The Second Marriage

Edition: October 2008 - Vol 16 Number 10
Article#: 3031
Author: Repertoire

Last month, Repertoire examined some of the forces driving hospitals and health systems to acquire physician practices, and driving physicians to seek employment. In Part 2, we examine why the marriage might work better than it did 15 years ago, during the last wave of hospital acquisitions of physician practices.

It was the mid-90s … the Roaring ’90s, insofar as physician practice acquisition was concerned, when companies such as MedPartners, PhyCor and FPA Medical Management were gobbling up physician practices. Wall Street loved them. Hospitals and health systems got into the act too, believing that by acquiring physician practices, they could indeed become “integrated” in more than name only. They also believed that bigger was better when seated at the negotiating table with the big HMOs. Meanwhile, physicians saw the physician practice management companies and health systems as ready sources of capital with which they could improve their practices … not to mention a way to ensure healthy salaries while shedding the headaches of running independent practices.

But the bloom came off the rose fairly quickly. By 1998, the stock of MedPartners and PhyCor had plunged, and the companies sold off practices almost as quickly as they had acquired them. As their stock tanked, so too did the value of physicians’ shares in them, hastening the stampede out the door. Meanwhile, hospitals and health systems found that running physician practices was more difficult and more expensive than they had originally thought, and they began to shed their new acquisitions as well (though the degree to which they did so is the subject of some debate).

Predictably, pundits called the trend “disintegration,” and they blamed it on a number of factors, including;

• Declining productivity on the part of salaried physicians. (At the time, the Medical Group Management Association reported that its consultants witnessed as much as a 25 percent reduction in physician productivity following an acquisition.)

• Higher-than-expected costs associated with improving practices with new equipment, billing systems, etc.

• Inexperience on the part of hospitals in running medical practices.

• A lack of involvement on the part of physicians in the day-to-day management of their practices.

That history notwithstanding, evidence is mounting that health systems are once again in the business of acquiring physician practices. (Independent physician practice management companies don’t appear to be a big factor this time around.) The big question is, will the outcome be any different? The answer is crucial to Repertoire readers who call on doctors’ offices, because if hospitals and health systems become owners of physician practices, they may get more involved in the buying decisions for those practices.

Drivers of the 1990s

“I think it’s different from the last trend,” says Caroline Steinberg, vice president of trends analysis for the American Hospital Association. “Last time, it was all about managed care and setting up integrated delivery models to accept capitation. Now, we see trends on the physician side – declining reimbursement, more trouble making ends meet, rising malpractice costs, and a lot of physicians who want … to be employed. They don’t want to run their own practices.”

Ten to 15 years ago, there was something of a “sky is falling” mentality on the part of many hospitals, says Ken Mack, president, Mack/Voyten and Associates, a physician-integration services firm in Brecksville, Ohio. “There was a prediction that we would be in a totally capitated healthcare environment. The answer was, ‘OK, let’s do two things. First, let’s hire all the primary care doctors, because they can help manage the subspecialists. Second, set up HMOs and PPOs.’

“Well, it didn’t happen. Government didn’t change the way it reimbursed providers. [And] hospitals didn’t think through how they would make this work. The only people who really made money were the doctors and consultants.

“The whole thing was driven by a belief that hospitals could control the system because reimbursement would change,” says Mack. “The end game was, ‘Let’s sign up all these docs, because if I don’t, they’ll go to the competition and take patients with them.’ The drive was to sign docs up, not to make the model successful.”

The wave of the specialist

If the 1990s was the age of primary care integration, the late 2000s is something different altogether. “Today we’re seeing the wave of the specialist integrating,” says Daniel Zismer, Ph.D., CEO, Essentia Health Consulting, a service of Essentia Health, a non-profit healthcare system based in Duluth, Minn. “That’s coming at an accelerating rate in the specialties that generate the most revenues and profits for the hospital – cardiovascular care, neuro and neurosurgical care, cancer care and a variety of subspecialties.

Adds Joseph Bujak, M.D., vice president, medical affairs, Kootenai Medical Center, Coeur d’Alene, Idaho, “Even people who walk with the biggest swagger are asking to be employed, because their margins are absolutely tenuous.” Indeed, the forces driving health systems and specialists together are strong.

Although the government has historically encouraged outpatient procedures because they are, theoretically, less expensive than inpatient procedures, policymakers have grown increasingly wary of them, says Bujak. “The government believes that if a doctor owns [a piece of equipment], every patient will need it,” he says.

Some specialists, such as orthopedists, have profited by performing procedures in outpatient facilities that they own. “But it’s important to note that reimbursement policymakers – government and commercial carriers – are starting to target these niche outpatient strategies,” says Zismer.

In fact, reimbursement for ancillary services performed in physician-owned outpatient centers is down, says Bujak. For example, a physician performing a nuclear cardiac scan in his or her own facility receives far less reimbursement than a hospital does for the same procedure.

“Payers, especially the governmental, are ‘surgically’ reducing these margins [on], for example, imaging services, outpatient surgery, endoscopy, etc.,” says Zismer. What’s more, the government is looking skeptically at joint ventures and other arrangements between hospitals and doctors. “The array of the more typical partnerships and contractual arrangements won’t be sufficient to fix the problems that are driving consolidation,” he says.

That could leave acquisition of specialists as the best option for both them and the hospitals. “When you employ a doctor, you get rid of all the Stark conditions,” adds Bujak, referring to the so-called Stark laws, which regulate physician self-referral for Medicare and Medicaid patients. “If the physician is in private practice, and [the hospital] does not employ them, any time money goes to the doctor, you have to worry it’s not a form of inurement. But when you employ them, all the gloves are off. You can align incentives much better that way.”

Simply put, acquiring the practices of specialty physicians may be the only way the health system can ensure it can offer the services it must in order to remain viable in its community.

Where it went wrong; how to make it right

If the crush to buy physician practices ultimately ended poorly 10 years ago, those with whom Repertoire spoke don’t expect the same outcome this time around. Health systems are much smarter now, and their expectations more realistic.

“Hospitals have learned that they have to treat medical practices as a business or service line, and that they have to [allot] appropriate resources, in terms of infrastructure, management and administrators,” says Nick Fabrizio, a principal consultant with the Medical Group Management Association’s Consulting Group. They learned that they can’t just take one of their hospital administrators and tell him or her, “OK, now you’ve got the physician practice,” he says. What’s more, health systems have learned that they have to carefully think through how their physicians are compensated. Last time around, “hospitals weren’t sure what they were buying,” he says. “They offered top dollar and compensation packages, but they didn’t link compensation to productivity.”

“The salary guarantees were risky and often unwise,” adds Bujak.

“There’s no reason [health systems] should lose a dollar on sub-specialty practices, unless the payer mix is extremely poor,” says Mack. “The key is putting together compensation systems that look a lot like private practice.”

In fact, successful hospital/physician relationships are run on a net cash receipt basis, meaning that the physician stands to make more money if he or she can improve productivity, says Mack. “In this model, it behooves me as the doctor to make the hospital ORs more efficient [if the doctor performs procedures in them]. It behooves me to standardize trays and implants, because that leads to efficiencies. If I’m an orthopod, I want real-time scheduling in the OR, so that they can turn rooms over more efficiently. If I’m using my head, I can turn over an extra case.”

Health systems must do their part too, says Mack. For example, it is absolutely essential that they make sure all their newly acquired physician practices are equipped with electronic medical records. As the number of doctors in its practices grows, the health system can start to leverage its investment in automation to lower various back office functions, such as collections, he says.

Outsourcing management

But health systems don’t have to do the managing themselves. In fact, they would be well-advised to outsource the function to a capable third party, according to observers. Fifteen years ago, about the only show in town in terms of outsourced physician-practice management were the PhyCors and MedPartners, according to Mack. But they failed to deliver the value-added that physicians – and shareholders – expected. Today, “we’re seeing a revolution” in outsourced management, largely due to the technology advances that have taken place in recent years, he says.

“Companies like ADP – which has years and years in the payroll business – are now outsourcing to larger groups entire HR functions, including healthcare benefits,” points out Mack. McKesson also outsources billing and collections. And many others are doing the same thing on a regional and national basis. For example, close to Mack, SS&G Financial Services in Akron, Ohio, provides outsourced accounting, HR, technology and payroll services to physician practices and other firms in the Midwest.

A change in attitude

The bottom line is that to be successful in this newest iteration of physician practice ownership and/or management, hospitals and health systems need to understand their limitations and adjust accordingly, according to observers. Perhaps most important, they should avoid treating their newly acquired physicians as employees, according to those with whom Repertoire spoke.

Most successful hospital-owned practices are run by the doctors, regardless of who is the employer of record, says Mack. “The physicians have the administrative types reporting to them, not the other way around,” he says. “We were involved in this 15 years ago, and still have some [hospital-owned] practices that are working,” continues Mack. “All of the successful models use the word ‘partners.’ The flip side – the kiss of death – is when the hospital says to the doctors, ‘I own you.’

“One of the things that you learn as a lay person is this: I am not the doctors’ peer,” says Mack. “As long as I can accept the fact that their training is different from mine, [the arrangement will work]. It’s not a perfect relationship, but it’s a good one. Those [practices] having issues with production are the ones that look at doctors as employees.”


“There’s no such thing as an employed physician,” adds Bujak. “They don’t bring the mindset of someone who’s an employee. They come in as the same person they were before. The fact that you’re writing the check doesn’t change how they work. If you treat them like an employee, that’s like playing with nitroglycerin.” In fact, says Bujak, health systems should consider their doctors not as employees, but as employee-owners. “They have to have authorship,” he says.

At the same time, physicians need to be held accountable for their performance, says Bujak. “They have to manage costs. They have to be effective, meaning they deliver high-quality care. And they have to provide a quality patient experience and be appropriate in their decision-making.”

Rather than receive a guaranteed annual salary, physicians whose practices are managed by Kootenai stand to gain or lose money based on their expenses and efficiency. “They’re on the hook for a proportionate amount of the overhead of their practice,” says Bujak. “When the doctor becomes responsible for how care is integrated and accountable for the budget, that’s when it works.”

It definitely is in the physicians’ best interest to make it work this time around. Says Mack, “Physicians risk and should have learned from 15 years ago that if the hospitals don’t operate the practices successfully, they will – as they did in the past with primary care physicians – abandon the models, and the docs will be back at square one. History does repeat itself.”