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Philosophical Agreement Crucial to Merger Success

Physician Compensation and Recruitment, June 11, 2009

Mergers and acquisitions are on the increase, and they bring with them a host of compensation-related issues. Knowing what they are and dealing with them early in the process can go a long way in cementing the new relationship.

Terrigal Burn, MD, board chair at the Palo Alto (CA) Foundation Medical Group (PAFMG), is working through many of those merger-related challenges now. PAFMG is a multispecialty group practice affiliated with Sutter Health. It was established January 1, 2008, through the merger of Camino Medical Group, Palo Alto Medical Clinic, and Santa Cruz Medical Clinic. Today, PAFMG operates as a single entity with more than 850 physicians serving more than 600,000 patients.

The process started in 2006, with regular meetings among the leadership of each practice. Among the questions discussed were:

  • What was the business case for a merger?
  • Would anything short of full integration achieve the goals desired for the merger?
  • What would this new group look like?

The merger itself was just the beginning of a process that continues today. Integrating the compensation plans is "still very much a work in progress," Burn says. But that was to be expected. "We anticipated that this would be a multiyear process," he says.

Burn notes that although the merger was a marriage of three similar groups, reconciling even slight differences required effort. What seemed like minor differences at the outset were "not so small when facing difficult decisions," he says—especially decisions related to compensation.

And that's why it's critical to address the philosophical principles before a merger. The details will prove challenging enough, but trying to tackle fundamental philosophical differences could be insurmountable.

Establish the fundamentals
Assess each entity's principles and philosophies. For example, one group may have a "split revenues equally" mind-set, whereas the other may take an "eat what you kill" approach, says Steven A. Nahm, vice president of The Camden Group in El Segundo, CA. Basic philosophical differences can undermine a merger.

Fortunately, each of the three groups constituting PAFMG had a similar perspective, says Burn. Each group provided compensation in a similar fashion, based on production and measured by wRVUs.

One of the fundamental issues the leadership had to address early on was whether the merged group would embrace the philosophy of equal work for equal pay. "We decided it was a principle we believed in for the solidarity and unity of the group," Burn says.

But the philosophy had to be more than theoretical; it had to be practical. Before agreeing to this concept, the leaders looked at the regions in which the groups were based. Since there was little disparity in housing costs and regional compensation rates, they decided they could move forward with equal work for equal pay.

"But we also wanted to do this embracing the concept of 'do no harm,' " Burn adds. Modeling the benefits of integration, including more programs of excellence and more superspecialization, the leadership anticipated that the flow of revenue would allow for both.

As a result, those physicians being paid less at the time of the merger have seen their compensation rise more quickly.


This article was adapted from one that originally appeared in the June 2009 issue of Physician Compensation and Recruitment, a HealthLeaders Media publication.

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