Physicians who sold their practices looking for an easier way of life now find the floor falling out beneath them. The floundering physician practice management industry is wreaking havoc on Wall Street, and hospital systems that purchased physician practices are bleeding red ink.
Last month, physicians were jolted anew when Pittsburgh-based Allegheny Health, Education and Research Foundation filed for bankruptcy for its eight Philadelphia hospitals, its physician practice network and Allegheny University of the Health Sciences. The 13-hospital system ate up about 300 Philadelphia and Pittsburgh physician practices in the past decade. AHERF has four hospitals in Pittsburgh and one in Willingboro, N.J., that were not part of the filing.
Later this month, AHERF will auction off the Philadelphia hospitals, and two hospital companies have already issued bids.
The future of the many physicians who sold their practices and put their faith in AHERF, however, remains unclear. The hospitals will need a network of physicians to maintain its referral level, but a restructured AHERF undoubtedly will want to streamline operations and could cancel provider contracts.
At the same time, physicians fed up with outside management may attempt to terminate their relationships with AHERF. Much will depend on the terms of the sale and what the Bankruptcy Court decides.
At present most doctors are taking a wait-and-see attitude. Whatever the outcome, healthcare analysts say, the situation in Pennsylvania may be just the tip of the iceberg.
"Everyone realizes that not only the Allegheny organization but (also) every other organization that entered into the practice acquisition frenzy has found this to be a daunting challenge, to manage these practices to a point of meeting everybody's objectives," says AHERF spokesman Tom Chakurda.
One observer says the system is a symbol of the problems that have washed over the physician marketplace in recent months. "You've got too much debt from rapid expansion. Allegheny, MedPartners, Oxford Health Plans -- all (are) companies that grew too fast to absorb what they had, saddled themselves with too much debt and drowned in it. All that (happened) in an environment of falling reimbursement, so less money is coming in and you saw some really rosy, overly optimistic projections of how fast they were going to cut medical costs," says Sue Lyn Schramm, president of Integrated Health Strategies, a Falls Church, Va., consulting firm.
AHERF was aggressive in gobbling up physician practices across Pennsylvania, and its current practice network is made up of 310 doctors in eastern Pennsylvania and 250 in western Pennsylvania. That rapid expansion, and the lower-than-expected productivity of those practices, led to $1.3 billion in debt and the Chapter 11 filing.
AHERF recently received an emergency $1 billion loan from an investment consortium to meet payroll and stave off creditors. But beforehand some student loan checks bounced, one creditor sued, and local newspaper reports surfaced of AHERF dipping into funds earmarked for research and education to pay bills.
The system filed for bankruptcy protection in U.S. Bankruptcy Court in Pittsburgh, and bids for the eight Philadelphia hospitals are due there by Sept. 25. (AHERF is selling its New Jersey hospital individually.) The auction is set to take place Sept. 29. Nashville-based Vanguard Health Systems bid $460 million, and Santa Barbara, Calif.-based Tenet Healthcare Corp. bid $465 million for the eight Philadelphia hospitals. Neither bid includes the purchase of the medical school, but both provide money to assist in Allegheny University of the Health Sciences' transition to an independent institution.
Although Tenet's bid does not include the purchase -- or even mention -- of AHERF's physician contracts, spokesman Harry Anderson says Tenet representatives are meeting with system physicians to discuss future relations.
"What we've been talking to doctors about is trying to find out from them what they think the solution is, so we can craft a plan," Anderson says. "They're saying a lot of things, not the least of which is they want management, need management, that the Allegheny system has left them bereft. They want somebody with an established track record that has managed a big system that knows how to work with academically oriented hospitals."
Providers not interested in working for Tenet or any other purchaser are looking into terminating contracts, says Bill Kalogredis, a Wayne, Pa., attorney who represents a number of AHERF physicians.
"Purchasing back the practice is an option for some," he says. "A lot of clients will be thinking about getting it -- either buying it back, or if it's (considered a) breach of contract, getting it back. For those practices that somebody wants, the question will be, do they have a right to just take it over or not? That will be a function of Bankruptcy Court and what it decides."
The contracts all have standard termination provisions, but those became obsolete when AHERF filed for bankruptcy. It will be up to the Bankruptcy Court to decide what happens to providers' contracts, explains Katherine Benesch, a health law attorney in nearby Lawrenceville, N.J.
"The termination provisions are primarily standard termination provisions which talk about if one party or the other wants to get out of the contract and how much notice they have to give," she says. "Clearly bankruptcy is not one of the conditions that was anticipated. Once Allegheny declared bankruptcy, that changed its legal status."
The Pennsylvania Medical Society sent a letter to the majority of physicians in the state soon after the filing, answering the most common physician questions about contract status. Because AHERF filed for Chapter 11, the letter explained, it can cancel or reject the contracts of both independent contractors and employees.
It also explained that physicians who wish to terminate their contracts can ask the Bankruptcy Court for an order directing AHERF to end the pact at an earlier date. Also, physicians not being paid for services rendered before the filing date may not sue AHERF to collect the claim.
Society President Lee McCormick, M.D., a Pittsburgh-area family practitioner, says most physicians are in a holding pattern until the end of this month when the auction is held and their future becomes clearer.
Attorney Benesch predicts doctors will have mixed outcomes. "Those physicians who are doing very well will probably continue to do very well. Those who haven't been making as much under Allegheny will probably be very happy to get out of this," she says. "The people . . . for whom the uncertainly is the greatest are physicians who may have been looking toward retirement. Or those people who in a market three, four years ago could have gotten a very high price for their practice, but today people are not buying physician practices."