Reforecast: New business models for hospitals buying medical practices

In the present reimbursement environment, the acquisition of physician practices by hospitals is requiring sellers to play by the hospital’s rules, sharing the same economics they do.
These expectations are a far cry from the buyer-seller relationship that existed during the early 1990s. Back then physicians enjoyed the upper hand, selling their practices for as much as 10 times what a practice it was actually worth, in some cases. The outlay was based to a large extent on goodwill value—the reputation the practice enjoyed with patients. This intangible asset seemed to promise hospitals a steady income for the foreseeable future.
Unfortunately, the economics didn’t pan out as hoped, and acquisition prices swooned. “The first go-round went bust, and most of those doctors were spun off and went away,” recalls David J. Cooke, former CFO at Park Nicollet Health Services, a healthcare delivery system comprised of two hospitals and a 650-group medical practice in Minneapolis, with annual revenues of approximately $1 billion. “Now there are different dynamics at play. Hospitals want to buy only hard assets now, not accounts receivables or goodwill.”
Cooke, who recently left Park Nicollet to become CFO at New Orleans-based LSU Medical Center, explains that hospitals are no longer snapping up physician practices for their intangible assets. “This is not about increasing (the number of patients), as much as decreasing patient admissions and length of stay, avoiding re-admits, and finding other means than surgery to care for them,” he says. “In the old days, it was all about the physician doing things to maximize the returns in his or her practice, which was in alignment with what the hospital wanted then. Now, the economics have changed.”
Alignment in the New Era
Today, finance has a different objective when it comes to acquiring a private practice. William McCauley, MD, president and CEO of Susquehanna Health Medical Group, points out that in the past Susquehanna required financial and productivity records, tax and income statements, and volume statistics as the premier analytical tools when evaluating private practices for employment acquisition. Today, the focus is not nearly as sharp on these factors.
“The old business model mirrored how a typical small business would run, with a profit/loss statement at the end of the day to show their value,” Dr. McCauley explains. “Nowadays, the business information about a practice is just one small piece of the puzzle and does not reflect the new definition of `value’ at all.”
Rather, to be successful as a healthcare organization, a hospital must acquire physician practices able to work in a world that is essentially foreign to what they are used to. “The `new normal’ is based on value, outcomes and patient satisfaction,” Dr. McCauley says. “Gone are the days where the financial bottom line tells the story. Instead, our new healthcare environment requires consistent, positive outcomes with well managed expectations throughout the continuum of care. … Our job is to be the vehicle carrying the support resources to ensure the practitioners can be successful in this new world.”
[See also: Reforecast: The end of the budget.]
When conferring with a practice on the block, Susquehanna Health emphasizes its culture, stewardship and care teams supporting patients. It points out that from a compensation standpoint, physicians are valued on patient satisfaction scores and how well they manage diseases in the outpatient setting, rather than how many inpatient hospital admissions are credited to their name. 
“We’ve changed our compensation model to reward physicians’ leadership and participation in a culture that fosters positive outcomes and healthcare management for our population,” says Melissa Davis, Susquehanna Health vice president and Chief Operating Officer. “If our patients are satisfied, receive good care, and require less significant medical intervention, the payers will reward them with high quality scores and accolades for being efficient and effective.”
This, in turn, guides greater compensation, as opposed to the old model of rewarding physicians for volume alone. “Our practitioners actually welcome the new model, as they prefer to be graded on value and good, clinical outcomes, rather than production line numbers that don’t have a face or a name,” she says. 
Cooke confirms this model, noting that it is not unusual to see physician compensation tied to RVU production after a one or two-year guarantee. An RVU or Relative Value Unit is a metric assigned to a CPT (Current Procedural Terminology) code describing medical, surgical and diagnostic services. Medicare pays physicians for services based on the CPT code. “It is more common today to see bonuses for achieving certain quality outcomes or patient satisfaction measures,” he says. “The new rules are productivity related to patient outcomes and quality care.”
New Rules
Obviously, these changes have import for physicians selling their practices. “Successful integration between the hospital and the practice requires tough discussions pre-acquisition,” says Cooke. “For instance, the practice owner will be told he or she must now refer their patients to a specific set of specialists, which likely won’t be the specialists they referred their patients to in past. They will need to participate in the hospital’s readmission avoidance programs, and expand their hours to accommodate same day appointments.”
This is the price of acquisition for many hospitals and not just Park Nicollet, he notes.
This helps explain why so few hospitals are interested in partial practice ownership, given the focus on patient care and related physician productivity. MD Anderson Center at the University of Texas in Houston, for instance, favors a total physician practice ownership model, rather than partial alignment with practice owners. “We have our own physician practices (set aside) as a separate entity, where we can watch their income statements, in terms of the practice’s plans and the financials behind them,” says Juan C. Castro, associated vice president, financial planning and analysis.
Not that this silo treatment is without challenge. “We need to make sure the doctors generate the revenue we expect from them to hit the bottom line,” Castro explains. “If they say they will be 60 percent clinical and 40 percent research-oriented (MD Anderson is an academic medical center), and then those percentages are switched, it doesn’t help us do what we need to do, economically.”
By managing the practices together through the separate entity, greater accountability can be applied. “If a doctor’s practice is plastic surgery and he or she says they’re 60-40, clinical versus research, we need good operating metrics behind that 60 percent,” Castro says. “We need to see how many surgery cases the practice has, how many patients, and the RVUs.”
While every hospital’s billing system is tied to the CPT codes, the problem is the definition behind the 60 percent clinical work, “what constitutes it,” Castro says. “It needs to be documented and benchmarked, which is difficult. And when it is discerned that the physician is not hitting the numbers, management must step in and hold them accountable.” This might lead to disciplinary actions like termination or probation, he adds.
Obviously, they heyday of physician practices striking gold is long gone. Selling the practice to a hospital or achieving some form of partial alignment are fraught with difficulties. For physicians at the threshold of their vocations, employment by a hospital, as Cooke pointed out, is increasingly the more viable career path. 
“The private practice in most markets is numbered, although there are some pockets where this is not true,” he says. “In small to medium-size communities, the independent practice has pretty much disappeared.”
And with this change, another slice of American enters the history books.