Like impulsive shoppers, hospitals can't seem to buy enough doctors. Last year, hospital-based systems reported a 60% increase in the number of physicians whose practices they owned or managed, to 11,234 from 7,015 in 1994, according to MODERN HEALTHCARE's 1996 Multi-unit Providers Survey. That followed a 70% increase the previous year (See chart, p. 40).
Hospitals own 10% of all medical groups with more than 50 physicians, according to the American Medical Association.
Often, however, hospital-based systems aren't prepared for the management challenges of running medical groups. Many have been plagued by productivity slumps and high operating costs, in some cases hurting the credit ratings of their hospital owners.
A survey of senior healthcare financial executives last fall showed only 17% of institutions that had purchased physician practices always or usually achieved a positive return (Sept. 25, 1995, p. 64).
Moreover, hospital-physician integration bucks a trend toward "virtual" networks of specialized companies bound by contracts rather than ownership. Recent developments on the West Coast show such integration doesn't always work.
Hospital administrators often are unaware of the cultural and operational disparities between hospitals and physician practices. Hospitals are more hierarchical; doctors operate by consensus. Accounting, credentialing, billing and personnel are handled differently at the physician level.
"Too many hospitals look at a physician initiative as simply another product line. Really, this is an entirely different business," said Robert Rowland, who organized a physician group for Swedish Health Services.
Several years into their buying spree, many hospitals are at a crossroads. They must learn new management techniques and perhaps even change their core philosophies in order to succeed in organizing physicians. Otherwise, their efforts could be further usurped by large medical groups, independent practice associations and physician practice management companies.
In less advanced markets, the acquisition frenzy often begins as a defensive tactic to protect market share. When one hospital starts buying practices, others follow, seeking to build networks that will give them negotiating clout with HMOs.
Sometimes, it's the physicians who approach the hospital for a deal as they seek to shed administrative burdens, managed-care negotiating hassles and a dearth of capital.
Hospitals usually lose money running physician practices, at least in the first few years, partly because overhead costs increase and physicians are less productive as salaried employees.
But despite start-up troubles, many hospitals believe owning medical groups is a solid long-term strategy. When VHA, an alliance that represents not-for-profit hospitals and systems, asked about a dozen of its largest members this spring whether their physician acquisition strategies were successful, all said they were.
Most hospitals view the difficulties as short-term, said VHA Senior Vice President John Koster, M.D.
"The challenge is working out what in essence is a new business," Koster said. "They recognize there are issues, but it's not a set of issues they can't work through."
HMOs have experienced similar start-up problems with their physician practices, and many of them have sold medical groups in the past year.
By contrast, hospitals have chosen to try to bring practices to profitability by renegotiating physician compensation packages or lowering overhead costs. Others are trying to achieve a critical mass in which they can wield negotiating clout with payers.
Some have begun to forge joint ventures with physicians, such as management service organizations, in which physicians retain an equity stake and a part in governance. They resemble models used by some physician practice management companies.
At least one small hospital has considered turning its employed physicians over to a joint venture with a large tertiary provider, said Lisa Martin, an assistant vice president for Moody's Investors Service, a New York bond-rating agency.
Several physician practice management companies say they are in negotiations to buy or manage troubled hospital-owned practices, but only one joint venture has been announced, according to MODERN HEALTHCARE research. In April, Washington-based Medlantic Healthcare Group signed a deal with PhyMatrix Corp., West Palm Beach, Fla., to build an oncology network in the Washington and Baltimore areas.
An obstacle to such deals is that, by and large, hospitals and management companies view each other as competitors. Also, physicians who sell their practice to the local hospital might oppose the hospital turning around and selling it to an investor-owned company, Koster said.
Hospitals see several benefits in operating physician practices. Employed physicians can help systems find ways to reduce costs in hospital operations, provide continuity of care and offer a distinct product-a physician network-that is tough to duplicate.
Often, the lead marketing point of a system isn't its network of hospitals but the number, locations and quality of its doctors.
Moody's sees hospital-physician integration as positive, even though it has lowered the ratings of some small hospitals that couldn't support the short-term costs of running practices (Nov. 13, 1995, p. 16).
A hospital that experiences a slip in ratings due to the heavy costs of establishing a physician practice might avoid a bigger credit hit down the road were its competitors to corner the physician market, Moody's reasons.
But advocates of medical groups say they will whither if their primary mission is to support hospitals.
Five years ago, Burbank, Calif.-based UniHealth pioneered the strategy many hospitals use today: affiliating with medical groups near its hospitals and integrating those groups into hospital operations.
But the strategy restricted the growth of the physician groups, said John Austin, M.D., president of UniHealth's professional services division. Many physicians and their patients didn't want to use a UniHealth hospital, often because of location, he said.
Also, efforts to coordinate hospital and medical group operations, such as allowing patients to undergo admissions procedures at the physician's office, diverted groups from serving the vast majority of patients who never use the hospital, Austin said. "What we failed to recognize is, being a hospital and being a physician group are fundamentally different businesses."
UniHealth established its professional services division in late 1994 to enable its physician groups to grow independently from its hospitals.
Since then, UniHealth's customers have nearly tripled to 720,000, giving it the second-largest market share in the state. About a quarter of those customers are in Northern California, where UniHealth owns no hospitals.
MedPartners, a physician practice management company, will have more than 1 million customers in California after its pending acquisition of Caremark International.
Austin said UniHealth attracts quality medical groups because it can show that it isn't focused on hospitals. In fact, UniHealth is creating four separate holding companies: for hospitals, medical groups, home health services and health plans.
Of all the hospital days generated by its 6,500 doctors-500 in medical groups and 6,000 in IPAs-less than 20% are at UniHealth hospitals, he said. Its hospitals, on the other hand, benefit from being included in the managed-care contracts a big physician network can draw, he said.
Another system that changed its physician strategy is Swedish Health Services, based in Seattle. Swedish built a primary-care network over three years at a cost of $10 million in operating losses and capital costs, said Rowland, executive director of Swedish's medical services.
But last year the system decided it would be cheaper and easier to sell the practices and enter contracting arrangements. Last fall, Swedish sold its network of 40 primary-care physicians to a multispecialty group, Pacific Medical Group, and formed a series of long-term contracting agreements with the group.
These cases don't necessarily mean buying physician practices is a bad strategy for hospitals.
In fact, in the case of Swedish, purchasing the practices offered a strategic advantage. Three years earlier Pacific had rejected an affiliation with the hospital; later it was willing to sign a deal to access Swedish's primary-care physicians, Rowland said.
However, at some point systems have to give up their hospital-centered view, Rowland and Austin said.
Certainly, if medical groups are unhappy, they can walk. One prominent example is La Habra, Calif.-based Friendly Hills HealthCare Network, which was purchased by Caremark in 1994, after spending one year as a foundation affiliated with Loma Linda (Calif.) University Community Medical Center. An internal memo suggested the economic incentives of the physicians and the hospital weren't in accord (Aug. 15, 1994, p. 6).
Robert Erra, a partner with MCG HealthCare Compensation in Minneapolis, advises hospitals to act more like corporations to compete with management companies and other hospitals. He suggests instilling economic incentives for long-term employment, such as vesting the proceeds of practice sales over several years.
"As you develop your model there are people with big enough checkbooks that are willing to take the organization that you built away from you," Erra said.
Advocate Health Care, based in the Chicago suburb of Oak Brook, Ill., is one system evolving from its hospital roots. Advocate has a variety of physician integration strategies, including operating groups through an MSO.
This month, Advocate expects to finalize an acquisition of Dreyer Medical Clinic, a 92-physician multispecialty group in Aurora, Ill. It's Advocate's first foray into the Aurora market, where it has yet to link with any hospitals.
Advocate outbid two big management companies, PhyCor and Caremark, to acquire Dreyer, said Michael Soper, M.D., Advocate's executive vice president for physician integration.
Advocate offered nearly identical deals as the other companies in terms of capital and governance, including equal representation of doctors and managers on the MSO executive committee, said John Potter, Dreyer's president. Physicians will set their own compensation formula, which the executive committee must approve. Plus, Advocate has a uniquely strong presence in the Chicago market, Potter said.
Still, Dreyer physicians had to be convinced that Advocate didn't retain a hospital mind-set. They were assured by the strong physician role in governing Advocate's other groups and the fact that Advocate has no inpatient beds in Aurora, Potter said.
In fact, Advocate says it will promote the Dreyer name. "In this new area, the reputation we will be pushing is that which has been established by the medical group," Soper said.