Hospital-Owned Physician Practices a Win-Win or Lose-Lose?
Mergers and acquisitions are at an all-time high in the healthcare industry, and the trend toward vertical acquisition, in which payers purchase providers, has made the competitive landscape tougher for hospitals and health systems. Low interest rates are making it easier for hospitals to finance deals, and as regulation increases, the idea of selling to a hospital becomes more attractive to many physicians.
The majority of doctors still work in physician-owned practices; however, hospitals and health systems have been aggressively acquiring physician practices in recent years in order to expand their networks and market share. Ideally these deals will be mutually beneficial, but that’s not always the case. It’s crucial for both physicians and hospital leadership to understand the potential pros and cons on both sides of these deals to increase the likelihood of success.
Pros and cons for physicians
On the medical practice side, many physicians are feeling more pressure to join a large system as regulatory requirements and reimbursement changes have made independence a difficult model to sustain. Physicians who manage their practice like a business will be better positioned to succeed in any environment.
Joining a hospital or health system can afford physicians more time to focus on seeing patients by taking administrative and operational burdens off their desk. In addition, physicians often have better compensation structures and more financial stability as hospital employees.
But there’s always a tradeoff. For physicians, one of the biggest losses is independence and the control that goes with it. From business plans to hiring choices and even seemingly minute decisions like ordering supplies, losing control over day-to-day operations can be a very hard change for many doctors to swallow. Physicians will no longer be the only voice for their practice.
The move to a large system often comes with additional policies and procedures and a more “corporate” culture than many physicians are used to. The staffing situation may change as well, and both physicians and their staff will likely have to learn new software, possibly including a different electronic health records system (EHR). In addition, hospital leadership may use different measurement criteria to judge physicians’ performance.
Pros and cons for hospitals and health systems
On the hospital and health system front, acquiring a physician practice can help an organization to become more scalable and expand its reach into the community. In this increasingly competitive industry, everyone is fighting for market share and control of the patient. By developing integrated delivery systems, hospitals are able to provide the entire continuum of care for population health management and are better positioned to move into alternative reimbursement structures.
Some hospitals have also been buying freestanding diagnostic imaging centers. Population health management has been a primary driver to maintain consistent subspecialized professional coverage across all inpatient and outpatient radiology. This is not only beneficial from a quality standpoint, but also may allow the hospital to strategically expand opportunities for the radiologists with whom it maintains exclusive arrangements. As diagnostics centers have suffered dramatic reimbursement cuts, increasing regulatory restrictions on the operation of referral sources, administrative difficulties and pending capital expenditures, these centers have lost significant strength and hospitals have been able to capitalize via acquisitions.
The Deficit Reduction Act of 2005, which began in January 2007, cut reimbursements for Medicare private office outpatient imaging centers, similar to the reimbursement challenges cardiology has incurred. Leading hospitals have taken advantage of these opportunities. Now with the advancement of alternative reimbursement structures, hospitals can mitigate risk by controlling patient utilization.
Of course, there are also challenges to consider. The cost of acquisition can be high, and employing physicians can become a significant expense in a business where the margins are slim. Return on investment (ROI) does not happen overnight. It may take a year or more for hospital to see a return on a medical practice acquisition. Hospital leadership should be strategic in deciding how and when they will measure and quantify that ROI.
Perhaps the biggest challenge – and one that is often underestimated – is post-deal integration. Integrating disparate systems and technologies, corporate cultures, operations, staff, etc., is a major undertaking that requires proper planning upfront. It’s not uncommon for growing hospitals to acquire several medical practices, in which case the integration challenges are multiplied.
Overall impact
Hospital acquisition of physician practices clearly presents both opportunities and challenges for parties on each side of those deals. But what about the implications for patients? Financially, the patient may suffer because hospitals typically bill patients under their fee schedule, which is much higher than a physician’s fee schedule would be. These higher costs are also a concern for payers. However, upcoming regulations may change this billing practice in favor of the patient.
Any physician or hospital considering a merger or acquisition needs to understand all of the potential pros and cons in order to be able to make the best decision for their practice or organization. In addition, they should regularly monitor industry and regulatory changes so they can continue to adapt to a dynamic environment. With proper planning and careful consideration on both sides, these deals are more likely to be win-wins.
