Anesthesia Group Mergers: Strategies for Success
Will Latham, MBA, CPA
President, Latham Consulting Group, Inc., Chattanooga, TN
In today’s anesthesiology environment, all groups are trying to size up their best option to survive and thrive into the future. Some try to go it alone and others sell out to practice management firms, while others seek or are forced into hospital employment.
Another option that many groups are considering is merging with other anesthesiology groups.
Why are anesthesiology groups considering mergers? Mergers:
- Allow them to maintain a higher level of autonomy than any other option,
- Prevent the groups from being played off against each other by hospitals or managed care companies,
- Build clout,
- Create the ability to hire needed management expertise, and
- Allow them to move towards economies of scale.
In addition, today’s healthcare environment is influencing many hospitals to merge or join systems. When hospitals integrate they often want to work with a single anesthesiology group to cover all their facilities. When this happens, many anesthesiology groups consider merging before the hospital system chooses winners and losers.
In order to be successful, medical groups that embark on a merger effort should know the answers to the following questions:
- What does it mean to merge?
- What are the costs and risks associated with merging?
- How does a merger process typically work?
- What are the key issues usually addressed in a merger process?
- Who participates in the merger process?
- How do we get started?
This article presents strategies for pursuing a successful merger based on working with more than 135 practices representing more than 1,300 physicians on merger-related projects.
What Is a “Merger”?
For the purposes of this article, a merger occurs when separate anesthesia groups become one group. Mergers may come about in many ways (via a true merger of groups, an asset purchase or a consolidation transaction—your attorney and accountant will help you decide which option to choose), but result in the combined organization exhibiting the following characteristics:
- One separate professional corporation or limited liability partnership is formed (or separate practices combined) and there is one tax identification number and single provider number.
- All physicians enter into an employment agreement with this organization.
- All employees from the previously independent practices become employees of the new entity.
- Operations are conducted by the new entity which bills and collects for physicians’ services in its own name.
- The combined entity owns the funds and revenues created by the work of its physicians.
- The merged group holds any exclusive provider agreements.
- Physicians typically contribute all assets from the predecessor organization. However, there are options where assets (such as real estate) can be kept in separate entities and leased to the merged practice.
- Benefit plans are standardized.
- Physicians become subject to one governing entity.
What are the Costs and Risks of Merging?
While there are significant benefits to be gained, there are also costs and risks:
- Work: Putting a merger together requires a significant amount of work and time from both the physicians and their administrative staff. Mergers often take six to twelve months to complete, and there are many issues to be discussed and decisions to be reached.
- Costs: Professional costs (attorneys, accountants, consultants) are significant. While professionals will often provide ballpark estimates at the beginning of the process, these estimates can change depending on the ability of the merger participants to negotiate and reach conclusions.
- Compromise: Many significant changes may be required by all involved. It is not feasible to merge and keep everything the way that it was. Some level of operational integration will be required and this requires compromise.
- Loss: Some individual physicians may not wish to merge and may leave the group. They may not like specific decisions that change their work life and/or limit their options (for example, when many practices merge they implement non-compete provisions in their employment contracts—this is unacceptable to some physicians). While the goal of the merger should be to keep all the physicians in the group, it may not be achievable.
- Failure: A merger might not be achieved. Anecdotal evidence indicates that 50 percent of all merger processes do not end in a merger. In some instances, this is a positive development as groups may turn out to not have the same long-term goals. In other situations, the lack of a disciplined effort to reach a decision often results in people becoming frustrated with the lack of progress and dropping out.
- Outsiders: External stakeholders might be uncomfortable with the merger. For example, hospital management may not be enthusiastic about a merger between hospital-based physicians.
Even with these costs and potential negatives, many anesthesiology groups believe that the potential benefits far outweigh the identified risks and decide to move forward with a merger process.
How Does a Merger Process Typically Work?
Merger processes involve a number of discrete yet inter-related steps. The general process is typically one of:
- Getting comfortable with each other,
- Understanding each other’s philosophy of practice,
- Discussion and negotiation of key merger issues,
- Developing Agreements in Principle,
- Closing the merger, and
- Implementing operational integration plans.
The specific steps of the merger effort are generally as follows:
- Friendship and Courting: Prior to any substantive discussions, members of each practice often make contact with each other via informal means. Typically they talk about shared interests, the benefits of merging and generally how the merger might work. Unfortunately, they also tend to avoid talking about any issues which might involve conflict. While avoiding issues of conflict at this point can keep the ball rolling, the issues which involve potential conflict must be resolved for a merger to occur.
- Commitment to Move Forward: At some point the groups agree that they should get down to brass tacks and look at the merger in a more formal manner. At this point they may engage someone to serve as a facilitator of the process. Such a facilitator could be a consultant, attorney or accountant.
- Antitrust Review: Depending on the local market, one of the first steps is to engage an attorney to conduct an antitrust review. While the details of such a review are beyond the scope of this article, the groups should seek experienced legal counsel in this area if there are any concerns about creating significant market power.
- Confidentiality, Non-Competitive Use, No-Shop Agreement: In order to protect their rights and the confidentiality of information, the groups should have their attorney draft an agreement in which each group agrees to:
- Confidentiality: Both groups agree to keep the other group’s information confidential.
- Non-Competitive Use: The groups agree to use the information obtained from the other group only for the purposes of merger negotiations.
- No-Shop: In this part of the agreement the groups agree to not seek offers from or negotiate offers with others for a period of time (say, three to six months). While the no-shop provision is optional, we believe that is critical when anesthesiology groups negotiate a merger for three reasons:
- Groups that are looking to merge are typically trying to remain independent in order to retain as much autonomy as possible. If one or more of the groups are looking for a buy-out, that is antithetical to the goal of retaining autonomy. Groups hoping for a buy-out should pursue being acquired rather than a merger.
- The time and dollars spent on the merger process come directly from the groups involved (as opposed to being paid for by investors). Once again, if a group is involved in acquisition negotiations, one has to wonder if it is worth risking the time and dollars on the effort to merge with them.
- If the groups don’t agree to a no-shop agreement it will be difficult for them to make the compromises necessary in a merger negotiation (because they may believe there is another alternative that may not require that particular compromise).
- Merger Committee Appointment and Empowerment: Unless the practices are very small, it is wise to appoint a Merger Committee to do the bulk of the discussion and negotiation effort in the merger. It is desirable that the rest of the physicians empower this group to discuss and negotiate on the key merger issues. Typically this committee includes one to three individuals from each of the groups.
- Gather/Organize Data: In order to improve the efficiency and effectiveness of the merger discussions, a significant amount of information must be gathered from each group. Such information may include practice documents and financial information. In addition, it is typically appropriate to have each physician and administrator interviewed or surveyed to identify any merger concerns that they may have.
- Merger Negotiation Meetings: Using the information gathered in the preceding step, the Merger Committee meets to discuss, negotiate and reach Agreements in Principle related to the key merger issues (discussed in the next section of this article). There are two basic approaches to how this process may be conducted:
- For groups that have already had significant discussion or are very knowledgeable about each other, a Merger Retreat (typically two to two and one-half days) can be used to finalize most Agreements in Principle.
- For groups that need more in-depth discussion and negotiation, a series of meetings are held during which Agreements in Principle are made. This is the more typical situation. During this effort other professionals (such as accountants, attorneys, benefits consultants, etc.) are involved as needed.
- Letter of Intent: Once the major Agreements in Principle have been made, the groups typically execute a Letter of Intent in which they agree to merge under the negotiated terms unless certain events occur. Once this document is signed, the attorneys, accountants and group management begin working in earnest to close the merger and develop plans for integration.
- Perform Due Diligence: During this step, the attorneys and accountants review a number of practice-related documents to identify any issue that might impact the merger from a legal, financial or tax perspective.
- Create Merger Documents: Once the Letter of Intent has been signed, the attorneys will draft several documents, including:
- Merger Agreement (the primary purpose of this document is to require each group to make full disclosure about its activities).
- New Entity Corporate Documents.
- New Entity Shareholder Agreement (Buy-Sell).
- New Entity Physician Employment Agreements.
- Other needed documents.
- Financial: At the same time the legal work is being performed, the accountants will be developing the financial information needed to close the merger and will be working with the attorneys to propose the best corporate form for a combined group. Depending on how the groups come together, the accountants may assist with cash flow forecasting.
- Develop Operational Integration Plan: The work we have discussed up to this point is focused primarily on the organizational, financial and legal aspects of the merger. Once the groups are on track to merge, an operational integration plan must be developed. This is normally prepared by the administrative management team selected.
- Merge: The merger occurs when all papers are signed and all are committed to move forward.
- Implement Operational Integration Plan: The operational integration plan is implemented.
What Are the Key Issues Usually Addressed in a Merger Process?
The key merger issues are different for any particular merger. However, typical key issues include:
- Overall practice philosophies
- Physician compensation system, retirement plans, benefits
- Physician contract issues
- Value of capital contribution/ownership
- CRNAs, anesthesiologist assistants: mid-level utilization and protocols
- Administrative management
- Billing and collections
- Relationships with professional service providers (attorneys, accountants, etc.)
- Operational infrastructure
As noted earlier, it is essential that those facilitating the negotiations capture the Agreements in Principle related to each of these issues. This information is critical for several reasons:
- It clarifies the actual agreements made (oral agreements can be remembered differently by different people).
- It can be used to communicate the agreements to those who are not on the Merger Committee.
- It will be used by the attorneys, accountants and administrative management to close the merger and implement activities related to the combined group.
Who Participates in the Merger Process?
Medical practice mergers involve a number of individuals and advisors to complete the process.
Naturally, the physicians in the practices are key to the success of any merger. They approve the final agreements. In many cases they should be interviewed individually to identify their specific concerns or key issues that must be addressed in the merger process. They should also be questioned about drop dead issues that need to be resolved.
As noted earlier, a Merger Committee should be established to negotiate the merger. In mergers of small practices typically all physicians are on the committee. For larger practices each group is usually represented by one to three physicians. If a subset of the physicians from any one group is on the committee, they should be empowered to speak for the others.
In most mergers, the practice’s administrative management is involved. They help with data-gathering, are often involved in negotiations, and are very involved in operational integration of the merger.
Many practices use a merger facilitator to organize the merger effort. The role of this individual is to serve as the objective third party who organizes the process and keeps efforts on track.
The facilitator sets the format and process for analyzing and discussing issues, and facilitates the negotiation meetings.
Once substantive Agreements in Principle have been reached, attorneys become heavily involved in the process. They advise the practices about various structural issues related to combining the organizations, develop merger agreements and other legal documents, perform due diligence and provide legal guidance on other issues.
Accountants are involved in forecasting the financial implications of the merger, providing guidance on tax and accounting issues, and preparing financial information needed to close the merger.
In some mergers others are involved, such as third party appraisers (if the merger involves real estate or other special assets) and benefits consultants.
Pitfalls to Avoid
There are many challenges that will need to be overcome when trying to merge two or more medical groups together. Here are a few pitfalls to avoid:
- Dueling Attorneys: Most have heard the aphorism that “one attorney in a small town starves, but two attorneys in the same small town make a nice living.” We have come across many cases where merger negotiations have bogged down or fallen completely off the track because the practices involved their attorneys in the negotiation process or tried to use the attorneys to negotiate for them. This is often because they spend so much time representing their client’s position and interests that it increases the likelihood that the two practices will not reach common ground.
- Naturally attorneys should review any agreements in principle, prepare merger documents, and be involved in the due diligence aspect of the merger. But care must be taken that there is someone representing the interests of the combined entity as opposed to the interests of each individual practice. This task usually falls to the merger facilitator.
- Lack of a Planned, Controlled Approach: More merger efforts are abandoned because they drag on and on than are terminated because of a disagreement over a particular issue. It is therefore essential that those involved use an organized, systematic approach to negotiating the merger.
- Lack of Full Disclosure: Full disclosure between the practices is critical for two reasons:
- Physicians won’t merge their practice with another unless they have significant knowledge about how the other practice is organized and operates.
- Unlike mergers in other industries where whoever is bought out leaves, when medical practice mergers are complete all (or at least most) of the physicians are still there, trying to live together in a new organization. To improve prospects for harmony, it is imperative to avoid surprises after the merger. Therefore, it is best to fully disclose information early on during the merger negotiations instead of waiting for it to be discovered in the due diligence process.
- Lack of Recognition that Changes Will Be Needed: In any merger, changes will be needed to make the combined organization work. If members of either practice are not open to such changes and compromises they should not embark on the merger negotiation process, as they will be disappointed in the outcome.
- Inability to Compromise: Upon beginning negotiations, each physician typically has his or her own viewpoint, opinion and expectations for the outcome. Each physician typically recognizes that there are a number of benefits to be gained from a merger (or they would not have initiated the merger negotiations to begin with), but during the heat of negotiations they often lose sight of the benefits to be gained and focus only on that they are not getting exactly what they want. When this occurs, whoever is facilitating the merger negotiations must be vigilant to remind the physicians of the benefits of the merger. The facilitator should always ask the question, “Are you willing to give up all the benefits of the merger over this one issue, or can compromises be made?”
- Talking but Not Deciding: In our experience, many physicians tend to be conflict avoiders. This hinders the ability to move a merger forward because when the groups come upon an issue where they don’t fully agree, they back away from it and start talking about other, less important issues. This can cause the negotiations to go on and on without making true progress. An objective third party is often needed to help the groups overcome this limitation and make the compromises necessary to merge.
These are challenging times for anesthesiologists and almost all groups are working hard to determine how to best move forward. Anesthesiology group mergers represent one of those options.
All anesthesiology group mergers have their challenges. However, in today’s rapidly changing healthcare environment, mergers continue to be an important option for anesthesiologists wishing to gain strength while retaining a significant level of autonomy.
Will Latham, MBA, CPA, President, Latham Consulting Group, Inc. Latham Consulting Group helps medical group physicians make decisions, resolve conflict, and move forward. For more than 25 years Mr. Latham has assisted medical groups in the areas of strategy and planning, governance and organizational effectiveness, and mergers, alliances and networks. During this time he has: facilitated over 900 meetings or retreats for medical groups; helped hundreds of medical groups develop strategic plans to guide their growth and development; assisted over 130 medical groups improve their governance systems and change their compensation plans; and advised and facilitated the mergers of over 120 medical practices representing over 1,200 physicians. Latham has an MBA from the University of North Carolina in Charlotte and is a Certified Public Accountant. He is a frequent speaker at local, state and national, and specialty-specific healthcare conferences. Mr. Latham can be reached at (704) 365-8889 or email@example.com.