Ever evolving, the practice of medicine is generally thought to be carried out through practitioners, their practices, and hospitals. Venture capitalists are a relatively recent addition who have influenced the field by increasing the number of physician practice “roll-ups.” An amorphous term, a “roll-up,” in the context of physician practices, is generally defined as the acquisition and consolidation of physician practices under an umbrella company that provides management and other administrative services, such as billing. If done properly, the benefits of a roll-up include achieving economies of scale, increasing bargaining power with third-party payors, and, of course, increasing profits. Venture capitalists are not the only ones who apparently see the value; hospitals, which once sought to distance themselves from physicians, now seem eager to purchase physician practices and employ the physicians, albeit for different reasons.
Whether you are associated with a physician practice, hospital, or venture capital firm, the purpose of this article is to identify a few areas that experience shows must be addressed when considering a “roll-up.”
1. How “Rolled-Up” is the Roll-Up?
The ability to negotiate certain terms often depends on how far along, or “rolled-up,” the transaction is. Meaning, if you are the first physician practice to be acquired, you are likely to have more success in negotiating more favorable purchase terms. Conversely, if you are the last or near the last practice, the buyer should not be expected to accede to your requests because it does not want to upset the applecart. Both the buyer and the seller should be prepared to discuss, in the abstract, the terms of previous deals in the roll-up to ensure that the agreement is on the same or similar terms.
2. Synergy – What Types of Practices is the Buyer Buying?
In a roll-up, or any other merger or consolidation, the greatest challenge is creating “synergies,” or the interaction or cooperation of two or more organizations to produce a combined entity that is greater, and more valuable, than the sum of its parts. The issue lies in finding the proper mix of practices. Imagine that a buyer purchases two practices, one with physicians much closer to retirement than the other. The retiring physicians have finally reaped what they have sown over the years, while the younger physicians are still trying to work off their medical school debt. Will the retiring physicians “earn their keep,” or will they coast on the backs of their younger, more eager counterparts? The importance of synergy does not stop with the age of the practices. Other questions include: how are the physicians at the respective practices compensated? Does a practice generally set aside profits that will now be sent upstream to the buyer? Who is in charge of deciding what medical services the practice will offer and where those services will be offered – the practice, or the buyer? Will the practice administrator be retained? Are the respective physician practices’ IT departments, including electronic medical record, cyber security, and billing systems, up to speed or will one lag behind the other? What about the current billing practices? “Economies of scale” and “synergies” cannot be obtained if the parts are not equally contributing to the whole. Thus, identifying the proper practice mix is essential.
3. How is the Buyer Financing the Transaction?
Because the purchase price is typically substantial, cash-only transactions are unlikely. Rather, the selling practice should expect to receive a portion of the purchase price in cash at closing, and the remainder over time via a promissory note. The payment options are endless, but what this means is that the selling practice (and each physician) should expect to loan a portion of the purchase price to the buyer. Essentially, this also means that the physicians’ services are helping the buyer to pay off the purchase price. Another consideration relating to the acceptance of a note is whether the buyer has other agreements that may restrict its repayment, such as a loan used to complete the roll-up. Ultimately, the physicians should expect their note to be subordinate to the buyer’s other financing arrangements, meaning that it cannot fully repay the note to the physician unless and until it repays its other obligations. This may temporarily prevent or completely jeopardize repayment.
These are a few of many items to consider when approached to participate in a roll-up. For more information about roll-ups or other health law matters, please contact Barry Weiskopf, or any member of the Tydings health care practice group.
This information has been prepared by Tydings for informational purposes only and does not constitute legal advice.