Ratna Palakodeti, MD, had a decision to make and it had to be made quickly. In 1991, he had joined a small family practice in Beavercreek, Ohio, just outside Dayton. Four years later, all four of his partners left the practice, leaving him a solo practitioner—an increasingly untenable position in the health-care climate of the ‘90s.
“I had to find four partners fast,” he says. But before he could start recruiting, the local hospital came courting. Let us buy your practice, the hospital recruiters told him. We’ll take care of all the administrative work. All you’ll need to do is take care of patients. Palakodeti sold his practice.
He wasn’t the only one.
Practice management trends in the ’90s
During the 1990s, hospitals were in a frenzy to buy physician practices. Blame it on a couple of things. First, there was managed care and along with it, capitated contracts which paid providers by the patient, not by the service. That placed hospitals at a disadvantage. “Like it or not, physicians controlled 80 percent of hospital utilization in the 1990s” says Charles Peck, MD, the medical director of LifeMasters SelfCare, a national managed-care company based in San Francisco. Hospitals still had to deal with spiraling costs but had no way to control their market share except by buying physician practices and routing patients to their facilities. Wayne Bracken, the chief operating officer of the Baptist Health System in South Florida, says, “It was a defensive position on our part. It was a way to secure referrals.”
As if managed care didn’t make physician practices attractive enough, along came competition for those practices in the form of national practice management companies. The goal of these companies was to improve the cost efficiencies of the practices they bought and managed and pocket the savings. When these companies began to come into markets and snap up physician practices, hospitals jumped into the buying frenzy, says William Spratt, Jr, a partner in the global law firm K&L Gates, and the past chair of the American Health Lawyers Association. “A bidding war developed between the hospitals and the practice management companies,” Spratt says. “Neither of them paid the right price. They both overpaid.”
To make matters worse, hospitals not only paid hefty purchase prices, they enticed physicians to come work for them by offering huge salaries.
“Who wouldn’t want a deal like that?” asks Terri-Lynn Smiles, a health-care attorney with the law firm Collis, Smiles & Collis in Columbus, Ohio. “Of course they sold their practices.” And physicians went to work as hospital employees, a scenario that didn’t work well.
The integration fiasco
The problem with the integration plan of the 1990s was its structure, says Michael Maynard, the chief executive officer of the Springfield Clinic, a 200-member multi-specialty group practice in Springfield, Illinois. “These arrangements were top-down management structures, not true partnerships.” As a result of this top-down style, tensions grew, and soon neither side trusted the other. Hospitals also learned the hard way that once physicians are paid substantial salaries, they’re less motivated to see large numbers of patients. The hospitals had bought practices based on previous revenues. Now, those revenues were going down.
Spratt says, “Originally, these arrangements were an attempt to create glue between the physician and hospital, but neither could manage the efficiencies or economies of scale required.”
Bracken agrees. “It was a model that was not built to last,” he says. “The money gained from the practices could not be sustained.”
Hospitals began to lose money, and as the next decade approached, they began to sell off the practices they had bought.
Meanwhile, another physician-hospital arrangement popped up. These were co-ownership deals or joint ventures between physicians and hospitals. According to Peck, “Hospitals learned the direct employment model was doomed to failure, so their next thought was splitting ownership 50-50.”
Ambulatory surgery centers, specialty hospitals, labs, and other facilities co-owned by physicians and hospitals began to spring up across the country, but they also caught the attention of the Office of the Inspector General. Soon, certain types of suspect arrangements were highlighted by the OIG and the number of these facilities dwindled substantially.
Hospitals never stopped looking for solutions, however. They merged, expanded, collaborated, integrated, and every time they did so, they became stronger.
Today’s management trend
As a result, today’s hospital system is stronger than ever, but now it’s the physician who faces some very troublesome issues.
“Malpractice insurance costs are up, administrative costs have risen, and the new technology that’s required to practice today is expensive,” says the Springfield Clinic’s Maynard. Most physician practices, for example, find they eventually have to switch from paper to electronic records—a huge cost that prevents some practices from moving ahead and competing for contracts. Add to that problem declining reimbursements and general dissatisfaction with the practice of medicine and you have a scenario that’s reversed from the 1990s.
Palakodeti agrees. “Hospitals are now in a dominant position,” he says. “They have become like big corporations.” Hospitals hire their own physicians, build and staff their own specialty hospitals, and have simply become less dependent on the kind of independent physicians they once hired. Now, those physicians who once were happy to sell their practices for a profit and a paycheck are turning to hospitals again—this time for survival.
There is another twist as well.
Many of the physicians who leave medical school today are more than happy to be employed rather than own a practice like the majority of the previous generation of physicians.
T. Cliff Deveny, MD, the vice president of physician alignment for Summa Health Systems in Akron, Ohio, says it’s a cultural thing. “Physicians who are coming into practice today need a good income because of the debt they’ve incurred,” he says. Hospital employment not only provides them with regular cash flow but also with the lifestyle they want, which usually translates as regular hours, more coverage, and less call. “Also, more women have entered medicine,” says Deveny. “Typically, women want regular schedules so they can spend more time with family.”
Sarah Sams, MD, is an example. Last September, she closed her Columbus, Ohio-based family practice and went to work for a local hospital, teaching and practicing as part of its family medicine residency program. There wasn’t a single, definitive factor that prompted her move, she says. Rather it was an accumulation of things over six years in private practice—lower reimbursements, higher administrative costs, lack of time to spend with her family, and professional liability costs that doubled in her first year and continued to rise, forcing her to give up the obstetrical work she loved. Now, she teaches, sees patients three or four half-days a week, and has returned to obstetrics. She’s happy, she says, because she doesn’t have to worry about the hassles of running a practice. She’s able to spend more time with her family, and thanks to built-in coverage, she recently took a week-long vacation without worrying about the loss of income.
The days of direct employment—as seen in the 1990s—are waning, however. That’s not to say that the direct employment model isn’t out there and thriving. Palakodeti and Sams are both practicing as direct employees of their hospitals, and Bracken says there will be more and more direct employment in the future. But this model, as well as other employment models, has taken a different form.
The “new” employment paradigms
“The new employment models are better designed than the ones in the ‘90s,” says Maynard. “They give physicians more voice and more independence.”
But these “new” employment models are not really new at all. They have always been available, says Smiles, the health-care attorney, and generally, they fall into three types: the direct employment model, the captive group model, and the service agreement model.
The direct employment model is what most of the 1990s partnerships were, says Smiles. In those arrangements, physicians gave up most of their control and independence and became hospital employees. Gradually, though, physicians were given a greater voice through various committees, and today they operate with more power than they had during the 1990s. At the same time, hospitals staunched the loss of revenues by building productivity measures into compensation. According to Bracken, “That was an element missing in the 1990s”
Palakodeti and Sams both say there’re happy working under today’s direct-employment model. “It has allowed me to focus on patient care instead of administration,” says Palakodenti. For many physicians, however, direct employment can take some adjustment.
David Barbe, MD , of Springfield, Missouri, wasn’t happy with direct empolyment when he sold his practice to St. John’s Health System in 1997. Fortunately, the hospital reorganized in early 2000 and formed its own physician group – making Barbe part of what’s known as a captive group model.
Under this particular employment paradigm, the hospital forms a physician group that operates as a separate entity. Physicians retain some control by serving on a board of directors or committee, and while, ultimately, the hospital has the final word on decisions, the physicians have a greater voice and more independence than in the direct employment model.
Barbe is now the president of a 450-physician group employed by the St. John’s Health System, and he continues to practice medicine in the new clinic arrangement the hospital created. He says he’s happy with the set-up and no longer has to worry about the administrative hassles he’d face if he were running his own practice.
The foundation model which has become popular in recent years is an example of a captive group arrangement. Under foundation arrangements, all hospitals belong to the foundation, and the foundation “owns” the patients, which means patients can be moved from doctor to doctor – or hospital to hospital – and stay within the same health-care system. The foundation model has been around for a while and includes examples like the Cleveland Clinic, the Mayo Clinic, and Kaiser Permanente. In California, where hospitals are forbidden by law to employ physicians directly, the foundation model has become hugely popular.
Finally, there is the service agreement model which allows physicians to remain independent practitioners who enter into contracts with hospitals to provide services.
Rick Oken, MD, is an example of a physician who works under the service agreement model. Oken belongs to a nine-member group practice, East Bay Pediatrics, headquartered in Berkeley, California. East Bay would be struggling today to compete for risk-bearing contracts if not for one thing. The practice joined the Alta Bates Medical Group, an independent practice association composed of leverage enough power to stay in business independently. “It’s the only way physicians today can take capitated risks,” says Oken. “You can’t survive otherwise.”
Before you sign a contract
Before you decide whether employment is right for you, and before you sign an employment contract, consider the following advice.
- Decide what you want. Ratna Palakodeti, who works in a direct-employment model, says plenty of physicians have asked him whether or not they should leave their practice and apply for work as a hospital employee. “I always ask them why they want to leave their practice,” he says. “What are they looking for? What do they want from medicine?” Physicians, he says, should not be running away from practice. Instead, they should be genuinely interested in the employment model. “You should move toward, not away from something.”
- Find hospitals with a track record. “If you’re looking for employment, look for a hospital where there is a physician leader who has had some practice experience,” suggests David Barbe, the president of a large, hospital-owned, primary-care practice. It’s a good idea to talk to some of the employed physicians to see if they’re comfortable with the situation. “Do they feel valued?” Barbe says. There is loss of input in any large group or employment situation, but “that can be handled if you feel you’re listened to and your needs are considered.”
- Approach it like a marriage. “You don’t want to approach these relationships like business deals,” says Charles Peck, MD, the medical director of a national managed-care company. Instead, consider the culture of the company, the kind of people it attracts, its philosophy. “Will you be happy working here 20, 30, or 40 years from now?” says Peck. That’s the question couples should ask before they marry. It’s the same with physician-hospital integration. “Focus on the relationship,” he says.
- Run a risk/benefit analysis. At the same time, you don’t want to ignore the financial side. Attorney William Spratt with the global law firm K&L Gates says it’s a good idea to look at what’s being proposed and run a risk/benefit analysis. “The hospital’s terms may offer certain benefits but may also restrict your practice,” he says. “Is it worth it?” If it’s a joint venture that’s being proposed, make sure the arrangement meets state and federal law. Joint ventures and equipment leases are being targeted by the Office of the Inspector General and the Center for Medicare Services. Joint ventures especially should raise red flags when you see them. Do your research and consult your attorney before signing on, says Spratt.
- If you think it, put it in the contract. Everything you’ve talked about while negotiating, every thought you’ve had about the new model should be reflected in the contract, says Terri-Lynn Smiles, a health-care attorney with the law firm Collis, Smiles & Collis in Columbus, Ohio. “What have you been told by the hospital recruiters? It should go into a contract,” says Smiles. That includes assumptions. She recalls working with a client-physician whose spouse was the office manager. The physician assumed the spouse would continue in that capacity. The hospital thought differently. If you want it to happen, it needs to be negotiated and put into the contract.
- Plan an exit strategy. If you plan to sign an employment contract, take the time to plan an exit strategy, says Jill Ojserkis, a partner in the Fox Rothschild’s Health Law practice group in Atlantic City, New Jersey. “Be careful, when you enter a contract, to build an exit strategy into it,” she says. That way, there is peace-of-mind in knowing that if the arrangement doesn’t work, you know how and when you can leave and what restrictions, if any, you have agreed to.
Given the fact that employment paradigms have become so prevalent in today’s health-care system, it’s interesting to imagine what the future of medicine might be, and whether these paradigms will continue.
The consensus seems to be that medicine will continue to evolve but will stay within three forms: direct employment, large groups, and entrepreneurships.
First, as Bracken points out, it’s likely that more and more physicians will be employed – either directly, which seems to be the case for the next generation of physicians who value lifestyle as much as career, or in captive group models, especially the foundation models, which are finding new homes across the country.
Barbe sees integration as the way of the future. “I think more physicians will be involved in integrated system,” he says, ticking off the reasons why: “It’s a way for physicians to deal with all the complexities in medicine today. It also gives physicians financial stability and a way to decrease the costs of malpractice insurance. The relationship between hospitals and physicians are also becoming more stable,” he says, which he says means more physicians are willing to give integrated models a try.
Second, if physicians like Oken continue to resist employment models, then they, too, will find their way to larger and larger groups or independent practice associations.
Maynard sees small group practices as unsustainable in the face of integration. “Today’s small group practices are like mom-and-pop stores competing against Wal-Mart,” he says. It takes a lot to compete against a hospital’s captive-group or foundation model or even the large group practices like Maynard’s Springfield Clinic. By banding together, large group practices can lower malpractice rates, purchase major technologies like MRI machines, and have the leverage to compete for contracts.
Smiles says the days of physicians leaving medical school and hanging out their shingles are long gone. Today’s medical school graduates are looking either for direct employment or large groups to join and are walking past solo and small group practices. That’s what drove Palakodeti to sell his practice. When he needed four partners – fast- he was faced with a hospital that was also actively recruiting primary-care physicians and offering them much more than he could afford. “I didn’t want to compete with the hospital,” he says, “so I joined them.”
Whether large single specialty groups will eventually merge into large multi-specialty groups is still open for debate, but Maynard says multi-specialty groups will become more prevalent as mergers become more common and medicine becomes more concentrated. “Single-specialty groups are already having problems leveraging contracts,” he says.
Still, some specialty groups are doing fine. While most hospitals are no longer interested in buying primary care practices, says Bracken, they are interested in specialty groups – like neurosurgery and orthopedics – where there may be a shortage of hospital-employed physicians and they are looking for specialists to cover calls.
Regardless, group sizes are certain to grow if physicians are going to remain independent and remain part of a service-agreement model, say industry insiders. “Health care is becoming expensive,” says Maynard. Large groups can handle it. Small groups struggle to do so.
Entrepreneurial spirit lives
Still, it would be wrong to underestimate the independent, entrepreneurial nature of physicians, which represents the third option in medicine’s future.
“One positive thing that came from hospitals hiring physicians in the ’90s is that doctors became part of hospitals boards and committees,” says Pack. These doctors received behind-the-scene glimpses into how hospitals made their money. “Most of us never had this information before, and some of us looked at it and said, “we can do this,” says Peck.
In Northfield, New Jersey, anesthesiologist Scott Hernberg, DO, is one of those physicians. For years he chaired various hospital departments and served as the vice president of clinical programs for his hospital. Lately, however, he has decided to leave the world of hospitals behind and has opened Tomorrow’s Wellness Center, a holistic health center that treats patients with a blend of Eastern and Western medicine. “Wellness is the direction medicine is headed,” says Hernberg, and as far as he’s concerned, he’s on the ground floor of the movement. At the same time, he knows he’s also on the periphery of today’s health-care system. After all, services at his center are not currenly covered by insurance and bringing patients through his door means educating them that it’s less costly to pay him now than it will be to pay for hospital care later on.
Braken agrees that physician-entrepreneurs can be competitive with hospitals. “If they can take out a service and do it on thier own, they can usually do so cheaper,” he says. It’s possible, of course, for a hospital to create an outpatient center that provides the same services in the same area and crush the competition, “but that’s a fantasy of hospital CEOs,” says Bracken. It generally doesn’t happen because mose independent facilities can pick their patients, opting for those with insurance or who can pay out of pocket. Hospitals treat everyone regardless of financial situation.
Spratt says physicians who have practiced for a while may become more entrepreneurial in the future – especially in urban areas. “In rural areas, physicians are more inclined to partner with their local hospitals,” he says. But in urban areas, hospitals and physician groups may develop virtual strategic partnerships and more sophisticated arrangements.
Barbe, too, says he is beginning to see more entrepreneurial physicians expanding into boutique practices, concierge medicine, and centers like Hernberg’s. “Employment models tend to rub older doctors the wrong way,” says Barbe. It’s creating some polarization between the generations, he says.
“There is no one perfect model for physicians,” say Maynard. They will have to decide for themselves whether employment, a large group practice, or entrepreneurship will work best for them.
Just don’t give up easily on today’s employment paradigms, says Maynard. “Remember in any marriage, some things will frustrate both parties. You work those things through. If properly designed, a good relationship will meet both parties’ needs.
Karen Edwards, an Ohio-based freelance writer, is a regular contributor to Unique Opportunities.