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Full Asset Merger

Herschel R. Lessin, MD, FAAP

​Herschel R. Les​sin, MD, FAAP

In this brief article, the basics of the full asset merger as a method of developing market power for pediatricians is reviewed. A full asset merger is just this—a merger. All assets of the merging practices are owned by the new practice. All expenses are jointly "owned" as well. The practice is centrally governed with uniform policies, procedures, and organization. There is the requirement for infrastructure that supports the expanding practice and its various endeavors.

The first question in forming such a group is "with whom does one merge?" The brief answer is that you merge with your strongest competitors, who are your equals (as close as is possible) in terms of size, quality, and adaptability. A considerable amount of time must be spent in getting to know one another and achieving a comfort level with each other in advance of any serious merger efforts. This will take months of meetings and discussions.

Once a comfort level is achieved, rules or bylaws of the new corporation/practice must be worked out. Following are the 3 most important issues:​

  1. Practice Culture. Members of the practices must think alike and have similar goals. A practice that likes and expects to see 35 to 40 patients per doctor per day with maximum efficiency, maximum quality, and maximum lifestyle will not be compatible with the practice that sees 20 patients per day, does most of the procedures itself, and is happy to work less and earn less, albeit with the same commitment to quality. No value judgment is made the culture of the merging parties must be understood before proceeding. Lifestyle is very important.
  1. Practice Governance. There are many ways to run a practice, but, for a large merged practice to be successful, traditional physician rule by the committee of the whole is rarely effective. It is best to have an empowered Executive Committee that has the power to bind the group as a whole, but is also subject to election by the partners at set intervals. The corollary to this is that, unlike smaller practices, no single physician has the authority to change policy or procedure unilaterally. This prevents staff from complaining to the doctor, who they know will listen, and prevents the doctor who is not committed to the practice philosophy from deciding not to abide by it. A poorly governed practice will soon fail.
  1. Practice Compensation Model. There are methods of compensating physicians that are too numerous to count. Before undertaking a merger, there has to be a productivity formula in place that motivates the doctors that is, at the same time, fair and equitable. There also may need to be a period of transition to equalize the salaries when one merger partner brings more to the table initially than another.

Only after all these items are worked out, along with a myriad of others, such as pension plans, benefits, and retirement buyouts, can a partnership agreement be drafted and adopted.

Other factors that soon come into play are operational in nature. Following are a few important ones to consider:

  1. Human Resources Policy. In a large practice in which all the physicians continue to practice medicine, it is vital to have an experienced administrator to run the company. He or she is the CEO (chief executive officer). The partners are the Board of Directors. The CEO should not be your trusted office nurse of 20 years. The CEO should not be a relative of the partners. The CEO will be a highly compensated individual with business training and experience who has the confidence to often act as "the grown-up" in the "family" of the practice. Once that person is selected, a policy manual must be developed, along with an administrative organizational structure and chart, departments, salary steps, and all the trappings of a "real" business, because it is a real business. The practice administrative team, along with the Executive Committee, should run the practice. Members of the Executive Committee should not be a rotation of all partners. The members must be physicians with a business skill set, along with a medical one. This is not a position for a doctor who lacks these skills. If the members of the Executive Committee are producing for the practice, they should be left in place unless an equally talented partner is waiting in the wings. There needs to be a program of senior physicians orienting and mentoring junior physicians joining the practice.
  1. Strategic Planning. A business needs a business plan that is well thought out and well executed. It should be flexible and adaptable to market conditions. An evaluation of the market, market share, physical locations, and office hours should be conducted. A budget should be developed and followed, with quarterly line item financial reports sent to the partners. A SWOT analysis (Strengths, Weaknesses, Opportunities, and Threats) should be conducted, so that the practice can plan and not just react. There should be a clear negotiating strategy with payers and vendors, and a purchasing agent whose sole job is to get the best deal on all supplies and services.
  1. Scheduling and Patient Flow. One member of the Executive Committee should be responsible for this area. They should design the patient flow, support staff, and physician schedule. This individual should have the final say on who works where and who works when. All vacations and time off should go through them. This will maximize patient flow and is probably the most important position in the entire practice.
  1. Physician Employment Model. Despite long traditions, not every physician in a practice needs to be a partner. While one can certainly work that way, it will result in less economic return and a less favorable lifestyle. The key to using employed physicians is fairness. The practice provides a compensation package that allows young physicians to trade money for improved lifestyle—flexible hours, no economic risk, no night call, no administrative hassles, and comprehensive benefits. As long as a balance can be reached, all parties can be happy and successful in their own personal goals. The practice can have several physician "tracks"—Partner track, Hospital and Night Call Track, and Staff physician track; each with different compensation and responsibility. New partners are not only required to be outstanding physicians, but must be interested in and capable of running the administrative and business aspects of the practice.
  1. Getting Help. Clearly, this can be a daunting endeavor. At least some of the partners must be committed to working on it, while still practicing. It is impossible to do alone. Other professionals are required. These include a consultant who has experience with putting practices together, an experienced health care attorney to advise on both legal documents and antitrust exposure, and an accountant who is more than just a bookkeeper and will provide advice on ongoing business issues.

There are several advantages of a full asset merger.

  1. The partners have control of the entire business.
  2. The discipline to run the practice in a business-like fashion.
  3. The ability to do real quality improvement with charting, policies, procedures, and medical staff meetings.
  4. The ability to have all partners "rowing the boat in the same direction."
  5. The ability to react quickly and decisively to changing market conditions and to pursue entrepreneurial ventures and alternate lines of business
  6. The ability to provide a pediatric network that a managed care organization (MCO) and hospitals can work with, which provides enough quality and hours to justify better contracts.
  7. The infrastructure to negotiate and expand and leverage market strengths.
  8. Enhanced competitiveness within the practice's market (competitors have less room to expand).
  9. Higher income, more benefits, and a better lifestyle.

There are several challenges, however.

  1. Infrastructure is expensive and will increase fixed costs. Unless there are increases in the top line, the bottom line may suffer.
  2. The loss of physician autonomy. Some doctors will be unwilling to let go. The challenge is to develop a culture of competence rather than a culture of control. The practice must get past "them and us" and somehow get to "we."
  1. The complexity of the setup can exceed other types of structures and requires committed and compensated physician managers to move the process along.

Which model is right for you? Super-groups are not for everyone. Every one of us has different needs and desires. Only a careful examination of the marketplace, competition, and the practices can determine that. 

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