What Physicians Must Consider Before Selling to Hospitals

February 6, 2014

Thinking of selling your practice to a larger health system? Here's what to do before signing on.

Across the country, hospital representatives are knocking on the doors of private practices. They come bearing attractive offers - higher compensation, simplification of administrative burdens, security in uncertain times. All physicians have to do is sell their practices and become hospital employees.

But as physicians who have already made the transition from owner to employee know, many of the perks associated with employment come with big drawbacks.

For pediatrician Jeb Teichman, who sold his two-physician practice to a hospital five years ago, those drawbacks included difficulty meeting the RVU bonus targets built into his compensation plan, and the bureaucratic nature of a larger healthcare system. "As physicians we are definitely not used to the corporate life and we are used to being more nimble with decision making," says Teichman, who was attracted to employment because it provided a guaranteed salary and an "old-fashioned" pension plan. "I was prepared to give up the decision making, but when an issue would arise, we weren't prepared for how long it would take for them to resolve it."

Experts say many physicians experience these struggles after selling their practices - and they are not the only ones that physicians tend to face. But that doesn't mean that the challenges of transitioning outweigh the benefits. It just means that physicians need to take extra precautions to ensure that selling is the right move. To help, we asked medical practice consultants and contract negotiation experts to share their tips. Here's what they said every physician must do before selling his or her practice.

Evaluate the fit

Just because an offer looks great on paper does not mean that you and your practice will thrive within the larger healthcare system. You must consider the potential employer's strategic objectives, and whether you will be happy practicing in that environment, says Bill Cherry, a principal at Pinnacle Healthcare Consulting, a consulting firm in Centennial, Colo. For example, if the health system is embracing key health reform initiatives, but you're more hesitant to do so, that should be a red flag. "If the physician views [patient care] one way and the health system views it a different way that could create conflict down the road," says Cherry.

When assessing the potential employer's strategic objectives, also consider whether it has the right intentions for your practice, says Jennifer Snider, vice president of operations at The Halley Consulting Group, a consulting firm in Westerville, Ohio. "Find that organization that has a strategic vision for what they want from their physician network; [make sure] they're not just scooping up the practice to keep the competing hospital from grabbing it," she says.

Outline the terms

One of the biggest struggles physicians face when they transition from owner to employee is a loss of autonomy, say experts. Understanding how much autonomy you will lose will help you make the right decision regarding selling. Plus, if you do determine that selling is the right move, going into the arrangement with your eyes wide open will help ease the transition. Cherry advises sitting down with the potential employer and identifying who will have what degree of decision-making power, and in what areas. "Clearly understanding that upfront makes for a better relationship at the end of the day," he says.

Also, inquire about the broader decision-making structure within the organization. If a decision lies outside your purview, for instance, you shouldn't have to go through too many "layers" to get it resolved, says Victor Arnold, managing director at Huron Healthcare, a consulting management firm in Chicago. "There will be some bureaucracy, the question is how much," says Arnold.

Evaluate the pay

The larger health system might promise higher compensation, but don't let that blind you to important details. The compensation model should be easy to understand and easy to administer, says Snider, who recommends seeking out productivity-based plans. "If it's just a straight salary, typically you're going to make what you make regardless of what you produce," she says. "If you're a physician that's working hard, day in and day out, you should be rewarded for that."

Proceed cautiously if the compensation model is revenue minus expenses, says Daniel Stech, a principal at Pinnacle Healthcare Consulting. "If a physician is being offered one of those kinds of models, they really need to understand what expenses are going to be allocated to them, and they need to understand what the consequences are if they don't generate sufficient revenue to cover those expenses," he says, adding that he knows many physicians who lacked this understanding and are now "upside down" with regard to compensation. "They're being asked to pay back the financial support the hospital is providing them."

Another big consideration: Pay close attention if you are evaluating a multi-year contract, says Wade Thomas, a regional manager at Healthcare Strategy Group, a consulting firm in Louisville, Ky. The contract should state that if both you and the employer decide to renegotiate at the end of its term, that the employer will pay fair market value for your specialty at that time, at a minimum, says Thomas.

Secure your staff

In addition to considering how employment will change your compensation, consider how it will change your staff's. "Nine times out of 10, the hospital benefit package is richer than the private practice's, but not always," says Snider. "... It's important to know those things upfront."

Also consider how selling will change your staffing structure. If the health system plans to make significant changes, ask what opportunities it will provide displaced staff, says Stech. The larger health system may be able to place them in a different area or department, if necessary.

Most practices retain their practice manager to oversee day-to-day operations after being acquired. The larger health system, however, may appoint an individual to play a broader management or practice-relations role (for instance, he may oversee all of the practices owned by the hospital). If this is the case, ensure that this individual has practice management experience, says Snider. "Someone with that ambulatory experience is so important to understanding what it takes to be successful in the physician-practice world."

Inquire about the future

Consider the health system's long-term expectations. Many will develop a financial projection regarding your practice's performance for the next year or the next few years, says Snider. "I think it's important for the physician to be a part of that and have input [into] what the financial projections are, and understand what the hospital's expectations are for them," she says, adding that the projections should be based on historical activity of the practice. If the health system is projecting growth, make sure those expectations are realistic, she says.

Another key question to ask: Will the health system add another physician to your practice in the short term or long term? An additional physician might help your practice grow, but that might also impede your productivity. "Sometimes that productivity can be sacrificed as you are growing another physician in the practice," says Snider, adding that it could be problematic if your compensation is tied to productivity. "Having an active voice and a seat at that table in that development, I think, is crucial."

Key questions to ask

Considering selling your practice to a healthcare system? Asking the right questions can help reveal if selling is the right move. For a list of the key questions to ask, visit bit.ly/nine-questions.

To sell or not to sell

Still having trouble determining if selling your practice is the right move? Visit bit.ly/employment-cons for an overview of some of the biggest pros and cons.

Technical concerns

If your practice wants to implement an EHR but cost has prevented it from doing so, selling your practice to a larger healthcare system could present a big opportunity. The larger healthcare system may provide you with an EHR.

For practices that already have EHRs, however, selling may present some big drawbacks. While some health systems may allow you to keep using your system; others may require you to adopt theirs, says Wade Thomas, a regional manager at Healthcare Strategy Group, a consulting firm in Louisville, Ky.

Transitioning to a new EHR can be frustrating and time consuming, especially if the larger system fails to provide you with an adequate transition, training, and support plan, says Thomas.

Before selling, ask the health system who will be in charge of the transition process and what resources will be available to you if problems arise. "Sit down and see the dedicated work plan on how you're going to transition from your system to the new system," he says.

Aubrey Westgate is an associate editor for Physicians Practice. She can be reached at aubrey.westgate@ubm.com.