Physician Entrepreneurs Can Prevent Medical Practice Acquisitions

December 6, 2013

Hospital acquisition of medical practices isn't a bad thing … just ensure it isn't the only thing your practice has as an option when looking at the future.

My brother-in-law was a partner in a very well-known, reputable, and long-standing pulmonology group until they were acquired by a large local hospital network.  This scenario is becoming all too familiar across the country as large hospital networks acquire local private practices, groups, and facilities. Recently, this topic has been addressed ad nauseam, but running a private practice has yet to become any easier or more attractive. And although practice management education is widely available, it often comes across as "too hard" or "not worth the hassle." 

While becoming an employee to a large hospital is not necessarily a bad thing, none of these partners wanted it. Before their acquisition, my brother-in-law’s pulmonology group had what I like to call a "no-risk" relationship with their affiliated hospital. They maintained their own legal entity under a separate tax ID, but all overhead and staff was paid for by the hospital. In this scenario, there is essentially no risk to the group as an entity, because they have little to no overhead or staff management responsibilities.

In some cases, physicians are even given a draw against future revenue from professional fees. In return, the hospital receives guaranteed revenue from the practice’s ancillary services and/or diagnostic tests. When my brother-in-law’s group was approached to negotiate the terms of the acquisition, they effectively had no leverage or resources. Under the threat of losing office space, staff, and a steady referral stream from the hospital, salaries and on-call obligations were the only terms left to negotiate With little to no business skill set, they left alternatives to the acquisition unexplored. 

What could they have done differently? First, there was no business valuation performed on the group for a possible lump sum buyout. Of course, the hospital assumed the group had no worth without their resources and referrals, and the matter was put to bed. However, there is worth in a well-known group with a 20-year reputation and ties to the community. Because of their reputation, this particular group was the last bastion against the hospital among other independent pulmonology groups in the area. They could have used this to build a coalition among the groups, and gain some leverage. They also could have pooled their resources to form a much larger pulmonology group, or super group, perhaps even with other specialists. This, however, would have required organization, business knowledge, and an entrepreneurial spirit, which are not taught in the current medical school curricula. Despite the fact that there are many local groups of physicians that have quasi-organized to promote cross-referring or continuity of care, they still lack business acumen. Doctors want to do what they do best. They want to deliver care, not organize a coalition of specialists to maintain an independent, profitable business entity.

That leaves us with two options:

1.) Physicians pool their money and hire a business consultant to help them achieve their goal; or

2.) Physicians accept the responsibility of leading their groups or practices towards a self-sustaining business with the leverage and resources to make their own rules.

The latter requires a lot of sacrifice, as the physician will have to spend even more unpaid time away from family, learning and implementing a new skill set. The rewards, however, are autonomy and bigger profit margins, which buy more time for a quicker and more comfortable retirement.

Commercial insurance carriers have a stake in this too. Under the guise of supplying "continuity of care," these large hospital networks are creating a monopoly of physicians, which gives them a tremendous amount of leverage when negotiating contracts with commercial insurers. This increases insurance premiums -i.e. the cost of healthcare. As discussed in the Wall Street Journal's article, "Same Doctor Visit, Double the Cost," outpatient services rendered in a hospital often cost more than in an independent practice.

To help level the playing field, I believe commercial carriers should be incentivizing doctors to go into private practice. Perhaps this would provide the motivation the dwindling population of physician entrepreneurs need. 

Matt Dallmannis president of the business consulting and physician education group Creative Practice Solutions. With over 26 years experience in healthcare administration, they have improved the functioning, efficiency, and collections of both private practice and outpatient hospital departments throughout New York City. E-mail him here.