2017 was a busy year for acquisition activity in the healthcare industry, with major deals announced in nearly every vertical. As consolidation and acquisition activity continues at a fervent pace, attractive acquisition targets are becoming increasingly scarce, the competition for these deals is fierce, and the deal structures are becoming more creative and complex. For acquisitions involving large physician medical groups, the challenges for a successful acquisition are even greater with increased regulatory compliance considerations, complicated and widely-varying compensation models and professional service relationships, and perhaps most importantly, the differing personalities, opinions, and motivations of the individual physicians.
It should come as no surprise that the continuity of providers plays a major role in medical group acquisitions. For large practices, gaining consensus among physicians across the myriad of negotiable deal terms is not easy. This is especially true when the target practice resembles a loose affiliation of individual sub-practices, or when the practice operates in “pods” divided by office location, medical specialty, or hospital affiliation. So what happens when one or more physicians or physician pods believe the proposed acquisition is not in their best interest? Should they oppose the acquisition and potentially kill the deal? Or is it possible for this sub-set of physicians to opt out and pursue an alternative? Here are five value considerations when physicians opt out of the deal.
A common misconception is that the value of a group practice varies proportionately with the number of physicians participating in the deal. Under that construct, if 10% of the doctors opt out, the value of the practice would be reduced by 10% (or conversely the value of the physician pod opting out is equal to 10% of the total). In many instances this construct does not hold true and the sum of the parts does not equal the whole. Large group practices benefit from economies of scale, including shared overhead costs, higher utilization of practice assets, intra-group collaboration/increased productivity, sharing of ancillary profits, etc. Because of this, when a group of physicians opts out of a deal, the cost structure and profit sharing of the parent practice may not change proportionately. This may result in a disproportionate decline in value or offer price. Similarly, when a pod seeks to separate from the parent, the revenue and cost structure associated with operating the smaller sub-group practice may be much different than that associated with functioning as part of the group, resulting in a lower valuation on a standalone basis.