An Alternative Trend: Creating Mega-Groups
Consolidation in the healthcare market continues at a frenzied pace, with hospitals and health systems taking the lead by creating networks that promote integrated, team-delivered care. Hospital and health systems are primarily creating these networks through hospital mergers, medical practice acquisitions, and employing physicians in their faculty practices. While hospitals are getting most of the press, consolidations among physician-led groups, commonly referred to as “mega-groups,” are increasing significantly.
The mega-groups we will discuss generally have broad ownership and governance that is shared by the group at-large. In these mega-groups, the practices that join (“legacy practices” or “divisions”) are generally credited with the income they generate, less their divisional expenses and their share of the mega-group’s common overhead. Mega-groups report under one tax ID. Billing, human resources, accounting, and other administrative functions are centralized. The advantages of joining a physician-led mega-group include:
- Remaining independent of hospitals and large health systems
- Sharing financial risk with payers and other providers
- Participating in new value-based payment models
- Retaining a significant amount of physicians’ own profits
- Developing and retaining professional management
- Reduced overhead and greater economies of scale
- Greater autonomy in how physicians practice in their own offices
- Greater access to new technologies
- Greater access to bank financing and other sources of private capital
- Greater likelihood of success in managed care negotiations
- Greater likelihood of success in retaining and attracting top doctors
- Investing in and providing ancillary services
- An even playing field when negotiating hospital joint venture agreements
Keys to Success
One key to forming a successful mega-group—one that has staying power—is leadership with a strong entrepreneurial spirit. It takes just a few entrepreneurial physicians with true leadership skills to build a group of member physicians who share a common vision and strive for the same long-term goals. Leadership must create lasting trust among member physicians, a trust that affords full transparency.
As with any new venture, getting proper advice and counsel is critical. A healthcare attorney well-versed in Stark, anti-trust, and other federal and state regulatory matters will keep the group from running afoul of the long list of potential healthcare-related compliance and regulatory risks. A financial advisor experienced in large group financial modeling will provide prospective members with the financial information they need to make informed decisions essential to moving the evaluation process forward. Consultants may also be needed to assist in areas such as managed care contracting, revenue cycle management, employee benefits, and information technology.
Explore, Form, Ramp-Up
The three stages in creating a mega-group are the exploratory stage, the formative stage, and the ramp-up stage.
During the exploratory stage, hold initial “town hall” style meetings with physicians, some of whom may be considering other options such as joining a hospital or an existing mega-group. Many entrepreneurial physicians, however, want to get in on the ground floor and have a real voice in decision making. Involving them in the formation of a new mega-group gives them that voice.
At these initial meetings, the group’s advisors field questions pertaining to governance, revenue-sharing, and other financial, operational, and business matters. It is usually a matter of time before it becomes apparent that there is enough interest to move forward to the formative stage. At this time, ask interested members to make a capital contribution to pay for the future services of the group’s advisors.
Address nuts-and-bolts issues of the prospective new group during the formative stage. This stage consists of financial modeling, addressing governance issues, addressing tax matters, deciding on the management structure of the group, obtaining financing, developing a negotiating strategy for managed care contracting, and operational planning.
Financial modeling. Request prospective members to provide their legacy tax returns, billing reports, and other financial information to the group’s financial advisor. The advisor will consolidate the financial information with two purposes in mind:
- To model what the new group would look like had the legacy practices operated as a single mega-group. Use this consolidated information to project what the mega-group’s future revenues and profitability might look like.
- To provide the lead physicians from each legacy practice with their own individual analysis that shows where potential savings might be, additional costs, and/or revenue opportunities from new ancillary services such as labs, enhanced fee-for-service reimbursements, or shared savings from new value-based payment models.
Address governance issues. Discussing and agreeing to termination and separation policies, as well as associated penalties, are significant for prospective members. Some questions raised may be:
- What penalties are associated with early termination and/or one given without proper notice?
- Does a member have to remain in the group for a minimum number of years to avoid the penalty?
- How many years?
- How is the penalty calculated?
- What happens in the case of separation from the group due to disability or retirement?
- Under what circumstances can the group involuntarily terminate a member’s interest?
Revenue and cost-sharing are also areas for discussion. Some questions raised may be:
- How are revenues from designated health services (DHS), such as labs, shared among members?
- Will a legacy practice lose a share of its DHS revenues if it joins the mega-group?
- Would other legacy practices get a bump in revenue?
- How are central business office (CBO) costs shared? Based on revenue, headcount?
- What expenses are included in CBO costs?
- Will a legacy practice’s overhead increase as a result of joining the mega-group?
Address tax matters. The financial advisor will typically address complex tax matters that arise when physicians consolidate or merge their existing practices. When assets, such as fixed assets, are contributed to the mega-group, significant tax implications may follow depending on the legacy practice’s tax structure and related factors. This is where planning with the legacy practice’s accountant is often needed to avoid unintended tax consequences.
Structure management. The size of a mega-group requires a much greater depth of management than a group of 5 or 10 providers. Decide whether to:
- Hire the group’s own management team
- Hire a management service organization (MSO) or
- Create your own separate MSO.
Today, many large groups form their own physician-owned MSOs. The MSO may manage not only the mega-group but potentially manage other independent practices that might one day join the mega-group. An MSO, therefore, becomes an investment vehicle for its members. As the MSO grows, its profitability and value generally increase as well. In today’s market, private equity is investing in MSOs, buying all or a portion of the member physicians’ interests, usually at a significant gain to the member physicians.
Obtain financing. Term debt financing is needed for startup costs, to pay for capital expenditures, and to pay off existing debt of the legacy practices. A line of credit is also needed for working capital purposes. Personal guaranties from the members, which may be limited, as well as the legacy practices, are typically required.
Develop a managed care contract negotiating strategy. Because the mega-group reports under a new tax ID, the mega-group needs to enter into new managed care contracts. For this reason, it is important for the mega-group to develop a negotiating strategy for its managed care contracting. As the transition from fee-for-service to value-based payment models continues to evolve, there may be opportunities to negotiate shared savings and/or enhanced fee-for-service rates as part of the negotiation with payers.
Operational planning. Make sure that the mega-group’s infrastructure is in place and the group is operational by its “go-live” date (when operations start and billing begins under its new tax ID).Operational planning consists of:
- Recruiting staff
- Training staff
- Making sure all software is fully operational
- Setting up accounting and financial reporting, and
- Perhaps most importantly, making sure all revenue cycle management functions are working properly
The Ramp-Up Stage
The ramp-up stage begins when the mega-group goes live and generally ends when collections and cash flow are steady. This usually takes anywhere from two to five months depending on how effective and successful the revenue cycle management team is with their billing and collections process. An extended ramp-up, which usually indicates that the billing and collection process did not go smoothly, can have significant financial consequences. An extended ramp-up generally requires the group to borrow more money than projected, which translates to higher debt service payments over the term of the debt.
Communication among member physicians during the ramp-up phase is extremely important. Even though the day-to-day feel in a physician’s office may seem unchanged, the reality is that member physicians no longer have “access to their checkbooks.” They do not have the same ready access to billing and collection information that they once did. While getting claims out, getting reimbursed, and getting doctors paid on time is the key to a successful ramp-up, if there are bumps in the road, keep member physicians apprised of how this may affect them individually and the group at-large.
The reality is that many mega-groups never get off the ground. If the group is to thrive and flourish, member physicians must share common goals. Members have to understand that they are part of a larger organization and their individual success will only come if the group-at-large is successful.
Originally appeared in Group Practice Journal, April 2015, 64(4): 28-30. ©2015 American Medical Group Association