It is no secret that the role of primary care is central to the creation of systems to respond to health care reform and changing reimbursement models. To the extent primary care providers have not already relinquished their strategic positions by becoming employed, entering provider service agreements or service line management agreements with hospital controlled systems, primary care providers maintain a strong position in the market.
Primary care groups are still faced with the need to create or participate in organizations that provide for the best means to manage patient care. Primary care groups are seeking strength in numbers by creating larger groups. The goal is to best maintain their competitive position, to diversify risk, to create efficiencies through shared savings opportunities, and to maintain appropriate levels of influence over care cycles, protocols and division of emerging, episodic-based payment.
In order to achieve these goals, some independent primary care groups are considering merger with other groups. Oftentimes, merging providers will seek ways to maintain some degree of intra-office independence while still taking advantage of the benefit of a larger group.
Provider mergers and acquisitions, particularly between competing independent practices in the same specialty area, can create sensitive antitrust issues. Generally, competing providers are prohibited from agreeing to the price of services. However, otherwise competing providers who legitimately merge into a single group are legally incapable of conspiring because they are a single entity.
The tension between the desire to maintain a degree of independence and the need to effectively merge practices leads to consideration of what has become known as a “divisional merger.” A divisional merger is similar in many ways to the concept of a group practice without walls that was prevalent during the 1990s. Under this model, individual offices or groups of offices form divisions that maintain some degree of operational and financial independence. Structuring divisional model groups can be extremely tricky. Balance needs to be created in the amount of financial, governance, and operational authority that is ceded to the central board of directors and maintained in the divisions. If too much authority is maintained at the divisional level, there is a risk that a “failed merger” will have taken place. If a failed merger is found, the individual providers or divisions will be considered to be independent and capable of conspiring in violation of antitrust laws.
Divisional mergers raise a host of additional legal and business issues. A divisional model group must be structured to comply with Stark Law and Anti-Kickback prohibitions. Generally, the group and its financial structure must comply with applicable Stark Law exceptions and must be structured as a qualifying “group practice.” An issue that arises in virtually all divisional model structures involves the treatment of ancillary revenues; in particular, “designated health service” revenues under the Stark Law. Although primary care practices tend not to generate as much DHS revenue as specialty practices, clinical laboratory and diagnostic revenues are common.
A divisional merger will be subject to all of the same transactional and due diligence issues that apply to any other type of merger or acquisition. Each participant will need to assess the risk associated with merging under one entity with other participants. This involves a lengthy process of due diligence and addressing issues that are raised through the process. Oftentimes, numerous sets of legal counsel are involved in the structural and transactional issues.
In the end, assuming that the divisional merger is properly structured, the combined entity can create significant benefits to primary care participants.