Physicians Partnering the Right Way

April 7, 2014

Whether you are partnering with one other small practice or joining a large healthcare system, here's how to do so while maintaining some independence.

Income security. Negotiating power. The growing cost of regulatory compliance. All explain why private practices have been running into the arms of hospitals, health systems, and even other providers for the last 20 years. But none address the problem that so often plagues physicians after the ink on their contract dries: loss of control. Indeed, as practices partner to compete in the modern healthcare marketplace, a trend accelerated by the Affordable Care Act, those that focus on the financial benefits of consolidation without considering its impact on their autonomy frequently find themselves trapped in an unhappy marriage, says Reed Tinsley, a Houston-based healthcare accountant and medical practice consultant.

"You can lose control in all corners from billing and collections, to clinical decision-making, to daily operations, to compensation," he says, noting one of his clients, a solo OB/GYN, was told soon after she became hospital employed that her salary would be docked because she wasn't meeting productivity goals. "After we looked at her pre- and post-acquisition numbers, it was painfully obvious that the hospital system was not doing a good job collecting for her services," says Tinsley.

Another solo practitioner he worked with was told her office and staff would remain untouched following its acquisition by the local hospital, Tinsley recalls. "After the deal was done, the hospital told her she had to lay off her front-desk person, who was her best employee and the one who had been with her the longest, because they required all employees to have a high school degree," says Tinsley. "The employee only had a GED. The hospital didn't budge."

Not all buyouts and mergers, of course, result in disaster. Much depends on the organizational structure, what you seek to gain, and how well you protect your interests at the negotiating table.

Here's a look at how to form an effective partnership without giving away the farm.

Evaluate the options

George Moseley, an adjunct lecturer of health law and management at Harvard School of Public Health, says private practices considering a business alignment should ask themselves first what's in it for them. Is it financial security, administrative or IT support, ancillary services, recruiting muscle, or market share? More importantly, how much of your independence are you willing to surrender to get it?

"Once they are clear on why they are considering a change - one that involves merger or acquisition - the physicians must accept that they will have to give up some things in return," Moseley says. "Many physicians just want to offload their administrative responsibilities and concentrate on what they were trained for and what they enjoy most: practicing medicine. What is hard to accept is that, to accomplish all this, they inevitably must give up a lot of control."

Some alliances, however, enable private practices to preserve their independence better than others. As such, providers should consider all their options before joining a group or taking a salary, says Frank Gamma, a health law attorney with Kessenick, Gamma & Free in San Francisco, who works exclusively with medical groups. Start by identifying potential partners, he suggests, including other independent practices, healthcare networks, and hospitals, evaluating each based on compatibility, reputation, and financial strength. A feasibility study, which highlights the strategic and operational benefits of combining your practice, and pinpoints major obstacles, will help determine how such partnerships may impact both your bottom line and ability to improve patient outcomes. So, too, will an analysis of your local market based on payer mix, managed-care penetration, competing providers, and concentration of hospitals, says Gamma, a one-time administrator for a large multi-specialty practice.

"There are a continuum of partnership options and the further you move down the scale the more financial security you get, but the more you also give up in autonomy," he says. If you're merely looking to reduce overhead, the least intrusive option is to combine with another independent practice, or two, says Tinsley. Such mergers, which must be structured to avoid antitrust violations as the group gets bigger, enable small practices to improve efficiency, share administrative costs, invest in IT upgrades, offer ancillary services, and hire management expertise. Doctors continue to assume the financial risk and/or reward for treating their own patients.

"For a lot of small practices, the way to go is to build their own group by looking for other practices that are candidates and rolling them in," says Tinsley. "If done right, you can make more money in that setting by benefiting from billing and collecting expertise and economies of scale."

Moseley notes, however, that the most successful mergers (those that yield the biggest financial payoff) are those in which the practices consolidate to a single location. "An often overlooked advantage of larger practices is the opportunity to assign more specialized roles to each employee, allowing him or her to develop more sophisticated expertise," he says. Take billing as an example, notes Moseley. "The merger of two or more practices will not reduce the total number of people needed to process claims; it will enable individual billers to concentrate on just a few payers," he says. "The result is improved efficiency of the billing process."

Networking: pros and cons

Another option that delivers the benefits of increased scale without usurping the physician's decision-making authority is to join a semi-integrated virtual network, like an independent practice association (IPA) or management services organization (MSO). IPAs contract with hospitals and payers to provide services to managed-care patients at a fixed rate. Physician members are able to share staff, group purchase, expand on-call coverage and develop clinical protocols, says Gamma.

MSOs, on the other hand, provide administrative support services including employee benefits, billing and coding, regulatory compliance, equipment leasing, and purchasing ― enabling member physicians to focus exclusively on clinical care. Owned by physician groups, hospitals, or private physician-practice management firms, like San Francisco-based McKesson, MSOs often function on an a la carte basis, allowing physicians to use as many or as few of their services as they need. Some provide those services for a fee, while others purchase the member physicians' assets outright and lease them back, allowing the physicians to own their own medical records and keep their health plan contracts. Either way, clinical autonomy remains largely intact, says Gamma.
The other advantage to MSOs? Deep pockets. "If you want to add an ancillary radiation oncology lab, MSOs can capitalize it," says Gamma.

Because semi-integrated models allow physicians to continue calling the shots in the exam room, while lowering overhead and enhancing patient access, Owen Dahl, a medical practice-management consultant in The Woodlands, Texas, favors this model for smaller practices that wish to consolidate. "IPAs give physicians the opportunity to maintain their independence, but also gives them clout in relating to hospitals and payers," he says. The IPA is also the model that would most easily evolve into a physician-owned accountable care organization (ACO) in the future, adds Moseley, the widely embraced delivery model envisioned by the Affordable Care Act and currently being tested by CMS and commercial payers. "A consolidated, integrated group of providers (hospitals and physicians) offers the basic structure for an accountable care organization, the hot new delivery model," he says. "They also are better able to manage themselves and their practice methods in response to the push for bundled payments and value-based reimbursement."

At the other end of the spectrum, the sale of your practice to a hospital or health plan will result in an almost total loss of autonomy, but it also eliminates the administrative headache and financial uncertainty of running a practice. "If you're independent and you want to buy a widget, you can buy the widget," says Dahl. "If you're part of a hospital, you're going to need approval from someone else. Those decisions get taken away." The same is true with clinical decision making, he says, noting employed providers must treat patients according to the group's directive. Some younger doctors believe that's a small price to pay, says Gamma. "A lot of young doctors just want a salary and benefits," he says. "The women want maternity leave policy. They want a job, not a business."

Gamma says he never advises practices on which direction they should take, as the decision to align (or not) is uniquely personal.

"The trend toward consolidation is not a bad one. I like to see doctors work together to control their economic future, but there's no one solution for everyone," Gamma says. While combining solo practices might preserve the most autonomy, for example, some doctors would rather sell out than attempt to merge with practices in their community that they've competed against for a decade or more. At the same time, doctors who are 50 and older would often rather retire early than reinvent their business strategy in the final stages of their career.

Fight for freedom

If you opt to align with a provider group or hospital, come to the negotiating table ready to shake hands, but be prepared to walk, advises Moseley. "The two parties in the process will engage in a negotiation; often prolonged, tempestuous, and complex," he says, noting it's important for both sides to create a long-term, mutually satisfying strategic relationship. "It must not become an adversarial, win-lose negotiation. If it becomes that, physicians should back out."

Any contract you consider should also delineate opportunities to take part in the governance process and participate in committees that help drive clinical direction, recruiting decisions, and potentially even equipment purchasing, says Moseley. "At the very least, a physician can negotiate a compensation package that meets his needs, retain discretion over the hiring of the staff that he works most closely with, seek a position on key administrative committees (perhaps even the board of directors) of the new entity that emerges, and be content that he probably is working fewer hours than he did previously," he says.

Doctors, particularly specialists, who join large medical groups or hospitals might also push for the creation of a department structure that gives them greater control over clinical decision making within their field of expertise, says Gamma.

Lastly, the partnership arrangement should include an exit strategy that allows both parties to unravel the relationship if it fails to deliver. "There is always a provision in these agreements, or at least there should be, that discusses the option of a buy back," says Tinsley. "It should spell out how you'll part ways if this doesn't work out." The degree to which you'll be able to negotiate those terms, he says, will depend largely on how much capital your partner is investing in your practice.

Don't rush in

Above all else, Dahl says practices should avoid any rash decisions, however pressured they may feel to merge as a result of reimbursement cuts and regulatory demands post-ACA. Weigh the decision carefully, consider your options, and decide how important clinical and operational autonomy are to your career satisfaction. You may decide that the best solution is to remain independent and hire more nonphysician providers to drive revenue, or add ancillary services to expand market share. You might decide, too, that it makes the most sense to convert to a cash-only or concierge model. Other practices struggling to slash overhead but retain their independence are converting to micropractices - one doctor, no staff, and a computer. (The doctor does everything from treating patients, to scheduling appointments, to managing medical records and taking vitals.)

"When we're in crisis mode we make emotional decisions that may not be the best, and we forget to think about all of the alternatives," says Dahl. "This is not a crisis that requires immediate action, but it is a situation where the window for decision making is narrowing." Indeed, penalties for failure to comply with EHR standards and the Physician Quality Reporting System (PQRS) begin in 2015 and 2016 respectively, he notes, making 2016 "a watershed year" for compliance. Practices that hope to defray those costs by leveraging the resources of a larger group should begin incorporating such strategy into their long-term business plan over the next 12 months to 24 months, giving them time to perform adequate due diligence with prospective partners. "When you decide how to move forward, you can start making all of your actions today consistent with that decision," says Dahl.

Moseley agrees, adding physicians should spend plenty of time thinking it over, being clear on their needs, desires, and values, and not acting impulsively - but they should not delay the decision too long. "Time is not on the side of the physicians," he says. "All the pressures compelling consolidation will only increase. If they wait until they have no choice about merging/selling out, they will have less bargaining power and will end up with less satisfactory terms for the new relationship."

In Summary

Looking to partner without losing all control over your business operations? Here's what our experts say to do first:

• Identify potential partners.

• Conduct a feasibility study (on strategic and operational benefits).

• Analyze your local healthcare market.

• Examine networks like independent practice associations or management services organizations.

Shelly K. Schwartz, a freelance writer in Maplewood, N.J., has covered personal finance, technology, and healthcare for more than 20 years. Her work has appeared on CNBC.com, CNNMoney.com, and Bankrate.com. She can be reached via editor@physicianspractice.com.

This article originally appeared in the April 2014 issue of Physicians Practice.