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BUSINESS OF
MEDICINE
HEALTHCARE MERGERS
By Dana A. Forgione, Ph. D., CPA, CMA, CFE
It seems just about everyone in healthcare is either merging, plan-
ning to merge, or debating if they should merge. We’ve been through
this before. Merging. Unmerging. Re-merging. I suppose it’s to avoid
sub-merging (sorry, couldn’t resist…). Some research shows that the
anticipated benefits of mergers often will never be realized. But it’s
all about strategic market share and negotiating clout. Of course it
doesn’t hurt that the brokers and lawyers earn tidy fees putting the
deals together, and taking them apart again later. Why, the latest
merger announcement about the Pfizer and Allergan’s $150 billion
mega-merger of the century already includes discussion of how they’ll
divide the impending biggest drug company in the world into two,
before the deal has even obtained its regulatory approval. Physician
practices are being acquired by hospitals, and then the hospitals and
systems are merging — so the payers are also merging to build
counter-clout. We’ll no doubt end-up seeing the market consolidate
into an oligopoly of national, fully-integrated healthcare organiza-
tions. Maybe that’s a good thing. Maybe it’s not. So what should you
consider if a merger or acquisition opportunity presents itself?
First and foremost, consider your expectations. For example, why
are you interested in merging? What are your greatest issues of con-
cern? What essential issues and risks need to be identified and ad-
dressed before starting a merger? What might the new organizational
governance structure be like, and how would it affect your role?
What benefits do you anticipate, and what is the prospect of realizing
those benefits? Are there other ways to achieve those benefits apart
from a merger?
For example, I was approached by a young cosmetic surgeon once
about wanting to acquire the practice of another cosmetic surgeon
who was planning to retire. I asked him what he was expecting to
gain from the acquisition. The patient referral base, of course. It takes
time to build a referral base, and this would be a way to jump-start
that process. We talked about the potential for hidden liabilities, un-
known malpractice claims yet to be asserted, patient attrition, and
other issues. I suggested that rather than acquire the practice, why
not just work with the other surgeon for a year, capitalize on his
goodwill, build a reputation and relationships with referral sources,
and then carry on with your own practice. Was the cost and risk of
an acquisition really necessary or desirable?
34 San Antonio Medicine • January 2016
Second, what information do you need to make a properly in-
formed decision? Too many deals go sour and end up dissolving. Ex-
pectations are not met, and adequate information is not obtained in
advance. While not a merger, I did a litigation support engagement
once where four surgeons were suing a hospital over alleged fraudu-
lent misrepresentation of the economic prospects for their practices
in the region. The issues are relevant. The hospital management had
done a health needs assessment for the surrounding community, and
determined it needed four more general surgeons. So the hospital
actively recruited these four surgeons from across the country, offer-
ing them signing bonuses, payment of their relocation expenses, and
collection-guarantee loans to help support them as they built up their
new practices. Of course the loans would be forgive on a pro-rata
basis over four years, as long as the surgeons stayed and continued
to serve the community. In compliance with Stark, patient referrals
to the hospital were explicitly not required. If the surgeons decided
to leave before their four-year term expired, all amounts would be-
come immediately due and payable. As collateral for the loans, the
hospital could take their office equipment, and both current and fu-
ture accounts receivable. There was also a non-compete agreement
upon severance.
The docs accepted the offers, signed the contracts, moved into
town, set up their practices, and bought homes. It’s an old story. Let’s
digress here for a minute. Some of you may be old enough to re-
member Tennessee Ernie Ford singing about 16 Tons:
You load sixteen tons, what do you get?
Another day older and deeper in debt
Saint Peter don’t you call me ’cause I can’t go
I owe my soul to the company store
The “company store” is an old economic routine, dressed-up in
new clothes. My grandfather was one of them. He was an Italian
immigrant who worked in the sand quarries of Long Island in
New York. The workers worked long hours and had to buy their
food and supplies only from the company store. And on their low
wages, the workers all quickly became deeply in debt to the store.
Moonlighting was not allowed. So what did he do? He would