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To survive, you must thrive: A business model for merging smaller groups to achieve improved financial efficiency, systemic operations and uniform training

Insight Article - September 23, 2021

Partnerships, Mergers & Acquisitions

Strategic Planning

Alex Rothschild CASC, FACMPE
Traditionally, private practices hire medical practitioners right out of school, hope their references are accurate, see if they fit into the culture, and then try and fill their schedules with patients. There is also the expensive proposition of building and opening additional locations, requiring a great deal of time, effort and money.

A viable and possibly better alternative is to look at other practices in the same specialty and start a conversation. Once these resources are identified, analysis can begin. The practitioners must all have positive attitudes and work ethics along with excellent medical and interpersonal skills. Next, you must make certain the cultures can meld. For example, two groups may not merge well if one group has a more authoritarian culture or formal hierarchy.

There are numerous elements of due diligence involved in leading to a relationship in which they can become part of a larger organization that will make the clinics stronger individually and as a whole.

Financially, a new office can easily cost $750,000 to build, as opposed to the lower cost of converting an existing space. Building a patient population can take up to a year versus acquiring an existing patient base. In the first year alone, this can save more than $1,400,000.

Examining the opportunity

One medical group has been in business for more than 30 years, with seven geographically close locations in large metropolitan areas in the state. There are 10 physicians and five physician assistants (PAs). The subspecialists encompass almost all the areas of orthopedic surgery, including spine, hand and upper extremity, arthroplasty, foot and ankle, sports medicine and pediatric. All diagnostic imaging uses the latest digital radiography technology, and all sites communicate for instant consultation between practitioners.

A large and diverse set of referral relationships are in place. Referrals come from primary care physicians (PCPs), urgent care centers, chiropractors, physical therapists and attorneys, as well as patient to patient. The group participates in most national commercial insurance plans, Medicare and with local insurance companies.

The medical staff has admitting and teaching privileges at local hospitals but has not felt it necessary for the group to align itself with major health systems.

An ambulatory surgery center (ASC) with comparable ownership helps make an easy transition for the patients requiring surgery because the doctor’s information is passed through to the center. From the physician standpoint, the center knows its needs and is prepared to handle the procedure for its patients. They perform surgery at the scheduled time, which reduces waiting and frustration.

This group is not unique in offering orthopedic services, rather it’s the only practice in the state to utilize orthopedic acquisition outside its practice. The group acquires other orthopedic practitioners and groups to create a synergy that helps it survive and thrive, while also creating more leverage for the larger group.

When looking at this from the patient perspective, there is continued availability for patient care that could have been lost due to practice closures.

Market opportunity

Since the group is successful and has excellent cash flow, it can work with smaller orthopedic groups to enhance them, thereby improving its position in the marketplace by creating a synergistic model.

Management

Ingrained in the culture is a cooperative management style that starts at the highest level of management and flows through to the staff. The board (consisting of six physician partners, two of whom have received an MBA) and senior management have successfully worked together for more than a decade. There is a strong relationship between the physician leadership and the administrator to discuss opportunities and issues as they arise. It then falls to the administrator and their team to work through the items. The team consists of a financial group, HR manager, radiography management, physical therapy department, ASC, business office management, administrative services management and operations management.

The financial group is responsible for audits and reviews, routine financial and productivity reporting, and ad hoc reports. The financial group is guided by the administrator and consists of an external certified public accountant (CPA)/auditor and two bookkeepers.

The HR manager has a background in medical administration, as well as human resources, and helps the other managers with counseling their staff.

The radiography manager supervises a team of radiographers and ensures regulatory compliance and that the equipment is tested and functioning. The team also handles stocking and supplying exam rooms per protocol.

Having a physical therapy center management team that knows how the clinical staff want their patients treated allows for better outcomes and faster recuperation. Additionally, the communication between the physical therapy department and medical group allows for patient changes to quickly be addressed.

The ambulatory surgery center management team creates a seamless interface for patients and doctors as the patient is transitioned toward surgery as necessary. The management team consists of a nurse director as well as two nurse managers — one focused on clinical care protocols and the other on administrative items such as inventory, system maintenance and compliance. This allows for clear and easy communication for the patient and doctor, creating successful surgical outcomes for the patient.

The business office team is responsible for compliance and auditing all items billed out, along with timely processing of credentialing items, claims, accounts receivable and remuneration. The manager of the department is a certified professional coder, trained in handling accounts receivable and management of staff.

The administrative services team handles items such as precertification of tests, medications and procedures. Along with this they handle medical records requests as well as helping patients with disability and other such forms.

The operations management team answers the phones and handles front desk operations. They enter demographical information, handle appointments, post charges and receive payments.

One of the most important aspects of our culture is promoting from within. From our experience, those individuals will lead better than those who are not familiar with our group.

Competitors

The group’s competitors are other orthopedic groups. Referrals are typically sourced from primary care, direct referral and external marketing. Media, television, radio and billboard marketing are used by some groups for focused referrals such as arthroplasties. We have found that because we are in high-density metropolitan areas, the competition’s marketing does not adversely affect our patient capture rate.

Other competitors are hospitals and insurance companies. Hospitals are attempting to purchase lower-cost specialty groups along with primary care doctors to create referral patterns for their benefit. Insurance companies are also attempting an analog of what the hospitals are doing. A prima facie example is UnitedHealthcare’s Optum buying up practices. Orthopedic groups in our region are not currently being purchased because they are highly profitable, creating too high a cost.

With respect to patient benefit usage, it is imperative to be in-network for patients to come to your facility. Since we are not dealing with patients who have issues that require services of a tertiary/research-level facility, they do not want to pay out-of-network deductibles or coinsurance.

Competitive advantages

The group’s competitive advantages are due to:
  • A strong management team
  • A profitable enterprise thanks to a team with excellent negotiating skills on the income and expense sides (with results above MGMA’s benchmark 75th percentile)
  • The foresight to develop and expand the enterprise
  • A culture that fosters excellence in service throughout the organization, creating patient satisfaction demonstrated by repeat patient care and referrals by former patients.

Financial projections

There is a one-time infrastructure capital investment of less than $90,000, paid for by the group performing the acquisition. That investment is responsible for a $27,000 loss in the first year, while generating a gross profit of about $103,000 and $129,000 in subsequent years.

Organizational plan

Business model

The group’s business model is to organically acquire small orthopedic groups to grow at a reasonable rate — in other words, as quickly as possible but not at a rate in which the infrastructure cannot support the business and clientele. Typically, two mergers per year is enough.

To be geographically strategic, these acquisitions should be close to current facilities. This ensures that the group is recognized in the community and allows the group to better negotiate with insurance carriers.

Lastly, this model allows for economies of scale by purchasing supplies and medications, and providing HR benefits, as well as many other affordable items and services.

SWOT analysis

Leadership and foresight are the group’s strengths. It has invested in infrastructure by diversifying product lines, and establishing short, medium and long-term goals.

Weakness is the disruption created by the growth of the larger group after a smaller one has been acquired. Integrating locations and staff into an existing structure requires a great deal of time and effort. Even with the best training and mentoring, getting people to adapt to the culture takes time. However, it is still a stronger option than opening facilities and hiring new doctors.

Opportunities here lie in the ability to acquire smaller orthopedic groups due to the pressure created by lackluster insurance company payments, increasing overhead and an increasing burden of government regulations.

Threats come from larger organizations looking to buy out orthopedic groups or create groups that steer patients away from independent orthopedic groups. This has been seen in a combination of hospitals and insurance companies that are trying to only funnel to groups that they are financially invested in.

Strategy

The strategy is to find groups experiencing issues with management, compliance, finance or marketing and approach them to form a beneficial partnership. Capturing enough of the market enables better negotiations with other larger organizations that do not share our interests, such as insurance companies and hospital conglomerates. Economies of scale purchasing are also achieved, thereby lowering costs. Prospectively, additional product lines that can be considered are advanced imaging (e.g., MRI and CT imaging), because patient volume will support them.

Strategic relations

There are currently no strategic relationships, but that will likely change. As the group grows and has greater negotiating ability, it will be able to create relationships with hospital conglomerates and insurance companies and enhance our negotiating power with malpractice insurers and purchasing organizations. Additionally, the group will be able to work with a reliable advertising agency to enhance its brand regionally to referrers and the public.

Key stakeholders and decision-makers

Key decision-makers are the board of directors and the administrator. Prior to bringing new providers on board, appropriate screening needs to be done to make sure they do not present a malpractice risk, customer service issue or aren’t a fit with the organizational culture.

Products and services

The ability to provide orthopedic services, durable medical equipment, radiology services and other related components makes up the group’s products and services. In addition, a standalone ambulatory surgery center allows for seamless interaction for patients requiring surgery.

With respect to enhancing products and services, the group is providing an infrastructure that can support additional medical staff, train existing administrative staff and reduce overhead, thereby creating an optimized working environment.

Administrative plan

Introductory meetings are held between the leaders of the respective organizations. Once an agreement in principle has taken place, it is reported to the board.

The administrator will then bring in a team of leaders from his or her organization to review billing practices, financial practices and documentation practices. This is in conjunction with a review by the accounting and legal team.

If there are no concerns at this point, negotiations will take place. The administrator will handle negotiations and report back to the board for approval.

After that, teams will work with the administrator on the major topics (see Figure 1).


Marketing

The overview and goals here are to develop the group into a cornerstone of orthopedic care for the region by adding experienced orthopedic providers in locations that are advantageous to creating additional market share.

Market analysis

The high-density market has a population of more than 1 million people spread across an urban and suburban capture area. There are approximately 3,000 physicians, a third of whom are PCPs. Of the 2,000 specialists, 10% practice orthopedic surgery. In our catchment area, there are 10 competitive groups ranging in size from five to 20 orthopedists.

Implementation of marketing strategy

If the group is already successful with respect to having a reasonable patient population, adding it to a larger brand allows it to keep its identity. The existing patients continue going to the group, but this also allows for the brand of the large organization to create additional throughput into the organization. If the group is having difficulty, it will appreciate being brought into the fold because of the brand. Both groups benefit from:
  • Streamlined management
  • Greater purchasing power
  • Cost controls
  • Better insurance rates
  • Marketing
  • Centralized infrastructure
    • HR
    • Business office
    • IT
    • Purchasing.

Financial documents

Financing

Considering the financial strength of the organization and low investment cost, reserved capital will be used to fund the project.

Capital needs

The capital required for this endeavor is approximately $150,000, which covers the infrastructure investment costs outlined in the pro forma as well the first three months of operating expenses. The operating expense component is simply a buffer until cash flow stabilizes. This will ensure payroll is not disrupted and timely payment of expenses such as rent, utilities, supplies and other items.

Resource costs associated/opportunity costs

When considering resource or opportunity costs, one must look at alternatives and where these resources may be utilized; for example, bringing on medical providers who are not established and opening expensive facilities in communities where we have no referral sources.

The cost associated with building out a facility could easily be $750,000. Added to that is the delay in revenue generation, which would be due to time spent in building up the practice to optimize patient throughput.

Time spent finding providers and building a full facility infrastructure is much greater than the time needed for the current project. These factors will contribute to a longer period to reach ROI and profitability. Therefore, these resources/opportunity costs are well spent on the model recommended herein.

Financial table

The two tables below represent multiple sub-tabulations. The first is a pro forma cash flow statement, which shows one-time capital improvement costs and three-year income projection. Break-even occurs in the second year.




Of note is the annual increase of costs of certain items due to typical increases; these include utility and supply items. Other items such as malpractice and rent remain stable due to stability in the sector and negotiations, respectively.

When reviewing revenue generation, the second year has an uptick due to improved productivity and an increase in reimbursement rates; the third year only grows due to reimbursement increases, as per contract.

The second table represents the larger acquiring entity’s financial summary for a three-year period. This is a summary overview of the income and expenses of the larger company. While it may appear that profits are minimal, at least one-third of the HR expenses are dedicated to profit distribution.

Innovative elements and expected business outcomes

This innovative idea positively impacts the population and the organization. Practitioners who otherwise would become corporate physicians or retire from practice can continue practicing as part of a larger body of collaborative surgeons. The positive effect on the population is greater access to physicians through a centralized system. The positive effect for the group is greater visibility to the community, improved stability due to size and better negotiating power.

What challenges did you encounter during this process and what have you learned?

Timing was the greatest challenge during the project. When working with architects, attorneys and construction workers, it was often a hurry up and wait process. Even though deadlines are set through the use of Gantt charts, PERT (Program Evaluation Review Technique) charts, and others, individuals will miss deadlines.

Additionally, it takes some team members longer to find their way in a new culture, requiring more support and oversight to succeed.

Next steps to put project in action

We found that the system works; the key is to continue implementing it with new practitioners and practices. This will increase the size of the group and allow us to meet the needs of the community and our goals. Per annum we plan to add two practitioners at a minimum or two practices at a maximum.
 
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About the Author

Alex Rothschild
Alex Rothschild CASC, FACMPE
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