5 Factors to Consider Before Selling Your Medical Practice

Written by on November 29, 2013 in Features - No comments

As everyman-philosopher Yogi Berra supposedly said, “It seems like déjà vu all over again.” Hospitals are, once again, purchasing/operating medical groups.  However, things are a bit different this time around.

In the 1990s, it was pretty much a one-way street, with hospitals aggressively pursuing medical groups. Physicians, not necessarily looking to sell, couldn’t refuse the rather exorbitant offers being thrown at them. Most of the purchases occurred in urban areas among competing hospitals, to protect/increase market share, and most of the physicians involved were primary care. Many hospitals purchased their own attending practices (cannibalism) just to keep competitors from buying them.

The purchasing frenzy in the 1990s didn’t last long. Hospitals overpaid for the practices, didn’t have a good understanding of their operations and were not prepared to manage them properly. Most hospitals never recovered their large upfront investments and subsequent operating losses. Losses were especially egregious when hospitals purchased practices (cannibalism) that were already admitting to the hospital. There was no new revenue to offset losses on the practice. Hard lessons were learned and most of the purchased groups were spun back off by the end of the decade. Twenty years later, things are very different.

First, hospitals, especially sole-provider hospitals, are purchasing certain medical groups primarily to preserve the viability and future of both the hospital and certain specialties. (Market share may still be a consideration, but is beside the point.) If hospitals don’t purchase certain groups and assume responsibility for them, the specialty will completely disappear from the community due to attrition. Rather than competing with them, hospitals have learned it is easier and smarter to start with their own attending physicians.

Second, it is no longer a one-way street. In many cases, medical groups are initiating discussions with hospitals. There are a variety of reasons for this, but the most common is the group can’t replace retiring partners and the remaining partners cannot handle the increased office workload, let alone the call schedule. In the current recruiting environment, hospitals and their attending physicians realize it is far better to cooperate than compete. A united recruiting and clinical front is much more appealing to a potential candidate.

Third, hospitals are doing their homework this time around. Gone are the good old days when they made offers physicians couldn’t refuse. To avoid both Stark and IRS violations, hospitals pay for an independent evaluation of the practice, which includes a full operational assessment and a fair-market-value determination. As a result, both parties have a better understanding of the finances and what they are getting themselves into, which ultimately lends itself to better decision making and a lasting relationship.

Fourth, hospitals are better at managing and operating medical groups. Typically, hospitals now employ a manager with a background in medical practice management. Depending on the specific circumstances, the hospital will elect to directly employ the physician or indirectly employ the physician through a separate, captive PC. In either case, the hospital is ultimately responsible for the bottom line. Physician compensation is generally a guaranteed base with an incentive clause.

Finally, unlike 20 years ago, both parties understand they need each other and are more likely to succeed as partners (clinically and financially) in a coordinated and integrated delivery system. Otherwise, both are doomed to fail and the biggest loser will be the community they serve. Declining physician reimbursement, difficulty recruiting, increasing patient loads, the inevitability of electronic medical records, and the worsening hassles of just operating a medical practice have all contributed to the selling of practices to hospitals. For some physicians, it is their only exit strategy.

Source: http://nyphysicianmagazine.com/?p=389

By George Chapman
Health Care Management Consultant

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