Will Practices Be Forced to Sell Out to Hospitals?

October 25, 2010

Practices might not be forced to sell out to hospitals, but they will need an alignment strategy, argues expert Marc Halley, MBA, because physician-hospital alignment is here to stay. Here's advice on picking the right partner.

Are private-office doctors going to be forced to work for a hospital in the next several years, or face extinction? Perhaps not, but hospitals are buying up private practices at a rate not seen since the late 1990s. Expert Marc Halley, president and CEO of The Halley Consulting Group LLC, thinks the integration trend "is here to stay this time."

The vast majority of practices will need to figure out a hospital alignment strategy - be it through a sale to a hospital or some other type of partnership - or face trying to compete with better-resourced integrated delivery systems under impossible odds, he said.

You can't beat 'em, Halley argues, so you'll need to figure out how to join 'em. "It doesn't necessarily have to be an employment model," he told a standing-room-only group Monday at the MGMA 2010 Annual Conference. "But I'll bet that alignment is in your future."

Integration efforts a decade ago mostly fell apart, sometimes acrimoniously, as hospitals and practices struggled to work together productively under employment models. But Halley, who is based in Westville, Ohio, said that the factors driving integration between hospitals and private practices seem intractable now. These include declining reimbursement; increasing cost and administrative complexity of practice management; and changing lifestyle objectives of younger doctors, who are more likely to prefer low-risk "jobs" to higher-risk "careers" that usually include long hours and entrepreneurial ambitions.

Moreover, hospitals understand better today than they ever have that primary-care doctors control a hospital's market share because they control almost all referrals, so they are motivated more than ever to secure their market share through strategic acquisitions and practices, as well as other types of partnerships.

"Are any of those factors going to change?" Halley asked. "I don't think any of them will. So I think we're in this hospital-practice integration business for the long haul."

What does all this mean for a practice weighing a sale or some other strategic partnership with a hospital? Halley suggested considering carefully several factors, including:

Hospital strategy. How does the hospital's strategy include attracting the type of physicians your practice has? What is its long-term plan for increasing its market share, and how do you fit in?

Execution. What happens on "day two" of an integration - the day after the deal is signed? How exactly will the hospital execute its strategy?

The hospital's current market position. Is the hospital positioned for long-term growth, or is it likely to be acquired itself (or possibly close) in the next several years?

Management. Do you have partners in the hospital's executive offices that you can work with? "The most important factor in the success of any integration with a hospital is the disposition of the hospital CEO," Halley explained. Not all CEOs understand the nuances of private-practice management, so it becomes the job of physicians and practice managers within the practices to explain those nuances to them. For example, some hospital executives see cost cutting by reducing support staff as an effective way to repair a financially struggling practice, but private-practice managers know that penny-pinching strategies usually backfire, since they force high paid physicians to spend time on administrative functions rather than revenue generating clinical work. Make sure you're dealing with a CEO you can trust to work with you post-integration. "Don't just say, 'They're idiots, they don't understand success in this business,'" Halley admonished. "Teach them the rules of success in your business."

Capital resources and service level. Some integrations fail because the hospital doesn't spend the money on the practice that its physicians were expecting. Make sure the hospital has access to capital that it is willing to spend to help you succeed. Also, make sure you understand how the relationship is going to work between hospital administration and your support staff on items like billing and human resources.

"Hospitals realize that primary-care doctors control market share, and they're responding by buying them up," Halley explained. "It's smart business for hospitals." For practices, he said, now is the time to find the right partner hospital, and to work carefully toward a partnership that works for both sides. The acquisition (or other partnership model) is not the end of the physicians' involvement in the business operations of the practice, but rather the beginning of a period in which they will have to learn to exercise influence instead of control.

Bob Keaveney is Editorial Director of Physicians Practice. Tell us what you think in the comment field below.