The financial implications of practice mergers

In some instances the successful working of Primary Care Networks has reduced the need to formally merge but there will continue to be many practices who will look to the potential advantage of merging.

The financial implications need to be clearly understood, and I will use this article to consider these.

Practices involved in potential merger discussions need a clear idea of their long-term objectives. While some may be looking for a ‘rescue’ or a clear succession path, others may be planning to increase business opportunities and generate greater profits.

In order for the merger to be successful, all sides need clearly identified tangible benefits – ideally ones that can be measured and understood.

By assessing at the outset what the value of these benefits are, it is easier to gauge whether it has been a success, and indeed whether a merger is right for all parties in the first place.

It is important to look at financial issues and the steps needed to ensure clarity and understanding for all parties.

1

To begin, a comparison schedule of each practice’s profits is needed, so all costs and income can be compared between the practices. When considering this, careful adjustments need to be made to ensure that the accounts are normalised to remove any differences in the treatment of items within the accounts by the practice accountants’. Areas to clarify include:

• Which items of income and expenditure are already allocated or charged to partners rather than being shared by everyone?

• Some expenses, such as superannuation, professional subscriptions, locum insurance and loan interest costs are not always dealt with in the same way. Whereas one practice may pay these costs directly, in the other they may be paid by the partners personally. Superannuation may be shown as a deduction from profits or maybe shown within partners drawings.

• The definition of a partner session may differ between practices, ie do outside appointments count towards a session if this income is pooled.

• Internal locum sessions may be treated differently.

2

Having identified the operating differences between the practices, adjustments are needed to identify a comparable profit per partner session for each practice. Be careful to understand how many sessions are considered Full Time at each practice, this will usually be 8 sessions but not always and ‘admin sessions’ may also cloud the comparison.

3

It is also worth considering how any future funding changes will affect each practice over the next few years. Will they:

• Convert from a PMS contract to GMS and what financial effect may this have.

• Be at risk of losing funding or services, ie with a contract coming up for tender or services being undertaken at PCN level rather than at practice level.

• Suffer any differences from their present profits per session rate once annual contract changes are factored in?

• Have already worked to create new sources of income or increased levels of a current funding stream pre-merger consideration.

4

The profits per partner session will not be the same, sometimes the differences are small which will make things easier.

If there are significant financial differences, the lower earning practice could accept a reduced profit arrangement for a time, rising to parity over a defined period, until such time as the full business benefits are reflected in increased profits. However, this approach tends to be impractical over a long period due to constant changes in contract income and staff movements.

When considering any rise to parity type adjustment always think what the merged practice would do within this period with regard to new partners coming in post-merger.

You will likely be comparing fairly historic results and practices may have changed performance levels since the date of the last available accounts.

As we all know things change quickly in general practice and crystal ball gazing is not an easy task for the accountant.

When creating a financial business plan, it will need to show:

• What additional income can be generated from the merger?

• What cost savings can be achieved and how long will they take to achieve?

• What additional investment will be required?

• What will be the share profit per partner session over each of the next five years?

• Will the merger lead to changes at PCN level such as the enlarged practice becoming its own PCN. This could have major advantages and other considerations such as VAT implications that will need to be considered.

• Staff costs will always be the largest cost, how do the different categories of staff costs per weighted patient compare and where can longer term economies of scale be made. In considering this have thought to ARRS staff under the PCN DES these are increasing in type and number and how might this effect costs post-merger.

• Any changes in partner numbers or sessions now in place such as a retired partner post the accounting year end who may not have been replaced like for like.

• VAT- if one practice is already VAT registered this will have implications immediately on the merged practice that will need to be VAT registered. Alternatively, is VAT registration likely to be needed as a result of the merger creating vatable turnover over the registration limit.

Premises are a major part of any merger and can vary tremendously

The financial implications relating to premises should be considered very carefully when discussing mergers. The questions to be asked, and the steps to be taken, will depend on the ownership model of the different premises. Practice owned surgeries:

• What is the basis of the present valuation? Is the value as a GP surgery based on rental income or is it an open market value? If a building is to be closed as a result of merger do we need to consider an alternative use valuation?

• How much does the difference between these methods of valuation amount to?

• Is the surgery likely to remain fit for purpose and commercially viable?

• Is the surgery funded under cost rent rather than notional rent?

• Are there any long-term fixed rate loans with high interest rates in existence? What are the potential redemption penalties if the loan is cleared early?

• Are any retired partners still involved in the ownership of the property? If so, are they willing to be bought out?

• Are any partners who are property owners likely to be retiring fairly soon post-merger, their position should be considered separately and exceptions may need to be made.

Surgeries owned by GP-owned companies or property partnerships

• Are the present owners/investors happy to treat this as a commercial investment for the long-term, or do they expect new partners to buy them out in due course?

• If a buy-out is expected, how much would be required?

• Is the income generated from the investment sufficient to fund the necessary bank loan?

NHS Health Centres

• Is there a lease in existence? How long does it have to run?

• What does the lease say about service charges? Have they been agreed?

• Are there any unresolved discussions about earlier years’ service charges? If there are, what is the potential scale
  of the arrears? This is a key problem area and should be carefully addressed.

Surgery rented from third party owner:

• Is there a signed lease in existence? How long does it have to run?

• Is it a full repairing and insuring (FRI) lease, or simply an internal repairing and decorating lease?

• If it is a FRI lease, does it include any dilapidations provisions? If so, is there an adequate reserve being built up on the practice balance sheet to cover that liability?

• How much work is needed to a surgery building to bring it up to date with dilapidation requirements and who should be responsible for the cost thereof?

Other matters

• Do practices have coterminous year ends or will a change of year end be needed. How will this affect individual partners both in terms of tax and the wider implications of AA tax charges on pension growth.

• How will the financial leadership of the combined practice look? Think particularly about the practice and finance managers and play to the skills that both practices have.

• What accounting systems will be best for the merged practice, consider the increased size.

• Does either practice have a separate company sitting alongside the practice such as a pharmacy company, how will the membership of this work post-merger do shares need to be valued and purchased?

• It is most likely that the core contracts of each practice will be merged but consider the impact of this on the Carr Hill formulae and weighted to raw patient list.

• Does the merged practice require a minimum number of partner sessions for an individual partner, will this cause a problem to any partner based on current commitment?

Practice mergers will undoubtedly continue over the next five years. The successful ones will be those with clear objectives and business plans that are robust and fair to all involved.

When practices are discussing merger plans they need a clear idea of their long-term objectives and to ensure a good financial fit from the outset. Personalities and ethos will also need to be moulded together to achieve maximum success.