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As the health care system strives both to improve quality and rein in spending, physicians are merging into larger groups or with hospitals to compete in what could be a future of declining reimbursements for the medical care they deliver.

Mergers present doctors with opportunities and risks, and the experts who advise physicians try to maximize the financial advantages — and design exit strategies in case the deal doesn’t work.

Monica Kaden is a principal in the accounting firm Fischer Barr & Wissinger LLC. She is an accredited senior appraiser who performs valuations of medical practices for a variety of reasons, including mergers, sales of whole or partial interests in medical practices, and litigation.

“This is a period of uncertainty for a lot of physicians, and there is comfort in becoming part of a larger group,” Kaden said. But doctors who have grown accustomed to autonomy may not adapt well to being part of a very large practice, or becoming employed by a hospital. For that reason, Kaden said, a deal may allow doctors to keep their own Medicare reimbursement number post-merger, so they can more easily go back to being independent if there’s a parting of the ways.

Health care attorney Mark Manigan with Brach Eichler added that a physician practice merger “usually has some mechanism built into the transaction that contemplates an exit” if the parties aren’t satisfied. He said there may be a fixed term to the deal, or there may be a “honeymoon” such as a 16-month period when “anyone can walk out.”

He added that poor management of the merged entity is a major reason why some physician consolidations don’t succeed.

Kaden pointed out that, despite the consolidation wave that has been underway for several years, New Jersey is still home to many small, two- or three-doctor practices. For generations, young doctors have bought into these small practices when the senior doctors retire, and that’s still going on.

“There are plenty of small groups still out there where a younger associate is buying in and wants to be part of that private practice,” Kaden said. While mega mergers tend get a lot of attention, “There are still a lot of younger physicians who want to become partners in established groups — that has not gone the way of the wind.”  

Kaden might be asked to come up with a value for the entire practice, she said, so the owners can determine how much an incoming partner might be asked to put up in exchange for a 20 percent stake.

While this consolidation has predominantly affected primary care physicians in New Jersey,  specialist practice mergers are catching up, Manigan said: “I would say much of the primary care market has done something: Either they have hooked up with a hospital or joined a larger organization. Those that haven’t are evaluating multiple affiliation opportunities.”

Manigan said he is working with several groups of specialists that are looking to form “single specialty super groups” that in one case would bring 50 doctors together in one group.

He said such a large group “has the wherewithal to invest in technology and negotiate with payers.” If the world changes as many experts predict — and doctors are paid for delivering value — these large groups will be better positioned to compete.

And even if health care doesn’t undergo this seismic shift to value-based reimbursements, the larger medical groups would still have an advantage: “At the end of the day, you are a larger and more dominant player in the market. You are well positioned for any reimbursement paradigm if you are large, integrated and well run.”

Another option is for the physician practice to consider be acquired by a hospital. Kaden said there are two main components of such a deal: how much the physicians will be paid up front for their practice, and what salary they’ll earn once they’re part of the hospital.

And in many cases, the hospital can increase the compensation the doctors receive.

“That is because the hospital knows they can get better contracts and higher reimbursement rates” from health insurers and other payers, Kaden said. Thus, the hospital “may offer a higher salary to the physicians than they were getting on their own.”

Manigan said another reason physician practices are merging is to create larger groups that can afford to invest in the technology needed to participate in new reimbursement models that many experts believe will become the norm in a few years.

Traditionally, doctors were paid a fee for every service they provided; now Medicare and commercial insurers are moving toward rewarding medical practices for hitting certain quality benchmarks, while also saving the payers money by operating efficiently.

“It will take some fairly sophisticated IT to track all the analytics in the practice of medicine” required by these new reimbursement models, Manigan said.

Kaden said a practice that has kept up with the times, particularly when it comes to technology, will likely command a higher value. For the past few years, there has been a major push by the federal government to encourage physicians to adopt electronic medical records. While the government provides grants to defray the cost, some physicians have been slow to go digital.

Kaden said, “It would definitely decrease the value of the practice if they have not converted to IT because (the acquirer) is going to have to spend a significant amount of money and time” to make the switch to electronic medical records.

Dennis J. Alessi, an attorney with the law firm Mandelbaum Salsburg, said it may not be advantageous for a small practice or a solo practitioner to join a very large practice, however. Such practices are likely to be dominated by the senior physicians and the merger terms “may not be very acceptable to the new physician coming in who may have very little say in how the place is run,” he said.

Instead, a better option may be for small practices “to try to come together with other small practices and create a new large practice.”

The challenge, Alessi said, is to “find a physician leader who can help bring the other physicians together.” But a brilliant physician may lack the skills to lead and manage a large organization.

“It is difficult to find that physician leader,” Alessi said. “But that is what you need to deal with all the bickering and bring everyone together.”

In a large practice, the specialists will be reimbursed at a higher rate than the primary care doctors, and may have to be convinced to share some of their income with the lower-paid primary care colleagues.

The argument for sharing, Alessi said, is that “the specialists rely on the primary care doctors to refer patients to them. You have a built-in referral base, but in return for that, you have to agree to share some of your income.

“That is the kind of issue you need a physician leader to deal with in order to bring everyone together.”

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