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Umbrella mergers: How they can benefit you, your patients and your practice
An umbrella merger allows practices to share ancillary services, while retaining their autonomy.
Orthopedic surgeons may benefit from “merging” their practices with others in their community to offer high quality ancillary services. I feel it is important for us to think about our orthopedic colleagues in our communities as allies.
Umbrella mergers offer the potential to maintain and control each practice’s identity. You supervise your staff, keep your own practice style, and maintain your own accounting and overhead structure while merging certain processes in a way that creates beneficial business opportunities. These special mergers offer the ability to increase the patient volume using ancillary shared services, making them more cost-effective and potentially more profitable.
The business world has used mergers for similar advantages for years. Many of you own small businesses and a well-thought-out merger may be an option you should consider, or at least know about.
Never forget — many groups are lobbying at the federal and state levels to restrict our ownership of ancillary services. One good example: the American Hospital Association, which is constantly lobbying to restrict physician-owned ancillary services (ie, surgi-centers and imaging facilities).
Elsewhere, the national organization of radiologists is trying to limit our ability to offer imaging services while physical therapists nationwide are lobbying against physician ownership of physical therapy services. We will benefit more by working together than by viewing each other as competitors.
I learned more about umbrella mergers when Jack M. Bert, MD, and attorney David M. Glaser, JD, gave presentations on these arrangements at Orthopedics Today New York 2006, A Comprehensive CME Course. To further illustrate this concept, I asked them some basic questions concerning umbrella mergers and how you and your patients might benefit from them.
Douglas
W. Jackson, MD
Orthopedics Today
Chief Medical Editor
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Douglas W. Jackson, MD
Jack M. Bert, MD
David M. Glaser, JD Douglas W. Jackson, MD: What is an umbrella merger?
Jack M. Bert, MD: It is an association between one or more medical groups which is a legal entity that preserves the divisional identity of the participants if certain requirements are met.
Jackson: Attorney Glaser, how does the legal entity of an umbrella merger preserve the individuality of different groups?
David M. Glaser, JD: Under an umbrella merger, two or more separate corporations merge into one legal entity, but agree to permit each original organization to maintain autonomy over the key decisions in a medical practice.
Because the practices are usually placed into separate operating “divisions” the transaction is often called a “divisional merger.” Each division has its own budget, authority to hire and fire, and the right to make the other decisions that the physicians consider crucial to preserving their independence.
It is analogous to living together but keeping separate checking accounts.
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Jackson: Why even consider an umbrella merger?
Bert: To allow solo practitioners and smaller groups to form a relationship without all the necessary legal and accounting considerations of a formal merger. It also allows you to create an integrated model without closely integrating the various physician personalities.
Glaser: Most physicians recognize that benefits flow to larger clinics, but they are understandably reluctant to surrender their autonomy. There are only a few ways a physician can improve his or her income without working harder.
The two principle methods are improving reimbursement from insurers or increasing ancillary revenue. However, legal barriers prevent a small physician group from using either strategy.
Jackson: How does an umbrella merger allow leveraging in negotiating and enhancing ancillary services?
Glaser: Improving payer reimbursement often requires a physician to have leverage over the plan. Small groups have almost no leverage. Recognizing this, many physicians have formed networks in hopes of increasing negotiating clout.
However, as soon as a network has the size and strength to have power over an insurer, it is almost certainly in danger under the antitrust laws. Consequently, a network is unlikely to improve payer contracts.
Moreover, any time physicians in separate groups discuss contracts, there is risk that they may be accused of violating the price-fixing or boycott prohibitions of the antitrust laws.
These are criminal laws, so when physicians in different corporations engage in any discussions about contracts, there is significant risk. By contrast, physicians within one corporation can legally discuss contracts. If the group grows too large, and becomes a monopoly, the government may force it to break up, but criminal penalties are not likely.
In short, merger presents much less risk under the antitrust laws than a network.
What’s more, a network does not allow physicians to share ancillaries. (If the network members happen to be in the same building, or are in a rural area, it may be possible to share ancillaries, but the network is not a factor in the analysis.)
Therefore, an umbrella merger provides physicians with a chance to improve payer contracts and ancillary revenue.
Jackson: What are some other advantages of an umbrella merger?
Bert: Getting “bigger” is better for having the ability to satisfy increased capital requirements for ancillary service projects, the ability to recruit, having a sense of “fraternity” amongst group members, a reduction of the fear of “being selected out” for business and contracts, negotiating payer contracts, capturing local market share, increasing “throughput” to the ancillaries, negotiating politically (ability to afford a full-time lobbyist) and better call coverage.
Jackson: What about physician autonomy?
Glaser: The umbrella merger allows the physician benefits without a significant loss of autonomy. The shareholders can agree that each physician will retain authority to control his or her practice.
Jackson: What are the disadvantages of an umbrella merger?
Bert: Administrative complexity, potential increased overhead, and “internal hassles” which involve “people” management and internal compliance.
Jackson: Attorney Glaser, are there other potential risks?
Glaser: While each division is contractually obligated to pay its own expenses, if one division goes bankrupt, the other divisions remain ultimately responsible for the bankrupt division’s expenses.
This risk is exactly the same as the risk a physician accepts when hiring anyone (either a physician or non-physician) to work in the practice. If the employee is sued, and the suit exceeds insurance coverage, the plaintiff may get corporate assets.
With few exceptions, your personal assets are not at risk simply because of liability created by a division (or an employee), but corporate assets are at risk.
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Jackson: What are the legal requirements of an umbrella merger?
Bert: The overall, combined practice must consist of a “single legal entity.” At least 75% of patient care services must be provided through the group and billed under a single provider number assigned to that group.
The group must pass the “Unified Business Test” with a centralized decision-making body, consolidated billing with accounting and financials and a centralized utilization review.
Jackson: Attorney Glaser, what qualifies as a merger?
Glaser: Legally, an umbrella merger is a true merger. The practices become one corporate entity. As a result, it is typically necessary to combine the group’s pension and profit-sharing plans. Because of the legal merger, some contracts may require modification. In addition, Stark regulations require the group to operate as a unified business, meeting the tests mentioned by Dr. Bert.
Jackson: Dr. Bert, what makes a merger successful?
Bert: If it works, the new “group” will dramatically increase its ability to have clout in the marketplace and influence the payers, and it improves its ability to make ancillary services profitable due to increased patient volumes offsetting fixed overhead. Furthermore, the group members may develop relationships with the other orthopedists that they are working with which just may become permanent.
Jackson: Attorney Glaser, what is necessary to make the merger a financial success?
Glaser: The benefits of size for an orthopedic practice are difficult to dispute. Any practice with fewer than five physicians is almost certain to benefit from growth. An umbrella, or divisional merger permits physicians who worry about loss of control to get the advantages of size. In most cases, a divisional merger is not complex. The legal fees to establish the merger should be around $10,000.
In my experience, groups generally experience a small improvement in reimbursement from insurers, but this change, alone, may not be enough to justify the merger. By contrast, the increases in ancillary revenue can be very significant. When combined with other benefits, physicians who have rejected forming a group should consider this option.
Dr. Bert says it well: Physicians who remain in solo practice because they want to be independent are likely to discover that insurers can do far more to damage to autonomy than any colleague. As Ben Franklin said, “We must all hang together or surely we will all hang separately.”
Jackson: If a group of 15 orthopedic surgeons, consisting of a group of five, two groups of three and four solo practitioners, who all practice within a 5-mile radius and admit most of their patients to the same hospital, where they all have privileges, collectively have the volume of patients to have a successful MRI imaging center, surgi-center and physical therapy center within a few miles of their offices — will an umbrella merger allow them to have an off-site facility in which they have an ownership?
Bert: The umbrella merger will allow them to get together as long as they don’t violate the Sherman Anti-Trust Act. They may have a concern for putting their hospital at risk; however, hospital profits last year were at an all time high at over 4.5% increase nationwide.
Glaser: I don’t think it matters whether the physicians have privileges at one hospital. To me, the most important issue is antitrust. Generally speaking, if the merged group has below 40% of the market, there is little risk it will be challenged. If it has between 40% and 60% the risk increases, and above 60% there is a higher risk, though there are still defenses available.
For example, the antitrust laws are designed to combat price increases, so if you can show that the merger will not result in price increases, then you have a strong defense. Another argument to defend a merger is that there are few “barriers to entry,” that is, if prices rose, other physicians could easily enter the marketplace.
For antitrust purposes, one key questions is “What is the market?” There are two different markets that must be considered, the “product market” and the “geographic market.” The “product market” considers who can provide similar services. It is an open question whether there are separate markets for general orthopedics, sports medicine, hand and spine surgery and other subspecialties. For a “quick and dirty” antitrust analysis, you can simply count the orthopedic surgeons in the phonebook in the geographic area. While there is no absolute rule to determine the proper geographic area, court cases suggest patients are willing to drive 1 hour for specialty care. In rural areas, this may create a market that is 60 miles in radius. Other factors may further extend the market — if an insurer threatens to send patients to another town because you refuse to participate with them, there is a very strong argument that town is part of your market.
As far as the off-site ancillaries, Stark permits a group practice to put ancillaries in a “centralized” location. That means if the group is billing for all of the ancillaries, it can place the ancillary service off-site. For example, a clinic with three different divisions may choose to place the MRI in a fourth location.
There are, however, two important limitations that the group must be aware of:
(1) If the group leases the ancillary to other organizations, then it may not be possible to locate the ancillary off-site.
(2) Certain ancillaries require physician supervision. For example, Medicare requires that MRIs with contrast have a physician present on site. However, MRIs without contrast do not require physician presence. Similarly, if a group obtains billing numbers for its physical therapists, the PTs can provider services without physician supervision.
Therefore, as long as the ancillary is used exclusively by the group, it will often be possible to place the ancillary off-site.
Jackson: What legal considerations must they follow on distributing profits?
Glaser: The main limitation on the distribution of profits is Stark, although an individual state may create additional limitations. Stark regulations prohibit the group from dividing Medicare and Medicaid revenues for any of the “designated health services,” like imaging, PT, orthotics, etc. on the basis of who ordered the ancillary. It is certainly permissible to divide the revenue evenly among all of the physicians in the group, although any other distribution method is permissible as long as it is not taking into account who ordered the service.
For example, it is possible to divide the revenue on the basis of total RVUs (relative values units) as long as physicians do not receive RVU credit for ordering designated health services.
Technically, unless state law prohibits it, it is even legal to divide revenue for non-governmental patients on the basis of who ordered the service, though great care is necessary to avoid inadvertently providing credit for services covered by Medicare or Medicaid.
Jackson: What would be reasons to joint venture with a hospital?
Glaser: There are three reasons. First, for some services, hospitals may be able to obtain better reimbursement for a service than a physician. Many hospital outpatient services are compensated by Medicare or private insurers at a higher rate than identical services in the physician’s office. Second, there may be political reasons to venture with the hospital. In some communities, hospitals depend on ancillary income. The venture may help ensure the hospital’s viability. Finally, in states with certificate of need (CON) laws, it may be necessary to venture with the hospital to obtain the CON.
Bert: A hospital can often bring business to the venture. With respect to ownership of the joint venture ambulatory surgery center (ASC), I would strongly urge them to have a 50/50 ownership with the orthopedic group doing the administrative management, including billing and collections for the ASC.
I have received several emails from groups who wish they would have done this because they don’t have control of the nursing staff and “administrative dumping” occurs by the hospital, ie, the hospital will put some of their administrative expenses into the ASC budget to offset the internal overhead at the hospital. This reduces the profits to the physician owners. We have been very successful managing our own 50/50 joint venture with a hospital system and charge them an administrative fee for our administrative tasks, and bill the joint venture for collection and billing costs within our office. Control is everything in the joint venture model to maximize efficiency for the surgeons using the facility.
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Jackson: What are the risks that laws and reimbursement will change for physician-owned ancillary services to which they refer patients?
Glaser: Unfortunately, this is a very real risk. The government has been willing to make changes to these laws. In some cases, existing relationships were allowed to continue through a “grandfathering” provision. However, in other cases, the government has simply changed the rules and forced physicians to divest. It is not realistic to attempt to predict the whims of any legislative body. Any physician offering an ancillary must recognize that there is a risk the practice will be forbidden. Of course, there are also other risks, such as technology might become obsolete. But there are also risks associated with inaction. As reimbursements fall, failing to take action to obtain ancillary revenue may make it difficult to remain in independent practice. Any course of action entails risk, and the physician must balance the risk of action against the risks associated with remaining passive.
Bert: Laws and reimbursements will be changing for these joint ventures. I believe that MRI reimbursements will continue to decline. The fixed Medicare reimbursement for physical therapy (PT) will probably not change or improve. However, in 2008, ASC’s will be getting 62% of the hospital outpatient department reimbursement for ASC procedures as opposed to the current ambulatory procedure code reimbursement that is currently in effect. The good news for orthopedics is that the average increase in reimbursement for procedures will be about 38% across the board.
The problem is going to be trying to fend off the American Hospital Association attacks concerning physician ownership of ancillary services. They argue that physicians who own their own labs, X-ray units, MRI’s, PT departments and ASCs tend to self-refer and are “hurting” hospital’s profits, which is in conflict with the fact that hospital systems had one of their best years on record nationally with mean profit increases of over 4.5%.
Regardless, they will keep trying to prevent physician ownership of any ancillary service which competes with a hospital so that they can control all of the fees received by Medicare, Medicaid and the private payers.
Thus, every physician who owns his or her own ancillary service must be politically alert and make certain that the local legislation in your state understands the monopoly intentions of the hospital systems.
For more information:
- Bert, JM. Ancillary services for the orthopedic surgeon. Presented at Orthopedics Today NY 2006, a Comprehensive CME Course. Nov. 11, 2006. New York.
- Glaser DM. The legal ramifications of physician owned ancillary services. Presented at Orthopedics Today NY 2006, a Comprehensive CME Course. Nov. 11, 2006. New York.
- Jack M. Bert, MD, 17 W Exchange St. Suite 307, Gallery Medical Bldg, Saint Paul, MN 55102-1034; 651-223-9204; bertx001@tc.umn.edu.
- David M. Glaser, JD, health care attorney, Fredrikson & Byron, P.A., 200 South Sixth Street, Suite 4000, Minneapolis, MN 55402;612- 492-7143; fax: 612 492-7077; dglaser@fredlaw.com.