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AAOS Now

Published 4/1/2011
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Craig R. Mahoney, MD; Kevin Ward

Divisional mergers

Consider this option for keeping your practice viable

If you are an individual orthopaedist or in a small orthopaedic practice, you may be feeling that the professional and financial returns you are seeking are becoming more difficult to attain. Thus you may be thinking about how to grow your existing practice or whether to integrate your practice into a hospital-based organization or a multispecialty practice.

Although these are currently the two most prominent options for practicing orthopaedic surgeons, we’d like to propose a third alternative—a divisional merger.

What is a divisional merger?
A divisional merger is a business agreement outlining a formal relationship between parties, while preserving the identity and best practices of the underlying individual businesses themselves. This is similar to corporations such as General Mills, which have many divisions, each of which has its own identity (Pillsbury, Yoplait, Green Giant, and so on).

In orthopaedics, this type of agreement would allow the individual practices to maintain autonomy in key decisions (such as referrals and marketing), while merging some contractually outlined services that can be shared (such as payer contracting, imaging, and transcription).

For example, merging at the divisional level would allow two or more orthopaedic practices in the same town that offer similar services to create a financial superstructure outlining the specific financial arrangement between the groups. Each of the “divisions” maintains its individual facilities, referrals, and service orientation. Before the merger takes place, cost-sharing and timeframes for consolidated transactional services could be agreed upon.

Advantages of a divisional merger
An immediate advantage of a divisional merger is leverage in negotiation. Increasing the size of the group increases your negotiating power with payers, hospitals, and any of the possible future payment vehicles (such as accountable care organizations). In most cases, a divisional merger also allows you to avoid antitrust issues.

Secondly, increasing the size of the group also increases the pool of capital available for business-related expenditures. A small practice may not have the capital to invest in ancillaries, such as advanced radiographic equipment, magnetic resonance imaging scanners, or other clinical items. A larger practice can acquire these in a more strategic fashion.

With size, there also comes increased patient demand. Additional capital can provide flexibility when seeking to integrate services that will be beneficial to patient care at your facility. This may also help with your efficiency and effectiveness in treating patients. Together, you may also find opportunities to invest in marketing, personnel, and other resources that allow you to focus on patient care and increasing patient flow.

Finally, a divisional merger will increase your “presence” in the marketplace. Providing care to a larger number of people, under a unified corporate umbrella, makes your practice more widely recognized within the community. This presence extends to integrated services, as more patients can have more services under one roof, and using standard protocols, these services can be delivered in a consistent and expeditious fashion.

To sum up, a divisional merger provides each practice with the ability to maintain its corporate culture while integrating where it is convenient and cost effective.

Disadvantages
A divisional merger can ultimately create more administrative complexity, simply by virtue of its structure. Some individual practitioners might feel it will change the way care is delivered within their office and potentially create friction between their staff and the new merged organization.

In addition, large organizations tend to have a more homogeneous management structure and a more structured decision-making process. This may lead to a belief that decisions are not quickly made or tailored to the needs of patient care for each group. When done right, divisional mergers allow separate practices to maintain their individual flavor, but integrate where it is most appropriate.

Another potential downside of divisional merger is financial complexity. Each group may have its own financial model and methods, which now must be harmonized. This may lead to adjustments for each group, which in turn could create either too much information or not enough information being provided to the individual physician about his or her practice.

This may be even more critical for tracking, reporting, and managing ancillary services. If this is a current issue in your practice, problems will likely increase under a divisional merger. Our advice is to hire the best accountants available before the merger takes place.

Other financial questions also need to be addressed before the merger agreement is signed. For example, what happens if one “division” has subpar financial performance and the other does not? How are the expenses allocated, and who pays for the shortfall? Conversely, how will ancillary income be shared, and under what model will we produce the best outcome for the physician’s bottom line? The goal is to allow each group to maintain its individual character, and be successful financially, once the groups are financially merged.

Keep the regulatory landscape in mind, especially antitrust issues. Be aware that this process will cause you, and each group, to think long and hard about things you never had to consider. For example, you may need to answer regulatory questioning about pricing and give commitments that you will have to live by in the future. You may also have to address competition, or the possible reduction in competition, associated with a divisional merger. Be ready to discuss facts, figures, and your stance on market share, access, and how your undertaking benefits the community.

To ensure that the divisional merger will not derail the goals of your individual practice, keep your eye on the priority items and put plans in place to deal with them should problems arise.

Summary
A divisional merger is a stunningly simple concept on paper—two entities become one, keeping the best of both. In reality, it requires a single legal entity, consolidated billing, uniform accounting, and must pass the consolidated business test. It may also require the merging of retirement accounts, profit sharing plans, or pensions. Be ready to evaluate these requirements, hire competent counsel to guide you through the process, and make sure “you dot every i and cross every t” while going through the process.

In these troubled economic times, many individual orthopaedic groups and practices continue to fight for independence. A divisional merger may be one avenue to consider that allows practices to maintain that independence while providing the financial strength, integration, and cost effectiveness you desire to continue forward.

Craig R. Mahoney, MD, is a member of the AAOS Practice Management Committee. He can be reached at iowamahoneymd@aol.com

Kevin Ward is CEO, Iowa Orthopaedic, Des Moines, Iowa; he can be reached at kward@iowaortho.com