A new partnership approach in the Philadelphia area may provide light at the end of the tunnel for beleaguered hospitals looking to exit the physician practice ownership business and for physicians seeking financial partners.
The partnership, known as a shared equity model, is not quite an equity MSO or a joint venture, where physicians and hospitals share ownership of an independent management services organization or freestanding outpatient facility. Instead, hospitals invest in an existing physician group in a way that allows a health system to develop and nurture relationships with local physicians without having to put doctors on the payroll.
If the concept continues to gain favor with providers across the country, it may appeal to medical groups looking to capitalize growth.
Jeffrey Smith, CEO of 25-physician Pottstown (Penn.) Medical Specialists, says the sale last year of 45% of the group to two health systems allowed the group to grow and, recently, to add an orthopedic surgeon. Smith says that selling equity in the multispecialty group, rather than the entire practice, keeps physician-owners in control of their own destinies and as a result keeps their motivation and production high.
"We got to remain in control, and the incentive for the doctors to continue to work was left in place," he said.
Back in the early 1990s, managed-care risk contracting dominated the healthcare scene, and Thomas Jefferson University Health System in Philadelphia was forced to rethink its relationships with primary-care providers. The health system knew that in order to survive in a highly capitated environment, it would need access to primary-care panels and a steady referral stream. Some of Thomas Jefferson's competitors, including the eight area hospitals in the Allegheny Health Education and Research Foundation system, decided that practice acquisition was the easiest way to assure access to panels and referrals. By the time it completed its buying spree, AHERF had purchased more than 300 physician practices in the Philadelphia area. Thomas Jefferson bought some physician practices, but it also began exploring alternatives to practice acquisition.
In 1995, Thomas Jefferson entered into discussions with a primary-care group in nearby southern New Jersey. The health system sought access to the group's patient panel but was not particularly interested in subsidizing physicians' salaries. The group needed capital to grow its practice and saw competitors selling their practices to AHERF and Pennsylvania Hospital for exorbitant amounts. The group considered selling the practice, but decided its autonomy was too important, and so began exploring a shared equity arrangement with Thomas Jefferson.
Since then, Thomas Jefferson has entered into four other shared equity partnerships, says Pamela Kolb, vice president of ambulatory and primary care development for Thomas Jefferson University Hospital. The health system owns up to 49% of the groups, sits on their boards of directors and participates in budget and strategy discussions. The physicians, meanwhile, maintain control of their day-to-day activities, gain access to capital and feel no obligation to refer patients to Thomas Jefferson. Strict self-referral laws make it illegal for hospitals to pay physicians for referrals.
Alan Morrison, a consultant with ZA Consulting in Jenkintown, Penn., who crafted and negotiated Thomas Jefferson's shared equity deals, says the arrangement draws on what each partner does well.
"This is an alternative to acquisition that we think is a better, long-term, stable and sustainable relationship. The hospital does not sustain economic losses related to physician compensation, and the group gains capital for growth."
Morrison estimates there are now about 12 shared equity partnerships across the country. The value of a 49% interest in a 30-physician multispecialty group in a competitive, healthy market would cost a hospital between $6 million and $10 million, he estimates. There is also the additional expense of hiring legal counsel to structure and implement the arrangement.
"These are very complicated and expensive transactions to implement--a lot more complicated to implement than just buying practices, but when you look at what it has cost hospitals to subsidize the practices they've bought, it makes a lot of sense," Morrison says.
In fact, Thomas Jefferson's decision to explore alternatives to acquisition since has proven to be a sound financial move: Many hospitals that bought physician practices earlier this decade suffered tremendous financial losses. In nearly every case, physician productivity declined after acquisition, but the hospitals were committed to paying out substantial physician salaries.
According to Ernst & Young's 1999 Physician Practice Benchmarking Survey, 96% of integrated delivery systems reported losses averaging more than $111,000 per physician in 1999. Last year, such losses became too much for Pittsburgh-based AHERF, and the system declared bankruptcy. AHERF sold its Philadelphia-area hospitals and physician practices to Tenet Healthcare Corp.
Tenet, however, recently announced it, too, sees physician practice ownership as a losing financial battle and will divest all of the 1,300 physician practices that it currently owns or manages, including the 100 AHERF Philadelphia-area practices that it still owns.
Morrison believes that the financial losses sustained by AHERF, Tenet and others largely were due to subsidized physician salaries. The shared equity model avoids such losses by keeping physicians in control of their own compensation methods.
"The key element in this model is the hospital doesn't have any operating subsidy risk. The physicians continue to have a salary structure under which they're not on guarantees. They have to earn their keep, so you don't have the dilemma that the hospitals have found in acquired practices of everyone going to sleep," Morrison says.
Joel Port, vice president of physician network development for Mainline Health/Jefferson Health System, last year helped negotiate the shared equity deal between Mainline, Pottstown (Penn.) Hospital and Pottstown Medical Specialists. Mainline and Pottstown Hospital each own 22.5% of the multispecialty group.
"It's a nice way to have a practice affiliated with you, yet you're not directly employing them. So the physicians are responsible for their own bottom line. If their losses are not subsidized by the health system, they're keeping the true economics of a physician practice, and the control (including productivity and compensation) stays in their own hands," Port says.
Although he is an enthusiastic proponent, Morrison acknowledges this model won't work with every group.
"You are looking for physicians who don't want to work for somebody. They don't want to be employed. They want to be profitable and productive on their own," Morrison says. "You need a group of physicians who have a reason for the capital. In other words, they'll actually benefit from the capital in terms of expansion or development of new services."
Port says strong physician leadership also is essential.
"You need leaders who are visionaries and who really understand the model and can see that there is a middle ground between being fully employed and fully independent. For a lot of physicians, it is either or," he says.
Port also says the model will not work with small groups. "A two-person practice isn't used to meeting with a board. They're going to want to make decisions quicker," he says. "But once you get to a certain size, say 10, but preferably 15 or 20 physicians, that's the ideal group because they know they have to operate as a large business. They're more apt to understand the need of a board, the need for long-range planning, budgeting. They're more comfortable with all of that."
And, yet, no physician wants an investor influencing their daily activities.
"(The hospital) is not a silent partner, (but) the deal is structured with supermajority rights and various covenants so that the day-to-day operation of the group is a function of the physicians. Nobody wakes up in the morning and worries about the hospital running the practice," Morrison says.
One advantage of the hospital's involvement, Smith acknowledges, is an improved relationship with Thomas Jefferson's many specialists.
"Our physicians are able to pick up the phone and call the doctors downtown (Philadelphia) more than before," he says.
That is exactly what the hospital was banking on, says Kolb. "It's all about relationships. That really is the key to this model," she says.
"You can't establish these for the purpose of referrals," she stresses. "We're an academic medical center, and we have many community outreach programs. We look for teaching opportunities for our students and residents in the community and to expand our base into the community. We would hope that because of the (improved) relationship that they would want to work with our specialists here."
Avoiding anti-kickback laws is just one of the challenges facing lawyers who structure these deals. In fact, shared equity models are rife with legal and regulatory land mines, which may explain why so few exist, says Morrison.
The legal pitfalls include Internal Revenue Service rules against private inurement by tax-exempt organizations, corporate practice of medicine laws, which prohibit corporations from employing physicians, as well as those self-referral and anti-kickback laws, which make it illegal for hospitals to pay physicians for referrals.
"There are lots of legal and regulatory impediments, which is why I believe a lot of people don't slug through all the barriers to doing it," he says. Despite these concerns, Morrison says, the shared equity model is still a better alternative than what's in the marketplace now.
"It's legally and structurally complicated, but strategically and operationally simple. As opposed to going out and buying a bunch of practices and hiring a bunch of doctors, which is legally and structurally simple, but strategically and operationally complicated," he says.