One of most common trends in our industry right now is the merging of practices. We see an acceleration of mergers largely due to the implementation of the Affordable Care Act, the roll out of ACO’s, and, last but not least, the ongoing pressure on practices to accept lower Medicare reimbursements along with the challenge of increasing reimbursements on commercial payer agreements.
I and my team have personally dealt with many recent mergers on the contracting side of the equation. What I have learned is that, while the merger happens from a legal entity perspective, i.e., a single tax id entity is the result, the individual practices may continue to operate as silos either permanently or for a period of time. The challenge is that the practices that merge come to the table with existing in network payer contracted rates that are inconsistent. Here is an example:
Let’s assume that there are two practices that merge, Practice A and Practice B, into a new practice, named Practice C. Let’s further assume that, prior to the merger, Practice A had a PPO agreement with Payer 1 for Practice A paid, in network, $1,000,000 the 12 months just before the merger. Their overall weighted average rate of reimbursement with Payer 1 is 100% of Medicare.
Also, prior to the merger, Practice B had an in network PPO agreement with Payer 1 that paid $200,000 the 12 months just before the merger. Their overall weighted average rate of reimbursement with Payer 1 for Practice B is 120% of Medicare.
Practice C, the merged practice, has decided to remain in Payer 1’s network, as long as their total new group reimbursement with Payer 1 increases in aggregate. After a long and difficult and protracted negotiation with Practice C, Payer 1 made a final offer of 108% of Medicare, down 12% of local Medicare from Practice B’s current Payer 1 reimbursements.
Assuming that, this is Payer 1’s best offer and, in the absence of this change, revenues will remain constant, should practice C accept this new and final offer from payer 1?
The answer is a resounding Yes. But, as the old saying goes, the devil is in the details. The reason that this is a good offer for practice C, compared to prior reimbursements for practices A and B is that, in this scenario, the revenue for practice C is $60,000 higher than the original $1,200,000 aggregate revenue for the two individual practices. However, when you peel back the details, notice that the reason for this aggregate increase is that the larger practice, Practice A, was making $1,000,000 of payments from payer 1 prior to the merger and was getting 100% of Medicare, overall, so a 108% of Medicare rate, therefore, raises practice A’s revenue by $80,000. However, 108% of Medicare is actually a 12% of Medicare or a roughly 10% decline in revenue for practice B. Since practice A is the “Gorilla” of the merger, from a revenue perspective, and practice B is the “Minnow”, the increase for practice A more than offsets the decrease for practice B. That is, Practice A increases by $80,000 while practice B decreases by $20,000 for a net gain for practice C of $60,000.
The tricky part is making sure that incentives for these likely outcomes is handled in advance of a merger. A suggestion is to do revenue allocation. After all, more money flowing into practice C is a good thing for all physicians in Practice C if they share in the upside. First figure out the current percentage of revenue contribution of Practice A vs. Practice B., pre-merger, to the new combined revenues of Practice C. In this example, Practice A is about 83% of the total revenue for this payer while Practice B is about 17%. Therefore, a simple and equitable approach is to allocate the incremental $60,000 using this algorithm for allocation purposes. In this example, about $50,000 would go to Practice A while about $10,000 would go to Practice B. Now, Practice B is happy because it continues to accrue the pre-merger revenues and adds $10,000 more. This is certainly a lot better than if Practice B had to reduce its revenues by 10% to accept this offer.
The take away here is that, regardless of the rates of reimbursements on payer contracts entering into a merger, take the time and make the effort to figure out how all entities that merger share in the upside benefit of newly negotiated payer agreements that increase. Also, make sure that you do the necessary math to assess the upside revenue based not only on Medicare Percentages but on the actual effect on the revenue that flow into the practice. I wish you good luck and a more prosperous future in your mergers and hope that you find this example and the information useful to you.
For more information about payer contracts, payer fee schedule analysis, and / or the effect of mergers on payer fee schedules please contact Steve Selbst, CEO Healthcents Inc. at 831-455-2174 or email@example.com