BLOG: Practice mergers as a tool for augmenting profits, part 2

ByJohn B. Pinto

There are dozens of technical and due diligence steps on the road to merger. At the front end of any prospective consolidation, none of these is more important than assessing the financial impact of the proposed transaction on the current partners.

When Wall Street weighs in on the viability of a corporate merger, one core question pointing to success or failure is: “Will this transaction be accretive to earnings per share?” That’s just fancy business speak for: “Will all of the owners of the underlying companies be better off with this deal than without this deal?”

You can translate and apply this merger viability question in your own practice setting: “Will the owner-doctors on both sides of our proposed merger make more money?” Perhaps the units here should be “dollars per hour” rather than “dollars per share” because the overwhelming majority of a surgeon’s paycheck is active income, not passive income.

Here’s a highly simplified example of a favorable merger:

Two practices, “A” and “B,” decide to merge. They will combine office facilities into the larger office of practice “B.” Practice “A” will terminate its lease. Two new ancillary services will be added, an ASC and an optical. In addition, when practices “A” and “B” combine, they can substantiate bringing in a part-time visiting retinal surgeon, who generates $1 million a year in collections and receives 50% of this as his compensation. As you can see from the grid below, marketing costs come down slightly. There is significant new revenue and there are some new costs, as well. Here’s the resulting performance:

	Practice A	Practice B	Combined practice AB
Base practice revenue	1,000,000	2,000,000	3,000,000
ASC revenue	0	0	900,000
Optical revenue	0	0	400,000
Retinal revenue	0	0	1,000,000
Total revenue	1,000,000	2,000,000	5,300,000

Staff expenses (core staff)	300,000	600,000	900,000
Facility expenses	60,000	120,000	120,000
Marketing expenses	50,000	100,000	125,000
Other general and administrative expenses	240,000	480,000	720,000
ASC expenses	0	0	600,000
Optical expenses	0	0	300,000
Retinal expenses	0	0	500,000
Amortization of merger costs and the additional management costs of running a larger, more complex enterprise	0	0	75,000
Total expenses	650,000	1,300,000	3,340,000

Profit available for physician income	350,000	700,000	1,960,000
Profit margin	35%	35%	37%
ASC?	No	No	Yes
Optical?	No	No	Yes
Retinal surgeon?	No	No	Yes
Number of partner physicians	1	2	3
Partner physician hours per year	2,500	5,000	7,500
Profit per partner physician-hour	140	140	261
Profit per partner physician per year	350,000	350,000	653,000

Note that under this scenario, the same three partner doctors have no additional clinical or surgical responsibility, although they will take on more risk and may have considerably more time they need to devote to partner meetings. While it is unusual that any two-practice merger event would lead to a convergence of benefits on this scale, this example points out the most common and important drivers for merger: shared facility costs, shared marketing costs, substantiation of new ancillary services and critical referral power sufficient to in-source profitable subspecialty services.

If your practice has already mastered what the most vanguard providers have learned in the past 20 years about how to run a more productive and profitable practice, merger may represent the next step in your practice’s development path.