Alignment Deal Making Keys to a Successful Transaction

Many alignment transactions between healthcare providers have occurred over recent years, and even more are in process or on the horizon. Whether the arrangements are physician-to-physician or physician-to-hospital/health system, there are basic overarching principles to consider and follow when completing such transactions.

Both parties must review several key areas to develop and maintain a high-level of trust between them and to avoid derailment of the deal. Individually, the parties must conduct a thorough due diligence. The success of the transaction is primarily based on the pre-closure determination of the overall sustainability of the deal. The review should encompass the following elements:

1. Financial review: In a merger or a complete sell, both parties must do their homework relative to the financial constructs of the transaction. Deals between physicians and hospitals/health systems must include the practice’s (or other entity’s) overhead, particularly regarding physician/provider compensation, both before and after the transaction. Careful financial analysis of the history of the entities is essential, ensuring the appropriate normalization of revenue and expenses.[2] Without a clear and definite financial analysis, the transaction is unlikely to stand the test of time. Further, it may not meet requirements for compliance.
2. Overall deal structure: All transactions either employment, a professional services agreement (PSA), or a lesser form of alignment structure must undergo thorough review, discussions, and negotiations. Of the various types of PSAs, the full alignment PSA model (sometimes referred to as “employment lite”) is extremely popular. Further, it is a vehicle that later may serve to segue to a full employment arrangement.

All forms of deal structures must be reviewed, defined, and accommodating to the parties to stand the test of time. As “second generation”[3] contracts are unfolding, many original structures are now being tested and modified to some extent. Primarily, the changes are necessary because the original structure was not well-thought-through and poorly designed.

3. IT integration: Information technology is the foundation of successful business operations, post-transaction. Its complexities call for meaningful research, analysis, and due diligence before the transaction. This study applies to all forms of IT software, including practice management and billing systems, as well as electronic health records. As clinical integration continues to rise in significance, particularly in shifting -from “volume-to-value” reimbursement structures, it is critical to address sufficiently and structure appropriately information technology post-transaction.
4. Cultural fit: The cultural factor refers to how the organizations will be able to work together. Each party, from top to bottom, must recognize the importance of building a collective mindset and business philosophy. Throughout the organization, all employers must have a uniform approach to patient service, policies and procedures, and the aggregation of the two previously disparate business entities. When overlooked, the ultimate consequence can be the unraveling of the transaction.

Addressing cultural fit issues must occur before the completion of the deal. The discussions must be frank and must encompass positions on leadership and governance, decision-making in general, and how these matters may affect the parties post-transaction. Discussions like these were often overlooked in the past, and transactions moved forward with the assumption that the financial structures would “take care of” these concerns. Now, we have learned from our mistakes and, for the most part, are doing a better job of evaluating cultural fit as an item of consideration.

In conclusion, these four elements take precedence over all other components, though there are many other specific areas to consider before completing an alignment transaction. Beyond these factors and foremost in importance is to recognize the magnitude of regulatory compliance. Compliance is the top priority in all transactions between healthcare entities.

Further, as second generation alignment contracts come up for renewal, we must consider these four areas, financial review, overall deal structure, IT integration, and cultural fit. The objective is to ensure that the “new deal” that results comes after the thorough vetting and clear definition of the issues. If done well, before the alignment transaction and at the time of renewal, the chances are favorable that the relationship will be successful and enduring.

1. Attached is a brief summary chart of the various forms of alignment, compartmentalized by three major classifications: limited, moderate, and full.
2. Normalization means that we complete a restatement of the historical financial statements, based upon the fact that certain revenue and/or expense line items are either one-time only or will not be replicated in some way, post-transaction. Restating the financials to their “normal” structure is essential.
3. “Second generation” transactions refer to the renewal terms of the original alignment agreements. Many are coming up for revision of terms through negotiation.