Creating a physician network can pay off with the right tools
Follow these tips to help acquired physician practices succeed
It’s a dilemma common to many hospitals that have acquired physician practices: Once physicians become employees, productivity can drop. The advice from a health system who has successfully integrated physician practices into its network is to affiliate through long-term professional service agreements, rather than an outright purchase.
"In order to maintain the entrepreneurial spirit of the physicians, we found that one of the last things we want to do is employ the physicians and put them on a salary," says Ellen Zane, MA, network president of Partners Health Care System, parent company of Massachusetts General Hospital and Brigham and Women’s Hospital, all in Boston. Zane oversees the system’s 800-physician network through another company, Partners Community Healthcare Inc. (PCHI). "We want to make sure the physicians maintain the same sense of accountability, responsibility, and efficiency that they had before we entered the picture."
So far, it seems to have worked. "In almost every case, productivity has increased, not declined," Zane says.
Zane attributes much of this success to PCHI’s unique acquisition methodology. When the health system acquires a practice, it purchases all of the hard assets as well as intangibles such as the practice’s goodwill and future value. To secure the physicians and get exclusive rights to do their managed care risk contracting for them, the health system uses long-term professional service agreements. "They are generally for 10 years," Zane says of the contracts. "What that does is maintain the continuity of health care in a community and helps ensure the physicians will continue to practice medicine at that location and continue to see the same patients."
This type of acquisition structure also prevents the physicians from adopting a "9-to-5" mentality and view the health system as an unlimited supply of capital. The two sides come to an agreement on what the health system needs to spend to run the practice and to allow the practice to grow. "But all of this has to come out of the revenue that the practice produces," Zane explains. "There is a limited pool of money, and this stops people from making outrageous purchase decisions. It stops people from saying Partners owns us. New carpeting for everybody.’"
Physician compensation structure critical
Because the physicians are not on salary or employed in a traditional fashion by the health system, "they stay hungry," Zane says. In essence, the physicians are paid much like they were before the acquisition. "One of the beauties of this type of arrangement is that we have not taken away the incentive for them to remain productive. If they were on a flat salary, this may not be the case."
Other professionals that work with practice acquisitions have a similar opinion of putting physicians on a salary after a practice has been purchased.
"When you know you are going to get a certain amount of money no matter what you do, there is a tendency to not work as hard," says Mary Kilmer, BSN, MBA, a consultant with Jennings Ryan & Kolb in Chicago. "This is nothing against physicians. It’s just human nature."
When physicians are placed on a health system’s staff after an acquisition, Kilmer advises setting up an incentive program that promotes the goals the system has set for the practice. For those organizations new to managed care, the financial incentive might be based on more traditional factors such as the number of office visits a doctor has in a given period or how much time the doctors are available to see patients.
Work out governance issues
Health systems with more experience in managed care and in more advanced markets may want to base pay on a blend of quality outcomes and the cost per case or the cost per member per month. "These are the ultimate measures of success in a true managed care market," Kilmer says.
Financial incentives also can cover aspects such as physicians’ ability and willingness to follow clinical pathways and protocols, participation in the development of such guidelines, and ability to meet established customer satisfaction guidelines, Kilmer adds.
Frequently, the hospital acquiring a practice will be larger and more sophisticated than the medical group being purchased. Does this mean the hospital will have all of the answers? Not by a long shot, says Richard Carpe, CPA, senior director for Health Care Financial Advisors’ Newport Beach, CA, office.
"Don’t let arrogance get in your way," he advises. "If you enter the process with a willingness to take the best from both sides, you are going to be much more successful. Don’t assume that just because you are bigger that you have all of the answers."
A battle for control can also sink a deal faster than many other issues. Early in the negotiation process, work out governance issues and develop a mechanism for conflict resolution for both the deal-making process and life after the deal is completed, Carpe says.
"One of the biggest things you need to decide is organizational consensus," he says. "If you don’t have that, the acquisition can take forever, if it happens at all."
Don’t limit options for potential partners
The rapid growth of physician practice management companies (PPMCs) have added a ew and often unwanted twist for hospitals looking to put together a base of primary care physicians. Traditionally, the management companies and hospitals have been competitors. But that may change in some markets, says James Vaughn, MBA, a principal at Cain Brothers, a New York City-based health care financial consulting firm.
In areas where management companies have secured a significant portion of the available physicians, "hospitals may want to consider partnering with these management companies," Vaughn says. "In the past, they have been more competitors than colleagues, but I think it is possible for the two sides to break through those barriers and work together."
In some instances, it may become the best or the only option a hospital may have. "From what I see, PPMCs are only going to get stronger, and hospitals may have to work with them," Vaughn says.
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