Merging to Win: ED Groups Find that Bigger is Better

Increased bargaining power, financial capital, and management strength afford ED practices more protection in the era of rapid health system consolidation

Whether it’s pressure from hospital partners to assume more financial risk, consolidation of area health systems, or just the formation of an independent practice association (IPA) by community physicians, changes in the health care landscape are driving a growth in mergers and acquisitions among emergency medicine practice groups.

For larger practice groups, an acquisition of or partnership with a company that offers a different service can be a way to protect market share and diversify the company’s assets.

For smaller and medium-sized groups, joining together to form one large entity or deciding to join a larger group can offer protection in the form of increased bargaining power with third-party payers and the management systems necessary to move to the next level of growth.

"It’s the age-old adage of not putting your eggs all in one basket by converting your equity in what is basically one contract—in the case of a small group maybe a couple of contracts—that can be terminated," says Stephen Dresnick, MD, President and CEO of Coral Gables, FL-based Sterling Healthcare Group and the Vice-Chairman of FPA Medical Management, Inc. "By being part of a larger organization, if, God forbid, we lose a contract, it’s not the end of the world."

Just doing a good job running the emergency department for 20 years is no longer enough to ensure renewal of an ED managment contract, he states.

"We’ve seen evidence of that," he says. "You can do a good job, but because of politics or some other things, your contract is terminated and you’ve lost everything."

Sterling’s merger last year with FPA, a practice management company that both owns and operates its own physician groups and offers management services to IPAs and PCP networks, is an attempt by Sterling to position itself to be a "strategic partner" with hospitals rather than just a vendor of primary care and emergency department services.

"Because of the relationship that FPA has had with a number of hospital systems, we have been able to get new ER contracts and, similarly, some of the hospitals we have had relationships with have been able to get FPA’s managed care initiative advanced a little faster than might have otherwise happened," Dresnick explains.

Through its contractual relationships with HMOs, FPA (and now Sterling) assumes a portion of the financial responsibility for the cost of the care given its patients. They have an incentive to find the highest quality and most efficient means of providing care.

For Sterling, the diversification had an impact on the way the group interacted with client hospitals.

"If we are giving them managed care lives and channeling our patients to them, then they can give us the ED, which allows us to give them a better rate," he says. "And, it really doesn’t cost them anything because we can make money on the emergency department side. It’s just a way that we can gain by having a stronger relationship."

By partnering with the hospital on the managed care side, Sterling/FPA is beginning to make inroads into coordinating care with the hospital to reduce inpatient admissions and length-of-stay (LOS). Starting observation units to keep patients in the ED for extended care and developing clinical treatment and diagnostic protocols are some of their goals, says Dresnick.

Acquisitions are nothing new to Sterling, the company has acquired 36 other practices since 1993. Continuing to expand is simply sound financial strategy, he says.

"I think you look around and the pace (of mergers) has quickened quite dramatically," Dresnick says. "This business requires resources, management, capital and all of those things that people thought for years that medicine was immune to. I don’t believe medicine is immune any longer to these factors."

One group’s perspective

Just over a year ago, Sterling acquired Maryland-based Professional Emergency Physicians, an emergency medicine practice group that had six department contracts, employed 65 physicians full- and part-time, and saw 200,000 patients a year.

A realization that the group needed professional management and access to more capital prompted the physician partners to begin searching for a larger group to join with, says James D’Orta, MD, FACEP, the group’s former chief, now the President and CEO of International Medical Consulting, Inc., in Washington, D.C.

"Our growth [is the reason]; we were just too large," he explains. "We had personnel issues, we had management issues, recruiting issues. Then, of course, from the business side, we had hospital clients asking our group to take more risk, to share risk on managed care contracts, and we did not have the expertise to analyze our risk nor the capital to support it if there was a significant problem."

D’Orta and his colleagues spent nine months researching the resources, background, and philosophy of several large physician groups before deciding to be bought out by Sterling.

"We did extensive diligence on this. We were very concerned," he says. "We interviewed every single one of them, Coastal, EMCare, etc. etc."

Ultimately, Sterling seemed to be the best fit for them.

"Sterling had several things going for it. One, it was in a growth phase. We liked the fact that we would probably be Sterling’s largest acquisition at that time. We liked Dresnick’s mission, vision, and philosophy. We also felt that, from the standpoint of our client hospitals, this would be the best thing for the hospital and for our employees beyond the partners."

The employee physicians and the hospitals both felt that Sterling would be a better partner as well, he adds.

Operationally, the group has not changed much, except that the acquisition has allowed the partners to concentrate on practicing medicine and leave management issues to people whose training is more suited to it.

Forming equal alliances

The consolidation of six hospitals into the Columbia health system in the Denver metropolitan area prompted the formation of CarePoint PC, an emergency medical practice group formed from five different groups that had been practicing at the individual hospitals, says Dennis Beck, MD, FACEP, Medical Director for CarePoint and President and CEO of the group’s management services organization (MSO), Beacon Medical Services.

"When they (Columbia) put together their system here, what emerged was a six-hospital, seven ED system with different groups practicing at the different hospitals," Beck explains. "We felt that by putting together a single group for emergency medicine, we would strengthen our position to provide a single voice for emergency medicine, primarily."

The merger of the five groups into one has allowed them to consolidate their administrative activities and reduce their overhead so that they could take advantage of economies of scale, he notes. They have also, by virtue of their increased size, been able to negotiate more favorable deals with malpractice insurers and third-party payers.

Because all of the groups had successful, long-standing relationships at their respective hospitals, it was felt that the best form of integration would be a model that allowed them to maintain a certain level of autonomy.

"All of the groups that made up this entity had been at their hospital for 20-25 years," Beck states. "We wanted to preserve [those relationships] as much as possible, so we kept the old groups as divisions, each division having a relative degree of autonomy, such that they have their own board member. While we function as a single PC (professional corporation), hospital-specific decisions are made at the hospital level by the ED medical director or the board member."

The key to the merger’s success was the formation of a "merger committee" consisting of representatives from all five groups. The representatives came together to do the "due diligence" of research required to know whether the companies would be compatible enough to merge. The committee also had the task of defining the structure of the new group, what degree of integration was needed or not needed, and how to incorporate, says Beck.

The committee also decided on the choice of MSO, probably its most important decision, says Beck. "That MSO is a separate entity that does all of the coding and billing for the group and handles all of the administrative functions. That was a big activity for the committee."

The group eventually decided to go with an existing MSO that did billing for three of the five individual groups. That MSO was acquired by the new group.

Other emergency medicine groups in their situation may choose another strategy, acknowledges Beck. Other alternatives would have been to form an emergency medicine IPA, or just forming a common MSO. "In our case, with the hospitals coming together as one system, this was the most attractive scenario for us."

"We are an example of a local affiliation that leads to a merger, to be differentiated from an acquisition by a STAT or King Health, or EMCare," he continues. "Actually, there are advantages and disadvantages to all of these particular strategies. In our particular case, given the sophistication, experience, and stability of the existing groups, we thought we had the resources to do it locally and to form our own organization."

Watching the horizon

A hospital merger can be an obvious sign that ED groups should begin looking at some form of cooperative integration, but there can be other signals as well, says Beck.

"When there is a hospital merger, if you don’t look at what is going on relative to other hospital-based physicians, you are ignoring the smoke signals. However, there can be more subtle transitions, consolidations among provider groups, whether or not a large IPA forms in your community, though the response doesn’t necessarily have to be what we did."

As more hospitals take more capitated risk under managed care, more will be seeking to pass on some of that risk to their contracted physician groups, which can get tricky for ED practices, says D’Orta.

"The hospitals might ask their groups to go at-risk and then they (the hospital) would back them up in some other sub rosa type of contract, but that never works," says D’Orta. "A lot of where I see major problems coming down the line (is) with smaller groups entering into risk relationships that are going to be guaranteed by health care systems. You are going to see strange relationships between both of them as the risk becomes a reality."

As an example, D’Orta relates the experience of several ED groups that decided to open an urgent care clinic in the late 1980s and went to their hospitals for the capital.

"When the urgent care center began to put a financial strain on the practice, the hospital reacted and foreclosed on the loan to the group for their freestanding [clinic]," says D’Orta. "Then, the freestanding ER went under, the hospital put out an RFP and got rid of them in the (hospital) ER too. So, they ended up losing on both sides."

Whatever type of relationship ED groups choose, whether it be an acquisition or merger, carefully choosing their partners and doing the extensive research required is essential, notes Beck. (See related story on preparing for a merger.)

"My advice would be, relative to your size and organization, simply merging and getting bigger can just make bigger problems," he says. "Size isn’t everything. You need to have a sophisticated organization with excellent management. In our MSO, we have a CEO at an MBA level with 10 years in administration of emergency medicine and we have a CFO who has been awarded an MBA. You need that kind of horsepower if you are going to take smaller groups and coalesce into a larger organization. Otherwise, you are just going to take small problems and make bigger problems."