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Eight practice merger success factors
Before combining practices, consider these points to decide if you are ready to merge and if it makes sense in the long run.
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“Every single time you make a merger, somebody is losing his identity. And saying something different is just rubbish.”
– Carlos Ghosn
“The whole is more than the sum of its parts.”
– Aristotle
“A work well begun is half ended.”
– Plato
Mergers, as they say on Wall Street, are driven by just two emotions: fear and greed. Said a bit more genteelly in keeping with the profession of ophthalmology, “distress” and “ambition” are the real drivers for practice consolidation today.
Mergers are clearly on the rise in eye care, fueled by several factors: regulatory complexities, falling fees, rising costs, tapering profits and a large cohort of baby boomer peri-retirement surgeons with not enough young, bold successors available to take over the wheel.
Mergers — and their near-cognates in practical, operational terms, such as acquisitions, joint ventures, strategic alliances and the like — take many forms:
- Coalescing two or more essentially equal practices into one larger practice;
- Large practices tucking in smaller competitors;
- Older providers selling their practice to a local colleague as a succession strategy, in lieu of hiring a partner-track physician;
- and Practice management companies and hospitals acquiring private practices.
Today, surgeons who are either distressed or ambitious — and many are both — are in the hunt for opportunities to join with their colleagues. Here are eight success factors as you either take the initiative and start looking for merger candidates or consider overtures you are increasingly likely to receive in the years ahead.
1. Have we spent enough time together to know this will work? There is no substitute for raw face time to gauge whether a merger is going to work out. As a general guideline, two practices that are contemplating a merger should nominate a joint exploratory committee (typically two MD- or OD-owners, two administrators and a sprinkling of department heads). Once discussions get serious, this committee should meet weekly, make site visits to each other’s facilities, learn how each side ticks, write formal merger plans and build an underlying rapport and respect.
2. Will a merger of practices be profitable? The business term for this is “accretive,” as in, “Is this transaction accretive to the net earnings per hour of the owner physicians?” It is critical in the near term to generate spreadsheets demonstrating the financial sense of consolidation. Deals are most accretive when duplicated staff, facilities and infrastructure can be eliminated or when powerful cross-referral opportunities exist. Even if a strong financial business case cannot be made to merge, there may be a longer-term strategic advantage: better service area coverage to aid third-party contracting or the ability to stand toe to toe with other large practices in the region.
3. Will we be better off operationally? Realize that there are often diseconomies of scale. Management layers can grow, until a decision that once took a day in your old, small practice now takes a month. It is well recognized that a two- or three-doctor practice is usually more efficient than a soloist. But few practice boards are aware of the inefficiencies that can creep in when a four-doctor practice grows to eight or 10 doctors.
4. Will there be a cultural fit between the practices? Experience shows that when mergers fail it is generally not because of economics or operations but because of underlying incompatibilities. While being “culturally compatible” may sound like a pretty spongy thing to measure, you can objectify and help assure compatibility in a few practical ways:
- Put the merger exploratory committee to the task of writing a short joint mission statement along the lines of: “Harris-Smith Eye Clinic will become the pre-eminent provider of eye care in Silver County by 2025.”
- Have the committee write down a brief list of values. An example of one of these would be: “We continuously strive to exceed the expectations of each patient and every referring colleague.”
- Prepare a summary 5- to 10-year strategic plan. This need not be longer than a few pages and should answer questions such as: What is our agreed geographic service area? What is our intended growth rate? What services will we add and subtract? How will our hospital and competitor relationships change in the years ahead?
5. Consider: Will you be stronger together than apart? The merger of many small, weak practices does not build strength — it builds a tribe of pygmies. A larger practice can be vastly more complex and fragile than a small one and needs much stronger leadership to take advantage of its scale. If you and several other weakened colleagues contemplate merging, one of the first things you should focus on is who the lay and physician leaders will be. Absent strong leadership, you may be able to pull together a larger group, but keeping it aligned and moving forward will be very frustrating.
6. Who is in charge here? Even when two relative peer practices merge, someone needs to be in a leadership position. Post-merger, there needs to be one managing partner. Do not take the political expedient of naming two co-managing partners for the group. Human organizations work best with one clear leader.
7. What is the operations integration plan? I am often called into practices where a merger transaction has already been completed, and the parties are now trying to clean up messy or unclear operations on the fly. This should not happen. One of the most important roles for the joint merger committee should be to write a detailed operations integration plan. This should cover things such as:
- Who will be the agreed managing partner, administrator, accountant, attorney, advertising agency, etc.?
- How will payer contracting change?
- When we merge, what will be the staff benefits structure? Will old benefits be grandfathered in?
- Will any redundant office locations be closed down? On what timetable?
- What new equipment, computer system or other resource will we be able to afford now that we have a larger user base?
- What changes will be made to the personnel and operations manuals?
- Will surgical facilities be built or changed?
- How will call coverage be adjusted?
8. Remember: Kindness kills businesses. When two practices merge and it is time to trim redundant staff, one of the most difficult decisions is who stays and who goes. This should ideally be worked out in advance of the merger, in the operations integration plan. Just as a surgeon has to put her patient through some unpleasantness on the way to a cure, so too does an administrator or board have to painfully remove unnecessary staff. If you do not have the stomach for this culling, you should probably not formally merge. There may be alternatives, such as sharing expensive equipment or joining forces promotionally, that will harness the benefits you seek in a merger without requiring you to make changes you are not yet ready to accept.