Doctors who decide to become hospital owners often do so because they have strong beliefs about how healthcare should be delivered. But turning those ideals into reality is tough.
About a year ago, Enrique Beckmann, M.D., decided it was time doctors had a stake in Chicago's Michael Reese Hospital and Medical Center. He has spent his free time in the months since arranging a purchase.
"It became clear to us," Beckmann says, "that unless physicians were directly involved in management, decisions would always be made by people who have interests (that are) not those of the hospital, its patients or physicians."
The 46-year-old pathologist has worked at Reese for 21 years and watched it struggle to survive under three owners: a community-based not-for-profit, an HMO and a national for-profit system. When the hospital's third owner, Columbia/HCA Healthcare Corp. of Nashville, Tenn., put it on the block, Beckmann stepped up his effort to purchase.
With nine other physicians, he formed an acquisition group, won the medical staff's endorsement and persuaded a Scottsdale, Ariz.-based firm to take majority ownership.
Though it may sound like smooth sailing, the group encountered a lot of choppy water along the way, including problems finding capital. Eventually, the physicians had to turn to the Scottsdale company, which required that they pay a steep annual interest rate of 12%. Then in the spring, in an effort to conserve funds, they had to lay off employed physicians and some staff (see May, page 14).
But if a stock issue to the medical staff is completed as planned this fall, Beckmann's dream will come true-doctors will own 20% of Reese and be assured of a major role in decision making.
The route from wish to reality when doctors attempt to buy hospitals almost always presents numerous challenges. In fact, the pool of doctor-owned hospitals appears to be shrinking, say experts who follow healthcare trends. No industry group tracks physician ownership of hospitals; so no precise comparative history exists.
But according to estimates from the Washington-based Federation of American Health Systems, which represents for-profit hospitals, there are now about 125 U.S. hospitals owned mostly by doctors. And doctors-in partnership with community-based systems and national chains-have minority ownership of about a few dozen more.
Many hospitals solely owned by doctors are "mom-and-pop" businesses, says Federation President Thomas Scully. The now-common death blow for those hospitals is that they are shut out of managed-care networks. For example, despite its physicians' high hopes, 1-year-old Precedent Health Center in Denver was forced to close this summer in part because it had trouble securing managed-care contracts (see July, page 2).
What's more, depending on the ownership structure, doctors' investments in hospitals and other facilities can fly in the face of a number of federal laws that ban payments to doctors for patient referrals or ownership set-ups that reward doctors for use of a facility. A recent HHS bulletin raised the possibility of a new hurdle in the Social Security Act (see August, page 2).
"The regulatory landscape is a mess," says Robert Homchick of Davis Wright Tremaine, a Seattle law firm. "In many cases, the legality of a deal essentially is a question of intent."
It requires great passion to take on hospital ownership, doctors say. For example, Sargent, Neb., cardiologist Rajith Goli, M.D., bought an ailing 18-bed district hospital in 1997 rather than watch it close. But in April she ran out of funds and had to temporarily shut down the hospital. Since then, Goli has lined up financial backing from friends and local businesses. She plans to reopen the facility this fall, reorganized as a not-for-profit.
Goli says when she bought the hospital she was well off and able to do so with her own funds. She declined to discuss details of the transaction, but according to state documents, the hospital had a purchase price of $609,175, which included the assumption of accounts payable.
"If I brought in a dime, I spent $10," Goli says. "It's not financially lucrative, but I kept it open for moral reasons. What bothers me about large hospitals is that the patients are like sheep: People stand in waiting rooms for long periods, they take a bunch of pills, they don't know what's wrong.
"When you take the Hippocratic oath, you're taking an oath to provide utmost quality, compassionate care," she says. "How can you work in an environment geared to productivity, where you don't spend time with the patients?"
Bill Campbell, M.D., feels the same way about his 150-bed Springfield, Mo., hospital. A family practitioner, Campbell says he likes the atmosphere of a small, doctor-run hospital. "You get to know the patients and the staff."
Campbell was one of 10 doctors who bought bankrupt Doctors Hospital in 1992 by agreeing to cover its bond payments. In 1995 the hospital again slipped into a financial decline as larger competitors locked up market share by creating their own HMOs. Then Doctors merged with a competing hospital and became a Columbia facility, with the physicians holding 30% equity and 50% governance.
In a massive restructuring last year, Columbia divested hospitals nationwide, a move that included the sale of Doctors and its sister hospital to competing Cox Health Systems of Springfield. The physicians decided it was time to take back their facility. Using their right of approval over the sale of the hospitals, they arranged a deal with Cox that gave them the original Doctors for their $2 million in equity and a $3 million line of credit for operations and remodeling. Doctors is scheduled to reopen later this month.
Cox also agreed to include Doctors as part of its provider system in managed-care contracts. Because of that, Campbell says, he thinks the hospital will do well.
Since the sale, an additional 16 physicians have joined Doctors' operating company, each paying a $5,000 subscription fee. They have agreed any profits will be used to better the hospital. "Eventually, the investment could be worth some money," Campbell says. "But short run, you're developing something to be proud of, (something) that meets community needs, that gives physicians choices and a feeling of empowerment."
Patients will benefit from the added competition, Campbell says. For example, breast cancer awareness month in October traditionally has meant half-price mammograms. But after Columbia sold its interest in Doctors, none of the area hospitals offered discounts, Campbell says. This year will be different. "I've always been a proponent of the third small option," he says.
Critics of physician ownership say it creates the potential that doctors will put hospital profits-and their own-above patient care. But Campbell, Goli and Beckmann disagree: They own hospitals to improve patient care.
Mark Pauly, a healthcare professor at the University of Pennsylvania's Wharton School, sees a trade-off. "On one hand, you have incentives for inappropriate referrals, on the other, incentives for operating efficiently," he says.
Strong community ties might prevent abuse, Pauly says. "When everybody knows everybody's business, doctors behaving inappropriately is harder to get away with," Pauly says.
Suspicion of physician ownership largely has been aimed at deals with for-profit chains. In fact, Columbia, which once vociferously advocated physician ownership as a way to improve healthcare, has unwound most of its deals to avoid the perception of conflicts of interest. Of 3,000 doctors who were investors in Columbia hospitals in 1997, only about 200 still hold interests, the company says.
Physician ownership, however, remains a core strategy for heart-hospital operator MedCath, based in Charlotte, N.C.
"My bias is physicians need to be operationally and economically involved in a hospital to improve outcomes and decrease costs," MedCath President Stephen Puckett says. "We think we've got a structure that delivers."
MedCath, a 10-year-old privately held firm, operates five heart hospitals and is scheduled to open four more. It has 51% ownership of most of its hospitals.
In July, a bulletin from HHS' inspector general's office raised questions about such ventures. The bulletin focused on gainsharing deals, which reward physicians for reducing hospital costs, and said such deals might violate a provision in the Social Security Act. Tacked on at the end, however, were two paragraphs that said physician joint ventures in specialty hospitals sometimes resembled gainsharing and also could violate the Social Security Act.
HHS spokeswoman Alwyn Cassil says the bulletin was meant to be a cautionary flag, rather than a stop sign. A hospital likely to get in trouble would be one that has only physician investors on staff and is constantly telling them how their actions affect its profits, she says.
MedCath says its strategy won't change. "In the conversations we've had, it's clear the ruling doesn't affect us," Puckett says.
Like Puckett, Beckmann of Reese says he is convinced that physician ownership will make for a better hospital and better patient care.
He should know because he's worked under a variety of nonphysician owners. "There was talk of a great deal of physician input, but I can tell you it was token at best," he says. "It was at the discretion of management that physicians were involved, and that was usually (on) clinical matters. I believe physicians have a great deal more to offer."
At 845-bed Reese, Beckmann and the nine other physicians who made up the acquisition group are now board members. Beckmann is chair of the 13-member board. The remaining members are Reese's president, its chief financial officer and the chief medical officer of Doctors Community Healthcare, which guaranteed the $60 million necessary to fund the purchase of Reese.
In the planned fall offering, Beckmann hopes the hospital's 250-member medical staff will put up $2 million for a 20% stake in the organization. Because details of the offering are in the process of being finalized, the physicians are barred by Securities and Exchange Commission rules from trying to secure commitments for purchases, Beckmann says. Under their deal with DCH, the physicians will control the board for day-to-day operations; in major capital expenditures, the two will have equal say.
"If you are a physician and you admit a patient to the hospital, you want to make sure the entire experience is excellent from the moment the patient steps into the parking garage," he says.
"Ownership is tangible assurance that physicians have a say in every aspect of hospital management."