In early 2004, things weren’t looking so hot for Scott Pargot’s Montana otolaryngology practice.

The Helena Ear, Nose, and Throat Clinic had just lost its office manager, and paying health premiums for the clinic’s eight employees had turned into a serious hardship. The clinic was also having no luck getting on the preferred provider list for the area’s dominant managed care plan — unless it accepted a painful discount.

Then Pargot noticed that some of his colleagues who had sold their practices to the nearby hospital and became employees of that hospital seemed a lot happier — stress-free, even. After doing his homework, Pargot and his partner decided to take the plunge, and they sold their practice to St. Peter’s Hospital in June of that year. They haven’t looked back since.

The hospital took over all of the practice’s business operations, freeing Pargot to spend his days doing what he wanted — practice medicine. And Helena Ear, Nose, and Throat Clinic quickly made it onto the provider list that had been so elusive.

“This has really worked out as a sound business decision for us, while building on our collegial relationship with the hospital,” Pargot says.

Halfway across the U.S., Kay Durst, MD, was facing oppressive malpractice insurance costs. Like Pargot, she looked to a hospital system to alleviate these and other headaches.

Pargot and Durst are on the forefront of a trend surfacing among physicians practices, or rather, re-surfacing — particularly in small- to medium-sized markets. Arranged marriages between physician practices and hospitals were common only a decade ago, when practices linked with their local hospitals, either through financial partnerships or outright sales and employment contracts.

In the late 1990s, though, many of those relationships soured and split. But, according to industry observers, the latest version of the integration trend is a whole different animal — better, healthier, and more manageable.

Why the first marriages failed

What went wrong with the first generation of these arrangements, and why won’t it happen again?

Well, a number of mistakes have been corrected, explains Bruce Johnson, a healthcare attorney with Faegre and Benson, LLP, in Denver, who has worked with hospitals and practices attempting to integrate in recent years. In the 1990s, hospitals essentially overpaid to lure independent physicians to be their employees, giving them salaries significantly higher than what they had been earning in private practice.

Productivity soon fell among many of these hospital-owned practices, and doctors who had been seeing 40 patients a day dropped to, say, 30, because patient load didn’t affect their salaries, says Johnson. The bottom line of these practices suffered, and so did the hospitals.

Hospitals also stripped many “cash-cow” ancillary services (i.e., X-ray, MRIs) from the practices they acquired, rerouting patients to the hospital for those services. As a result, those practices didn’t show the same profits they were bringing in before they were acquired; in many cases, they posted losses.

Hospitals, upset with the affect all of this was having on their balance sheets, subsequently attempted to cancel many of their multi-year contracts with physician practices.

“Back then, there were grandiose plans to create these huge provider networks to negotiate managed care contracts — some of which came to fruition, some of which didn’t,” says Johnson.