Tom Ealey

The rush to physician group integration requires due diligence and attention to detail.

At a Glance

While contemplating physician group integration, providers should perform due diligence and ask questions in several key areas to ensure successful integrations:

  • Financial-Is the group producing the revenue expected, and is the revenue cycle managed effectively?  
  • Statistical-What are the numbers of encounters, procedures, surgeries, and ancillaries?  
  • Compliance-Has the group developed and operated a sound compliance program, and has compliance been a priority?  
  • Succession-How many physicians are within three to five years of retirement?  

Physician group integration is a hot issue and likely to remain that way. National healthcare reform and various economic pressures have led to a stampede of physician group integrations with hospitals and various forms of integrated delivery systems (IDSs). Although entities and exact strategies vary, the prospect of integrating creates interesting strategic, tactical, and management challenges for both parent systems and physician groups.

The ongoing rush to create various delivery systems creates numerous challenges for both sides of the transaction during and after the integration process. Providers are feeling the pressure to create or join accountable care organizations (ACOs), which likely will be impacted by IDSs during the early development phase.

Integration is not a new phenomenon. In the early 1990s, a push toward health maintenance organizations and President Clinton's aborted attempt at healthcare reform led many groups to reconsider their business models. Snagging the right physician groups was viewed as the way to build a referral network and capture market share. Many primary care physicians saw integration as a means of survival.

Some integration initiatives worked while others flopped. The ability to manage a hospital did not always translate into the ability to manage physician groups, and some physicians were unhappy to surrender management control.

Careful and systematic due diligence may improve the odds of successful integrations and better bottom lines. Intense work by experienced healthcare transaction lawyers is needed to improve the odds of a successful deal. This work includes anticipating problems and crafting preemptive solutions; creating a "prenuptial agreement" is important because some deals, like some marriages, end in divorce.

Performing Due Diligence

All physician groups are not created equal. Some groups are well-oiled machines, and some are underperformers. Some groups are managed, while others barely manage to be a group. Some groups have effective governance structures and cohesion. Troubled groups are not likely to become cohesive groups solely by integrating with a hospital.

Approaching the merger process with due caution and due diligence is the first step toward a successful outcome. Performing due diligence prevents sloppy reviews and reduces the temptation to ignore problems. During this process, the parent organization should use staff properly and resources efficiently. As the management team is assembled, protocols and checklists should be developed for due diligence and used to evaluate potential integration partners.

Due diligence should consider at least eight attributes of the group.

Financial performance. Key considerations should include whether the group is producing the revenue expected, having trouble collecting and managing funds, managing its revenue cycle effectively, digging out from under a pile of debts, or facing tax problems.

Care statistics. The due diligence effort should include looking at numbers of encounters, procedures, surgeries, and ancillaries to set the stage for evaluating the group's productivity. An important point to consider is whether the coding distribution make sense-i.e., whether coding is too high, too low, or producing a strange pattern.

Compliance. The group should be able to show it has made compliance a priority-for example, by having developed and operated a sound compliance program. Red flags include questionable coding practices and medical records that are not in good order.

Character. To the highest possible degree, the due diligence should be on the lookout for problems with the physicians' character: Are there any records or signs of drug or alcohol abuse, sexual harassment of employees, or problems with temper? Are any of the physicians on the federal exclusion list?

Succession planning. The age demographics of the group should be considered, including the physician age distribution, the number of physicians within three to five years of retirement, the presence of or the lack of younger physicians, and the likely number of hires that will be required in five to 10 years.

Malpractice record. Due diligence should include a review of current and potential malpractice actions and arrangements for any necessary tail insurance for the physicians. If the malpractice situation looks too negative, a serious reappraisal should be in order.

The physician office. Facilites should be able to accomodate future needs and meet the standards of the parent. Ideally, it should already be in a good location and not require immediate relocation. It is important to ask who owns the building and when the lease is up.

Quality and productivity. Quality and productivity are important for economic and patient service concerns and for accomplishing the mission of the integration initiative. Productivity can vary according to the age of the practitioners, "lifestyle" concerns, gender composition of the group, location, local economy, and several other factors. Understanding group productivity and how to maintain or improve it before the merger is important. The parent organization's physician leaders should be asked to perform an honest assessment of the group's clinical quality before any merger is consummated. Any required improvements should be addressed before the merger.

Integration of Specialty Groups

Early waves of physician-hospital integration saw more success with primary care groups than with specialty groups, particularly surgeons. In this new era, integrations involving specialty and surgical groups are likely. Parent organization executives need to consider the ways specialty groups and primary care groups differ fundamentally in operations and attitudes.

A hospital should not move too quickly when integrating with a specialty group, A specialty integration process requires a careful courtship that takes all contingencies into consideration to avoid entering into a complicated marriage. For example, many groups have added in-office ancillaries for revenue enhancement. If the parent organization wishes to pull those ancillaries back into a hospital setting, there should be a clear understanding of the impacts before the merger.

Physician Compensation and Benefits

Physicians may have unrealistic expectations about compensation. The parent organization should not be defined as a big bank with lots of cash. After being burned in the early attempts at integration, many parent organizations have become better at developing compensation formulas. Some groups will come with compensation problems, possibly including overpayment of older physicians, overpayment/underpayment of some specialists, or-even worse-overpayment in general, supported by borrowed funds. This is a time for painful reality therapy.

Currently, many current compensation structures are productivity-based, but the new era of innovation will require new compensation models. Physicians should be made aware of (and contracts should allow) updates to reflect new models (ACOs) or new payment methods (bundled payments).

As innovation progresses, flexibility will be a new reality for physicians. Benefits are somewhat easier: The management services organization (MSO) created by the parent entity to deliver practice management and administrative support to its physician groups will have a benefits structure, and operational and legal requirements will require conformity.

Revenue Cycle and Accounts Receivable

A major premerger decision is the disposition of existing practice accounts receivables. Either the parent will buy the receivables and run them out or the physician group will retain the receivables and arrange to work them through completion, likely a four-to-six-month process.

If the group retains the receivables, accommodations should be made for the group to retain necessary office space, staff, separate banking, supervision, internal controls, and responsibility for compliance to avoid interference with the new operation. There should be a clear statement of responsibility and liability for prior revenue cycle issues, including routine matters (patient credit balances) and nonroutine issues (recovery audit contractor audits).

If prior receivables are merged into the parent entity, a plan should be devised to work through the accounts. This decision may involve considerable technical issues, so it will require some thought.

The quality of revenue cycle management is important. If the parent is buying the preexisting receivables, there is a high likelihood of an overly optimistic valuation. Revenue cycle management is tough in a physician group, and even well-managed groups have management issues.

Whether or not the parent is buying the old receivables, some notion of the effectiveness of revenue management gives a clue to the work needed in the group. Even if the parent is taking complete control of the revenue cycle, there may be problems with the front desk, demographics, and perhaps coding.

Staffing Issues

The merger will likely be more traumatic for the physicians' staff than for the physicians. The process should be approached gingerly. The negotiations will normally be shrouded in secrecy, and employees will be shocked when the merger is announced (unless an indiscreet physician has leaked negotiations).

The physician staff will become employees of a different entity and will complete paperwork with changes to benefit carriers and plans. They will likely feel their employment is in jeopardy. Nepotism can be a problem in physician groups. If the parent nepotism policy is going to clash with previous practices, the physician group should be informed of its potential consquences early in the process. 

The parent company should be aware of pre-existing loyalties. Many physicians are attached to their primary clinical employees, whether they are nurses or medical assistants. Patients often are attached to the physicians' staff. As much as possible, the parent should be sensitive to such pre-existing relationships and find ways to avoid disrupting them. Even so, physicians should be willing to accept that some level of control will slip away and that employees, management structure, and procedures will change and evolve. This situation requires some administrative finesse, and may take a few years to evolve and resolve, but ultimately, patients will stay for good service and high-quality medical care.

Medical Records

Provisions for current and future medical records are important in the merger negotiations. If the timing is good, the new parent can implement enhanced electronic patient records for the physician group capable of interfacing with the parent company's electronic health record (EHR) system.

Physicians may be stuck using an electronic records system they do not like. Physicians are particular about input devices and methods, but this concession may be a price to be paid for integration.

If transferring old paper medical records to electronic records is not part of the deal, the group should make arrangements for storage, retrieval, and eventual disposal in accordance with state and federal laws. Integration of new and old can be a serious logistical problem, especially in a paper-to-electronic transition. Whatever the nature of the transition, it will require prior planning and a commitment of resources.

Practice Management Systems

If the MSO is experienced in practice mergers, it will have a model plan for making practice management system transitions. If not, there could be a bumpy ride and higher costs. Odds are the MSO will not adopt any of the group practice management systems so there will be a need for serious technical transition planning and a plan to store and retrieve information before the merger (and may require keeping some hardware and some software licenses in place for some time).

As the MSO contemplates choosing a long-term practice management product, it should investigate transition issues and costs. As the transition date approaches, every possible report should be run on paper, including summary and patient account details.

If a data transfer is not possible, there will be a major data entry process into the new system, which can be made manageable but will be time- and labor-intensive. Patients will be inconvenienced. This is a good time to check the design and compatibility of forms with the practice management system.

If the group has been using a practice management system tied to its electronic patient records, a double transition may be necessary to make it compatible with the systems adopted by the MSO, which could result in four times the amount of work.

Managing the Results

Merger and its aftermath is not always easy. A common mistake is using under- utilized hospital personnel to fill management slots in a physician group MSO. The parent entity should be prepared to hire adequate personnel and, if necessary, practice management consultants.

Data, feedback, and evaluation systems should be put in place by competent medical group practice executives and managers. Constant attention to detail, strict enforcement of contracts, physician support and assistance, and regular monitoring of practice operations and results are necessary to fulfill the mission of the newly integrated system.

Tom Ealey is associate professor of business administration at Alma College, Alma, Mich., and is a practice management consultant and former group practice administrator (


Publication Date: Thursday, December 01, 2011

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