Talk about a reversal of fortune. Five years ago, specialty physicians were pondering early retirement or retraining in primary care, as experts predicted that managed care and capitation would slash demand for their services.
Meanwhile, primary-care practices, which were supposed to curtail specialty utilization, were being snapped up by hospitals and management companies like canned goods before a hurricane.
Contrary to expectations, demand for specialty services has never been higher, thanks to aging baby boomers and the patient-choice movement. Meanwhile, income worries have prompted specialists to merge their practices and invest in for-profit outpatient facilities and specialty hospitals, posing a direct threat to hospital profits.
As a result, hospitals and health systems can no longer afford to ignore specialists. After spending billions assembling primary-care networks, many institutions now are cozying up to their top revenue generators, such as cardiologists, oncologists and orthopedic surgeons.
Cushy recruitment packages, joint ventures and management-sharing with independent physician groups are suddenly in vogue.
"If hospitals and health systems don't step up to the line and discuss those types of durable relationships, (specialists) will seek those relationships elsewhere," says David Vellinga, president and chief executive officer of 500-bed Mercy Hospital Medical Center in Des Moines, Iowa, which is negotiating ties with cardiologists, orthopedic surgeons, gastroenterologists and nephrologists.
Ideally, partnerships between hospitals and specialists should improve services and lower costs. But financial losses and management disasters suffered by hospitals as a result of their excursions into primary care are a bleak reminder that deals must be crafted with proper physician incentives and advice. If hospitals aren't careful, their revenues could be nibbled to death.
Recruitment intensifies. In rural central Kentucky, 99-bed Harrison Memorial Hospital in Cynthiana is recruiting a cadre of specialists, including a urologist, a radiologist, an otolaryngologist, a part-time neurologist and a full-time cardiologist in an effort to boost hospital referrals.
It isn't alone. As of mid-1998, specialty recruitment has outpaced primary-care hiring, according to Merritt Hawkins & Associates, an Irving, Texas-based recruitment firm.
Within the last several months, hospitals have boosted income guarantees for cardiologists and oncologists by about 25% and 40%, respectively, while perks such as educational loan forgiveness have increased, says Mark Smith, vice president of the firm's eastern division.
In addition to those costs, hospitals can expect to pay $30,000 to $35,000 plus relocation expenses to recruit one doctor.
"Cardiology, rheumatology and hematology/oncology have been the areas where we've really seen the need intensify," Smith says. "As (systems) focused on developing their networks of primary-care physicians, they developed enough of a network that they can actually support more specialists and surgeons."
Harrison Memorial delved into specialty recruitment after polling local employers, makers of such products as Post-It Notes and refrigeration coils, says Administrator Darwin Root. He says employers don't want workers taking a day off to drive to Louisville, Ky., for care. "We needed to have the kinds of services that the public was demanding," Root says. He adds that nonlocal providers "may end up giving an employee two weeks off for a strained finger. When industry tells us they don't want us to do that, we listen."
Payrolls and productivity. A few hospital systems are putting specialists on their payrolls. But productivity is a big concern.
"I would remain generally very leery of any kind of increased employment arrangements with doctors," says Martin Arrick, a director in the health group at rating agency Standard & Poor's, New York.
One exception is Mercy Health System in Janesville, Wis., which since 1995 has doubled the size of its physician group to more than 200 doctors, 60% of them specialists. Mercy is one of the few systems nationally with a successful physician integration strategy, according to Moody's Investors Service, which revised its outlook for Mercy's A2-rated debt to positive from stable last fall. Mercy is the parent of 217-bed Mercy Hospital in Janesville.
Key to Mercy's success are basing pay on productivity, placing doctors in underserved and growing markets, redirecting physicians' ambulatory referrals from competitors to Mercy facilities and involving physicians in management planning, according to Moody's.
Mercy President and CEO Javon Bea is a tireless promoter of the hospital's integration strategy. He argues that most hospitals' integration efforts are flawed because they ignore specialists, driving them to affiliate with physician practice management companies or create single-specialty "cartels."
Bea says hospitals can successfully integrate specialists by basing pay on a percentage of professional billings rather than a guaranteed salary. But unfortunately, he says, most hospitals "are losing so dismally on the primary-care practices they don't want to enter into a dialogue about hiring specialists."
The competition motive. Often, the best physicians in town don't want to become hospital employees. To bind themselves to strong medical groups, hospitals are stepping up efforts to create joint ventures. One motivator is the competitive threat of companies such as cardiac provider MedCath and American Oncology Resources, which consolidate physicians and build their own for-profit facilities.
Late last year, Des Moines' Mercy Medical Center created a joint venture ambulatory surgery center with 20 orthopedic surgeons. Governance, ownership and financing are split 50-50.
In the past, such a facility might have been funded solely by the hospital, Vellinga says, with revenues-expected to be about $10 million annually-also going into hospital coffers. But Mercy didn't view the deal as handing over part of its revenue stream to doctors, he says.
The move was part of a strategy adopted by Des Moines-based Mercy Health Network, a system of seven Iowa hospitals formed last year to create formal relationships with specialists.
Now, physicians and hospital administrators sit at the same table to plan strategy and operations, which he says has already resulted in better patient satisfaction scores and some cost savings.
Some hospital administrators are recognizing that specialists who control vast portions of healthcare spending are essential business partners.
They'd like to reward single-specialty medical groups financially for improving quality and enhancing efficiency of particular service lines. Under so-called gain-sharing arrangements, specialists are typically paid fixed management fees plus incentives, such as a portion of net operating revenues, in exchange for directly managing hospital services.
But HHS' inspector general's office and HCFA haven't approved gain-sharing strategies with independent physicians. The agencies are studying whether such arrangements would violate the Stark laws against physician self-referral or discourage provision of Medicare and Medicaid services. Initial rulings are expected this year.
Earlier this year, the Internal Revenue Service gave its OK to two gain-sharing programs with cardiologists, ruling they didn't threaten the hospitals' tax-exempt status (April 5, p. 12).
More optimistic observers believe it's only a matter of time before federal regulators grant clearance to at least some gain-sharing models.
"There are a lot of services that are duplicated. In theory, putting all the incentives in the right place to look at the overall continuum of care should be good for the system," says Jeffrey Sinaiko, senior vice president of the Healthcare Practice Enhancement Network, a Los Angeles-based consulting firm.
Sharing control. Some hospitals are already finding ways to give specialists a bigger role, short of gain-sharing, in running hospital services.
In January, Vanderbilt University Medical Center in Nashville opened a 45,000-square-foot heart institute in partnership with 20-physician Page Campbell Cardiology Group. The new Vanderbilt-Page Campbell Heart Institute is part of the hospital's planned $15 million investment in cardiac care over the next few years.
The institute gives the private practice a voice in cardiac services. Page Campbell has two seats on the institute's seven-member governing board.
Ties were further strengthened by merging the university's four cardiac physicians practicing at Vanderbilt satellite offices with the 34-year-old Page Campbell practice. Page Campbell physicians work side by side with faculty physicians at the institute, although they will continue to perform most procedures at St. Thomas Hospital in Nashville, site of Page Campbell's main clinic.
Both sides had reservations, says Drew Gaffney, M.D., the medical center's senior vice chairman of medicine for clinical services. Private practitioners were wary of medical center bureaucracy, while faculty physicians feared the academic mission would evaporate, he says. But the goal of crafting a nationally competitive cardiac program held sway.
The heart institute provides the private practice with access to the hospital's advanced information systems and marketing expertise, as well as clinical research opportunities in cutting-edge techniques such as gene therapy, says Andre Churchwell, M.D., the group's managing partner.
"We view this as more than opening another office, but as a partnership that provides access to techniques that heretofore were just the province of the university," Churchwell says. "We think it's the kind of strategic alliance that medical schools will need to look at in the future."
For Vanderbilt, it provides a larger population of patients for clinical trials. The alternative, recruiting new cardiologists to Vanderbilt's staff, "seemed almost socially irresponsible in a community that already has one of the highest bypass rates in the country," Gaffney says.
Similarly, Avera McKennan Hospital in Sioux Falls, S.D., recently partnered with five private-practice orthopedic surgeons who see about 1,500 new spine patients per year. The Spine Institute of the Midwest, launched in January, is funded equally by the hospital and the physicians' practice. While not a gain-sharing strategy, the partnership gives physicians an avenue to coordinate and market services with the hospital.
The institute allows the practice to tap the hospital's marketing expertise and regional provider network, says one of the orthopedic surgeons, Joseph Cass, M.D. More important, he says, the hospital's wide network, which includes physical therapists in outlying counties, provides an avenue to implement regional protocols for back-pain patients.
Specialists often lead the charge to such a customer focus, says Daniel Zismer, national practice leader for health systems consulting at the Minneapolis office of Towers Perrin. "A great motivator has not just been simply money, but their belief that these can create a better experience than traditional hospital services," he says.
Control issues, however, often keep such partnerships from getting off the ground. The creation of the Spine Institute of the Midwest was stalled for many months because of an impasse over whether the director should be employed by the hospital or by the clinic. Ultimately, the physicians hired the director, with the hospital footing 50% of her salary.
The hospital "would like to help us become a better practice," Cass says. "They realize what's good for our practice is good for them."