Merge safely: How to combine practices successfully

Midwest Medical Associates, which officially started business April 1, is made up of three groups that were seeking safety in numbers. It has plans to grow even larger in the coming years -- provided it doesn't dissolve first.

But the St. Louis-area physicians are confident that their agreement won't suffer the fate that befalls many physician group mergers. Their feelings stem not from financial goals, such as gaining leverage with insurers, serving a larger patient population and gaining a stake in future investment opportunities, but from the 18 months they spent on the nitty-gritty details that, if neglected, can ruin a merger.

"You have to set out what you expect to happen with the new organization," said Patrick Garrett, MD, an internist and new president of Midwest Medical Associates. "If expectations aren't set, it's difficult to proceed."

Often, mergers dissolve almost as quickly as they're formed. Deals fall apart because they're formed on flimsy ideals and without the future partners hashing out the delicate details up front, health care consultants said.

From the ability to make tough staffing decisions to sharing a common medical philosophy, there are many factors that go into making a physician group merger work. Merging is a time-consuming process that requires the foresight to anticipate potential problems that can cause a group to implode down the road.

No strategy is immune to failure, if certain vital topics aren't discussed early on, consultants said. Some groups choose to grow horizontally, adding specialties to make themselves into an all-inclusive group, but that can have pitfalls in the form of unforeseen expenses and unfamiliar governance issues. Other groups seek to grow vertically, adding doctors in the same specialty until it becomes top-heavy and difficult to operate because of competing interests among partners.

Michael Brown, president of Health Care Economics Inc., a consulting firm in Indianapolis, said he knew of numerous cases where groups would merge without necessarily combining any assets. Expenses would actually increase, and the merger would quickly unravel, he said.

"Doctors are very independent guys and girls," Brown said. "When you have two competing groups, you think you can get together and cut back on expenses, but what if the main doctors have been at war for 10 years?"

With the demise of large physician practice management companies, it would appear that the merger market has slowed down in recent years. Irving Levin Associates Inc., a health care research firm based in New Canaan, Conn., reports that $119.3 million was spent in 2003 on 24 physician group mergers.

But only publicly announced deals are tracked, meaning that more mergers among small, private groups fly under the radar.

Consultants agreed that one of the ways to keep a merger together is to maintain some individuality among the practices that join. Tony C. Clark, a practice management consultant with Professional Management Midwest Inc. in Johnston, Iowa, described a merger he helped broker in which the practices shared some operational costs but maintained incentives for individual physicians to produce.

"It gives them the opportunity to generate their own income," he said. "It wouldn't be throwing everything into a pot and taking out equal shares later."

Physicians, of course, are limited in terms of what they can discuss by federal legislation. Antitrust laws, Stark laws and other regulations force doctors to keep discussions in abstract terms, and local control is one strategy to employ so doctors can't be accused later of price-fixing or other transgressions.

The autonomy can protect a small practice's income, but it doesn't necessarily ensure its voice in the group's overall scheme. Governance is a stumbling block in many mergers, especially as the group continues to grow, consultants said.

Robert Johnson, director of anesthesia business development for Sheridan Healthcare Inc., an outsourcing provider of anesthesiology, neonatology and emergency medical services to hospitals and ambulatory surgery centers, said he had seen groups grow aggressively with the same sort of governance structure they employed when they had only five or six physicians.

"You're still trying to make business decisions and implement business plans from this 'We're all equal' framework with 20 or 30 doctors," said Johnson, who is based in Baltimore. "It becomes unwieldy and ineffective."

Keeping track of the practices is difficult, especially when they're not under one roof. Consultants warn groups who don't consolidate locations that they could forget or neglect to consolidate operations expenses as well. Some important decisions and ideas, such as staffing cuts and efficient ways to collaborate, might not get the same attention they deserve if doctors are in different locations, consultants said.

On the other hand, maintaining current offices makes it easier to avoid power plays between groups, consultants said. Issues such as where to practice and whether to buy a new building can be shelved, though groups still need to discuss computer systems, Clark said. A network is an easy solution, but setting one up requires compatible equipment, he said.

"You may end up deciding at that point to convert to an [electronic medical record] system," he said. "It might be the timing is such that one group just bought a new system."

Midwest Medical's strategy

Dr. Garrett said Midwest Medical Associates is looking to reach 150 physicians through both mergers and hiring, with the goal to increase its geographic coverage. That means very little, if any, condensing of office space, because patients might not like to travel farther to see their physician.

To start, the new group will have 33 physicians, the vast majority of whom come from Southwest Medical Center in Kirkwood, Mo. The other players are Clayton Primary Care Group, a two-physician practice in Richmond Heights, Mo., and Alexander Rudoi, MD, an internist in solo practice in St. Louis.

The doctors each contributed $12,500 to build the new company's capital -- a relatively small price compared with the buy-ins many physicians see when becoming a partner in a group. The practices also will keep their own names and signs for brand recognition but become subsidiaries of the parent firm.

Perhaps the first positive point that helped the three groups broker a deal is that they were familiar with each other, but they weren't rivals. The physicians all had been part of a hospital-owned practice that spun off a few years ago and broke up into smaller, physician-owned groups. The physicians had an interest in regaining strength in numbers, which brought them to the negotiating table.

"What we could see is with a small group, you just can't contract with insurance companies the same way," said J. Collins Corder, MD, an internist with Clayton Primary Care Group. Without merging, he said, "the ways of expanding were just not good."

Dr. Rudoi felt the same way after a few years in solo practice. Both practices were initially cautious in discussions with Southwest Medical Center. The 30-physician group, however, was not looking to simply swallow up the smaller practices.

"The idea was I would still have autonomy in my office," he said. "Whatever we do in our own practice is what we will receive. There would be some centralization, but I don't want to have the micro decisions made for me."

One of the concepts of the new group was to extend the reach of the overall organization without forcing the individual practices to join a large corporate environment. While major purchases will be decided by the group and profits from new ventures will be divided among the partners, local revenues will stay primarily in the individual practices.

With one group clearly the big player in the formation of Midwest Medical Group, there was the potential for the two smaller groups to lose authority. To alleviate those concerns, the physicians agreed to form an executive committee made up of representatives from each practice, with no group gaining more than a 50% control share.

Right now, the executive committee has five members -- two from Southwest Medical Center, the two doctors from Clayton Primary Care and Dr. Rudoi. One of the group's primary goals is to expand, and the current leadership setup will allow for the many transitions likely to occur, Dr. Garrett said.

"There's always the fear that if there's one dominant group, individuals would lose autonomy to the large group," he said. "We designed [the governance structure] so that when we did go out and talk to other groups, we would have this in place."

The physicians with Midwest Medical concede that they probably haven't thought of everything, but they're hoping their philosophical similarities and ability to adjust will help them through future problems. They'll know soon enough how well they planned when they decide to add another group to the mix.

"So far, it's gone as we would hope," Dr. Garrett said. "We were able to anticipate 90-plus percent of the issues, and the ones that have come up have been relatively minor."