Mergers & Acquisition for Medical Practices

1. Mergers & Acquisition for Medical Practices Charting a Course for Safe Navigation Daniel J Bryant, CPA, PS

2. Overview • Planning • Change Impact • Acquisition Process • Legal & Tax Issues • Negotiating the Deal • Before Signing • Implementation • Case Studies

3. Overview • 60-70% of mergers don’t meet expectations • How to plan for realistic expectations • In the M&A process the business valuation is only one element of the process (a critical element but still only one) • Clients need help navigating through the process • This may be their first M&A • Explain that it’s not a first time marriage • It’s a second marriage • With children on both sides 3

4. Planning • Discuss M&A process in annual client discussions • Does Client want a tree house or a dream house • Need for a project manager • Provides a detailed & summary plan of the M&A • Lets client know what is coming around the corner • Allows you to inform the client what information is needed and from whom • what decisions the client will need to make and when

5. Planning – Project Mgr • Phases of Planning • Criteria for partnering • Identify potential partners • Acquisition / Merger plan • Negotiating plan • Announcement / Communication Plan • Training plan • Implementation Plan • Client / Employee feedback • Forecast / Realistic Expectations

6. Planning – Take Time • Building a tree house in stead of a dream house • Need for a project manager • Provides a detailed & summary plan of the M&A • Lets client know what is coming around the corner • Allows you to inform the client what information is needed and from whom • what decisions the client will need to make and when • Reason for annual discussions with clients

7. Planning - Complications • 2nd Marriage with 2 sets of kids • Not the same as starting from scratch • Even if the new owners get alone what about each staff • At least the kids aren’t voted out of the family • What processes and systems will remain & which will change • Will there be a new organization structure 7

8. Planning - Issues • Mergers versus Acquisition • Similarities to buying and selling • Dissimilar Issues • New issues

9. Change • Why Change • Change Process • Communication Plan • Implementation Plan • Emotions of Change • Power Shift • Benefits

10. Change • Why - Reasons for Change • Negotiating Practice Efficiency • Customer Service Improvements • Identifying Best Strategies 10

11. Change • Change Process - Effect • Not the normal time to adjust • No time for resisting, denial, acceptance, getting on board • Requires plans to be in place on day one • Communication Plan • Implementation Plan

12. Change • Communication Plan • When more than one office-clinic-location is involved then the formal announcement needs to be made on the same day and time • Announce only decisions that have been made • Be honest, open and communicate • Lack of communication can cripple an organization • There will always be questions asked that haven’t been addressed • When change is done in stages explain the stages and timing

13. Change • Implementation Plan • Organization / reporting structure (Org chart) • Reporting relationships • Department heads • Staffing levels • Processes & Systems • What will change • What remains the same

14. Change • Emotions always exist • A loss has occurred even in a merger but especially in an acquisition • A loss has taken place • A business has died • A Loss of control and independence • Allow feeling to be expressed • Doctors don’t always want to make the announcement

15. Change • No longer king of the mountain • Can’t call all the shots • Need to get buy-in • May no longer be involved in the decision making process • Frustration • Setting expectations helps

16. Change • Growing the breadth of the practice • Expanding patient base • Administrative consolidation • Common systems & processes • Growing the Depth of the Practice • Offering broader range of services • Bringing outsourced services in-house

17. The Acquisition Process • Need to define the process in advance rather than reacting to an opportunity • Two plans • Acquirer • Acquired • Need to identify objective • Allows for a criteria based evaluation • Not a gut feeling

18. The Acquisition Process • Acquisition Program • Establish policy responsibility • Develop an acquisition plan • Define acquisition criteria • Identify potential candidates • Establish contact • Perform Due diligence • Negotiate based on previous established benefits • Ensure effective follow-up integration

19. Medical Alignments • Types of Merger/Acquisitions • Hospitals • Merging • Buying medical practices • Group clinics • Merging • Buying medical practices • Medical Practices

20. Appraisal Role • Appraiser needs to be independent of both parties • Establishes a basis for starting negotiations • When Appraisals are beneficial • Hospitals to Hospitals • Clinics to Clinics • Practices to Practices • Practices to Clinics

21. Legal Land Mines • Antitrust Laws • Federal Anti-Kickbacks • Self Referral Restrictions • Corporate Practice of Medicine

22. Legal Land Mines • Antitrust Laws • If significant decrease in competition • Price-fixing • Monopoly • Boycott 22

23. Legal Land Mines • Federal Anti-Kickbacks • Illegal to pay for referrals of patients whose services would be reimbursed under Medicare or Medicaid • Prohibits solicitation or reimbursement for: • Referring patients • Purchasing, leasing and ordering or recommendation of such • Safe harbor rules • DHHS • OIG 23

24. Legal Land Mines • Self Referral Restrictions • Stark Laws • Stark 1 • Stark 2 • Allowed referrals 24

25. Negotiating the Deal • Negotiating is as important as the Appraisal • What to Negotiate • Negotiating Concepts and Myths • Negotiating Skills • A Model for Negotiating • Success negotiating is based on trust

26. Negotiating the Deal • What to Negotiate • Price & Terms • Terms of employment of the physicians after transition • Decision making process & authority • Concepts & Myths • Negotiating Skills • Listening • Self management • Creativity

27. Negotiating the Deal • Negotiating Model • List needs • Prioritize needs • Evaluating alternatives • Look for mutual satisfaction • Consider other consequence

28. Tax Issues • Objectives • Buyers • Shift toward to Capital Gains rather than ordinary income • Sellers • Structure sale to avoid IRS audit • Determine tax effect • After value has been agreed to • Before allocating to specific parts

29. Tax Issues • Future Considerations • Physician compensation when transitioning to employee • Pay • Bonus incentives for: • Future growth • Retention of workforce • Productivity improvement • Double taxation for C-Corp • Other tax issues • Retirement plans • Single versus Periodic payments

30. Before Signing • Protective Covenants for Buyers • Protective Covenants for Sellers • Assuming Liabilities • Fine Print

31. Before Signing • Protective Covenants for Buyers • Full Disclosure • Maintaining License, Insurability and Privileges • Physician’s Full Effort • Production Standards • Accountability • Non-Competition • Length of Employment Contracts • Length of Notice of Termination 31

32. Before Signing • Protective Covenants for Sellers • Timely payments • Professional Autonomy for Patient Care • Length of Employment Contract • Length of Notice of Termination • Sharing of Information • Backing Out 32

33. Before Signing • Assuming Liabilities • Professional Liability Insurance • Staff Employment Issues • Can be critical part of change • Benefit changes • Vacation • Sick Leave • Retirements Plan • How secure is their job • Reimbursement Issues

34. Life After the Deal • How decisions get made • Blending cultures • Preparing for market change • Maintaining economic soundness

35. After the Deal - Integration People Processes Technology

36. After the Deal • Organization Structure • Governing Board & Committees • Policies • Employment Issues • Patient Policy • Fees • Contracts • Capital Approval • Purchasing Supplies

37. After the Deal • Blending Cultures • Understanding Mutual Needs • Understanding Differences between Large & Small Orgs • Grieving Loss of Control • Identifying Issues of Common Destiny • Forming the New Team (org)

38. After the Deal • Preparing for Market Change • Information Systems • Practice Efficiency • Customer Service Improvements • Identifying Best Strategies • Maintaining Economic Soundness

39. Medical Practice Valuations • Mergers & Acquisitions – Clinic / Practice • Managed care services are more popular in certain areas • Primary care physicians targets in acquisitions • Gatekeepers of healthcare services • Identify need for specialists • CPA role in M&A • Appraiser • Facilitator • Consulting services

40. Medical Practice Valuations • Factors affecting the value of physician practices • Changes in reimbursement for physician services • The regulatory environment • Changes in the operating environment • Goodwill • Movement of the patient base

41. Medical Practice Valuations • Regulatory Environment • IRS position is that acquisitions must meet Community Benefit Standard (arm’s length) • Tax-exempt organizations must pay fair value • IRS prefers – income approach to valuations • OIG prefers valuation based only on tangible assets (contrary to IRS)

42. Medical Practice Valuations • Changes in Operating Environment • Increased operating expenses • Mid-level providers (NP, PA & MW) • Require supervision • May generate additional revenue • Goodwill • Patient based payers • Physicians • Managed care providers

43. Medical Practice Valuations • Information unique to medical practices • Payer mix • Total active patients • Average number of patient visits per day • Average number of new patients per month • Average hospital admissions • Gross charges for CPT codes

44. Medical Practice Valuations • Information unique to medical practice • Fee schedule - how do they compare to the average • Medical specialty of physician & mid-level providers • Listing of all participation agreements • Listing of all fixed-fee arrangements • Description of billing procedures • Relative Value Unit (RVU)

45. Medical Practice Valuations • Information unique to medical practice • Location - number of competitors • Sellers reputation • Average future scheduled appointments • Patient demographics

46. Case Study - 1 • Hospital Merger • Large multi location hospital • Growth in patients in outlying areas • Local hospital in outlying area need capital • Similar cultures • Impact of Change • Executive Perspective • Employee Perspective • Patient Perspective 46

47. Case Study - 2 • Hospital Acquires Primary Care Provider (PCP) • Large multi location hospital • PCP has high overhead • PCP needs to upgrade technology • PCP not run efficiently • Hospital willing to pay for assets only • Physicians sign 5 year employment contact • Physicians need to increase productivity • Impact on PCP employees 47

48. Case Study - 3 • Hospital Acquires PCP with Ancillary Services • PCP has radiology facility • Ancillary services valued different from rest of PCP • Physicians sign 5 year employment contact • Future pay based on productivity • Impact on PCP employees • Reassigned to hospital organization • Released due to overlapping of personnel • Need retraining to hospital processes & systems 48

49. Case Study - 4 • Merger into Group Clinics • Which physician will be in charge • May need to setup a governing board for policies • Need to establish common compensation packages • Staffs are not similar in number • One clinic moves to newer systems • Maintain 2 locations or combine into one location 49

50. Case Study - 5 • Merger of Group Clinics • Create mega-groups • In response to new government requirements/oversight • Alternative is to remain same or join hospital • Less likely to give up location and staff • Allows for possible sharing of technology 50