How a Physician Practice Can Negotiate an M&A Project with a Health System
In this video series, EisnerAmper Partner Michael McLafferty explains the process EisnerAmper uses to assist a physician practice to negotiate an M&A project with a health system. Mr. McLafferty has over 20 years of experience in the health care field providing business services to multi-hospital systems, pharmaceutical firms, surgery centers and physician practices.
In this video, Mr. McLafferty provides an overview of all the steps in negotiating an M&A with a Health System — starting with the strategic value, through compensation and the actual employment agreement. He explains that when his team first meets with a physician group, they often discover that the practice has already been talking to the health system for anywhere from 2 to 3 years. The physician practice is very frustrated — they can't seem to work out a deal and they don't trust the hospital.
The EisnerAmper team often represents the physician group as an independent business advisor. When they are retained by the physician organization, EisnerAmper has experienced that the health system's reaction is very positive. They see it as a sign that the physicians are serious about making a deal. After meeting with the health system, EisnerAmper can then help the physician understand how they might have more leverage than they realize in a negotiation.
0:00 We've been doing this particular service now for number of years and what we normally do when we first come in and meet with the physician group is we find out that they probably have been talking to their health system for anywhere from 2 to 3 years before we get involved.
They're very frustrated, they're annoyed, they can't seem to work out a deal, they don't trust the hospital, then we provide them with the approach we've used successfully now for a number of years; almost 10 years now. We basically tell them that we would go in more as an independent business advisor representing them and that our experience shows very consistently that when we get retained, by the physician organization, the health system's reaction to that is very positive. They actually see it as a sign that the physicians are serious about making a deal.
1:10 The first thing we do is we go in and talk to the hospital, introduce ourselves and that we are now representing the group. More importantly, we use the first meeting to understand: Why does the hospital feel there is such strategic value to bring in this group and this system? What's so important about this group? Usually the hospitals have good reasons for doing this, but the benefit for us representing the physician practices we can go back to the physicians and say, “You have more leverage in this negotiation than you realize." Once we get retained we take a look at, first and foremost, the compensation that the physicians are currently getting and to try to get some sense, based on past experience, how we might be able to help them improve that.
2:00 We'll talk about what's called a term sheet, which involves not only the comp, but all of the critical components of a contract that they are negotiating for; their benefits, their CMEs, retirement, any type of restrictive covenant. All that type of stuff is listed in that term sheet. That discussion then will proceed to what is called, usually, a ‘letter of intent,' which is just a letter that formally explains the groups are trying to merge or be acquired. The term sheet is attached as an attachment, and once that gets signed off, there is usually a period of time given for exclusive negotiations between the two parties and then they try to come up with some sort of employment agreement if they are being acquired or a leasing agreement if they decide to be leased.
2:58 So that gives you an overview of all the steps starting from the strategic value tocompensation through the actual employment agreement so, when all work is finished, basically they are at a point where they get a starting date, they know what the new compensation arrangement is going to be, they understand all of the terms of the contract. Usually these agreements go anywhere from 3 to 5 years, when its first negotiated, and then at that point they can be renewed usually annually.
Physician practices negotiating an acquisition by a Health System. Mr. McLafferty discusses why the pure acquisition option is the favorite for most health systems. Physicians and their staff become employees of the health system and the physician practice will be liquidated.
In the video series, Physician Practices Negotiating an M&A with a Health System, Mr. McLafferty explains the difference between acquisition and leasing options. In the physician practice lease model, the physicians and their staff remain employees of the physician practice.
In the video series, Physician Practices Negotiating an M&A with a Health System, Mr. McLafferty discusses the benefits of a hybrid option where the physician practice is owned by the health system, but the practice remains so physicians can keep putting money into their pensions.