Due Diligence and Integration: Bringing a Unique, Informed Perspective (Coach Series, Part 5)

Physician leaders must take measured steps as their organizations proceed with mergers, acquisitions and other transactions amid a consolidating health care marketplace.

Due diligence is the research and analysis of a company or organization for a business transaction or the care a reasonable person exercises to avoid harm to other people or their property. Both definitions apply here for physician leaders as their organizations proceed with mergers, acquisitions and other integrating transactions as the health care marketplace consolidates.

The first definition generally applies to the pre-closing phase of an integrating business transaction, a focus on financial, legal, regulatory, tax and compliance issues by the acquirer.

The second is as important, because the surviving, controlling entity will often assume responsibilities for past and future acts of the acquired.

It is the latter definition that is the focus here: the role of physician leaders in assuring that the acquired organization properly discharges its responsibilities for delivering health services to patients and communities, and that the working relationships between the organization and affiliated physicians are properly designed and administered.

Physician leaders must take measured steps as they conduct their due diligence examinations of the organization to be integrated with theirs.

The organization to be integrated is referred to here as the acquired, although the integrating transaction may not be technically classified as an acquisition. It could be a merger, for example.

The acquired’s brand strategy and abilities to deliver on reasonable expectations of performance of clinical service lines represented as being within its control.

If, for example, the acquired represents ownership of a cardiovascular service line, the focus of the examination is the extent to which the organization actually controls, directs and manages the component parts of the service line, including the clinical providers. If a patient commits his cardiac care to that service line, can the person reasonably expect that the organization exerts due care and control of all aspects of care and care processes that affect quality, safety, patient experience, care coordination and total costs?

In other words, can the patient expect that all care provided is reasonably under the control of the health system promoting the service line?

The acquired’s brand representations, or the extent to which public representations or brand promises are fair, accurate, reliable and consistent with the reasonable performance expectations.

Examples of brand representations would include:

• Use of evidence-based best practices.

• Quality, skills and training of providers.

• Coordinated care.

• Clinical outcomes and cost.

• Participation with payers.

• Provider qualifications and experience.

The acquired’s methods and management of formal affiliations with independent physicians.

You’ll want to know formal devices used, such as partnerships, joint ventures or contractual agreements, the incentives created, and the effects of those incentives on performance and potential risks to patients and the acquirer. Particular and specific attention is paid to how these relationships compensate the physicians. Included in this is the extent to which compensation is reasonable for the value received, and whether the incentives may cause affiliated physicians to extend clinical care practices beyond the boundaries of evidence-based clinical guidelines or reasonable ethical standards.

Another issue is whether compensation may cause affiliated independent physicians to exploit available financial opportunities, such as selecting patients for service in their own practices based upon payer reimbursement opportunities.

The acquired’s models and methods for the hiring, leadership and management of employed physicians.

These may include:

• An internal, controlled structure that serves as the employer.

• A formal leadership and functional management model in place.

• Employment agreements, examined for internal consistencies across all employed physicians.

• A compensation plan that encourages incentives likely to contribute to the delivery of high quality, cost-effective care. Know whether active operating and financial incentives are likely to align the behaviors of the physicians with the mission, goals, objectives and ethics of the integrated health system overall.

The overarching issue here is the extent to which the acquired’s approach to the employment and management of physicians (as well as other licensed professionals) is likely to contribute positively or negatively to the performance and culture of the integrated health system.

The acquired’s approach to hospital medical staff management.

You’ll want to know the approach used to manage the formal medical staff of controlled hospitals, including:

• Credentialing and privileging, especially under circumstances where there are few physicians practicing within a given subspecialty or all the physicians within that specialty are members of the same independent practice.

• The formation and function of the medical executive committee.

• The interaction of the chief of staff with the board of the hospital.

• Methods of managing incident reporting and related performance of peers.

• The interactions of employed physicians with independent physicians as active members of the medical staff.

• Methods for verifying qualifications of members of the medical staff as well as professional liability coverages in force.

• Medical staff bylaws design and functionality.

The acquired’s approach to the ongoing evaluation of clinical quality and safety.

You’ll want to know these:

• The clinical and patient care areas reviewed, and rationale for them.

• Metrics monitored and methods of performance evaluation applied.

• Method of reporting, including to management and the governing board.

• Evidence of remedial action and process improvement.

The acquired’s history with professional liability claims.

Physician leaders look for patterns, preventable instances and methods of claims evaluation and problem resolution.

The acquired’s culture and the contributions of that culture to the quality, safety and patient experience.

Know the culture of the physicians, and make sure it aligns with the acquired’s brand and reputation.

Conclusion

Physician leaders in health systems with active growth strategies should play an active role in preintegration processes of due diligence.

While there are less conventional areas for examination by physician leaders, experience demonstrates more productive areas are those relating to:

• Brand representations pertaining to clinical care processes, quality, safety, patient experience, care coordination and costs of care.

• The means and methods applied to business and clinical care relationships with independent physicians, including clinically integrated networks.

• Structure, leadership, management and compensation of the employed providers.

• The hospital board’s relationships with the hospital’s medical staff.

• Methods of oversight for clinical quality, safety, patient experience and reporting and management of quality of care.

Through these, physician leaders can bring a unique and informed perspective to the due diligence process.

Daniel K. Zismer, Ph.D, is a founder and managing director of Castling Partners, a consultancy focused on strategy performance and integrative risk management for health care organizations. He has a 30-year career in the leadership of health care organizations and executive education. His area of specialization is strategy and the performance of strategy. He is the Wegmiller Professor Emeritus, School of Public Health, University of Minnesota Programs in Health Care Administration.