June 1999 Bulletin

Security in numbers

'. . .many significant gains can be achieved through group formation.'

Consultants tell benefits, how to succeed, fail

By Carolyn Rogers

Survival. Control. Clout. Those are some of the driving forces of the continued formation of small- to mid-sized orthopaedic groups.

"Physicians by their nature tend to want to have a good deal of control over their own destinies," says Tom Loughrey, president of Conomikes Associates, Inc., a practice management firm based in Costa Mesa, Calif. "They only come together in groups because they see it as a way to survive. And they also know that, in the process, there can be many additional benefits."

One of those benefits is the ability to offer a more diverse array of services or subspecialty areas, according to Michael J. McCaslin, managing director, Somerset Financial Services, Indianapolis, Ind. "This not only allows surgeons to specialize, but makes the group more attractive to purchasers of health care."

A larger group size also allows physicians to take advantage of some ancillary income opportunities that smaller groups can't take advantage of, such as MRIs, CTs and bone densitometers, says McCaslin. And it may provide the additional purchasing power necessary to acquire more internal talent, he adds, such as a CEO or CFO. It also may, in rare cases, allow for the possibility for some contracting leverage.

On that last point, Loughrey warns, "Physicians need to know that clout in the marketplace is nearly impossible to achieve. A group that grows from six surgeons to 12, or from 12 surgeons to 30, still isn't big enough to have clout. Groups that grow from 30 to 100 surgeons might begin to carry some weight, but then they'll run into legal antitrust issues. So doctors who merge groups with the intention of gaining clout in the marketplace will likely be disappointed."

Nonetheless, Loughrey notes that many significant gains can be achieved through a group formation. One potential benefit to a practice merger is the cost savings gained through efficiencies.

"We worked with some orthopaedists in Southern California who were looking at extremely tight market conditions," explains Loughery. "They were dealing with very aggressive MCOs with very tight fee schedules. Because they had no ability to change those conditions or influence them, their only choice was to become more efficient, and they were very aggressive about accomplishing that.

"They consolidated from three different offices into a single office. The only way that could work was to dramati-cally expand the office hours, so they went from traditional offices with 9 to 5 hours, with an hour lunch break, to a combined practice that is open from 7 a.m. until 7 p.m. and doesn't stop for lunch. In so doing, they have eliminated the rental expense of two facilities. They also consolidated their staff and were able to gain significant savings over their individual overhead costs. That savings went straight to bottom line and increased their income."

If your intention is to increase income, the only place to do that-given today's marketplace-is through reductions in overhead costs, Loughrey says.

However, "when an individual examines his or her overhead," he notes, "they'll find that there are very few places they can effect significant savings. In a solo or small group orthopaedic practice, for example, it's not likely that you're going to lay off many employees. In fact, the managed care system often requires a larger staff just to deal with all the complexity. And in a marketplace with nearly full employment, most employees are not going to take a paycut.

"The landlord isn't going to lower the rent, and the electric company isn't going to decrease their rates. But if I can take that office and squeeze in two more doctors, we'll be able to keep our costs relatively constant while increasing productivity."

The opportunity to create a "continuing business value" is another reason surgeons ought to consider forming a group, Loughrey says.

"In a solo practice, the value of the practice is the individual surgeon himself," Loughrey explains. "When the surgeon decides to retire or move, the practice itself will have little value to anyone else, other than the minor value of equipment and charts. However, in a small group, when one surgeon decides to retire, an ongoing business is still there and that business has value. So that retiring partner has something to sell either to his partners or to another physician coming in. Value is created beyond the career of one physician. That just doesn't occur in a solo practice."

Merged practices gain an advantage in recruiting top-quality people, as well, Loughrey points out.

"Very few orthopaedic surgeons coming out of fellowships and residencies today are attracted to the idea of a starting business on their own or joining up with another solo physician," Loughrey says. "Most are looking for security in numbers; they're looking for a group practice that can help them get started in their career, and where there will be support for their income in the months it takes to get started. They're looking for more referrals and more learning opportunities than can exist in a solo or even a small group practice. Because of that, group practices have a great advantage in recruiting."

After five years in solo practice, Herbert S. Gates, III, MD, an orthopaedic surgeon in Naples, Fla., took the plunge and merged practices with fellow orthopaedic surgeon Leon P. Mead, MD, in September 1997.

"Naples is an unusual community," Dr. Gates says. "There were no groups when I started-everyone was a solo. About four or five years ago, Leon and I started talking about forming a group. We were looking for advantages like call coverage and strength in numbers, as far as market share and insurance contracts."

Once they made the decision to merge-which took more than a year-Dr. Gates and Dr. Mead worked with Loughrey to form the partnership. The process took six to eight months. They still work out of separate offices, but share one bank account, one tax I.D. number, and one accounting system. Dr. Gates has been pleased with the results, though it has its ups and downs.

"It's a lot different when you've already been in practice on your own," Dr. Gates explains. "They don't teach billing, collections-the business side of things-in medical school. If you go into a group right out of residency, you learn to do things the way the group does them. But I'd been on my own for five years and my partner for seven. It was kind of like getting married for the first time at the age of 45 or 50 instead of 21-we're more set in our ways. We've had to hammer out a lot of issues such as accounting, computer software and retirement plans."

But Gates believes the advantages of being in a group outweigh the advantages of being solo in the long run. "You just have to be dedicated and patient," he adds.

Orthopaedic group practice, percent of orthopaedic surgeons


1998 1996 1994
New England 62.3%52.2% 50.7%
Mid Atlantic 63.055.5 54.8
East North Central 62.858.6 57.9
West North Central 65.460.3 62.2
South Atlantic 68.158.1 58.0
East South Central 74.1 65.3 66.7
West South Central 57.750.9 50.4
Mountain 65.457.7 57.8
Pacific 51.246.6 46.3
National 62.655.2 54.8

Source: Orthopaedic Practice in the U.S. 1994/1995, 1996/1997, 1998/1999, AAOS Department of Research and Scientific Affairs

How to succeed

Michael J. McCaslin, managing director, Somerset Financial Services, offers the following "how to" guide for a successful integration:

Make sure you are comfortable with the clinical competence of your prospective partners.

All potential partners need to work together to identify and write down the group's mission or vision for delivering care. What is this organization going to be about? What are the patient service issues that we're after? Do we want more diversity in the skill sets that we offer? More locations that are more convenient for our patients? More ancillary services? Write it down.

Once those issues are agreed upon, integration issues come into play, such as:

A lot of micro-operations issues must be addressed at this time. Who will be the banker? Long-term accountant? Attorney? Insurance agent? Medical suppliers?

Choose a name and set a realistic start date. Work toward making sure everything is ready when you turn the switch "on" as the new entity.

Once the new entity is in place, expect to spend the next 18 months working through all the nuances and problems that will inevitably arise, such as basic office policies and procedures, how forms are utilized, how billing and coding is handled, changes in the dictation system, authority over staff, etc.

Hold a mini-planning retreat every quarter to reaffirm what's been done, why it was done, and to address any major problems or issues. But the main purpose of the mini-retreats is really to keep the momentum of the transaction moving forward.

How to fail

Group ventures fail for many reasons, but Tom Loughrey, president of Conomikes Associates, Inc., and Michael J. McCaslin, managing director, Somerset Financial Services, offer six pitfalls that are likely to cause mergers to crash and burn:

Preserving preexisting entities in name and in culture is a sure-fire way to fail. Most physicians try to put together mergers that threaten their pre-existing entities to the smallest degree possible. This is a mistake. If members are unwilling to accept significant change, the merger will not succeed.

Unrealistic expectations. Physicians frequently enter new ventures expecting to reap instant revenue from new contracts and drastic cuts in operating expenses. In reality, the costs of setting up a venture almost always offset income for the first 12 to 18 months of operation.

Not allowing an adequate time schedule for the merger. You can't rush it.

A lack of full participation from all of the physicians involved in the merger. There is a tendency to want to appoint a committee or an individual to make it all happen, but getting members "buy into" the plans after decisions have been made is far more difficult if they weren't involved early on in the planning process.

Poorly thought-out compensation formulas, or failing to integrate income distribution formulas, will cause significant problems. You must have a single, well-thought out compensation formula.

Poor governance structure. A structure that requires membership approval for day-to-day decisions or paralyzes decision-making by splitting it too many ways hinders the group. Governance should guide, not impede, management.

Personnel issues also can get sticky when integrating practices. The concern is not just the number of people to employ, but who those employees will be. "If one of the goals is to become more efficient, then letting some people go is a necessity," Loughrey says. "But the attitude that comes through every time a merger takes place is, it's fine that we have to let people go, as long as they're not my people."

Another difficult personnel issue arises when staff members are unwilling to buy into the group concept. The physicians may be able to get together, but certain nurses and other staff members may continue to see themselves as working for only one doctor. Getting them to accept the reality of the new group can be very difficult.

"We've been in the position of recommending that certain employees be let go, not because they hadn't been good employees," Loughrey says, "but because they were unwilling to buy into the group concept."

As a final caveat, both Loughrey and McCaslin note the importance of accepting change as an integral part of the process.

"If you are unwilling to accept change, then you have to challenge the wisdom of going through with a merger," McCaslin says. "Every member of the group has to experience change, or it will feel like somebody won and somebody lost. The focus has to shift from preservation of the past to what's in the best interest of the new entity moving forward."


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