicians.

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One thing is that they have to have one common pension plan. There is a transition rule that a lot of people aren't aware of in the classic IRS mumbo jumbo, but what the law says is that the retirement plans have to be compliant on the first day of the end of the year of the full year following in which you merge. What the heck does that mean? It means that if you merge together a group on April 1, 2009, everyone doesn't have to be in the same pension plan until January 1, 2011, and that is a real good ice breaker for those groups who were saying, "I like to have control of my own."

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Malpractice insurance -- that can be the biggest stumbling block. This is also the embarrassing part, right, because you get all ready to merge and you find out the carrier won't insure one of the groups because of all of their old claims. That can be very touchy.

If the group is large enough and their malpractice history is real, real bad, you can usually negotiate. We even have a group where that happened and they saved so much on the corporate scale and made so much money out of that centralized pathology lab that the corporate budget picked up the spread to pay the increase, the surcharge by coming together. So we have only had one time where they said, "We absolutely won't insure this group if these guys are a part of it."

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Legal documents, insurance, ancillary services, credentialing, consolidated billing, employee benefits, marketing, planning and growing, type of organization, get your documents put together, your government issues, legal considerations, and again a little bit of a recap there, accounting and what are you going to do.

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The other thing that I have found is that personnel, when you bring all of these people together, it is a firestorm. So the scenarios are, as you walk through that, you probably find out that you have to have key leaders in the group because if I have got 6 groups I am bringing together, here are 5 managers who are not important, and the issue is picking the right one and trying to find the person that is going to work for them and bringing the staff together. Picking the key players is all part of that model, so that is going to be an issue.

The other thing, when you are merging groups together, is the pushback you get from the existing office managers. Usually the physicians are all for it, and the managers are scared to death and resist it. What we end up doing is these mergers usually take about 6 months, so we have the physician meetings sometimes weekly or every 2 weeks, and we typically have the administrator meetings every 3 weeks, and we parcel out a lot of responsibility to those administrators. What ends up happening is the good ones rise to the top, and the people who are afraid of the unknown because they are not very good at what they do usually kind of fall off or their role becomes minimized.

Leslie Kane: Thank you for listening to Medscape's roundtable discussion at the National Society of Certified Healthcare Business Consultants' mid-winter meeting on National Issues.

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