In a slightly new twist on an old concept, medical groups are seizing upon some of the same logic behind the hospital-consolidation craze of the 1990s, using mergers to rapidly boost their size, strength and purchasing power.
Take the case of Harvard Vanguard Medical Associates, an appropriately titled group practice in the Boston area that has led the way in this evolving trend by orchestrating a merger earlier this year with three smaller medical groups. One of the biggest players in the metropolitan area even before the merger, Harvard Vanguard immediately ballooned by 40%, morphing into a 700-doctor powerhouse that serves more than 600,000 patients across a broad swath of eastern Massachusetts.
For Kenneth Paulus, Harvard Vanguard's president and chief executive officer, the consolidation made complete sense in almost every way, providing the medical group with more leverage in contract negotiations as well as added convenience for its patients. What's more, it provided a prime opportunity to boost capital spending for costly information technology systems that are often beyond the fiscal reach of smaller groups.
"I think the days of solo practice and small group practices are numbered," Paulus says. "Every single physician will have to be part of something larger. The cost trends have just been too steep to overcome alone."
Since the merger, Paulus says, revenue for the consolidated enterprise has increased by 10% to 15% while expenses have been reduced by an average of approximately 5%. The partners have also increased revenue by expanding imaging services and cut costs on malpractice insurance by pooling coverage, he adds.
More important, Paulus says, is the promotion of patient care through the increase in size and resources. Quality of care will inevitably improve as the group spends its cash on services that promote patient safety, including a new medical-records system, he says.
"There is a real need to innovate into electronic medical records to help improve outcomes," he says. "Small groups will not be able to afford those systems. Put together the pressure from costs and the need to buy these expensive systems, and it's becoming harder and harder to make it on your own anymore."
William Jessee, a physician who is president and CEO of the Englewood, Colo.-based Medical Group Management Association, acknowledges a growing movement toward larger doctors' groups. The advantages, he says, are clear as physician groups mimic the merger mania that swept across the hospital industry a decade ago and resulted in the formation of hospital giants like HCA and Tenet Healthcare, both of which sprang to life through mergers in 1994 and 1995, respectively.
Bigger and better
"From an economic perspective, (larger groups) have a lot of advantages," he says. "But there are other advantages, too. Physicians have the ability to interact with colleagues, and the ability to get a second opinion. There's the intellectual stimulation of having someone else to talk to. And patient convenience-that, in particular, starts to kick in when you talk about multispecialty groups."
Jessee's organization boasts about 19,000 individual members representing some 11,500 organizations that employ more than 237,000 physicians. The majority of those organizations are small physician groups-about 69% of members are groups with 10 or fewer physicians.
That's a reflection of the whole industry, according to the Chicago-based American Medical Association, which conducted a survey of physician groups by size in April 2003. The survey found that about 43% of the nearly 20,000 group practices in the U.S. comprised three to four physicians. There were only 241 with 100 physicians or more, according to the AMA.
Still, more and more physicians are abandoning private practice as they embrace the notion that there is strength in numbers, says Donald Fisher, president and CEO of the Alexandria, Va.-based American Medical Group Association. Fisher's group represents large multispecialty groups, with an average size of 272 physicians.
"We're in an arms race in healthcare-and it involves information technology," Fisher says. "If you're small and you're struggling, it's very difficult to come up with the capital to make that kind of an investment."
The increase in large multispecialty groups, he says, also is based on the growing recognition that patients want the convenience and value of coordinated care. "This model-all your medical needs under one roof-will provide better outcomes at lower costs," Fisher says.
Examples of this push for consolidation are scattered across the country.
On a far smaller scale than Harvard Vanguard, a group of seven orthopedic surgeons in the Chicago area broke off from a 28-member hospital-based group in January, joining about 70 other specialists of the Illinois Bone & Joint Institute. The merger provided not only administrative savings but also greatly improved the specialists' negotiating clout across a broad region stretching from the Wisconsin border to Chicago's South Side.
"The number of people we had in administration was greater for 28 guys than we now have for 80," says Edward Forman, one of the physicians who worked on a complicated merger that took nearly two years to complete. "We had a significant savings in overhead costs. We've also got some leverage with insurance companies.
In California, one of the hottest group practice-merger markets, HealthCare Partners Medical Group in Torrance has become one of the state's biggest and most powerful through selective acquisitions over the last 15 years, says Robert Margolis, a physician who is the CEO of a wide-ranging practice with more than 400 salaried doctors at 40 sites that serve about a half-million patients. On average, he says, the practice seeks to add about 50 to 100 doctors every two years or so, providing a little more heft to their bargaining power, among other advantages.
"The WellPoints and Anthems of the world are getting bigger-they're huge, dominant national plans," Margolis says. "So, if you're a small doctor group and you're trying to negotiate with them, you're a commodity. And if they don't need you, you're toast.
"But for us, it's not so much size as it is to get to a place where we're an important element in the delivery system for employers and patients and health plans. We like to consider ourselves indispensable."
While the urge to merge is based on some of the same rationale that propelled the hospital-consolidation craze-particularly eco-nomies of scale and leverage with third-party payers-another catalyst is the potential for a big boost in ancillary revenue for high-margin services such as ambulatory surgery and diagnostic imaging.
"A lot of the motivation for merging is to have a large enough group to drive ancillary revenue," says Jeffry Peters, president of the Chicago-based consulting firm Health Directions, who works with many group practices.
A larger base of physicians, Peters says, allows groups to reap big profits on ambulatory surgery services and diagnostic tests like computed tomography and magnetic resonance imaging scans, both of which can net anywhere from $200 to as much as $500 in profit per test.
Despite those obvious advantages, the market in mergers has just recently begun to stir, experts say. "We think mergers are going to pick up steam," says Hank Duffy, president of the Dallas-based JHD Group. "And that's largely because of the fact that the bruising from the (physician practice-management) debacle is finally wearing off. And there's a growing awareness that size is important."
The number of mergers or acquisitions of medical groups has dropped dramatically since the heady days when free-spending physician practice-management companies like PhyCor were building national networks of physicians. But that model collapsed because both sides-the doctors and companies-believed they were paying too much and gaining too little.
In 1998, when that phase was still in its heyday, there were 264 transactions involving medical groups, says Sandy Steever, editor of Health Care M&A Monthly. That number fell by almost half in the following year, to 139, and has decreased in each of the past three years as well. In 2003, Steever says, there were 24 deals involving group practices, though several smaller mergers might have slipped under his radar.
Yet Steever says he's seeing some movement in mergers involving group practices banding together to enhance market share and negotiating clout. "Of course, it's nowhere to the extent it was in the mid-1990s," he says.
Though most such mergers often go unnoticed, Harvard Vanguard's deal attracted considerable attention in both the healthcare community and the mainstream media. Indeed, the Harvard Vanguard merger rated a 1,069-word story in the Boston Globe in mid-April.
Harvard Vanguard, a not-for-profit operation that serves as a teaching affiliate for Harvard Medical School, merged in January with three smaller practices-Dedham Medical Associates, Southboro Medical Group and the South Shore Medical Center. Those three groups are now converting from for-profit to not-for-profit, a transformation that allows the entire operation to take advantage of tax-exempt financing along with the ability to reserve capital for big-ticket items such as information technology that might otherwise be eaten up to some degree by taxes.
Paulus and others who have rallied to consolidate practices can only hope that the long-term outcome will be different from the disastrous results that marked the period during the mid- to late 1990s when practice-management firms were paying huge premiums to string together networks of physician groups and hospitals were busy buying up medical groups just to try to keep pace.
These days, experts say, the secret to a successful merger is like that of a happy marriage-a long courtship, common interests and compatible personalities.
"Back in the early '90s, hospital mergers were the big thing," says Chris Jedrey, a healthcare tax lawyer with the Boston office of McDermott, Will & Emery who represents Harvard Vanguard. "The theory was: `Let's just do it. You agree at the board level, merge a bunch of hospitals into a system and we'll just work out any transitional issues that develop in the future.' Well, they often didn't work out.
Asking the right questions
How tough is it to merge group practices?
"Other than getting a young doctor to buy into a practice, a close second in terms of difficulty is trying to get two groups to merge," says Michael Brown, president of Health Care Economics, a consulting firm in Indianapolis. "Anytime you get two doctors in the room, you're going to have challenges. Egos get involved, and you get emotions involved."
Mergers and consolidations are often a minefield of potential problems, including differences in culture, clinical philosophy and compensation. Will the doctors divide total revenue after operating expenses? Will it be apportioned through some type of productivity model? Will all physicians be equal partners?
"Group practice mergers are so fraught with peril-I usually give them about a 10% chance," says Steve Messinger, a principal with ECG Management Consultants in Arlington, Va. "One thing is you can never reconcile compensation, especially if you have groups with different philosophies. There are issues like allocating capital as well as basic cultural problems and misgivings by many doctors concerned about losing their identity, their voices, in a larger group. Doctors groups are very difficult enterprises to merge together."
Duffy, the Dallas healthcare consultant, says there are a few useful checklists for a successful merger. Do the groups share an "underlying rationale" for becoming partners? For instance, do they both have the desire to serve a larger geographical area or to increase their clout in dealing with hospitals and third-party payers? Are their corporate cultures a good fit? After all, an organization with a lot of hard-charging physicians will not mesh well with a group whose members are more concerned with getting to the golf course for a 3 p.m. tee time every Wednesday.
And he agrees with Messinger that the most crucial aspect is money: "It comes down to numbers; how they calculate income and share the money," he says.
"If you have a good cultural match, a common approach to money and a reason to come together-if all those fall into place-you have the ingredients for a deal," Duffy says.
His advice to would-be merger partners: Be patient and plan for any contingency. It can take many months, if not years, to put together a successful merger.
Says Jessee: "The mergers that work take longer than the ones that don't work. The message is this: Hasty mergers are likely not to go very far. Those that are thought out-How are we going to operate? What will our value system and practice philosophy be?-are the ones that work."
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