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“HERE THERE BE MONSTERS” AVOIDING THE PITFALLS OF OPPORTUNISTIC PHYSICIAN-HOSPITAL INTEGRATION |
Medicare and other payment reductions may bring increasing numbers of doctors to your doorstep in the next few years. They may want you to acquire their practice, ambulatory surgery center or imaging facility, or may be seeking to renegotiate their professional service agreement. Many hospitals, facing these kinds of opportunities have found themselves “at the edge of the map” and like early explorers, threatened by the monsters that lurk beyond.
Any of these openings for opportunistic physician-hospital alignment may be strategically beneficial for the hospital, if handled properly. Ideally they will be evaluated against a system-wide physician-hospital integration plan that spells out objectives, timing and structural guidelines.
or without a plan, however, certain opportunities that arise may appear worth exploring although not previously envisioned. Typically, these require rapid action, with its potential for missteps.
Here are some common pitfalls of opportunistic integration, and DGA’s recommendations on how to avoid them.
CREATING A FRANKENSTEIN
When radiologists ask a hospital to buy their imaging center, they may also suggest that you give them a management and billing contract for the facility and others in the area. Ultimately their strong vested interest can lead to turf wars with specialists like orthopods over who can read an image. Regardless of who wins the battles, the hospital gets caught in the cross-fire.
Radiologists aren’t the only potential Frankensteins. Any time a single group of physicians is given significant control over a service line, there is a risk that those doctors will find a way to shift the economics in their favor (often requiring hospital “subsidies” to the service where none were necessary before). They may also alienate other segments of the medical community or manufacture competition where none existed.
Prevention: Don’t give a physician group too much control over any service line. For example, in setting up a management company, make sure the physicians have less than 100% control of governance, and structure decision-making so a supermajority is needed to take certain actions.
FOSTERING “FAVORED CHILD” SYNDROME
Often a physician deal involves a service niche similar to one occupied by doctors elsewhere in the health system. It’s hardly news that in such a situation, doctors are likely to share—and distort—intimate details about deal structure, compensation and price. Perceived differences in treatment lead to some physicians feeling “unloved,” with the potential for later demands and friction. Healthcare managers know all this, yet DGA has found that it’s easier for hospitals to know it than to act accordingly.
Prevention: When negotiating and structuring a deal, always strive for consistency with physicians providing similar services. When the deal transforms into a joint venture, make it as inclusive as possible of all medical community elements. Where that’s impossible, have a contingency plan to deal with the inevitable fall-out.
FAILURE TO SHAPE EXPECTATIONS
Physicians who are involved in a deal, whether centrally or tangentially, usually perceive progress as frustratingly slow. They don’t see all the tasks or understand that the hospital doesn’t control all timeframes. They may also have unrealistic perspectives of value and financial returns. “Fish stories” from a medical school buddy can inflate anticipated financial returns to unattainable levels. Back of the envelope valuations by a local CPA with limited valuation expertise have torpedoed many a deal.
Prevention: Communicate frequently and consistently with your physicians. A monthly newsletter or bi-weekly email can assure that the doctors know what’s happening now, and what is determining its timing. Physicians need to understand that valuation, legal opinions and deal structuring itself take months, not weeks.
Make sure the physicians share your understanding of the probable deal economics. Both the hospital and doctors need to keep in mind the fair market perspective: “What would a prudent, uncompelled, knowledgeable buyer do in this circumstance?” Although often perceived as an annoyance by physicians and hospital executives alike, this outlook is a good way to be sure you’re doing the right thing.
DELIVERING BAD NEWS, LATE
Nothing flattens an opportunity faster than having to go back and tell doctors, “I thought this was a good idea, but the lawyers say it’s impossible.” The only thing worse is telling physicians that the deal won’t pass fair market valuation scrutiny.
Another common pitfall is waiting until price has been discussed before informing physicians about the relationship between post-transaction physician compensation and fair market value. That’s a recipe for physician animosity.
Prevention: Discuss the business plan, goals and objectives and general structural alternatives at the outset with legal counsel to establish general parameters and guidelines before you start exploring ideas with physicians.
Begin the business fair market valuation process before discussing terms and pricing — and begin compensation discussions even before that. When dealing with a selling physician who will maintain any kind of post-transaction role, (whether as a service provider, or landlord) the first topic should be how that physician envisions their post-transaction compensation. That compensation is a crucial element in determining the fair market value of a transaction. Once this is resolved, you can discuss business valuation. Early involvement of a third party valuation professional often helps to identify and highlight these issues and can provide the physician education necessary to move things along.
Clearly, there are considerable upsides to the pursuit of “opportunistic” physician hospital integration strategies. Avoiding the common mistakes along the way can ensure that the downside risks are minimized and the positive potential materializes.
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