Consistency Pays Off with Physician Transactions

Though most hospitals have been purchasing physician practices and employing physicians for several years, it’s surprising how few have developed a consistent philosophy on acquisitions and physician compensation.

We’ve all been exposed to the CEO whose mantra, like Nike’s, is “Just do it,” but there are two compelling reasons to develop a consistent process. First, transactions can be completed more expeditiously and second, consistency fosters a higher level of trust in the hospital-physician relationship before the marriage. In their simplest form, physician transactions have two main components:

  • the purchase price of the practice; and
  • physician compensation.

It’s important to perform the valuation and develop the compensation plan simultaneously, because the valuation must include the level of compensation the physician(s) can expect going forward.

To Buy or Not To Buy
So where do you begin? Before talking dollars, assess the practice from a broad perspective. This initial assessment will help determine whether it’s in your best interests to acquire the practice. Key questions include:

  • Does the practice support your strategic plan?
  • Is it presently a strong supporter of the hospital?
  • Does it provide a critical service to support your mission?
  • How will the acquisition be perceived by other owned practices and their competitors?
  • What trends is the practice experiencing in terms of volume growth, perception in the community and payer mix?
  • Is the practice involved in any joint ventures, such as an ASC or imaging center, which could make the transaction significantly more complex?
  • Are there operational concerns such as high employee turnover, coding or overhead?
  • Depending on the situation, could it be merged with an existing practice?

Performing this initial assessment also helps mitigate difficulties that may arise before the valuation team gets to work.

What Are You Willing to Pay For?
Once you’ve decided to acquire a practice, you need to determine what you’re willing to pay for:

  • Hard assets only?
  • Identifiable intangible assets such as the trained and assembled workforce?
  • Unidentifiable assets like goodwill?
  • Are you going to “cherry pick” the hard assets and buy only those you want?

Did you follow the same rules for the last practice you acquired? Chances are good the practice had had conversations or, at the least, has heard rumors. Today, we see asset-only transactions except for the most strategically-critical practices.

Educating the Physicians
Once you’ve decided the acquisition makes strategic sense, sit down with the physicians. You need to know how many physician partners are necessary to represent the practice at meetings and gain a clear picture of their expectations about the negotiations. Equally as important, the physicians need to understand:
How the process will unfold, including the information they’re required to share about the practice and its finances.

  • That the purchase price must meet fair market value tests.
  • That compensation meet fair market value tests (see below).
  • That a coding assessment will be required to protect the hospital’s interests.
  • That a non-compete clause is required.
  • Your policy on purchase price, asset-based or more expansive.

Managing Compensation Expectations
When it comes to compensation, physicians must understand the legal and financial constraints on these transactions. When they hear terms such as “fair market value” (FMV) or “commercial reasonableness,” physicians may suspect they’re about to be taken. They need to know that the intent is to protect both parties should a transaction be challenged.

When you develop the groundwork for your compensation plans, ask yourself these questions:

  • Can we meet the historical compensation levels?
  • How do we handle the fact that the practice relied on technical revenue in the past?
  • How will quality and citizenship measures be integrated into the plan?
  • If we establish a productivity model, at what level will we set the “base draw?”
  • At what intervals will we perform adjustments? Quarterly?
  • Will we design a straight productivity model or allow a practice to form a compensation pool and allocate the pool as they determine?
  • How will tail coverage be handled?
  • How will we handle the difference between the retirement plans?

This is no guarantee that every transaction will go smoothly, but being consistent and getting potential deal-breakers – e.g., coding review and non-compete clauses – out on the table early in the discussion can go a long way to streamlining acquisitions and creating an environment of trust in your medical community.

HSG has specialized in physician alignment strategies since our founding in 1999. We can help with developing consistent acquisition policies, setting compensation and valuing practices, as well as developing comprehensive alignment plans.