This article was originally written and published in CardinalHealth’s “The Source” Publication
It is estimated that physician medical groups’ total dollars associated with mergers and acquisitions increased to $4.4B from roughly $466M. On the other hand, the total number of mergers declined from 108 to 681. What does this trend suggest to us? There are a smaller number of large and more influential practices. In fact, with the emergence of Accountable Care Organizations (ACOs) and the continued growth of Physician Hospital Organizations (PHOs) and other clinically integrated organizational structures, there is every reason to believe that this trend will continue.
When practices merge, there is often s a high focus on the integration of administrative practice management procedures such as billing, collections, and scheduling, in addition to clinical integration using digital or IT infrastructure such as Electronic Medical Record (EMR) systems. Unfortunately, there is rarely focus on how to leverage payer contracts in newly merged groups, until it is too late. Often the contracts are an afterthought that comes into focus after the merger happens. The problem with this approach is that the existing contracts are still active on the prior Tax IDs of the prior practices and, depending on the payer and market; these medical groups may have disparate fee schedules in place. It is much harder to reconcile and renegotiate your agreements, post-merger, if you do not begin the reconciliation process in the early stages of the merger via what is known as the “Super Messenger” model. The Super Messenger Model is a disciplined approach for assessing payer fee schedules whereby a merging practice’s prior individual payer fee schedules, under the guidance of legal counsel and a skilled business analysis team, are combined and analyzed so that the merging practice knows what its composite reimbursement is as a unified and merged group. The importance of the Super Messenger Model is that the analysis of each commercial payer fee schedule can be completed prior to the merger so that the merged practice is ready to hit the ground running and negotiate payer contracts at the time that the merger is completed. It is important to note that the “Messenger” is not permitted to share or to distribute the outcome of the analysis until the merger is complete and the new entity is officially operating under its separate or consolidated tax ID.
Of course, there can be many “gotchas” if you are not careful in applying proven and well thought out methods to insure that you maximize your reimbursement as new entity. After all, even if you have a state of the art billing / practice management system, a well-functioning EMR system and best practices for clinical integration, you will leave a lot of money on the table if you do not systematically analyze and prepare to negotiate and consolidate your payer contracts. To illustrate, consider the example below (click on the table below to view details).
In this example, there are three practices merging, denoted by the different colored columns for practice 1, practice 2 and practice 3. Notice that the weighted average reimbursement for payer 1 for practice 1 is 90%, practice 2 is 113% and practice 3 is 106%. It would be great if we could get above 113% on our new merged practice contract for payer 1. However, unfortunately, we have to ground this rocket back to planet earth. The reality is that payers will conduct the same type of analysis illustrated here. That is, payers will look at weighting each agreement based on its revenue contribution and level of reimbursement. In this case, practice 1 contributes the most revenue, about $328K of $807K. Unfortunately, this practice also has the lowest weighted average reimbursement of 90% for payer 1. So, what can we do to maximize the composite reimbursement of the three practices as a merged entity?
First, if the reimbursement pattern illustrated here for this one payer is consistent across all payers, then it may be worth considering consolidation of the three groups into practice 2’s Tax ID. The rationale is that practice 2 has the highest overall weighted average percentage Medicare reimbursement. In a perfect world, it would substantially improve the revenue contribution of the merged practice to ride the coat tails of practice 2 and inherit its fee schedule. However, there may be legal entity considerations which prevent this from happening and the payer may be doing the same assessment so that even if this is possible, the payer will not consolidate the prior practice’s fee schedules and credential all of the physicians from the prior practices into practice 2’s tax ID. Therefore, the next best approach will be to shoot for a reimbursement higher than the weighted average reimbursement of all three practices’ payer 1 fee schedule. That is, the overall benchmark we would need to exceed is the dollar amount represented by 101% of Medicare, which is about $807K of total revenue in this example.
The best practice is to conduct a fee schedule analysis in this way for your top revenue producing codes that represent over 80% of your practice’s revenue, as a merged practice, for each of your key commercial payers. Be careful to check with your legal counsel, every step of the way, to insure that you are not inadvertently violating Sherman or Clayton or other antitrust laws. None of us looks good in a striped suit, unless it is business suit.
Here are the four steps to maximizing fee schedules for newly merged practices:
- Use the Super Messenger Model, as explained above and illustrated in figure 1, to understand your weighted average reimbursement by CPT code for your top codes representing at least 80% of your revenue over recent one year period.
- Put together payer fee schedule proposals for your combined practice as a percentage above your weighted average reimbursement for your aggregate reimbursement for each payer.
- Build compelling proposal letters to explain to each of your commercial payers that the merger has occurred, and include the newly proposed fee schedules as part of your proposals.
- Negotiate your new agreements.
It is critical that you embark on this process in the early stages of practice integration — the sooner in the process, the better (assuming legal approval). Since the Super Messenger Model will require a significant effort on behalf of each practice to locate and identify fee schedule, volumes of services performed by CPT code by payer and billed charges by code, it is best to get started with the Super Messenger Model as soon as legal counsel agrees that you are ready to do so.
A potential landmine that may not be apparent when you merge is the sharing of bonuses and upside. What makes this difficult to navigate in a new merger is that, as illustrated above, you likely will have a lot of success negotiating agreements that produce more revenue than the individual practices that merge as a group, but, the reimbursement for some of the practices, as part of the merged group may decrease. This is due, once again, to the weighting of revenue and fee schedules across the practices that merge. To illustrate, suppose that you two practices merging, Practice A and Practice B, into a new practice, named Practice C.
Prior to the merger, Practice A had a PPO agreement in place with Payer 1 that 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. 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 is 120% of Medicare.
Practice C has decided to remain in Payer 1’s network, as long as their total group reimbursement with Payer 1 increases in aggregate. After a long and difficult negotiation with Practice C, Payer 1 made a final offer of 108% of Medicare, down 12% from Practice B’s current reimbursement. Assuming that, in the absence of change, revenues will remain constant, should practice C accept this new and final offer from payer 1? While it may not have been immediately apparent, the answer is a resounding “Yes”. The reason is that, in this case, Practice A’s revenue increased to $1,080,000 from $1,000,000 due to the 8% increase offered by payer 1. On the other hand, the smaller practice, Practice B, experienced a decrease of $20,000. That is they went down 10% on 120% of Medicare to 108% of Medicare (A 12% of Medicare reduction which is reducing 120% of Medicare to 108%, which is a 10% reduction). Therefore, since practice B was making $80,000 as a stand along practice, in the merged practice C, practice B will not make $60,000, a loss of $20,000 on an $80,000 base. However, fortunately for Practice C, Practice A is the “Gorilla” and the net result is an increase $60,000 of revenue. In this example we set the criteria to be more revenue for Practice C, as a merged practice, than Practice A and B as stand-alone practices.
However, practice B will not be celebrating unless they can share in the overall upside revenue. While we all want to be team players, it would be hard to explain to practice B’s physicians that they are taking a financial haircut while the overall practice’s revenue is going up by $60,000 on a $1,200,000 prior combined revenue of the individual practices. Therefore, it is recommended that any time there is an upside to the overall practice, all participating practices and physicians share, proportionally, in this upside. In this example, we have $1.2M of total revenue. 83% of the revenue contribution is from practice A while 17% is from practice B. We can simply maintain the prior revenue flow into both practices during the merger period and flow 83% * $60K incremental revenue into practice A, which is $49.8K and flow the remaining $10.2K into practice B. Now, everyone makes more money and everyone shares in the upside. The moral of the story is make sure to think through your bonuses and upside revenue sharing early in the process and plan to distribute “new revenue” across all providers in the merged group in order to avoid stalemating negotiations or losing partners.
One of the recent and emerging trends in both hospital systems and in private practices is the merger of multiple specialty and primary care groups. This introduces yet another consideration for such practices. That is, there may be a discrepancy in reimbursement rates for the same CPT codes performed across specialties. For instance, if a Urology practice and a primary care group merge, payers will often look to calibrate the specialist fee schedules for office visits at rates well below the primary care rates established for these office visits. The payer’s rationale is that they are trying to push office visits back to the primary care provider rather than the specialist. However, this is often not appropriate since the specialist may be handling a chronic care case and, as such, may need a high volume of office visits to effectively treat chronically ill patients. An example is a patient being treated for prostate cancer. It is key that if you are merging into a multispecialty practice that you make sure that your reimbursement rates are set at high enough levels to cover the costs of your treatment and episodes of care and make a profit.
In summary, it is important for merging practices to get ahead of the curve, with legal and business guidance to consolidate and analyze their fee schedules and determine a path forward for negotiating as a new group. Prepare for negotiations of new contracts for the merged group by doing your data analysis early during the merger process and hit the ground running by renegotiating your payer contracts the day the merger and new or consolidated tax is official. It is also important to have a realistic approach to increasing your fee schedule as a combined practice. The “whole is greater than the sum of the parts” is likely to be an excellent strategy if you deploy the weighted average aggregate payer approach illustrated in figure 1. Remember to share. That is, if the merged practice makes more money, all of the participating physician members need to share, at least proportionally, in the upside. No one should be losing money in this scenario.
This article is written by Steve Selbst, CEO and Co-Owner of Healthcents Inc. Steve has assisted many large Urology and other Specialty practices in analyzing and negotiating payer contracts, including merged practices and stand-alone practices. More information about Steve is at and you can reach Steve by email at firstname.lastname@example.org or 831-455-2174.
1 Irving Levin and Associates, 1/13