Have You Considered the Alternatives to Selling Your Practice to a Hospital?

March 28, 2013

by Mark F. Weiss, JD

The business of physician practice, like the fashionable width of ties, is cyclical. As I write this, we’re at a similar point in the physician business cycle as we were approximately 30 years ago when managed care began making independent physician practice shaky, and large numbers of physicians sought cover by selling their practices to hospitals and hospital-owned entities.

Many, even most, of those 80’s hospital-physician ventures subsequently failed. In fact, the acronym used for many of those arrangements, PHO, for “physician hospital organization,” is now all but unrecognizable. The average physician might think it’s the all-capitalized name of a popular Vietnamese dish.

This time around, it’s not managed care that’s driving physicians to seek cover. Instead, it’s pressure on reimbursement, rising costs and exploding governmental regulation: Obamacare and its accountable care organization (ACO) structure.

History as a teacher appears to need a better lesson plan, because many physicians today see selling out to, and becoming employees of, a hospital as the panacea.

Hospital employment may be the cure for some, but the arrangement is likely to be extremely problematic for most.

Mentality

Setting aside other considerations, employment is a hierarchical, bureaucratic structure. There’s someone in charge (or so he or she believes), lots of middle managers, and then you. Those “above you” in this structure get to tell you what to do and they pay you to do it, not something else. (More on pay below.)

For some, that is an acceptable arrangement. They find solace in not having to make business decisions.

For many, it is not. Those physicians used to running their own practices, or at least those who were partners or shareholders in practices and who acted as such, often find that becoming an employee (no matter what cute acronym is applied, like “team member” or “associate”), is a soulless experience. It may even be more risky, as the bureaucrats actually making the decisions will eventually run out of luck.

Secure Isn’t So Secure

Growing up in the 1960′s and early 1970′s, it was a common assumption that going to college and getting a job with a large company was the key to financial security. But how did that work out for the millions of corporate employees who saw their jobs disappear when their companies failed, when they were laid off in a downsizing (oh, sorry, “right sizing”), or simply replaced by someone who’d work for less?

Is hospital employment any more secure?

Certainly, no one can predict the future, but what safety is there in a one-year employment contract? What safety is there in a seven year contract if it can be terminated on 90 days’ notice without cause or, as many physicians have come to realize, with cause, if it’s easy for the hospital to manufacture cause?

Sorry, but there is no security, at least nothing absolute, nothing that can be assured you. Large organizations are not more stable than small ones. There are very few, if any economies of scale created by clamping a large physician organization onto a hospital.

In fact, as these organizations grow they are likely be more fragile than they were to begin with: The failure of hospitals in the past put just its staff on unemployment. The failure of hospital-physician systems puts you and every other employed physician on unemployment with them. (Although the hospital CEO who put the deal together will likely be retired by then, enjoying the sun and the wine, and fondly remembering the accolades of his/her genius as a “visionary”).

So, no matter what, you are bearing the risk.

Decreasing Compensation

[Those who fool themselves into thinking that it’s all about patient care and that money is not important should just skip this section.]

Still reading? Then think about this:

For “compliance” reasons, from Federal Anti-Kickback Statute concerns to issues of private remuneration related to preserving tax exempt status, and simply because it seemingly makes good business sense to pay as little as possible, hospitals generally reimburse physicians based on compensation surveys. They engage valuation consultants to provide opinions on which the hospital can pin proof of its good faith.

But even assuming that compensations surveys are statistically valid, the compensation consultants hired by hospitals tend to be conservative and, accordingly, leave a large margin for error on the upside when issuing their opinions. They often take the position that they will not opine as to the bona fides of an arrangement at more than the 75th percentile of value as reported on national, or large-area regional (e.g., “Western Region”) studies.

But for that 75th percentile to exist, there must be a top quartile.

The trap here is that as more physicians shift from private practice settings where compensation surveys do not heavily weigh, or even weigh at all, to the hospital setting where those surveys control, overall compensation will decline: A prior year’s 75th percentile will soon become a subsequent years’ 99th percentile and that, of course, is “too risky” a value at which to opine.

Additionally, many integrated hospital-physician systems are directly aiming at ACO participation. Inherent in the ACO model is reduction of payment – you know, less money for better care. The impact of those payment reductions, particularly from ACO payment programs sponsored by private payors, which are driven to increase their profits by reducing reimbursement, will directly hit physician compensation.

Even if you choose to ignore the spiraling down effect of survey-based compensation and the more than likely impact of a declining share of bundled ACO payments, consider that in private practice you trade a degree of risk for an upside that is not artificially capped. In hospital employment, your minimum compensation is only preserved for the length of your contract’s notice of termination provision, and your upside is capped by whatever bonus provision, if any, exists.

And, finally, there’s another angle to this: It’s the fact that earning $X, net, self-employed versus earning $X, net, as an employee, are two very different things. $X as an employee comes subject to being fired, subject to being told what to do, and subject to a plethora of rules — that’s a much poorer compensation package.

Alternatives

So, what alternatives to selling out to a hospital exist for physicians and their groups wanting to remain actually, or relatively, independent?

Create An Experience Monopoly™

To start, no matter what other alternatives you also consider, you must begin to pull your group out of the commodity game.

In order to achieve a transformationally better future, it’s anathema for your practice to simply do what every other practice does, even if it’s doing what the best of everyone else does.

Forget about “benchmarking” in terms of relationships. Instead, you should be devoting significant effort to creating a monopoly in terms of the experience that you provide to your “customers:” hospitals, referring physicians, and patients. The term I use to describe this is an Experience Monopoly™.

You need to position your practice to be viewed by those customers as the only conceivable provider of your specialty services. Creating an Experience Monopoly is one of those positioning strategies. Think about it: You shouldn’t really want to “compete,” you should want to dominate.

We know that people actually make most decisions on the basis of emotions, not intellect, and that they then “back fill,” in a manner of speaking, their preliminary emotional decision with “facts” that they can use to justify their emotional decision to third parties.

I’m not suggesting that facts are not important. You have to provide good, no great, medical care, but that’s simply the price of admission. What I am suggesting is that you need to understand that creating relationships is not simply about hard facts—just who tells the better story, just who delivers the better experience, a unique experience—your practice or another one—might mean who wins the economic battle.

Market, market, and market your services from the Experience Monopoly viewpoint. Face it, hardly anyone else will understand what it is that you are doing.

Consider Merger

Another alternative is to consider merging your practice with another group.

But beware the fact that merging two weak performing groups rarely creates a strong one. Think Sears plus Kmart.

Merging even two strong groups can be problematic, as there’s far more to a successful merger than balance sheets — focus, personnel, management style and group culture play determinative roles.

For example, there is a way of ranking groups based on their culture from the most reactive to the most strategic. I call this ranking The Four Circles™. Because of space the limitations of this publication, suffice it to say that there is a success-culture that distinguishes the most successful groups, what I term Strategic Groups™, from the great majority of the mediocre. Merging your Strategic Group with one occupying the opposite end of the spectrum, one that is operated in the manner of a club and which is simply reactive to all business situations, doesn’t offer much promise.

The key is to seek the right merger partner with which to create a strategic merger, one in which one plus one equals 3 or more. Bad math, but very good business.

Consider Alternative-to-Merger Structure

As much as ACO’s hark back to PHO’s, you may want to consider another managed care age model, the “group without walls.”

In essence, a group without walls is like a merger without complete loss of constituent entity identity.

Generally speaking, a group without walls involves setting up a central entity, usually a corporation or in those states that permit, a limited liability company, through which the entire group’s financial operation is run. There’s centralized management, billing, collection and the like. However, the constituent groups still exercise a large degree of autonomy in terms of supervising their staff and managing their relationships with referring physicians and patients. Additionally, the constituent groups can have a degree of financial independence in terms of being treated as separate profit centers or divisions.

As in most, no, probably all, healthcare business arrangements today, structuring a group without walls is complex. But, it may be a very attractive alternative for you.

Consider Other Alignment With A Hospital

If your impetus in considering a sale to the hospital was to join its controlled group and participate in the hospital’s ACO, you may want to think about an alternative alignment strategy.

For example, you can continue to maintain your own practice but contract, as a participating provider, with the hospital’s sponsored ACO.

You can remain outside of the ACO and still market to the physicians within that structure.

Or, in order to gain more clout in loose alignment negotiations, you can consider forming, if one doesn’t already exist, an independent practice association, an “IPA,” to be the vehicle for loose affiliation.

I know that “alignment” is often the politically correct term for domination, but if you resist totally ceding power there can be ways to remain independent and still align your interests with a hospital and the physicians within its gravitational pull.

Concierge Practice

I’d be remiss in not mentioning concierge practice: practices that charge a fee to patients for access (that is, for the right to become a patient).

Although it’s not an alternative for all specialties, it can be a solution for some, even many.

Consider that even though it may be too soon to know for sure, it seems likely that the impact of Obamacare, and certainly its second order effects such as a push toward care by paraprofessionals and toward more “factory like” medicine, will create a demand for high quality, high touch medical care for those willing to go outside the system.

You just might want to be there, ready to welcome them.

Conclusion

It’s a tough world out there for physicians—at least that’s what many physicians think.

If you’re still serious considering selling to a hospital and joining the ranks of their employed physicians, take the time to groom your practice for that sale and to strategize for the best sales deal, and the best employment deal that can be had. You might also consider a two phase deal, selling your practice to another group followed by your employment by a hospital.

At the same time, consider the alternatives, those discussed above and others.

No matter what, you are bearing the risk. Wouldn’t you rather hedge your chances by having more control over your destiny?

Being free to practice medicine without the attendant worries of running a business is the recruiting poster for those who want to pay you at the median of last year’s salary survey, a continuously decreasing sum.

Consider that for many, it’s a con, a long con, and that you’re the intended mark.

___

Mark F. Weiss is an attorney who specializes in the business and legal issues affecting physicians and physician groups on a national basis. He holds an appointment as clinical assistant professor of anesthesiology at USC’s Keck School of Medicine and practices with Advisory Law Group, a firm with offices in Los Angeles and Santa Barbara, CA representing clients across the country. He offers complimentary educational materials for our readers at advisorylawgroup.com. Mr. Weiss can be reached by email at markweiss@advisorylawgroup.com or at 310 843 2800.

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