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Practice Group Combinations: A Pre-Merger Checklist

In today’s climate, many area practice groups have considered whether joining forces with another practice group may allow the combined group to provide increased patient care, more efficient patient call coverage and a more profitable combined practice for the affected practitioners.  The checklist set out below provides practice groups contemplating a merged practice with an overview of the pre-merger considerations that should be weighed before moving forward with such a combination.

  • Merger Objective.  Each practice group may have different objectives to accomplish by merging practices.  Each group’s objectives should be spelled out in writing and thoroughly vetted to insure all objectives can be accomplished by the merger.
  • Practitioner Compensation Formula.  Compensation formula may vary from “eat what you kill” to “equal sharing” to some combination of both.  The combined group may need to establish a transition plan in order to move the combined group to a single compensation formula.
  • Call Coverage.  Agreement on call coverage/vacation/time off is critical.  The practice groups should come to an agreement on how the combined group will address call coverage.
  • Retirement Plans.  Combination of practice groups may require adoption of single retirement plan.  Retirement plans of both practice groups should be reviewed to assess the various options available to the combined group.
  • Malpractice Insurance.  Combination of practice groups may result in different carriers within the combined group.  Note that some carriers will not provide coverage in such circumstances.
  • Medicare/Medicaid/Key Insurance.  Merger of practice groups may require agreement regarding acceptance of Medicare, Medicaid and/or other key insurance.  Maintaining different approaches may result in patient confusion and scheduling/billing inconsistencies.
  • Staffing/Staff Compensation.  In some cases, merger of two practice groups may create redundant staff.  Compensation formula for staff (salary, bonus, health insurance, profit sharing) at both practice groups should also be reviewed.
  • Real Estate (Office Space)/Office Equipment.  Each practice group may own/lease office space and related office equipment.  An agreement may need to be reached on the most efficient utilization of each practice group’s office space and equipment.
  • Governance.  The practice groups should consider how the merged practice group will be governed and whether the “governance” function will be compensated.
  • Non-competition/Non-solicitation/Buy-Sell Agreements.  If either practice group or any of their members are currently subject to any non-competition/non-solicitation/buy-sell agreements, such agreements should be reviewed in detail.
  • Billing.  The practice groups should consider whether the combined group will utilize an outside billing service or process billing internally.
  • Litigation/Administrative Actions.  Any litigation and/or administrative action involving either practice group or any of their members for the last 5 years should be reviewed.
  • Intangibles.  Have the practice groups ever worked together before?  How well do the two practice groups know not only each other, but also the other’s practice?  Can the two groups realistically “work” together?  While these are subjective questions, the answers may be predictive of the merger’s success or failure.
  • Confidentiality Agreement.  A confidentiality agreement should be put into place between the potential merger partners before any proprietary or confidential information is exchanged.  Such an agreement will protect both practice groups in the event the decision is made not to pursue a combination.

Assuming that consideration of the pre-merger checklist set out above indicates that a merger may be in the best interests of both practice groups, the practitioners (along with the assistance of their outside financial, tax and legal advisers) may then proceed to address the more detailed financial and legal hurdles that must be overcome in order to effectuate a merger of the practice groups.  While a detailed discussion of these hurdles is beyond the limited scope of this article, they include:

  • Legal/tax structure of the proposed merger;
  • Financial analysis of overhead, production, adjustments, accounts receivable/collections;
  • Treatment of pre-merger accounts receivable/accounts payable and other liabilities;
  • Treatment of outside honoraria/outside business activities;
  • Ownership of pre-merger medical records;
  • Review of current leases and other contractual agreements;
  • Analysis of any relationships requiring Stark/Anti-kickback review;
  • Review of any potential antitrust concerns;
  • Compatibility of office/billing software systems;
  • Equalization of any assets contributed by both practice groups;
  • “Buy-in” provisions depending on the structure of the merged practice group;
  • Buy/sell agreement for members of merged practice group;
  • Non-competition provisions within the merged practice group; and
  • “Bail out clause/cold feet” provisions.

This article appeared in the July/August 2008 issue of the Physicians Bulletin (A Publication of the Metro Omaha Medical Society