PHYSICIAN PRACTICES: A TIPPING POINT FOR HOSPITALS

If you could listen to some physicians’ thoughts these days, here’s what you might hear: “Everyone’s talking about quality — but how can I afford to spend time with patients, with payment rates going down? Malpractice is pushing me to the mat, and I’m always looking over my shoulder so I don’t get sued. And now they want me to buy an EMR?” These kinds of pressures on physicians will further change their relationship with hospitals. DGA believes that we may be at a tipping point where hospital ownership of practices may increasingly become the norm. Here are some of the near-term changes for which your hospital or health system should be prepared.

THE WORLD IS CHANGING FOR PHYSICIANS

Physicians face financial pressures with limited options to compensate for lost income. Hospitals must choose how they will respond to physician reaction to these stresses. Medicare’s physician reimbursement policies are continuing to squeeze physician revenues. In 2007, there will once again be no increase in the payment conversion factor. Rates are basically the same for the third year in a row, effectively lowering real dollar payment. For some specialties, RVU tweaks and reimbursement technicalities are cutting revenues more directly. Since Medicare is a dominant payer for many physicians, it is difficult to make up for these losses. At the same time that physician Medicare income is declining, health plan consolidation in some markets is also reducing payments to physicians. How will physicians respond?

Some will continue to compete for ancillary and ambulatory surgery revenues, although this strategy may be waning. While we are accustomed to physicians “verticalizing” their practices to capture revenues from the hospital, this trend may slow or even reverse. Physician-owned facilities already get lower reimbursement for imaging, endoscopy and ambulatory surgery than hospitals. Continuing changes in Medicare reimbursement further reduce the attractiveness of freestanding status. Of course, local circumstances drive the decision, but some physicians may think harder before starting these services. Some may even sell existing services back to the hospital.
Physicians may demand compensation for “everything” — including on-call coverage. Physicians now see a need to stay in their offices and maximize their throughput. They no longer feel that the occasional new patient from on-call work is an adequate quid pro quo. If hospitals refuse payment and doctors perceive coverage requirements as too burdensome, hospitals may find that they cannot recruit enough medical staff members to serve their
Increasing numbers of physicians may seek to be employed by the hospital. The cumulative impact of malpractice insurance, regulation and decreasing income is changing physician’s mental calculus about being acquired. Where physicians cannot supplement their professional revenues with ancillary services and coverage, they may look favorably on being part of a hospital or health system.
In some markets, this change in physician attitudes could lead to a local practice acquisition “feeding frenzy.” It appears that some hospitals may be taking aggressive first steps on acquisition, such as sounding out every practice in a community about their interest in having their practice acquired. Where one hospital starts aggressively acquiring practices, others will feel compelled to respond.

THE “ART OF THE DEAL”

As the potential for more frequent, but often unplanned, practice acquisition opportunities develops, hospitals and health systems need to have a well-defined process for handling these opportunities. When a primary care doctor says, “Buy my practice, please” or the local Sleep Center owner makes you an offer they don’t want you to refuse, there should be a “standard drill” for making it happen — or deciding not to.

Decide whether acquisition makes sense for the hospital. Is the practice a critical part of your service mix? What volume of referrals does it generate? Would it refer patients to your ancillary services who would otherwise go to a competitor?
Fair Market Value (FMV) assessment. Wherever there is to be any payment to a physician, the fair market value of the practice must be determined. It’s critical both for setting an acquisition price and to address regulatory concerns about private inurement.
Due diligence review. Overlapping with FMV evaluation is being sure you know what you are buying. What will practice revenues actually be once the practice is acquired? Does the physician have medical directorships with other hospitals that are presented as part of their practice income? Are revenues being inflated by questionable coding practices? All these income sources will vanish.
Have a “Chief Acquisitions Officer.” By centralizing the responsibility for handling practice and other acquisitions, you will assure greater consistency in their handling. In a small hospital, the CFO might handle acquisitions. In a larger organization, it might be the vice president for business development supported by legal counsel. Whoever it is will learn and become increasingly proficient at the art of the deal.

WE OWN THEM — NOW WHAT?

If a tipping point is reached in your community, you may find, sooner than you expected, that your organization owns a large number of physician practices. Learn from mistakes made in previous periods of high practice acquisition activity. Make sure compensation and incentive structures align the interests of physicians and hospital, and conform to fair market value regulations. Managed correctly, these owned practices could form the foundation for very positive changes including improved integration of clinical care for patients, supported by integrated patient care information technology.