Economic imperatives in health care financing are compelling a variety of mergers, acquisitions, integrations, and other forms of amalgamation. As hospitals merge, their pathology practices are merging. Physicians are forming clinically integrated groups, both with and without hospitals. Universities, commercial laboratories, and even insurance companies are acquiring laboratories and pathology practices. There are few standards or guidelines to help the practicing pathologist respond to such new undertakings. In the present study, we present a “how-to” guide or template to assist pathologists in evaluating proposals to amalgamate and in managing the alliance. The procedure begins with an articulation of the cons and pros, followed by a series of assessments of the cultures, the market, the organization, and operations, as well as a legal and financial assessment and human resources appraisal of each of the entities. We then outline the method for developing an organizational and operational model for the new merged entity and for performing the feasibility analysis, making a final decision, drafting a contract, and developing the business plan for the new venture.

The College of American Pathologists 2011 Practice Characteristics Survey found that 8% of the respondents were involved in some sort of merger or acquisition. Of these, 55% were consolidations of small pathology groups brought about because their hospitals were merging.1  Large hospital systems are also merging; in November 2012 it was announced that Henry Ford Health System of Detroit, Michigan, and Beaumont Health Systems of Metro Detroit, Michigan, had signed letters of intent to merge to create a single $6.4 billion system. The College of American Pathologists survey also found that 7.5% of respondents were participating in or involved with an accountable care organization (ACO), and an additional 12.5 % were exploring an association with an ACO.1 These numbers are growing rapidly; as of July 2013 there were 250 ACOs, serving 4 million beneficiaries. Hospitals, in addition to merging, are acquiring physician practices—not only clinical practices, but hospital-based practices as well. It has been estimated that by 2013, only one-third of medical practices will be physician owned. Not only hospitals but universities and their medical schools, as well as commercial laboratories, health care systems, managed care organizations, and even insurance companies, have been acquiring pathology practices and pathologist-directed laboratories. In October 2012 Quest Diagnostics of Madison, New Jersey, signed a definitive agreement to purchase the clinical outreach laboratory business of the University of Massachusetts Memorial Medical Center, a member of UMass Memorial Health Care, Worcester, Massachusetts, the largest health care system in central New England. During the past 10 years, more than 50 laboratories have been acquired for$6.3 billion. It is likely that most pathologists will face a proposal to merge, to be acquired, to join, or in some other way to amalgamate or integrate with another entity in the not too distant future.

The typical law and business school texts on mergers and acquisitions24  cover important topics, including asset valuation, due diligence, financial accounting, calculation of key statistics and ratios, methods of financing and leveraging, risk management, federal and state laws and regulations, postacquisition divestiture, and tax implications. These are all critical issues and may well be addressed during the evaluation of any merger; however, none of the texts address the unique aspects of pathology practice or clinical laboratory organization and operations that have an impact on a merger and are emphasized in the present study.

DISCLAIMER: It is not our intent to provide specific legal advice, and nothing herein should be interpreted as tax advice. Each merger or acquisition is unique and requires the collaboration and guidance of experienced legal and accounting professionals.

Before addressing what to do, it is important to articulate the common fears that surface when a proposal to merge or to be acquired arises. Beginning with the “worst case,” it may mean the loss of a job. A major impetus to any merger is to decrease expenses by eliminating redundant personnel, and the greatest savings occur when the highest-paid personnel (ie, pathologists) are eliminated. Can 2 hospital laboratories, each with 4 pathologists, when merged, be run by 6 or 7? Probably. If jobs as such are not in jeopardy, will there be a decrease in income? Not unlikely, as when an independent practitioner billing on a fee-for-service basis becomes an employee of a larger enterprise, the likelihood is that income will suffer. If a pathology group has been receiving a “management fee” for supervising the clinical laboratory, what happens to that fee? Similarly, what happens to long-established referral and consulting arrangements? Of critical importance is the fear of losing capital investment that has been made in a practice, and what happens to any buyout agreements and pension plan contributions? All of these concerns need to be resolved during the assessment of any merger.

Of equal importance are anxieties concerning governance of the new entity. Will there be loss of authority, autonomy, and control? Most certainly there will be. Will the director of laboratories of a single independent laboratory become merely the “lead pathologist” in a branch of a larger enterprise? What happens to the relationships of the pathologists within a group, the relationships with the medical staff of a hospital and with administration? What happens to the relationship between the pathologists and the laboratory staff? Will staff now report to a lab director located elsewhere? And what about the working environment? When a community hospital pathology practice is incorporated into a research university's pathology department, will the community pathologists be second-class citizens, the “local MDs”? And how will workload be equalized? Should the pathologist in the community, signing out 100 cases and doing a couple dozen frozen sections, be paid the same as a professor teaching a class every few weeks and spending the rest of his time in the research lab? Again, when assessing a potential merger, these questions need to be resolved.

Before attempting to evaluate a potential amalgamation, the impetus or intent should be clearly articulated. How does the proposal fit into your personal, or your pathology group's, strategic plan? The hospital's? The buyer's? Who or what is the driving force, and what are the apparent benefits and synergies? Is this going to be a voluntary merger of equals, a hostile takeover, or something entirely different? Is the proposed merger exclusive? Can you join this entity but still retain your existing practice? If these questions can be answered and you decide to proceed, it is essential that a steering committee be formed to undertake the complex task of carefully assessing the deal. Each of the potential groups should assign a pathologist, a senior technologist, and possibly an administrator to serve on the committee. Their task will be to develop a plan for assessing the merger, establish a timeline, perform the actual assessments, put forward the new organizational and operational models, and, most importantly, communicate the process to the other pathologists and to the laboratory staff. One of the first tasks of the steering committee is to engage 2 consultants: an attorney and an accountant. The attorney will prepare confidentiality agreements and letters of intent to be signed by each party and later will need to review the various existing contracts and other legal instruments and to participate in the drafting and negotiation of a final agreement or contract. The accountant will be needed to assist in the evaluation of the financial and tax data and in preparation of the pro forma and the business plan.

Historically, business alliances fail because of differences in culture.5  Even though a merger may be financially advantageous, may accelerate market penetration, may enhance technologic development, and may improve customer satisfaction, disparate corporate cultures and dysfunctional corporate personalities too often wreck the best thought-out business plan or alliance. So the first task of the steering committee is to identify the cultures, priorities, and personalities of the merging entities. Community hospital pathology practices would probably rank their priorities as follows: first, patient care, and then income, followed by education and research. A university pathology department's priorities would likely be just the opposite. The personalities of the groups must be defined: One group may be a startup—young, small, and still insecure. Another might be in a rapid growth phase—confident, aggressive, and innovative. Yet another group might be more mature, somewhat cautious, perhaps complacent, whereas another group might be in phase of decline, with older pathologists, rigid and quite risk averse. Personality clashes would seem inevitable. Leadership styles also vary markedly among groups and may collide. Is leadership autocratic or inclusive? What is the extent of delegation? How involved are the pathologists in the operation of the clinical laboratory? How is communication within the group? How are conflicts resolved? How involved are the pathologists with the medical staff and with administration? If all these attributes were similar in merging entities, the chance of success would be greatly enhanced, but that would be very rare.

It is a major task of the steering committee to attempt to align the disparate cultures and personalities. Before proceeding with any of the more difficult assessments, the steering committee should clearly articulate the various players' priorities and values, their life cycles or personalities, their management styles, and their levels of involvement. If there are synchronies, they ought to be recognized and the major discrepancies should be clearly identified. The committee might explore the possibility of an “ideal” culture, although that is unlikely. Perhaps some compromises are possible; if not, can the differences, once out in the open, be recognized and accepted? If so, then the assessment process should continue. If not, then the parties should call it quits, because a successful merger would be unrealistic.

The next assessment that the steering committee needs to do is the assessment of the merging organizations. This is best visualized in a side-by side spreadsheet that includes details of the ownership, governance, legal organization, and financial, tax, and insurance status of each. All current contractual obligations and arrangements should be listed, and there should be a side-by-side comparison of the organizations' strategic plan visions and missions. Major items of disparity in these categories need to be identified and hopefully aligned.

Essential to the eventual decision making is what is happening in the market. Are there other mergers and acquisitions proceeding in the community? If these are successful, how will that impact your patient base? Is your laboratory only one of several being considered for acquisition? And what happens if another is acquired first—how will that impact your business model? What is the goal of an acquiring entity? Does it wish to expand its market penetration, or does it have a reputation for buying another laboratory and then simply closing it to eliminate competition? The market assessment might also include an evaluation of the potential patient base that would be served by the merged enterprise—what is its demographic? Are the patients coming from employee health plans? Insurance companies? Managed care organizations? What is the expected proportion of Medicare and Medicaid patients? Will there be capitation or bundling arrangements that will have to be dealt with? Of ancillary interest is the fate of physician office laboratories when hospitals buy physician practices—will these continue, or will they be closed and all laboratory testing done in a central lab controlled by the pathologist?

The next task for the steering committee is to prepare a detailed listing of the current scope and nature of services and operations in each of the merging entities. A spreadsheet format that not only lists but compares and possibly contrasts operations is most useful. It is this assessment that becomes invaluable in determining synergies, redundancies, areas of special expertise, and unique service lines for the new enterprise. The listing should include the facilities, the equipment, and the tests performed. There should also be a listing of “send-out” tests and which reference laboratory is used. The current staffing, scheduling, workload, and productivity must be detailed, and the listing should include the current quality assurance program(s), the results of recent inspections, accreditations, and proficiency testing surveys, as well as recent customer satisfaction survey results.

As mentioned previously, alliances most often succeed or fail depending on their cultural alignment—and that is almost entirely dependent on the people involved. Thus, the human element needs to be carefully assessed. This should begin at the very top. If, for example, there is a proposed merger of laboratories in 2 hospitals, not only should there be an assessment of the laboratory leadership, but the governing body and administration of each hospital must be thoroughly evaluated. What are their attitudes toward the laboratory and the pathologists? Are these attitudes adversarial or collegial? Have they been supportive of new and innovative technology, or penurious and risk averse? What are their long-range strategies? Next, there needs to be a listing of the professional talent of each entity—the pathologists and PhDs and their areas of general as well as special expertise, where they are located, their ages and their interest in—or attitude toward—the merger. A similar inventory of the technical talent of each entity is needed. Are there especially talented medical technologists, cytotechnologists, or histotechnologists? Are there technologists with particular expertise in genomics or molecular methodologies? Where are they located, and how do they view the proposed merger? This assessment will not only identify those individuals that would be essential to the success of a merger, but also might point to redundancies where cost savings could be realized.

Legal and accounting expertise is essential in performing the next 2 assessments. As before, a side-by-side listing of the essential items makes the evaluation simpler. First, obviously, is the licensure and accreditation status of each entity. Next is the tax status of the entities—are they individuals, partnerships, S corporations, tax-exempt organizations, for-profit corporations, or combinations? What are the contractual obligations of each entity, such as employment contracts, pension plans, buyout agreements, leases, insurance obligations, and managed care contracts? Are the existing contracts assignable to the new entity? Are there any potential practice issues relating to Stark self-referral and antikickback regulations? Are there potential antitrust problems in the merger? Is there any pending or possible litigation against any of the merging entities? Is the current malpractice coverage occurrence based or claims made, and if the latter, is there adequate tail insurance? Clearly, the above is not an exhaustive list of potential legal issues, and your own legal counsel must be engaged to perform a detailed assessment.

The financial assessment is the sine qua non of the merger and acquisition drama—it is the most data rich and is essential for predicting financial success. The steering committee with its accounting consultants must do a meticulous historical review of each entity's balance sheets and revenue and expense statements for at least each of the last 3 years. There should also be an analysis of the sources of revenue—such as the proportions of revenue from Medicare, Medicaid, managed care, private insurance, and others—because this is important for subsequent revenue projections for the merged entity. There also needs to be a side-by-side comparison of current fee schedules, billing and collection procedures, employee compensation and benefits packages, and pathologists' professional fees and benefits. In addition, there needs to be a quantification of current contractual obligations and outstanding debts, as well as prior commitments to pathologists for buyout, or repayment of capital investments. If there is to be an acquisition, how will the value of the practice be determined, and what are the assets and liabilities? The goodwill? What are the tax implications of an acquisition? All of these data will need to be incorporated into the planning and forecasting that follow.

On completion of the above assessments, the information gleaned and the conclusions reached should be made available to the professional leadership in each entity for their comments and input. It should then be obvious if a merger is possible at all; there may be obstacles in the culture or in fiscal/legal philosophy that preclude any further discussion. Knowing that a decision not to merge has been made based on a thorough assessment and evaluation is very important and eliminates subsequent second-guessing and recrimination. If, however, the assessments demonstrate that a merger is possible, the next task for the steering committee is to define the organization and operations of the new enterprise. In addition, it might be useful to list and prioritize any outstanding contentious issues so that they may be addressed in the subsequent planning process and or contracting phase.

At this point the steering committee will don the mantle of prophet and planner and will propose the organizational structure and function of the new entity. Who will own it? How will it be governed? What will be the composition of the governing body? What will be the charge to the governing body? What will be the pathologist's role? It would be exceedingly useful to define the role of the pathologists in a position charter or job description that precisely defines the pathologists' specific duties and work expectations, the reporting relationships, the responsibilities, and the extent of the pathologists' authority. How will disagreements be handled? Is there an alternative dispute resolution system that has finality? How might the entity handle terminations, dissolutions, and bankruptcy? The organizational model should also address the financial structure of the new entity, particularly for the pathologists; what will be the payment model? How much can the pathologists expect to earn? Will there be an equity position? Will there be a profit-sharing plan? If the entity proposes interfaces or amalgamation with ACOs or other quasicapitation payment models, are the data and systems in place to assure fiscal viability?6

The development of an organizational chart that clearly depicts the separate professional, technical, and administrative hierarchies and describes the reporting relationships and relative ranks of the various sections and positions in the new endeavor is essential. It shows the members of the new team where they belong, how they are ranked, and how they can interface. Next, the operational model will define what services will be provided at what locations, by whom, and by what methodology. Will there be centralization of some or all services? Will there be uniformity of methodology at all sites? Which method will be used? What will be the projected test volumes? What will be the need for, and the role of, the pathologists in both anatomic and clinical pathology? What personnel will be required to perform the services? How many managers, supervisors, technologists, technicians, histotechnicians, pathologists' assistants, secretarial/clerical staff, and others will be needed at each site? How much space will be required, and what instrumentation will be needed? What will the computer requirements be? Is a new computer required to meld disparate facilities? Is a courier system needed? How will the billing and collection be done? Is there a marketing program; and if not, why not? Who will manage that? In addition to deciding how, what, where, and by whom the testing services are performed, the steering committee also needs to address how, what, where and by whom the quality assurance, educational, and research activities of the new entity will be performed. Will these be distributed or centralized? Will specialists in transfusion medicine, for example, be circuit riders, going to several facilities, and will there be a central quality assurance coordinator? In establishing the operational model it is important also to consider some of the new regulations and systems that will soon have an impact on the practice of laboratory medicine. Where in the operational model will the gatekeeper be? If it is a primary care physician or a nurse case manager, how will he or she interface with the laboratory, and how will the lab handle prior authorizations for expensive (eg, molecular) tests? What about the requirements of the HiTech Act for the electronic health record and the confirmation of “meaningful use”? What will be needed to access the pay for performance models and the various reporting requirements of Centers for Medicare & Medicaid Services and the Physician Quality Reporting System? Who will be responsible for compliance? If these seemingly peripheral needs are not addressed prior to merger, they will inevitably surface and cause grief later.

The major impetus for, and advantage of, consolidation is cost savings. Economies of scale, elimination of duplicative personnel and services, and centralization with increased productivity all can result in a more efficient and effective health system, which is then in a stronger position to negotiate with employers and health insurers and thus increase market penetration and capture market share. By clinically integrating all medical services, a system will be better positioned to participate in health insurance exchanges under the Patient Protection and Affordable Care Act and in ACOs. Soon, physicians who are not participants in some type of amalgamation will see their patient base dwindle and disappear.

For the individual pathologist in a merged entity, there should be less administrative and management responsibility. The centralization of individual physician performance measurement and continuing education programs should make licensure, recertification, and credentialing easier. Centralization of testing and of the information system should lead to uniformity in methodology and protocols; should improve preanalytic, analytic, and postanalytic operations, including order entry, reporting, billing, and compliance; and also should provide data for test use analyses by physician group, by individual doctor, and by diagnosis. Uniformity or standardization and/or centralization of methodologies should decrease costs by eliminating redundant personnel, equipment, and supplies, and should also lead to economies of scale in purchasing supplies and other services. Centralization of quality management and performance improvement protocols should simplify the ability to comply with standards for accreditation, the electronic health record, and meaningful use, and should simplify accessing pay for performance programs and developing data for the Physician Quality Reporting System, the Patient-Centered Outcomes Research Institute, and the Healthcare Effectiveness Data and Information Set. Having cost, use, and performance data centrally available should strengthen negotiating and contracting positions with employers and insurers. The scientific advantages include access to core competencies and technologies in specific subspecialty areas of both anatomic and clinical pathology that are not available or would not be cost effective in any single entity.7

The next task for the steering committee is to again return to their own organizations and present the proposed organization and operations for the merger, and to reiterate the fears and the advantages with regard to the merger. Keeping the staff informed and asking for their input is not only the right thing to do, but it is essential in the subsequent implementation of any merger.

Assuming that (1) there has been no revolution from the individual groups, (2) the advantages trump the fears, (3) the cultural differences, even if not accepted, are acknowledged, (4) there is a recognition that there will be some sacrifice of sovereignty, and finally, (5) there is the time and the will to undertake the merger, then it is time to prepare the pro forma. It is essential to have professional accounting help in developing this financial instrument. There needs to be a thorough examination of the current operating statements; the cost of new services, personnel, equipment, and facilities; the cost of equalizing salaries and benefits and fee schedules; the cost of any buyouts of employment agreements, contracts, or leases; the cost of retiring existing debts or other obligations; and many other factors. There must be estimates of cost savings that would occur because of the amalgamation as well as a projection of revenue and revenue sources. The pro forma then models the anticipated results, with an emphasis on projected cash flows and net revenues using the proposed new organizational and operational models. The pro forma projects the financial status of the new enterprise during the next 3 to 5 years, and it is used to make the ultimate decision regarding the feasibility of the new entity.

Assuming the pro forma projects an economically viable merger or acquisition, the next task is the drafting of the contract or agreement that reflects the desires of the merging entities and incorporates the organizational and operational model of the new entity. It may be necessary to negotiate outstanding issues at this time, and prioritization of such issues is necessary. Legal counsel is essential during such negotiation and is obligatory for the development and drafting of the final legal contract. The final task for the steering committee will be the formulation of the business plan, which should begin with a strategic plan for the new entity, including new mission and vision statements, short- and long-term goals and objectives, and criteria for the evaluation of the merger. Next, a timeline for implementation and a budget based on the previously developed organizational, operational, and financial models are needed. Of critical importance at this time is the development of the marketing plan for the merged entity—this should not only focus on the customers, but also enlighten and persuade the pathologists and the technical staff to embrace the new entity.

In this new health care environment, most pathologists will be afforded an opportunity to merge with another group, be acquired, or in some other way amalgamate or integrate with another entity. A successful merger or acquisition depends on adequately prepared and enthusiastic pathologists—pathologists who are willing to assume leadership positions in new enterprises, pathologists who understand their role in the “continuum of care,” pathologists who understand the concept of integration of pathology and laboratory medicine into patient care. In addition to keen and engaged pathologists, a successful amalgamation requires a steering committee of pathologists, technologists, and administrators to perform a series of assessments of the existing entities and to develop plans for the new venture. Not every potential amalgamation requires the exhaustive and thorough assessments described herein, but the more detailed the assessments, the more likely that the decisions will be correct. There will be several decision points during the process, and at these points negotiating skills will be essential—for negotiating with potential collaborators as well as one's own colleagues in order to come to a mutually advantageous outcome. Finally, it is essential to have realistic expectations. The new health care environment and the new payment models that mandate lower costs will make any win-win merger difficult, so we should be prepared to adjust in order to retain our professional integrity and our indispensible contribution to patient care.

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## Author notes

The authors have no relevant financial interest in the products or companies described in this article.

## Competing Interests

Presented in part at the annual meeting of the College of American Pathologists; September 11, 2012; San Diego, California (PM 107 “The New Interfaces and Accountabilities of the Laboratory Director”).