Hospitals are acquiring physician practices at a brisk pace. Driven by the economics of medical practices, the shortage of physicians in some specialties, and a variety of other issues, the trend toward physician employment is growing.

In helping dozens of hospitals evaluate acquisition opportunities or complete acquisitions already committed to, our consultants have seen almost every scenario imaginable. But the situation that is of biggest concern is clients who are reacting, not thinking through the strategic implications of an acquisition. At its best, these organizations spend time and valuable resources while gaining no real strategic advantage. At its worst, they can create long-term problems by acquiring non-productive practices.

Ideally, organizations should develop an employment strategy that addresses the specialties the organization wishes to employ, the vision for the employed physicians in terms of culture, behavior, and performance, the infrastructure needed to make the strategy a success, and a variety of other issues. With such a strategy defined, organizations increase their chances of producing the desired results and developing an employment model that will meet your objectives.

In evaluating an acquisition there are six questions that must be considered. Doing so will ensure that you are using scarce resources appropriately and developing an employment model that will meet your objectives.

Does the practice fulfill a strategic need?

Is the specialty one you must have to implement a service line growth plan? Does the acquisition help you expand into a new geographic market? Does the acquisition increase your leverage with insurers? Does it support another element of your strategic plan? If you cannot answer yes to one of these questions, the acquisition might not be appropriate.

Does the practice fill a community need important to your mission?

Does the acquisition bring new expertise to the organization, improve patient care, or does it ensure that you will be able to provide coverage and consults?

Does the hospital have the capital resources to sustain the acquisition strategy?

While the acquisition may be very logical, it could be a bad strategy if it limits the organization’s ability to pursue other opportunities. In addition to the acquisition costs, the ongoing subsidy of the practices must be considered as well. These issues should be addressed in the strategic plan/employment strategy. An associated financial plan will help you better understand the overall financial implications of pursuing acquisition of the practice. Failure to understand financial implications before making the deal is one of the biggest omissions we see.

Will the physician’s fit the culture you are developing?

Will the physician work well in a larger organization? Will he support the objectives of the organization? Will she work to develop a team approach to tackling priority issues? These are crucial questions, especially if you wish to avoid acquiring a problem doctor.

Do you have the infrastructure needed to make this acquisition a success?

Some acquisitions can overwhelm the management capabilities and systems of the acquiring organization. Does the hospital have adequate leadership, IT capabilities, billing systems, etc., to make it work?

Does the compensation system create appropriate incentives? All must be considered before an acquisition is completed, and corrective actions integrated into the financial plan.

Can the model be replicated with other practices?

Negotiation with practices can be intense and physician demands will vary greatly from group to group. It is crucial to consider what precedents you are creating and what problems you are creating for the people who will have to implement the deal. One hundred percent uniformity is not possible, but it is strategically important to minimize variation, as variation will add to operating and political costs in the future.

As you are considering an acquisition, use these questions to help avoid problems.  Better yet, develop an employment strategy by asking these questions in a planning process before you begin acquisitions.  Doing so will help you avoid wasting resources. And it will help ensure that your employment efforts are successful and meet the strategic objectives of the organization.

Neal D. Barker

Partner and Managing Director, Compensation and Compliance