Thursday, August 01, 2024

Part 3:
Creating a Multispecialty Group

by Dr. Shakeel Ahmed

Part 3 of a 6 Part Series

For parts 1 and 2 of this series please visit PhysiciansOfficeResource.com/articles 

“I can do things you cannot, you can do things I cannot; together we can do great things.”—Mother Theresa

This chapter is aimed at the physician investor/entrepreneur as they navigate their path into the expansive realm of medical careers and opportunities. Although opening a medical group might not be categorized strictly as an investment, this business choice will significantly shape the future of your financial returns and endeavors in the healthcare field. This is coupled with the occasional need to invest in these models, which sets the stage perfectly for an investment framework.

Physicians have a plethora of employment models to choose from, including single-specialty groups, multispecialty groups, solo practices, and hospital employment. For the sake of discussion, I will assume the reader is an existing physician looking to broaden his practice horizon: In comes the concept of expanding into a multi-specialty group.  For those considering multispecialty groups, which often involve capital investment and promise subsequent returns, diligent research is essential. 

First, a few words to describe these entities.  Medical multispecialty groups are collaborative bodies that bring together healthcare providers from various specialties to deliver comprehensive care to patients. These groups typically include primary care physicians, specialists, nurses, nurse practitioners, and physician assistants. There are numerous compelling reasons for such structured practices to exist. Some reasons are obvious, while others may not be immediately apparent. There are also other factors to consider before diving into this venture, as it involves significant complexities and the interplay of many personalities can result in either harmonious or contentious outcomes. Nevertheless, there is strength in numbers, and when a group of physicians unites their economic objectives, shared operational costs, and collective bargaining power, a multispecialty group can thrive remarkably. 

"The whole is greater than the sum of its parts."

—Aristotle 

According to the Medical Group Management Association (MGMA), in 2021, there were approximately forty-five thousand medical groups in the US, about 75 percent of which were multispecialty groups. This prevalence indicates substantial underlying benefits. 

As the landscape of medicine transforms from year to year and law to law, the advantage has tended to favor the multispecialty group setup. However, some supposedly level playing fields are less neutral than others. But this is already known. 

“The Roman arena was technically a level playing field. On one side were the lions, fully equipped, and on the other, the Christians, marked for slaughter. That's not a level playing field; that's a predetermined defeat.”

—Louis O. Kelso. 

The dynamic nature of medical practice structures and politics mandates that individual practitioners continuously position themselves advantageously. This need has spurred the development of medical multispecialty groups, which, when effectively orchestrated, can provide both fairness and favorable conditions. 

While some multispecialty groups are shaped from the scars of battle, most are also systematically built from the ground up to align common goals and mitigate various risks. Where you fit in this structure depends on whether you are a founding member, have earned your way into ownership, or are looking to buy in de novo. 

Key Considerations in Establishing a Multispecialty Medical Group 

1- Overhead Costs:

Deciding between a simple coverage arrangement, a partnership, or various positions within a partnership can present daunting choices. Sometimes these setups succeed; other times, they fail due to personality differences, conflicting practice philosophies, minor financial disputes, or even jealousy. However, one consistently successful strategy is sharing overhead costs. Reducing redundancies not only helps in swallowing some tough decisions (a lot of crow) but also maximizes financial efficiency and benefits the practice in numerous ways. 

"Typical mergers occur when two competitors unite, thereby reducing overhead."

—Tony Fadell. 

Increasing efficiency through strategies such as bulk purchasing, sharing staff like nurses and ancillary personnel, and utilizing common spaces for laboratories and equipment always yields better results. More participants generally mean enhanced benefits, following simple arithmetic. 

2- Economy of Scale: 

Consider electronic medical records systems, which are seldom inexpensive and typically run into six figures. Affording systems with comprehensive features not only enhances the work environment but also improves functionality, saving time and money and potentially correcting delays in accounts receivable. Thus, applying such economies of scale throughout the practice can significantly cut costs and boost financial returns. 

"It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money—that’s all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do."

—John Ruskin, from 19th Century’s The Common Law of Business Balance 

Implementing streamlined processes can be less costly in a larger practice compared to a smaller setting, allowing for the inclusion of advanced technology and equipment. 

3- Bargaining Power: 

"Negotiation requires the power to compel the other party."

—Saul D. Alinsky, American community activist and political theorist 

A multispecialty practice serves as a convenient one-stop solution for patients, encompassing various specialists. This consolidation significantly strengthens bargaining power during contractual negotiations with insurance providers. The ability to influence these negotiations can prevent unfavorable outcomes that might occur in less comprehensive setups. 

4- Geographical Considerations: 

"Location, location, location."

—Harold Samuel. 

The practice’s location can significantly impact its accessibility and attractiveness. Situating the practice strategically can alleviate common logistical barriers for patients, such as traffic or distance, making the practice a preferable choice. 

5- Diverse Services Offered: 

The comprehensive nature of a multispecialty group means a wide range of healthcare services under one roof, leading to higher patient intake, shared costs, minimized liabilities, and increased geographic prominence. Multispecialty groups typically feature a larger team of physicians compared to their single-specialty counterparts, significantly enhancing service delivery and income. 

6-Enhanced Healthcare Delivery: 

Studies show that multispecialty groups provide better coordinated care, improved patient outcomes, and reduced healthcare costs. Patients have better access to a variety of specialists, ensuring continuous and comprehensive care, which translates to higher quality treatment across the board. This also benefits healthcare providers during contract renewals with payers due to improved service efficiency and patient satisfaction. 

7- Quality of Life for Providers: 

"The significant achievements of the world are accomplished by ordinary individuals who manage to work in an extraordinary manner."

—Gordon B. Hinckley 

Multispecialty groups distribute workloads more evenly among providers, reducing individual administrative burdens and allowing providers to focus more on patient care. This setup improves the work-life balance and overall job satisfaction. 

8- Financial Success: 

In financial terms, multispecialty groups typically achieve higher revenues and profitability than single-specialty groups. According to the MGMA, the median revenue for multispecialty groups in 2021 was significantly higher than that of their single-specialty counterparts. While outcomes can vary by region and competition, the trend towards forming larger multispecialty groups or health systems is becoming increasingly prevalent, driven by the complex dynamics of the healthcare industry. 

9- Know the Beast You’re Riding: 

The foremost requirement in managing your multispecialty medical group is a thorough knowledge of the healthcare sector. This sector is continuously evolving—financially, legislatively, and technologically—driven by new technologies, regulations, and bureaucracy, leading to regularly updated reimbursement policies. 

Medical knowledge is now doubling every few months, courtesy of collaborative research facilitated by the internet. This acceleration introduces new protocols, inventions, and clinical practices. Your familiarity with, and comprehension of, the latest technologies and procedures across various specialties must be up-to-date. Moreover, you should be aware of efficient inventory management practices. 

Bureaucracy has evolved too, with physicians assuming significant roles within hospitals, such as serving on executive committees, overseeing disciplinary protocols, quality assurance, utilization review, and even human resources. Building and maintaining positive relationships with nursing, clerical, administrative, and other ancillary groups has become crucial. Keep your hat size handy, as you will be wearing many. 

You must stay informed about all these diverse personnel, places, and processes. Ensuring that your medical group provides the best possible care hinges on your ability to adapt to this ever-evolving world. Staying current also includes complying with laws and regulations concerning patient information management and understanding the reimbursement policies and payment systems of insurance companies and government programs like Medicare and Medicaid. 

10- Control the Beast You’re Riding: 

Ethical standards, rigorously enforced by the SEC, necessitate vigilant oversight to avoid inadvertent legal missteps in financial dealings. This underscores a well-known truth: being a doctor is difficult—mentally, physically, and emotionally. Yet, atop these challenges, you must also ensure that your multispecialty practice remains financially sound. 

11- The Financials: 

Managing the financial health of a multispecialty medical group is crucial. This management involves budgeting, accounting, and strategic financial planning. Understanding the costs associated with operating a medical group and the potential revenue streams is essential. The complexity of your organization requires attention to elements not typically dealt with at smaller scales, such as employee benefits including insurance, retirement funds, and possibly ownership shares, which are vital for maintaining employee satisfaction and loyalty. 

Consider the tangible and intangible costs of losing seasoned employees—replacing them, training new hires, and earning their trust can be expensive. Generosity in employee compensation proves cost-effective in the long run, while frugality in this aspect may ultimately be more costly. 

12- Human Ressources: 

Handling human resources is a critical aspect of managing a multispecialty medical group. This includes recruiting, hiring, managing, and training staff, as well as offering opportunities for employee development. A new sensitivity has emerged regarding respect for individuals concerning privacy, harassment, and the challenges that arise from interpersonal conflicts. 

13- Marketing: 

A robust marketing and advertising strategy is essential. You have constructed a substantial operation that competes with other large entities. Developing a strong brand identity for your medical group and crafting effective marketing materials and advertising campaigns are crucial for promoting your business and attracting new patients. Maintaining a commanding online presence through websites and social media is also key, requiring investment in professional expertise to manage these platforms effectively. 

Forming a Multispecialty Group: Merging and Acquiring 

“Strategic buyers, particularly health systems, are motivated to acquire practices to increase patient volumes and market share as well as to enhance negotiating power with payers.”

—Stout Global Investment 

Valuation: 

The first step in building or buying a practice is the concept of valuation. Valuation is crucial in a merger or acquisition. It can be based on either fair market value or investment value, which considers possible economic benefits from expense reductions or revenue/profit adjustments. However, acquisition must be made via fair market value to comply with Stark laws and Anti-Kickback Statutes. 

Valuation has three possible methods: 

1. The income approach is either via a capitalized or discounted cash flow. While both determine value as equal to projected future free cash flow, the former is a single-period capitalization, and the latter is a multiperiod discounting. 

2. The market approach is either via the Guideline Public Company (GPC) or the Merger and Acquisition (M&A) method. The former values the company by comparing it with similar publicly traded companies, and the latter values the company compared to similar companies that have been in merger or acquisition “done deals.” 

3. The asset approach is based on appraisals of real and personal property appraisers when a practice’s value falls below market value of the assets, i.e., when the practice is not expected to result in a positive cash flow. 

There are also other facets to this jewel you’re polishing, i.e., goodwill and brand worth; satellite ventures, such as buying into a laboratory for the practice; and shares that come with the purchase and their future dividends.

Physician mergers and acquisitions are predicted to be strong over the next several years, so there must be a good reason. It’s the smart move today. However, hell is paved with the best intentions, so you must beware of “gotchas” like variable expenses, fixed expenses, and future staffing needs based on anticipated patient volume and growth. 

Buying Into a Multispecialty Group 

1- Medicare Multiple: 

The above considerations will also figure into buying into a multispecialty group practice. You will want to look at what Medicare multiple is being used. 

Wait… Whats a Medicare Multiple?? 

The term “Medicare multiple” isn’t a standard term in financial or medical practice valuation contexts. It is an informal or non-standard metric used in specific discussions or scenarios,  related to the valuation or financial assessment of healthcare practices where Medicare reimbursements play a significant role. This could involve calculating how many times over the Medicare reimbursement rates are factored into the overall valuation of the practice, reflecting its dependency on or the profitability of Medicare-related services. It might also refer to the practice’s ability to optimize Medicare billing and maximize reimbursements, which could influence its financial attractiveness. 

Example Scenario: Valuing a Medical Practice Based on Medicare Revenue: 

Suppose there is a medical practice whose total annual revenue is $1,000,000. Of that revenue, $300,000, or 30%, comes directly from Medicare reimbursements. A potential buyer is evaluating how much to pay for the practice based primarily on its Medicare revenue, given its stability and predictability. 

To determine the value, the buyer might consider using a "Medicare multiple" approach. This approach would involve setting a multiple to apply to the Medicare-specific portion of the revenue to reflect its importance, predictability, and potential for future growth or stability. 

Calculating the Value: 

- Medicare Revenue: $300,000

- Chosen Multiple: 3x (This multiple reflects the buyer's assessment of the risk and the expected return on investment. Higher multiples might be justified by a stable patient demographic, a critical location where Medicare patients are prevalent, or efficient management that maximizes Medicare billing.) 

Calculation:

- $300,000 (Medicare Revenue) × 3 (Multiple) = $900,000 

Total Valuation Approach: If the buyer evaluates the practice based not just on Medicare revenue but on a combination of factors, they might add a separate valuation for non-Medicare revenue. Suppose the rest of the revenue ($700,000) is valued at a 2x multiple due to its less predictable nature: 

- $700,000 × 2 = $1,400,000

- Add the Medicare-based valuation: $1,400,000 + $900,000 = $2,300,000 

2- Accounts Receivables: 

Accounts receivable are self-explanatory. Certain businesses have protracted timelines for incoming accounts receivables. Obviously, they will want to incorporate that into your buy-in formula. 

An uglier aspect of accounts receivables is outstanding bad debt. You’re unlikely to get it after more than ninety days without payment. Once you go over one hundred and twenty days, you’re not likely to see it…ever. (Alternatively, any debt owed that is less than ninety days is still considered current). 

3- Hard Assets: 

Hard assets are not factoring significantly at the current time. Physicians are in so much demand at this point that few dare risk losing a candidate by trying to fleece them of a few dollars for old computers and desks. Medical equipment and instruments may be more cost worthy. Buildings and real estate are the most important. I caution the readers to refrain from buying into real estate with a new job. Property investment is a commitment that’s hard to undo, and should the partnership fall apart in the future, that will be hard to reverse. 

4- Goodwill: 

Goodwill is over. It is an anachronistic term that reminds older doctors like me of the days when we felt we had an edge over the candidate, when what we brought to the table was prizeworthy. Now, between groveling to the new doctor about how much we need them and bending over backward on vacation terms, goodwill is a term that cannot be brought up lest you upset your chances of a deal. 

The Final Showdown 

Once you have factored these points into your discussion, you come down to the brass tacks of buy-in. That’s where the company’s true value is formulated and presented to you by the actuaries and the accountants. Usually, and this applies to medical practice buy-ins and general business buy-ins, there are three formulas for evaluation of a business’s strength and value: 

1. Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) Multiples: This formula calculates the value of a business by multiplying its EBITDA by a certain multiple. The multiple used can vary depending on the industry, market conditions, and other factors. For example, if a business has an EBITDA of $500,000 and the multiple used is 5, its value would be $2.5 million. 

2. Discounted Cash Flow (DCF) Analysis: This formula calculates the value of a business by approximating its future accruements and discounting them back to present value using a discount rate. The discount rate represents the time value of money and the risk corresponding with the investment. This method requires forecasting future cash flows, which can be challenging but can also provide a more accurate valuation. 

3. Comparable Company Analysis (CCA): This formula values a business by comparing it to similar companies recently sold or publicly traded. The key metrics used in this analysis are revenue, EBITDA, and net income. An estimated valuation range can be established by comparing the target business to similar businesses. 

These are complex steps. Your accountants will guide you through these procedures. The outcome will be a prorated fee for your investment in the group, determined by your ownership stakes, your revenue-generating potential, and the demand for your specialty. This trifecta of business principles define your final buy-in amount. For example, a general medical doctor aiming to join a renowned Manhattan group might pay millions for this privilege, whereas a sought-after orthopedic surgeon in a small town could face no buy-in costs and might even receive a six-figure bonus to join. Ultimately, our circumstances determine our worth in both life and business. And in relationships, but that’s a separate topic. 

Overall, running, buying into, merging with, or acquiring a multispecialty medical group requires a combination of business acumen, industry knowledge, and a commitment to providing high-quality care to patients. High-quality care is the most essential ingredient. If you can’t do well providing high-quality care, then you must be doing it wrong and are doomed. Yet, done right, it’s a win-win for you and your patients. 

By grasping the intricacies of the healthcare industry and its regulations, effectively managing the financial and human resource aspects of the business, and implementing a robust marketing and advertising strategy, you can establish or contribute to a thriving and enduring multispecialty medical group. Operating such a group is a demanding and intricate task that necessitates a deep understanding of the healthcare sector, a dedication to providing high-quality patient care, and a readiness to adapt to rapidly changing healthcare environments—similar to the swift color changes of a cuttlefish. Success and sustainability in a multispecialty medical group can be achieved by concentrating on the financial, operational, and marketing dimensions of the business and by cultivating a team of committed and proficient healthcare professionals. 

Building a successful medical practice is fraught with challenges.  In the words of Nelson Mandela, “Do not judge me by my successes, judge me by how many times I fell down and got back up again.” But the end result, in the form of a successful venture, will be well worth the injuries. 
 

Spanning two decades, Dr. Shakeel Ahmed, a gastroenterologist turned healthcare mogul, has transformed his vision into the Midwest's leading Ambulatory Surgery Centers network. His dual expertise in medical administration and surgical execution-gained from years of frontline experience-has been pivotal in mastering the complexities of the healthcare sector. Dr. Ahmed's notable contributions extend beyond the ASC sphere; he has played a key role in developing a comprehensive healthcare network, including a range of medical facilities, diagnostic centers, and surgical establishments across several states. His literary contributions includes 6 published books alongside hundreds of articles in prestigious national and international journals. He is a consultant for multiple governments on healthcare development and works as an advisor to various governments across four continents in the establishment of outpatient surgery centers.