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Medical practice mergers: Is bigger really better?

March 2014
BY REED TINSLEY, CPA, CVA, CFP, CHBC

Is bigger better when it comes to private medical practices? This is a question I get quite frequently from physicians who are considering whether to merge with other practices. In my experience, the answer is almost always “yes”, but usually for different reasons from those the inquiring physician has in mind.

Quite often physicians believe that the primary or only reason to merge is to gain leverage in negotiations with third-party payers. Aside from the questionable legality of such a motive (think “antitrust”), this mindset misses the point. In my opinion, the reason to become bigger is not to eliminate competition but rather to enable a practice to better compete in a complex and very competitive marketplace.

How does getting bigger make a practice more competitive? To begin with, being bigger allows for spreading of risk. In today’s healthcare environment, in order to be competitive, medical practices must make significant investments in human resources and information technology. Where these investments might be difficult or impossible for a small practice, they are much less painful when spread among many physicians in a group. Where a small practice might be able to afford only a parttime practice manager, a large practice might easily be able to afford an MBA level CEO. The same holds true for legal and accounting resources, investment in compliance and strategic planning. And, while being a bigger, more sophisticated “business” will not guarantee better third party reimbursement, quite often thirdparty payors are receptive to paying efficient, well-run practices more than they will pay high cost disorganized practices.

The above paragraph itemizes only a few of the potential benefits of practice consolidation. Other possible benefits include increased patient access (i.e., more locations), practice succession, increased purchasing power, economies of scale found in consolidating redundant operations such as billing, and the potential addition of ancillary services that might otherwise be too costly of an investment for a small practice.

In my opinion, practices that want to remain private and thrive should actively be looking for strategic alliances, including merger where appropriate. The rest of the healthcare marketplace is consolidating. Those late to the game may find that the most desirable partners have already been taken.