Nick Hernandez, MBA, FACHE

Physician partnerships require much pre-planning, careful structuring, and a whole lot of continued communication in order for them to be successful. I am often asked to help a practice facilitate the undertaking of physician partnerships. It is certainly not a process that should be rushed through nor taken lightly and my recommendation is to be both thorough and methodical throughout the process — from due diligence to drafting documents to communications during future partner meetings.

Here are the six areas I recommend examining in great detail when undertaking the process of beginning and nurturing physician partnerships.

 One of the first areas to consider is the practice structure; both how it is currently configured as well as potential future arrangements. How many locations are involved? What types of treatment services are offered at each location? Is the equipment leased, owned outright, or being paid for? Are the buildings owned or rented? Who are the current owners? Is this a family-owned practice (any nepotism)? Are there any joint ventures with hospitals? Are there any medical directorships with other facilities?

 The current physician owner (or owners) needs an internal perspective to see what impact adding a physician partner would make. Similar to deciding to get married, the end result (albeit good) will certainly not be the same as the current situation. What does the current owner want in a partner (financially, operationally, and strategically)? Is there an exit strategy for the current owner? Have there been any discussions with the potential partner about partnership?

 The physician being considered for partnership needs to have a stake in this interest as well. Oftentimes I see a practice that greatly values what a physician brings but fails to consider what this same physician may want out of a partnership. What does he want out of the partnership arrangement (financially, operationally, and strategically)? Keep in mind also that it is perfectly reasonable for a physician to ask how much he will be paid in the first year and in subsequent years.

 After the first three areas have been fully vetted and accomplished, it is time to consider how the partnership should be structured. Is there to be a buy-in? Is the real estate included? Are all assets part of the partnership? Is a formal valuation necessary? What is the voting structure? What are the governance documents to look like? Is there a buy-out?

 If careful consideration has been given to the first four areas, then there should not be much material disagreement with the offering. It should be more of a matter of understanding the terms and if necessary, some tweaks of the legal language in the documents. This period, however, is the heightened point of sensitivity for all parties, so patience, calm, and understanding are characteristics that would serve well for those involved. This is not the time for any appearance of an "us versus them" atmosphere.

 Perhaps the most important item is what transpires after executing the physician partnership agreement. Now that a new partner is on board, she has a say in how the practice operates, what marketing messages look like, who is and isn't hired, etc. This means treating the new physician on equal ground with the senior partners in many situations, including new patient referrals. A new partner will also need to be brought up to speed with financial and operational metrics, as well as any business ventures. Consequently, meetings should harbor a considerate tone as the new partner is trying to learn. Furthermore, a junior partner should not bear the brunt of the work and receive low compensation from the practice. My recommendation is to stick to regularly scheduled meetings (quarterly or monthly) where business is discussed and all partners have the opportunity to have their voice heard.

Nick Hernandez, MBA, FACHE, is Founder & CEO at ABISA, LLC

Articles

Entering a physicians partnership is not a process that should be rushed through nor taken lightly.

Focus on six key areas for successful physician partnerships

With all the useful information available on Physicians Practice, it is easy to become overwhelmed.

With this in mind, the tip of the week is a chance to reflect on some of the wisdom found all across the site. In a January 2021 story on Working through physician partnership issues, Nick Hernandez, MBA, FACHE writes the following:

When physician partners are disputing, their quarrels tend to disrupt the daily operations of their practice. If they are not careful about keeping their disputes between themselves, it can result in the failure of their medical practice. 

some of the most common problems medical practice partnerships face and ideas for how to deal with them.

– In order for the relationship to be successful, all of the physician owners must agree on the same strategic direction for the practice. If one partner wants to build a well-known physician practice and the other partner only cares about earning a decent living, the practice is destined to fail. Set a clear, agreed-upon course for the practice that meets the needs of all physician owners.

 - Three months is a reasonable timeframe to see if the plan is achieving the results you want. Schedule an actual time where you will sit down together to see what has been accomplished toward the goals you set. If you see progress, you may want to give it another three months. If your evaluation tells you there is no hope, it may be time to make that very difficult decision to end the relationship.

 - I cannot stress enough the importance of scheduling partner meetings regularly. When issues have arisen, you may also need to schedule a separate meeting to address them head on. Give your partner plenty of lead time and full disclosure about what the meeting is about. Let them get prepared for the meeting, but don't let it be put off because someone "doesn't have time"

 to read the rest of the article and be sure to check back next week for another 

Your weekly dose of wisdom from the Physicians Practice experts.

Practice tip of the week: Working through physician partnership issues

As you sit down with your physician partners, practice manager, and perhaps consultant over the coming weeks contemplating direction for 2023, I thought it may be beneficial to offer a few pointers to help you along the way. For starters, you should pause to reflect upon new competitors in your catchment area, as well as current competitors and new initiatives they are taking on. For physician practices, a competitive analysis is a means to assess who your competitors are, what value they provide, understanding their (and your) strengths and weaknesses, and where your practice fits in. A good competitive analysis is a scouting report of the actual market terrain that your practice must navigate in order to be successful. While analyzing the competition is an essential component of your strategy, most medical practices don't conduct this type of analysis systematically enough. However, a thorough competitive analysis is indispensable.

Gather a list of your practice's competitors. 

Most of the time, such a list is comprised of who your practice considers to be its chief competitors. However, there may be other healthcare organizations that indirectly compete with yours, perhaps ones outside of your catchment area that offer services such as telemedicine or niche treatment modalities that are aiming for the same patients. You will also want to include information on healthcare entities that may be entering your market in the coming year. Once you have compiled the list, you can highlight those practices that will be the greatest challenge.

Analyze the competition's services in terms of features, value, and target patients. 

How do they market them? How do patients see your competition? How do referring physicians view your competition? Take an honest look at their offerings. Is your quality commensurate? Do you have similar offerings? What is the unique value you provide that competitors don't or can't? Emphasize these benefits in your marketing.

Compile a list of competitor strengths and weaknesses and remember to be objective. 

You'll do your practice no good if you allow bias toward your own physicians, staff, and services to cloud your judgment. Try to see the competition's practice as though you were them. What makes their practice so great? If they are growing rapidly, what is it about their practice that's promoting that growth?

Observe how your competitors market themselves through advertising, collateral material, and perhaps the use of physician liaisons. 

You will have to go to many different sources to get a complete picture. It takes practice and a little shrewdness on your part to piece together a complete picture of strategies and objectives, so the use of a qualified consultant may be to your benefit. Focus on the facts, be persistent, and trust your intuition to help you.

Determine the current market demographics for your practice.

 If the market is flat, then the competition for patients is likely to be fierce. Your practice will find itself scrambling to win market share. The outlook portion of your analysis may seem like forecasting, but it's really a measure of trends. By the time you've done most of your research, you'll have enough information to determine what the outlook really is.

By evaluating yourself against your competition, you'll likely find new ideas for your practice. While compiling a competitive analysis is an interesting piece of work, it can indeed be challenging. Consequently, you may want to seek the help of a healthcare consultant to guide you through this process. You'll learn a lot about your market and in the process become a more valuable resource for your patients and referring physicians.

From there, you will want to get into an abbreviated strategic planning process.That is, development of a plan (with timelines and objectives!) for what you plan to accomplish for 2023.Strategic planning is an essential business activity. However, several common mistakes must be understood so that physician owners can guard against them. Pointing out these mistakes is not a criticism of the process but acknowledgement of improper implementation. Medical practice leaders must recognize both the benefits and the potential pitfalls of strategic planning, because it is their responsibility to ensure that strategic planning is conducted properly to achieve the desired goals. Here are four of the most-common planning mistakes we find:

1. Attempting to forecast and dictate events too far into the future.

In part, this may result from the natural desire to believe we can control the future. It is a natural tendency to plan on the assumption that the future will merely be a linear continuation of present conditions, and we often underestimate the scope of changes in direction that may occur. Because we cannot anticipate the unexpected, we tend to believe it will not occur. In fact, most strategic plans are overcome by events much sooner than anticipated by practice leaders.

This is not a criticism of detailed strategic planning but of planning in more detail than the conditions warrant. This pitfall often stems from the natural desire to leave as little as possible to chance. In general, the less certain the situation, the less detail in which we can plan. However, the natural response to the anxiety of uncertainty is to plan in greater detail, to try to cover every possibility. This effort to plan in greater detail under conditions of uncertainty can generate even more detail. The result can be an extremely detailed strategic plan that does not survive the friction of the situation and that constricts effective action.

3. Tendency to use planning as a scripting process that tries to prescribe actions with precision.

When practice leaders fail to recognize the limits of foresight and control, the strategic plan can become a coercive and overly regulatory mechanism that restricts initiative and flexibility. The focus for staff members becomes meeting the requirements of the strategic plan rather than deciding and acting effectively.

4. Tendency for rigid planning methods to lead to inflexible thinking.

While strategic planning provides a disciplined framework for approaching problems, the danger is in taking that discipline to the extreme. It is natural to develop planning routines to streamline the strategic planning effort. In situations where planning activities must be performed repeatedly with little variation, it helps to have a well-rehearsed procedure already in place. However, there are two dangers. The first is in trying to reduce those aspects of strategic planning that require intuition and creativity to simple processes and procedures. Not only can these skills not be captured in procedures, but attempts to do so will necessarily restrict intuition and creativity. The second danger is that even where procedures are appropriate, they naturally tend to become rigid over time. This directly undermines the objective of strategic planning — enabling the organization to become more adaptable. This tendency toward rigidity is one of the gravest negative characteristics of strategic planning and of strategic plans.

Strategic planning is one of the principal tools used to exercise operational control because it will help you to decide and act more effectively. Remember though, that strategic planning involves elements of both art and science, combining analysis and calculation with intuition, inspiration, and creativity. To plan well is to demonstrate imagination and not merely to apply mechanical procedures. Done well, strategic planning is an extremely valuable activity that greatly improves practice performance and is an effective use of time. Done poorly, it can be worse than irrelevant and a waste of valuable time. The fundamental challenge of strategic planning is to reconcile the tension between the desire for preparation and the need for flexibility in recognition of the uncertainty of the healthcare industry.

It's never too early to start planning next year's strategy.

Planning your 2023 strategy

In recent years, there has been noticeable increase in practice mergers among physician groups. Undoubtedly with the ever-evolving reform of the U.S. healthcare industry, there is a lot of uncertainty for private practice physicians. Some practices are content with no organizational changes and some have decided to be acquired by hospitals. Others have gone the route (or are pondering) of merging with another private practice (either same specialty or different specialty). The decision to buy, sell, or merge a medical practice is more complicated than ever, and determining a medical practice's worth is just one element crucial to this process. For those that are considering merging with another private practice entity, there are many things to strategize about and that's assuming there will be a windfall of benefits by consummating a merger.

Physician owners must have a clear rationale for a transaction or truly understand a deal's impact on their practice's long-term financial future. Too often, however, there's a misguided sense of why the merger should take place at all, and there's far too little time spent defining how the merger enables them to beat competitors and increase organizational value. Those that fail to take this into account contribute to the failure rate of physician group mergers.

For many physician groups, the link between strategy and a transaction is broken during due diligence. By focusing strictly on financial, legal, tax, and operations issues, the typical due diligence around a proposed merger fails to test whether the strategic vision for the deal is valid. To do so, physician groups should bolster the usual financial due diligence with strategic due diligence. They should test conceptual rationale for a deal against more detailed information available to them after signing the letter of intent. They should also see if their vision of the future operating model is actually achievable.

A strategic diligence should explicitly confirm the assets, capabilities, and relationships that make a buyer the best owner of a specific target acquisition. It should bolster the physician owners' confidence that they are truly an "advantaged buyer" of an asset. Advantaged buyers are typically better than others at applying their established skills to a target's clinical and business operations. They also employ their privileged assets or management skillset to build on things like a target's practice reputation, patient experience, or relationships with referring physicians. Naturally, they also turn to their special or unique relationships with vendors and the community to improve performance, leading to advanced synergies that go beyond what's normal.

When change comes suddenly, it can turn strengths into weaknesses and sweep away dreams of success.The aim of a merger should be to achieve mutually reinforcing advantages.Michael Porter wrote that competitive advantages stem from how "activities fit and reinforce one another. . . . creating a chain that is as strong as its strongest link."By undertaking strategic diligence, physician owners will be able to not only define their main objectives, but also gain greater control over the desired direction of the new entity after the merger is consummated.Some of the strategic diligence questions to ponder include:

What opportunities exist as a result of this merger?

What threats do we face by completing this merger?

What is the current culture of each practice?

It is critical for physician owners to be honest and thorough when assessing their advantages. Ideally, they develop a fact-based point of view on their beliefs — testing them with anyone responsible for delivering value from the deal, including physicians, physician extenders, clinical staff, and front and back office personnel.Above all, when it comes to the merger of two physician groups, culture is a key decision criteria.Culture should be evaluated and discussed prior to any financial considerations. In my experience this is of paramount importance for practice-to-practice mergers and is meticulously examined only through strategic diligence.

The decision to buy, sell, or merge a medical practice is more complicated than ever.

Considerations for physician practice mergers

Oftentimes physicians and administrators discuss strategies and may even devise a strategic plan, only to see nothing come of it. The most common reason for strategy failure is that they failed to build execution into their strategic planning process. We often see that budgets are not linked to strategy, staff incentives are not linked to strategy, and a very small number of employees understand the practice strategy. There are three reasons strategy fails to execute:

Practice initiatives don’t aligned with strategy

Practice processes don’t align with strategy

To ensure that your strategies are successfully implemented, you must build the execution into and across the strategy and the strategy planning process. Below are the 5 steps to successful strategy implementation.

A key road to failed implementation is when we create a new strategy but then continue to do the same things of old. A new strategy means new priorities and new activities across the practice. Every activity (other than the most functional) must be reviewed against its relevance to the new strategy.A good way of doing this is to create a strategic value measurement tool for existing and new initiatives. Initiatives should be analyzed against their strategic value and the impact to the practice. Measuring your initiatives as such will help highlight the priorities and ensure the right initiatives are adopted for delivery.

Ideally your budgets are structured in such a manner as to protect strategic expenditure from being re-allocated to short-term requirements of operating expenditures while subjecting strategic initiatives to a rigorous review (e.g. forecasted revenue growth and productivity) much like is done for capital expenditures.

The practice’s business performance should be closely aligned to strategy. Performance measures should be placed against strategic goals across the practice and each physician and staff member. All staff members will have job functions that will impact on strategy. Most staff members will have impacts across a series of strategic goals (e.g. financial, patient experience, operational, etc.). Ensure employees are aware of their role and influence on strategy delivery and performance. 

Likewise performance incentives should be directly linked to performance against strategy. They should include a combination of individual, team and practice performance measures that ensure staff recognize their direct and indirect impact on strategy performance.

A transformational strategy may require a transformation to structure. Does the structure of your practice allow strategy to cascade across and down the organization in a way that meaningfully and efficiently delivers the strategy?Practices that try and force a new strategy into an outdated structure will find their strategy implementation eventually reaches a deadlock.

The key reason strategy execution fails is because the practice doesn’t get behind it. If you’re physicians and staff members don’t understand the strategy and fail to engage, then the strategy has failed.So, how is this accomplished?

 Strategy involves change. Change is difficult and human tendency is to resist it. So not matter how enlightened and inspiring your new strategic vision, it will come up against hurdles (cognitive, resource, motivation and political). It is important to understand each of these hurdles and develop strategies to overcome them.

Bring influential employees, not just managers into the planning process. Not only will they contribute meaningfully to strategy, they will also be critical in ensuring the practice engages with the strategy. Furthermore, listen across the practice during strategy formulation. Some of your best ideas will come from within your practice, not the management team.

Ensure every staff member understands the strategic vision, the strategic themes and what their role will be in delivering the strategic vision. And enrich the communication experience. Communicate the strategy through a combination of presentations, meetings, emails, and updates. Continue strategy and performance updates throughout the year.And engage staff members emotionally in the vision. The vision needs to give people goose bumps – a vision they believe in, that they want to invest and engage with.

 It is important that all employees are aware of expectations. How are they expected to change? What and how are they expected to deliver? Each individual must understand their functions within the strategy, the expected outcomes and how they will be measured. As mentioned above performance measures and incentives should be aligned with performance against strategic key performance indicators (“KPIs”).

A strategy must be a living, breathing document. As we all know: if there’s one constant in healthcare these days it’s change. So our strategies must be adaptable and flexible so they can respond to changes in both our internal and external environments. Strategy meetings should be held regularly throughout the year, where initiatives and direction are assessed for performance and strategic relevance. At least once a year we should put our strategy under full review to check it against changes in our external and competitive environments as well as our internal environments. 

Strategy is not just a document written by physicians and managers and then filed away. It is a vision for the practice, owned by the practice. And to succeed the whole practice must engage with it and live and breathe it. Strategy should inform our operations, our structure, and how we go about doing what we do. It should be the pillar against which we assess our priorities, our actions and performance.When execution is brought into strategic planning you will find that your strategy is weaved throughout the practice, and it’s from here that great leaps in growth and productivity can be achieved.

Nick Hernandez, MBA, FACHE, is founder & CEO at ABISA, LLC.

The most common reason for strategy failure is that they failed to build execution into their strategic planning process.

5 Keys to successfully implementing strategy 

Many physicians consider selling their practice at some point, whether that be to another physician, another medical practice, a hospital, or a private equity-backed management company. Regardless of the reason for selling, there are numerous complex issues a medical practice must consider when its owners decide to sell. Both the preparation for the sale and the actual transaction present issues.For those reasons, you should plan at least a year ahead if possible.Here are seven key considerations.

The more profitable your practice, the easier it usually is to sell, and the more it is worth to a buyer.Consequently, you should maintain business as usual and not slow down your practice in advance of a sale. Growing practices are more attractive than stagnating ones.

You may want to develop a financial forecast sheet for a buyer. Physicians offering potential buyers documented proof of strong and consistent financial results will encounter buyers inclined to pay more than expected. Financial forecasts also show how a physician’s practice takes advantage of opportunities and addresses threats that have been described in the internal practice assessment.

Dissatisfied employed physicians re-entering private practice, and physicians relocating to be nearer to their or their spouse’s family are the primary candidates for buying a practice. They have a choice of joining another group, starting their own practice, or buying your practice. You therefore are not competing just with other practices for sale but also with employment in groups and start-ups.

Your most likely buyers are already practicing in your area, since they don’t have to move or re-license, and they have a strong reason to be there. In many cases, the most likely buyer might be your competition so don’t rule out a merger either.Consider merging your practice with a local group in lieu of a sale to an unknown single buyer, with a higher compensation for one to three years in lieu of a sale price.

Delays due to ill-prepared sellers can have adverse consequences as time kills deals.The quicker you can respond to due diligence questions from a prospective buyer, the better off you are. Remember that due diligence is a two-way street.To avoid a financially troubled buyer, physician owners considering a sale need to have a strong team in place to help them. Due diligence is critically important to ensure that the medical group that you are selling into is financially sound. Engage a transactional consultant and accountant to assist you with this endeavor.

The buy-sell agreement that is drafted will include pre-closing and post-closing responsibilities of all involved parties. If the selling physician is remaining in the geographic area and will not have a continuing professional relationship with the purchasing physician, restrictive covenants will most likely be included in the buy-sell agreement. (Currently, these restrictions are enforceable if reasonable in length, duration and geographic area in all states except California.)The agreement will also have indemnification provisions.These clauses protect the purchaser in the event the selling physician breaches any representations or warranties of the buy-sell agreement. A selling physician will most likely be expected to indemnify and hold harmless the purchaser from losses that arise for any misrepresentations of the selling physician.

Prior to closing on the sale of a practice, it is important for both the seller and buyer to agree on the role and involvement of the selling physician post-closing. If the selling physician is leaving the geographic area and will no longer be practicing medicine, a formal written agreement regarding employment or consulting is likely not needed. However, if the selling physician is staying in the area and the purchasing physician wants to continue working with the selling physician during the transition, the physicians should consider executing an employment or consulting agreement outlining the roles and responsibilities of the selling physician and term of such agreement.

You may also want to provide transitional marketing services.Consider that you are selling the practice to a new owner, who may have to introduce herself to her new patients and to other members of the medical community. As part of the sale, you add value to the sale if you stay on for a couple of months.During this brief period of time, you may stay at the practice and introduce the new physician to the patients, and go with the new physician to visit practices of referring physicians and other important members of the medical community.

Many buyers often seek to have a valuation performed.There is nothing wrong with that and it can certainly give you an idea of the practice’s value.Just know that the valuation may not equal the purchase price.

As you are considering a sale, remember to make a good first impression.This may entail cleaning up your practice’s website and/or Facebook presence with new pictures.Keep in mind that those are the first things a potential buyer will look at.Eventually a buyer will visit the practice, so make sure to clean up the office so that it appears modern and attractive. Fresh paint, carpet, and furnishings are inexpensive and create quality “staging.”

Nick Hernandez, MBA, FACHE, is founder & CEO at ABISA, LLC

Regardless of the reason for selling, there are numerous complex issues a medical practice must consider when its owners decide to sell.