When you merge your practice into a larger one

September 15, 2007

At some point you may need to consider merging the practice into a hospital or larger group. Like all processses of growth, merging medical practices can involve risk and a certain amount of pain. Here's how to prepare yourself for the transition.

Key Points

I've had many years of experience incorporating smaller groups into our 61-year-old medical group, and whether you've built your practice from scratch or made your career as a member of a previously established entity, at some point you may need to consider the possibility of merging the practice into a hospital or larger group. This question is especially pressing because managed care continues to dominate the financing of medicine in the United States.

There's an incentive to make yourself part of a "presence" in your area. Aside from the economies of scale that can be brought to bear in larger organizations, there is a substantial increase in leverage that comes with having more market share that can be used to your advantage when negotiating with insurers. A large, well-managed group can generate significantly more income for its partners than a small practice can.

But, like all processes of growth, merging medical practices can also involve risk and a certain amount of pain. To minimize both, prepare yourself thoroughly in advance of discussing potential mergers with any other parties.

Presumably, you will be selling all or most of your practice and its capital and real estate to the new entity, but there are many ways to incorporate the merged practitioners, their practice financial resources, and their property. It's in your best interest to obtain opinions from legal and financial professionals about how to group and separate them. If the new practice will own its office real estate, it's advantageous to keep it separate from the rest of the assets because that way the real estate can be protected from creditors in case of bankruptcy or adverse legal judgment. Make sure you know how your existing practice and property will be valued, and ensure that your personal financial resources will suffice to make shareholder investments as necessary over whatever time is required.

If both or all entities involved in a merger will be shareholders in the new group, then it will be best for each shareholder to have an equal share. To achieve this, a practice with less valuable assets at the time of combining may need to provide cash to make up the difference between its value and the value of the practice with greater assets. It is worth taking a loan, if necessary, so that every partner in the new group will have an equal stake going forward.

2. How will the merged entity be governed?

Make sure you know what the administrative structure of the new practice will be. You'll want to have a solid idea of how many physicians you will have in your specialty, how many of them will be shareholders (versus, for example, employees or fellows on a partnership track), and what sort of matters will be decided by the shareholders. If you're going to be part of a multispecialty group, be sure that ob/gyn will be well represented in any major decisions that affect the entire group.

3. How will I be paid by the new entity? Will I have a salary, be paid according to productivity, split a share of pooled revenues, or will there be a combination of these?

If you're accustomed to generating high revenues by performing a large volume of work, being paid according to productivity will work best for you. However, depending upon the sort of group you're joining, the dynamics may not support each member's being paid based on productivity, in which case some sharing of pooled revenues is typically required. Find out what the formula will be for the merged practice and check with your colleagues to assess how well the formula works. Compare their experiences with your own work style to ensure that you'll be able to adapt to the new system of remuneration.

4. What will the fiscal schedule be?

Some large practices that have productivity-based pay generate regular payroll checks throughout the year, parceling out distributions at the end of the fiscal cycle after revenues and expenses for the year have been reconciled. Find out the payment schedule for your new group and make sure that you can manage your personal finances, particularly large items like mortgage payments. Aim to avoid, or at least minimize, tapping into your savings as you adjust to the new system by computing what your regular "draw" will be relative to your personal expenses.