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What a buyer wants in your physician practice

Purchasers have specific things they want to know before making an offer. Here’s what those things are, and how doctors can prepare their answers.

By Sheryl Cash amednews correspondent — Posted Nov. 19, 2012

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For a physician, selling a practice may ease the administrative, regulatory, legal and financial burdens of ownership. It also may provide more flexibility and financial stability — an attractive prospect for older physicians and physicians interested in decreasing their workload or focusing exclusively on patient care.

But what about the buyers of a physician practice? What are they seeking from an acquisition, and what practices are most attractive to buyers?

When hospitals or other buyers look at a physician practice, they have specific criteria in mind that must be met before a purchase is made. Analysts said practices should keep in mind what those buyers want if they plan to get the maximum value and benefit from the sale.

In general, potential purchasers are looking for practices with status, a shared philosophy, a willingness to agree on a viable compensation agreement, and good financial health and income potential. They also are looking for anything that possibly could be seen as a deal breaker. Knowing this, physicians can best prepare their practices for presentation — and make their own determination on the best potential partner.

Status

“First and foremost, buyers are looking for premier practices, a well-established practice with strong name recognition with patients and payers that will not only help the hospital with its strategy and furthering its mission but also can help them attract and recruit other physicians,” said Don Barbo, director of health care advisory services for Deloitte Financial Advisory Services LLP.

Most often, hospitals and health systems have knowledge of physician practices in their community from other doctors, vendors and patients, Barbo said. Some hospitals also have development staff members who regularly go out into the community, “getting to know folks and developing relationships.”

Practices that may not seem optimal or “premier” on paper or by reputation still may be attractive to potential buyers, Barbo said. “You need to show the health system that you’re a growth-oriented practice, that you believe in practicing efficiently,” and that providing quality care is “of utmost importance. These are things that health systems like to hear.”

Often a simple office walk-through during an initial meeting can provide a potential buyer with a more positive impression.

The office should be “organized, neat and clean; things are filed and put away,” Barbo said. “The staff is professional and things are orderly. It’s like walking in a house. You can tell right away if a home is well-organized and nurturing.”

Shared philosophy

Physicians in the practice “need to be of a like mindset” with the doctors and staff at the acquiring hospital or practice, Barbo said. Buyers are “looking for team players, in growth-oriented practices, with physicians and staff who are not afraid of using technology and are focused on quality and efficient care models.”

W. James Lloyd, principal at Pershing Yoakley & Associates, a health care consulting firm in Knoxville, Tenn., said, “Ideally, buyers and sellers are financially and operationally aligned and committed to improving efficiencies and quality of care.”

A discussion on care and operational philosophies often takes place during an initial meeting between buyer and seller. The meeting is typically an open discussion between the physicians and the health system to discuss “their view of the world and their strategies,” Barbo said.

Different philosophies on accountable care organizations and evidence-based medicine may preclude a deal, Barbo said. An agreement probably won’t go forward “if the physician isn’t open to working in a team setting and if there are rivalries with other practices.”

In addition, “most physicians like their autonomy,” Lloyd said. This is sometimes an issue with negotiating a successful acquisition and alignment transaction. “Some [hospitals or other buyers] are comfortable with employed physicians having a high level of independence, whereas others prefer more direct involvement in the physician’s practice. The most successful transactions generally stem from hospitals and physicians collaboratively working together to improve patient care and reduce unnecessary costs and share in the benefits of those efforts.”

A viable compensation agreement

Typically, the general parameters of an employment agreement are the compensation structure (base salary plus incentives for quality outcomes, etc.), including severance, if any, and whether employment will be guaranteed. These parameters are discussed at a high level on the front end of the negotiations but worked on throughout the transaction, said Brian Kerby, a director in the Transaction Services Group of Crowe Horwath LLP, a large public accounting and consulting firm in Chicago.

“The negotiations may be ongoing, but there needs to be a comfort level between the seller and the buyer, including an idea of what the physician(s) might be making,” Kerby said.

In a practice owned by a hospital or health system, physicians should “expect to have a production-based compensation package which includes quality outcome measures rather than a long-term salary guarantee. This is a must, since reimbursement is gravitating more toward quality outcome measures,” Kerby said.

Financial health and income potential

If the initial meetings go well, a due diligence process will commence, typically under the protection of a confidentiality agreement. In this stage of the negotiations, buyers seek a wide array of financial and operational documentation, including financial statements, volume/charge reports for the physicians and any nurse practitioners or physician assistants, payer mix reports, tax returns, and physician curriculum vitaes and compensation history. In addition, they most likely will ask for information about liability exposure, such as coding practices, staffing issues, medical liability claims and payer contracts to gauge practice value and income potential, Barbo said. The location and quality of the facility, equipment and furnishings and use of technology also are important.

Buyers are not necessarily looking for practices with the most current technology infrastructure such as electronic health records and billing platforms, Kerby said.

“If [the buyer] is a hospital, they most likely already have [these systems] in place and can implement or expand them into the new practice,” Kerby said. “They will also either have or will hire the appropriate resources to manage the practices, including technology infrastructure needs. If it’s a private equity firm, the need for new/additional technology infrastructure may be factored into the purchase price.”

Lloyd said that if a practice is still using paper medical files or if their “accounting records are not in good order,” they may need to clean house before attempting to negotiate a sale transaction.

Deal breakers

From the start, a buyer is going to look for red flags it believes will scuttle a deal before it gets started. Often, those red flags involve money.

“Unrealistic expectations on the value of the practice and/or unrealistic expectations for future compensation” can be deal breakers, Barbo said. A hospital might deem a practice value unrealistic based on Stark and anti-kickback regulations requiring it to pay only fair market value. Or it just might be that the physician wants more than the hospital is wiling to pay.

In addition, a “big liability,” such as an expensive pension plan, can end sale negotiations, Kerby said, as can code compliance issues that could expose the new owner to fraudulent billing charges or penalties.

Like any good relationship, a successful agreement and sale often are contingent on basic trust and respect between the buyer and seller.

“There needs to be trust and respect on both sides,” Barbo said. “Part of that trust and respect depends on how serious the practice is in aligning with the hospital. For the relationship to make sense and be sustainable, there needs to be a compelling value proposition for each side to come together, with shared goals and aligned interests.”

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ADDITIONAL INFORMATION

Financial details practice buyers want

Experts say before a hospital or other organization makes an offer to buy, it generally asks to see these items to judge a practice’s financial health:

  • Accounts receivable
  • Medical supplies inventory
  • Fixed assets
  • Accounts payable/accrued expenses
  • Net revenue per procedure or type of service provided
  • Net revenue per provider
  • Details of any significant ancillary revenue
  • Operating expenses
  • Physician productivity and compensation details

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