Don’t rush to sign the contract yet
Don’t rush to sign the contract yet
Tips for negotiating a PPMC purchase
Selling to a physician practice management company (PPMC) can benefit a physician practice, but the potential for disappointment is great if you aren’t careful, says Elaine Scheye, president of The Scheye Group Ltd., a Chicago-based firm that gives strategic counsel to physicians and hospitals."The most important piece of advice I think I give physicians is to be honest with themselves in their assessment of their strengths and weaknesses — where they would like to be in five years, and realistically, whether they can achieve those goals and objectives with the capital and management expertise they currently have at hand," Scheye says. "I’m emphatic about the need for physicians to be honest with themselves and whomever they are negotiating with to actively listen so they can understand what it means to be an employee and to have a practice under management."
For instance, it’s possible that the practice could be sold to a practice management company that in turn is acquired by another organization that physicians may not wish to be affiliated with, Scheye says. Therefore, physicians need to assess their tolerance for the degree of loss of control over ownership and the management of their practices.
Scheye also says practice acquisition prices will probably come down within the next two and a half to five years, as the federal Securities and Exchange Commission is taking a much more aggressive role in scrutinizing the accounting and reporting practices of PPMCs.
Affiliating with a PPMC can represent an excellent opportunity for practices if physicians go into the venture with realistic expectations and a clear understanding of the nature of the arrangements, Scheye says. As a protective measure, physicians should hire a valuation firm that specializes in valuation of physician practices.
Scheye advises physicians to ask the following questions as part of their due diligence to help them make an informed decision:
1. How risk-averse are you? If you seek security and stability, a PPMC probably is not a sensible alternative.
2. Is the PPMC a "pure play" PPMC, deriving all its revenues exclusively from management of physician practices, or is that only one segment of its business? This will determine how much of a priority the PPMC places on the management and development of physician practices.
3. What is the PPMC’s growth or acquisition strategy? Growth and diversification that occur too rapidly can stretch management’s capabilities and can result in financial ruin.
4. How well-executed are the acquisitions? Managerial expertise is essential in executing and integrating purchases effectively.
5. Is the PPMC growing at a rate that can support its newly acquired practices without straining its daily operations? A PPMC mired in debt after an aggressive acquisition program can’t also finance the growth and enhancement of a practice.
6. What is the business-management expertise of the PPMC? Keep in mind that managing a physician practice differs significantly from managing a hospital.
7. How stable is the management? Rapid turnover is both costly and disruptive.
8. What is the PPMC’s management fee structure? This can be based on its adjusted gross revenues, cost plus an agreed-upon percentage of those costs, capitation, or a flat fee.
9. How will expenses be allocated between physicians and the PPMC? You need to reasonably project what your compensation or income will be under this arrangement and decide whether it is acceptable to you.
10. How is management compensated? They usually receive a salary plus a percentage of practice earnings. Make sure management profits only when you do.
11. What services does the PPMC offer? All services may not be available at the start-up stage. This would affect how much capital the PPMC requires, the degree of control you will have over the services provided, and their quality.
12. Will you have access to capital from the PPMC when you need it? This may be subject to certain predetermined clinical performance standards that are tied to the overall financial performance of the PPMC.
13. What is the quality of the PPMC’s information system? PPMCs that adopt a "best of the breed" for each information system are better equipped to manage capitation, adjudication and payment of claims, development of practice guidelines and protocols, physician profiling, credentialing, and outcomes management.
14. Does the PPMC have experience with managed care and capitation arrangements? The PPMC should enjoy a good local reputation in order for practices it owns to garner contracts with purchasers in your area.
15. What is the composition of the PPMC’s board? How many physicians serve on it? You may be tied to goals management has set without having a hand in the development of clinical guidelines or protocols, or without having a voice in the way the PPMC is governed.
16. Carefully review non-competition clauses, exit-strategy options, restrictive covenants, provisions for resolving disputes, and breaking deadlocks. Having sold the most valuable assets of your practice, you may not have anything of worth left once you choose to exit the contract. Additionally, you may be prevented from affiliating with other independent practice associations or physician-hospital organizations. When negotiating your contract, be sure to include a mechanism for dealing with disputes and deadlocks.
17. Carefully weigh all other options. You may not have to affiliate with or sell out to anyone. With a well-honed strategy and sufficient capitalization, you may be able to enjoy the benefits of a PPMC without the inherent competing and conflicting goals that likely will always underlie publicly traded companies.
(Editor’s note: Questions reprinted with permission from Today’s Internist 1997; 38:8-10.)
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