Our consultants see an interesting dichotomy with clients: they believe, almost uniformly, that closer alignment with physicians is crucial to future success, but when evaluating merger partners or acquisition targets, the issue isn’t often high priority. This is a failure in client strategy.
Part of the problem is that physician alignment is difficult to assess. Bond ratings and balance sheets have clear, easy-to-evaluate standards. The intellectual capital and capabilities embodied in the physician strategy are much more complex. Nonetheless, they should be assessed during the evaluation and due diligence phases. We see five key areas to explore.
1. Physician Leadership. Do the physician leaders in the hospital/health system and the employed physician network have a clear vision of their roles in the organization and how the organization must evolve to be successful? Do they influence the thinking of the rank-and-file physicians? While this may best be determined through interviews, you should also examine the organization’s strategic priorities to see if you’re considering merging with an organization that’s pursuing business as usual or one that’s evolving to meet the challenges of reform.
2. Employed Network. Physician networks are major investments. A worthy merger partner should be leveraging their network to produce value for their organization, rather than managing it as individual practices. Examples of leveraging can include direct contracting with employers, favorable contracts with managed care companies that require the network’s PCPs and utilizing the group leadership to drive best practices throughout the network and medical staff in general.
3. Managing to the Metrics. Many metrics are crucial to hospitals’ long-term success: readmission rates, core measures, patient compliance with preventative measures and so on. Assess the ability of a potential partner to manage to these metrics. Poor performance on Value-Based Purchasing, for example, should be a red flag.
4. Medical Efficiency. How efficient your potential merger partner is at providing care, as measured by costs per DRG or APC, connotes a good working relationship between the hospital and its physicians. If there’s a strong constructive relationship, you should expect cost performance below the midpoint on these measures.
5. Growth. The last physician-related indicator is revenue growth. Organizations that are growing are by definition adding physicians and capturing admissions from splitters. While this measure is more relevant in a fee-for-service world, it’s indicative of an organization that works well with physicians.
One area where value can be produced post-merger is by combining the physician groups to create strategic advantage. That activity is complex under any circumstances, but it’s easier when the merger partner’s physician enterprise is focused on producing value and actively engaged in doing so.
For more information on assessing the physician alignment capabilities of potential merger partners, please contact David Miller, Partner, at (502) 814-1188 or at dmiller@hsgadvisors.com.
