When considering a merger, what model should you choose?

By Shannon Geis
September 2, 2016
Body of Knowledge Domain(s): Operations Management

Integration is a tough topic for many practice managers to embrace. The loss of autonomy is particularly scary for the physicians at many practices. One way to avoid integrating with a larger hospital system may be to merge with another independent practice.

According to Will Latham, MBA, president, Latham Consulting Group, Chattanooga, Tenn., the biggest force driving consolidation today is what he calls RAIDS – “rapidly approaching income deficiency syndrome” – due to heightening competition with hospital systems, the difficulty in negotiating with payers, and the move from volume to value-based payment systems.

Latham says practices have a few options in the face of these changes. A practice could continue to go it alone, but that's becoming increasingly difficult; practice physicians could become employed by a larger hospital system but risk losing autonomy; or a practice could join forces with another practice of like mind. "A merger is one of the last tools physicians have to maintain autonomy," says Latham.

In a recent MGMA webinar, "Medical Practice Mergers: When, Why and How," Latham outlines several different models a practice should consider when looking to merge with another practice.

Reasons for practices to consider a merger include increased negotiating clout, survival in light of physician retirements, and shared leadership and management expertise. But figuring out what model works best for your practice can be tricky.

Latham outlines three main types of mergers: Independent Practice Associations (IPAs), Management Services Organization (MSO), or a Full Asset Merger. The decision on which to pursue depends on a group’s goals, the opportunities and threats in your environment, and the strengths and weaknesses of your group.

Independent Practice Associations

In an IPA, independent physicians join together for managed care contracting purposes. The IPA provides services such as contract administration, credentialing and claims administration; physicians otherwise remain independent.

Latham cited a handful of advantages IPAs have, including:

  • Autonomy
  • More experienced contract negotiators
  • Low start-up cost
  • No requirements to participate in all contracts negotiated
  • No transfer of assets

However, he noted several disadvantages:

  • No economies of scale
  • Difficulty managing utilization and risk over large and diverse group of providers
  • Dues-based funding
  • Limited impact

Management Services Organizations

In an MSO, a new, separate entity is formed with shared physician ownership while the existing practices remain intact. Certain functions such as billing and collections or credentialing are transferred to the new entity and then shared among the existing practices, though the existing practices continue to contract separately and retain their provider numbers.

Latham says some of the advantages to an MSO include:

  • Autonomy
  • Economies of scale
  • Increased operational expertise
  • No transfer of assets

But the biggest disadvantage to an MSO, he says, is that there are significant capital requirements to start one.

Full Asset Merger

Unlike an IPA or an MSO, a full asset merger requires the creation of a separate professional corporation or limited liability partnership with one tax identification number and a single provider number to conduct all operations. In addition, all employees from the previously independent practices would become employees of the new entity, and all physicians would enter into an employment agreement with the entity.

Many practices, when considering these options, prefer full asset mergers, according to Latham. “Full integration allows a true coordination of effort and reduces concern over challenges by the government,” he says.

However, a full merger is a much larger commitment and requires significant structure changes and investment – both time and cost – from all involved.

Regardless of the model you choose, Latham says the most successful mergers are the ones where practices discuss the most difficult issues first and set up a detailed process for moving forward. Latham says a lack of commitment from participating entities is one of the most common reasons for mergers failing.

You can learn more about these different merger types, as well as the process Latham recommends for going through with a merger by checking out the MGMA Webinar, “Medical Practice Mergers: When, Why and How,” which is now available on demand.

Shannon Geis, Staff writer/editor, MGMA

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