Consider Drawbacks of Merging Practices

Physician Entrepreneurs: Strength in Numbers , January 22, 2009

The increasing financial pressure on the healthcare market is leading to consolidation of a growing number of healthcare organizations, including physician practices.

Although there are many benefits to merged entities, as with any venture, there are a number of drawbacks that must also be considered. These can include, but are not limited to, the following.

Merger costs. Merging practices is not cheap, and participants often underestimate the expenses associated with such a venture. Two distinct types of costs will be incurred in a merger process. First there are formation costs, which typically include legal and consulting costs to form the merged entity on paper. Generally, consultants are used to facilitate the decision-making process and then attorneys are used to draft the actual legal agreements for the merged entity and perform any necessary legal due diligence. To get the new practice operational, participants will also incur several operational expenses, such as the cost to purchase equipment, add employees, procure new facilities, and so on.

Both types of costs can vary widely with each merger. For example, some physicians who already employ qualified administrators to help facilitate the formation process may not need to hire consultants. The operational costs can also vary substantially based on the infrastructure of the practices that are coming together. For example, if they are all using different IT systems, the merged group will incur costs to develop one unified system. Additionally, if there is insufficient space within one of the practice’s facilities to set up a billing/management office, the entity will need to invest in a new facility.

In every merger instance, it is important to perform the necessary due diligence to understand the costs involved and develop a plan to cover them, either by taking on debt or by having each physician contribute capital.

Loss of autonomy. One of the biggest deterrents for physicians in developing a merged entity is an understanding that there will be some loss of autonomy. The sacrifice is necessary for a merged group to succeed. In a large group, it is impossible for all physicians to continue to dictate the majority of their practice operations as they were able to do in their smaller practices. Otherwise, little cost savings would be recognized and an environment that is chaotic and difficult to manage would result. Accordingly, physicians must be willing to give up some of their autonomy to realize the full potential of a merged practice.

Practices that have been in existence for a long time generally have a particular manner in which they go about practicing medicine. Accordingly, comingling operations with practices that may operate differently can be tough, not only for the physicians involved, but also for their support staff. Many times, a strong administrative leader can consider how things were done in the past at each individual practice and choose the best alternative for the new practice. It is then necessary for all members of the practice—physicians and the support staff—to buy in to the decision and go along with it.

Although not necessarily drawbacks, other potential problems could lead to the failure of the merged entity. Issues to avoid include the following:

  • Clinical and relational differences among physicians/practices
  • Poor planning, a hastily constructed business plan
  • Failure to identify a single macro message for the merged entity
  • Political difficulties among practices/physicians
  • Lack of transition management
  • Defensive motivation (e.g., participating in the merger only to maintain current market position)

It is important that all of these issues are indentified early in the merger process to ensure that they can ultimately be overcome.

This article was adapted from one that originally appeared in Physician Entrepreneurs: Strength in Numbers, a HealthLeaders Media publication.




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