Mergers & Acquisitions for Physician Practices
The Unique Alternative to the Big Four®
Provider/Hospital Perspective
The ever-changing healthcare environment has lead to an increased number of physician
practice mergers and acquisitions.
Provider Perspective
Healthcare Environment
 Technology requirements
for meaningful use dollars,
future cuts
 Medicare professional fees
reduction potential each
year
 Management care
contracting challenges
 Increased number of
physician/hospital
acquisitions and mergers
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Increased administrative time for billing and collecting
Payment reductions with additional anticipated
Advanced clinical integration
Electronic medical record implementation
Potential feeling of loss of ownership/control
Salary security for self and employees
Hospital Perspective
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Continuity of care for patients
Improved physician relationships and integration
Mission/Vision/Values and strategic fit
Research mission advancement
Competition differentiation
Market share opportunities
Daily operations evaluation with potential changes
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Physician/Hospital Alignment Opportunities
 Payment Changes:
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Quality impact (value based purchasing,
readmissions, HACs)
o Quality improvements cannot increase
overall costs
Bundled payments
o Care coordination role expanded
EMR implementation
o Establishing and reporting meaningful
use
 Data Transparency:
•
•
1.) Physician
leadership
development
4.) Outcome
Reporting
Physician /
Hospital
Alignment
2.) Physician
lead initiatives
for quality,
safety, and
satisfaction
goals
Patient satisfaction surveys
Quality outcomes
 Physician Alignment Importance:
•
•
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Physician leadership key in clinical
integration
Physician lead quality and satisfaction
initiatives
EMR usage and adoption
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3.) Clearly
defined
accountability
areas
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Antitrust Issues
“Deals that involve specialists tend to invite more scrutiny than those involving
primary-care doctors because there are fewer providers”
James Grimes, Antitrust Law Practice Leader at Bass, Berry Sims, LLP, quoted in Modern
Healthcare, November 26, 2012
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Antitrust Issues in the News
 Pending in Appeals Court –
ProMedica (OH) appeal on
acquisition of hospital
 November - Reading (PA)
Health System cancels
acquisition of Surgical
Institute of Reading
 November – 4 ASCs sue
HCA, Centura Health and
state ASC trade association.
 August – FTC settlement with
Renown Health, Reno (NV)
required suspension of
noncompetes
 April – OSF HealthCare (IL)
and Rockford Health System
abandon merger plans
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Business Decision - Financial Proforma
Financial Proforma: Analysis of practice revenue and expenses
Before private practices and healthcare organizations align in employment agreements,
hospitals need to complete the exercise in examining the practice revenue versus expense
structure. Through a financial proforma analysis, opportunities can often be found in either
revenue cycle improvements or practice expense reductions. This exercise helps to ensure
a successful financial alignment once the employment opportunity is in place.
Financial Proforma sample:
Year 1
Year 2
Year 3
Revenue
Professional Fees
Total Revenue
Expenses
Physician Salaries
Staff Salaries
Fringe
Other Expenses
Malpractice
Rent
Utilities
Supplies
Drug Costs
Total Expenses
NET INCOME
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Financial Proforma Approach
1)
2)
3)
4)
5)
6)
7)
8)
Development of an estimated financial pro-forma depicting projected revenue and expenses associated
with the employment of the current private group for the next three year period.
Revenue, including direct and indirect, as well as expenses will be estimated to establish a cost benefit
relationship for the employment of the private practice.
Volumes for any of the applicable areas for the private practice will be projected based on office visits
(new and established), in-office procedures, hospital visits, and surgical cases.
The current payor mix for the private practice based on charge information will be determine.
The projected reimbursement for the private practice is based on the projected volumes as well as the
payor contracts for the physician group which the practice may join.
Indirect revenue and expenses will be obtained from the hospital including any applicable areas such as
inpatient admissions, surgical cases and ancillary revenues.
Current staffing levels and pay ranges for the private practice will be examined to see if they fit the
model of other
employed groups within your organization.
Additional valuation: If the private practice currently is affiliated with the medical center:
•
•
9)
An analysis of the current revenue to the hospital from the private group will be examined to estimate the impact of
the loss if the private practice was no longer affiliated with the hospital due to employment by a competing health
system.
This includes an analysis of hospital admissions, cases, and ancillary revenue.
If referral source information is available from the private practice:
•
•
An analysis to examine if any current referral sources may decrease or eliminate due to a potential employment by
the organization.
An analysis to show current referral sources which are affiliated with your organization
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Provider/Practice Integration Process
Provider/Practice Integration: Eight step integration process
Once a provider signs an employment agreement, there are many complex and movable
components which need to be synchronized and completed for a successful transition into
employment. If these components are managed correctly, the provider can begin seeing patients
and billing for those services on the first day of employment. If delays in any of the tasks occur,
then healthcare organizations are at risk for lost productivity and revenue while expenses will
begin to accrue on day one.
Crowe’s 8 Step Process for a Successful Provider On-boarding:
Organizational Goals
Provider
Involvement
Communication
Roadmap
Accountability
Acknowledge
Success
Support
Structure
Monitor /
Reports
 The establishment of a process for provider on-boarding can have the following benefits:
 Better alignment with the new provider and healthcare organization
 Increase awareness and communication with critical departments within your healthcare
organization.
 Enhanced feedback of “lessons learned” for continual process improvements
 Improved coordination between departments involved in the on-boarding process
 Strengthened teamwork between the new provider, organizational leaders, and departments
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What is the Integration Approach?
 Eight step process for a successful provider /practice integration:
1) Organizational Goal: Ensure that the creation and
successful on-going provider transitioning is known
throughout the healthcare organization as one of the
overall goals and priorities.
2) Provider Involvement: A successful on-boarding will involve
key input and feedback from the provider during the course
of transition.
3) Communication: Developing a communication structure
and frequency of communication and is essential for the
success of the on-boarding. Communication can be in the
forms of updates or identification of potential problems or
roadblocks.
4) Roadmap: At the initial notice of the provider’s signing of
the employment agreement, a roadmap needs to be
developed showing all of the necessary pieces needing
completion before the provider’s official first day of
employment.
5) Accountability: Each team member needs to have a clear
set of expectations of their accountable components within
the roadmap. During the course of the transition, team
members will need to report on their process and any
potential issues for each component which are their
responsibilities.
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6) Acknowledge Success: Many of the team members
involved in the on-boarding may have duties outside of
the transition and the work they complete on the project
will be on top of their regular duties. A simple
acknowledge of a job well done keeps the team
motivated and engaged for next provider on-boarding.
7) Support Structure: Once a new provider starts
employment, a structure must be in place to maintain the
established relationship between the provider and the
healthcare organization for continued success.
8) Monitors/Reports: Appropriate monitors and reports will
need to be established for not only the feedback that the
provider may have requested but also to convey to the
provider their performance relative to any established
organizational goals.
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Integration Considerations
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What communication structures are in place to ensure the on-boarding goes smoothly?
Will the physicians roles remain the same as a result of the on-boarding?
Have roles and responsibilities been discussed and clearly delineated?
What are some of the potential impacts of shifted physician leadership if they are to
take place?
Does any technology need to be updated or changed to comply with the organization?
Will the physical space occupied change with the on-boarding? If so, what
arrangements need to be made?
What are the private physicians standards for quality and how do those compare to
those of the organization?
What steps can be taken to avoid interruption in services while improving the quality of
care for the patients?
What interruption in billing could be caused by the on-boarding? How can they be
mitigated?
What training needs exist to be met before the on-boarding goes live?
Will the steps could be added to anticipate challenges on the backend? (improved copayment remittance, precertification, insurance verification, etc.)
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Provider Compensation Modeling

Base Salary
Components that should be considered as a part of a
provider compensation model include:

Cost
Reduction
Quality


Practice
Revenue vs.
Expense
Productivity
(wRVUs)
Patient
Satisfaction
Citizenship
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 The key to developing the right model for a provider
group includes considerations for using outside
benchmarking data, examining and selecting the right
mix of components, building scenarios to measure
success, and ending up with a standardized
approach for use into future years.
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
Base Salary – in line with fair market value, but should not be
100% guaranteed, allowing for performance indicators to
reflect in total physician compensation.
Productivity (wRVUs) – rewarding physicians who are
increasing productivity each year and are in the higher
percentile brackets when comparing to specialty benchmarks.
Quality – rewarding providers who meet or exceed quality
standards (through Physician Quality Reporting System).
Patient Satisfaction – rewarding providers who have high
satisfaction scores as healthcare organizations evaluate
consumer choice, transparent patient satisfaction data, and
reimbursement.
Practice Revenue vs. Expense – rewarding providers when
their practices reach or exceed their budgeted revenue
and/or expense.
Citizenship – rewarding providers for partnering with
organization including membership on committees,
implementation of organizational initiatives, publishing,
presenting, and teaching the next generation of medical
providers.
Cost Reduction – collaboration with providers on reducing
unnecessary orders, yet not compromising the quality of care
delivered to patients.
© 2012 Crowe Horwath LLP
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Provider Retention
After the merger or acquisition occurs, there are several items to consider for the successful integration
and retention of the provider. During the course of the recruitment, the institutional and department
goals along with expectations are first discussed and should continue once employed. Participation in
current project, committees, hospital/department initiatives can strengthen the provider integration into
the hospital culture while continuing to build the practice and referral base. Physician involvement with
reviewing reporting metrics for improvement opportunities offers a clinical perspective for the continual
evolution of the practice.
Begins in the early states
of the interviewing
process, setting the tone
with first impressions
Shifts toward practice
building and monitoring
phase for growth and
engagement in overall
success
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1
Recruit
4
Build/
Monitor
2
Onboard
3
Integrate
Continues into onboarding
phase where quick-wins can
be gained by support staff
and administration
Moves to integration
phase where culture
buy-in and assimilation
into committees and
groups is key
© 2012 Crowe Horwath LLP
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Typical Physician Practice Valuation Process
 Valuation engagement is defined
 Valuation date
 Standard of value
 Discussion with Clients and Advisors related to
approach and methodology
 Relevant data is gathered
 Gain understanding of business/interests
to be valued
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Nature of the enterprise
Services, products and markets
Competitive situation
Management
 Financial data is analyzed
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Historical
Prospective
Identify appropriate financial metrics specific to
valuation assignment
 Valuation methodologies are considered from
Income, Market and Cost Approaches
 Valuation conclusion reached and draft
reports submitted
 Concluding conversations with Clients and
Advisors to finalize analysis
 Appropriate documentation completed
 Gain understanding of the economic and
industry environment
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Valuation Methodologies
 The three generally accepted valuation methods will be considered in our
appraisal of the business interests and assets.
 These methods include the income approach, market approach, and asset/cost approach. The
application of the approaches differs slightly depending on the type of business or asset being
valued.
Income Approach
 The value of the business or asset is estimated based on the estimated future cash flows expected
to be generated.
 The process includes analysis of a multi-period cash flow projection based on gaining an
understanding of the assumptions used by management to develop the projections.
 Value is determined by discounting these cash flows and the residual value at the end of the
projection period, if any, at an appropriate discount rate that accounts for the relative risk of
realizing the estimated cash flows and the time value of money.
 If a forecast is not available or if stable earnings are anticipated, value is based on capitalizing
some measure of financial performance such as earnings or dividends, using a capitalization rate
that reflects both the risk and long-term growth prospects of the subject firm or asset.
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Valuation Methodologies (cont’d)
Market Approach
 The value of the business or asset is determined by comparison to either:
 Comparable companies or assets that have been bought or sold during a reasonably recent period of time
(guideline transaction method); or
 Comparable companies that are publicly traded on organized capital markets (guideline company method).
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Appropriate capital market multiples are determined from a sample of comparable data points.
These multiples could include: price/revenue multiple, price/cash flow multiple, price/equity multiple,
etc on a historical or forward looking basis.
Value is determined by applying relevant multiples to the corresponding financial metrics of the
business or asset.
Asset/Cost Approach
 The value of the business or asset is estimated based on an analysis of the market value of its
underlying assets, both tangible and intangible.
 Under the adjusted net asset method, a method within the asset approach, the values are totaled,
and the business’ liabilities are subtracted to derive the total value of the enterprise. The enterprise
value indicator is the sum of the values of the individual assets and liabilities of the business.
 In real and personal property valuation, this approach estimates the replacement cost new (“RCN”)
for each property and related improvements under the premise of “in continued use”. From RCN,
allowances for physical depreciation, functional obsolescence, and if applicable, economic
obsolescence are subtracted.
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Typical Valuation Report Content
 Overview
 History and Nature of the Business
 Overview of the company
 Current operations
 Overview of financial results
 Valuation of Business
 Income approach
 Market approach
 Asset approach
 Conclusion of Value
 General Economic Outlook
 Summary & highlights
 Global outlook
 Industry Outlook
 Valuation Approaches & Methodologies
 Determination of the Rate of Return
 Rate of return on debt capital
 Rate of return on equity capital
 Capital structure & conclusion
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Negotiating and Closing the Deal – General Key Terms
 Compensation valuation
 Business Valuation
 Stock v. asset sale
 Equipment
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Succession planning
Employee retention
Restrictive covenants
Future terms / renegotiating future compensation
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For more information, contact:
Christian Heuer
Direct 615.360.5572
Mobile 615.584.8056
christian.heuer@crowehorwath.com
Pat A. Sorrentino
Direct 630.990.4448
Mobile 630.514.9226
pat.sorrentino@crowehorwath.com
Crowe Horwath LLP is an independent member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath International is a separate
and independent legal entity. Crowe Horwath LLP and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath International or any
other member of Crowe Horwath International and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath International or
any other Crowe Horwath International member. Accountancy services in Kansas and North Carolina are rendered by Crowe Chizek LLP, which is not a member
of Crowe Horwath International. This material is for informational purposes only and should not be construed as financial or legal advice. Please seek guidance
specific to your organization from qualified advisers in your jurisdiction. © 2011 Crowe Horwath LLP
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