Mergers and more: Where should you begin?

From the November 1995 ACP Observer, copyright © 1995 by the American College of Physicians.

By Adam Heavenrich

Q. I am part of a multi-specialty group. There has been a great deal of activity in the health care market in which I practice--sales, mergers, groups forming. Where do my group and I start, and how do we know which arrangement is best for us?

A. A driving force behind the sales, mergers and group formations in the health care market is the movement to managed care, which creates new and greater demands on providers and payers. In a competitive managed care market, the small group practices and solo practitioners will be at a competitive disadvantage in winning managed care contracts. These practices lack the efficiencies and contracting capabilities of large managed care oriented organizations, which include large primary care group practices, multi-specialty groups with a large primary care base, vertically integrated delivery systems or primary care dominated physician hospital organizations (PHOs), independent practice associations (IPAs) or physician organizations (POs).

To place yourself at a competitive advantage, you can explore a number of different options depending upon your goals and objectives, competitive trends in the market you serve and your resources. You may want to evaluate your options in light of their ability to help your group become part of, or grow into, a dominant primary care delivery system in your market. This will allow you to be well positioned in a managed care environment for the long term.

Your options include:

• Merge with an existing primary care oriented group practice or an integrated delivery system with a large primary care base. For many smaller practices, this option may be the most practical route. When seeking such a partner, make sure that it has the resources that will allow you to reach your goal. Critical resources include geographic breadth, systems and management depth and expertise in how to successfully contract with employers or HMOs.

• Join a primary care dominated contracting coalition. A highly evolved PHO, IPA or PO will be owned and controlled strictly by physicians. For primary care practices, a contracting coalition should be made up of at least 50% primary care physicians and have a majority on the governing board. It should have appropriate geographic distribution of physicians and be highly selective about credentialing. To be cost effective and provide quality care, its members should have common procedures, quality assurance and common electronic medical records keeping for all covered patients.

One difficulty with a contracting coalition is that these common procedures and standards are difficult to coordinate from many different practices. Because the assets are not merged, incentives may not be completely aligned and different practice cultures may cause conflict. In addition, unlike an integrated group practice, a contracting coalition cannot easily accumulate and invest capital for growth. Therefore, this option may be seen as an intermediate step in serving a managed care market, which may be available before fully integrating.

• Hire a management services organization (MSO) and outsource the managed care portion of your business. An MSO provides practice support services to medical practices. MSOs can be owned by hospitals, health plans, physicians or outside management companies. They typically charge a fee that may be a percentage of the practice's revenues or a flat fee. Physicians may sell their assets to the MSOs. Most MSOs are taxable for-profit corporations that can access capital. MSOs should be evaluated on their management expertise and their track record in increasing practice revenues and decreasing or controlling practice expenses.

• Develop a large primary care oriented group practice. The large primary care group practice is one of the most highly evolved provider models, since it has a common ownership, strategy and management structure. While a group practice is not necessarily a managed care entity, a large practice can directly contract with employers and national HMOs, if they are covering a wide geographic area. Fifteen to 20 primary care physicians can provide a strong basis for establishing a large group practice. Ultimately, this type of organization will allow you to provide cost effective capitation.

If you are a smaller practice, develop a business plan to increase its size. The business plan should include budgets; information on management structure, ownership, governance and compensation; a succession plan; plans for a management information system; methods for utilization review; a means of maintaining quality assurance and a marketing and sales strategy. The business plan should anticipate your practice growing to the point at which it will become the dominant primary care oriented provider in your market and will support the necessary resources to accept capitated managed care contracts. This process will take time and requires capital, but help is available. For example, you can contact a physician organization, like ACP, that maintains a list of prescreened professionals to help find a consultant to guide you through the process.

Whatever option you choose, it is important to establish your goals and objectives, understand your competitive environment and review your options to determine which one best fulfills your goals and objectives. If you will be practicing medicine for more than a few years, you should work to position yourself in an organization that can effectively and efficiently serve your managed care market.

Adam Heavenrich is principal of Heavenrich & Co. Inc., a firm specializing in health care and medical practice joint ventures, networks and mergers and acquisitions, in Chicago.

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