Still Keen on Consolidating? Three Key Deal Points to Consider in Negotiations

If, after careful consideration, you conclude that consolidation offers you the best opportunity going forward, the following key deal points, at minimum, should be carefully considered during your negotiations with a health system, payer, or private equity firm.

1. Autonomy. In our experience, the primary motivation for physicians selling their practices and pursuing employment is their desire to practice medicine without the burden of running a business. Handing over operational responsibility, however, always means losing some level of autonomy.

For example, staffing in private practice, both clinical and operational, may vary significantly based on individual physician preferences, long-standing employees, and specific community needs. The physician’s new employer, however, may require different staffing in the practice because of greater efficiency expectations or other factors. Although these changes may directly impact how the physician practices, he or she may no longer be able to unilaterally direct staffing—even clinical staffing. Generally speaking, staffing decisions are made by the one responsible for the practice’s financial performance. 

In anticipation of negotiations with a potential buyer and/or employer, take stock of those operational matters over which you want to maintain some level of control, such as clinical staff, patient scheduling, and referrals for diagnostic services. Be prepared to make your case for being part of the decision-making process. In striking a deal, strive to maintain a level of autonomy that ensures your professional satisfaction. 

2. Compensation. Productivity-based arrangements continue to dominate the landscape, but payment adjustments based on specific performance metrics are becoming increasingly common. And more employers are considering straight-salary arrangements.

Be sure you have a complete and thorough understanding of the compensation formula before signing any employment agreement. For example, calculate future compensation based on past performance. Consider how circumstances beyond your control could negatively impact compensation (e.g., the health system’s decision not to contract with a specific payer) and negotiate for safeguards to protect your interests. 

If an employer proposes to tie some compensation to quality performance, ask questions (and demand answers!) regarding how the metrics are selected, how data is gathered and evaluated, and whether your patients’ acuity levels are considered. Also, understand how often, and by what process, performance metrics are evaluated and recalibrated.

Carefully consider the benefits package offered by the employer, including insurance coverages, vacation and sick leave, and expense reimbursement. Evaluate how the compensation package compares to the overall market. A valuation expert can provide the data and analysis needed for such comparison, thus strengthening your negotiating position.

3. Purchase price. You can significantly improve your negotiating position by securing the opinion of a valuation expert regarding the value of practice assets. Otherwise, your options will be limited to nit-picking the potential purchaser’s valuation. As necessary, determine whether the purchaser will honor previously negotiated ownership buy-outs and retirement planning.

Determining fair market value, understanding the underlying approaches and application to your practice, and looking ahead to the impact of a future compensation structure—and its potential effect on the practice valuation—are all important economic principles that a buyer will consider. Physicians who take the time, and make the effort, to dig into this information before the transaction negotiations begin may save themselves, their partners, their employees, and their legal counsel significant heartache, frustration, time, and expense.  

The circumstances of every deal are unique, but focusing on these three deal points—and making sure all questions are adequately answered prior to signing on the dotted line—significantly increases the likelihood that consolidation will be beneficial to all parties.