The frenzy of physician practice acquisitions in the 1990s is well-documented--as are the significant financial losses that many health systems are suffering because of those acquisitions.
Now, many of the thousands of physicians who sold their practices to health systems and were on the leading front of integration find themselves at the heart of today's disintegrations.
Several large, well-known systems, including Mercy Health Partners in Toledo, Ohio, have announced that they are divesting their physician practices. Also, many of the original five-year physician employment contracts that were signed during the buying frenzy are about to expire.
Whereas integration often took place at a furious pace, most systems are approaching disintegration at a more measured pace, which is good news for physicians, says John Deane, president of Nashville, Tenn.-based Southwind Health Partners. Southwind helps systems re-evaluate their physician organizations, sometimes assisting with divestitures.
Deane says that most hospitals realize they need to keep the divesting physicians happy, and they will likely need to offer some sort of financial and management assistance to ease them back into private practice. As a result, they are approaching disintegration carefully.
"Hospitals need to find a way to reduce the operating losses of the employed physician groups without losing that referral source," he says.
Although the well-publicized financial struggles of some health systems have given many the impression that hospitals are desperate to unload their physician practices, most health systems are not holding fire sales. In fact, 60% of health systems are committed to keeping practices, 35% are seriously considering at least a partial divestiture, and just 5% are currently divesting, according to an informal survey by the Washington-based Advisory Board Co.
Nonetheless, the numbers are sobering. According to Englewood, Colo.-based Medical Group Management Association, health systems in 1997 lost an average of $79,000 per employed physician.
For this and numerous other reasons, disintegration is at least on the minds of quite a few systems.
"Within the past two years, the landscape has changed from just a handful of generally isolated divestitures to people saying they can't just keep plugging away at trying to get these losses down, and have to make an informed decision about whether to cut them loose," says Christa Smith, senior consultant with the Advisory Board.
The 5% that are divesting can expect the process to take a minimum of six to eight weeks, say health law attorneys. The task of developing a plan to divest the 100 employed physicians at Memorial Hermann Healthcare System in Houston took Bert Zimmerli 60 exhausting days and nights, he says. Zimmerli is past president and CEO of OneCare, an affiliate of Hermann, and currently the executive vice president at Methodist Health Care System in Houston.
The "orderly wind down," as Zimmerli calls it, began in June 1998 and was completed the following December. About 40 of the 100 physicians opted for another employment situation, 40 re-entered private practice, and a handful of physicians left the community or entered academia.
The first step for the Hermann physicians was a practice valuation to determine the value of the assets and medical records to be bought. Zimmerli says hospital administrators made it clear early on that all sales would be at fair market value. They also pledged the same process for valuing medical records and assets would be used for each practice.
"We told people no special deals, all people would be treated the same," he says. "In other words, no one would be thinking, 'If I hold out for three months, I can get a better deal than the guy who agrees on day one."'
Many physicians may falsely believe that the hospital's financial losses will cause them to sell the practices for a song. Not the case, says Gerry Benedict, president of Denver-based consulting firm Med Directions.
"The biggest land mine in divestitures is the doctors may want something for nothing," he says, and hospitals simply can't afford that.
Also, it's illegal. Federal tax laws prohibit private entities to benefit from the earnings of a tax-exempt organization, meaning sweetheart deals for physicians could jeopardize a hospital's not-for-profit status. In 1998, the IRS revoked the not-for-profit status of Great Plains Health Alliance in Phillipsburg, Kan. Great Plains managed small rural hospitals in Kansas and Nebraska. The IRS declared that Great Plains' management activities were no different than those of a for-profit company and did not deserve tax exemption.
Dwayne Thomason, M.D., a family physician in Castle Rock, Colo., recently bought back his practice assets and medical records from Denver-based Centura Health for $53,000. He says it's a fair price. Thomason had been in private solo practice for 20 years when he sold his practice four years ago; he completed the repurchase in January.
"The linchpin (to any divestiture) is knowing what your business is doing. You have to make a decision based on reliable information, so you have to be able to access your accounts receivable, your billing, your insurance contracts," he says. "Once you've done that and have that information, the decision is usually easy because you already know what will have to be spent."
The biggest challenge facing Thomason, and any other physician re-entering private practice, is lack of cash flow. Even the most popular and successful physicians need several months to build accounts payable and develop a cash flow. Thomason took a short-term loan from a bank, putting his house up as collateral.
In Houston, Hermann offered its physicians some assistance to ease the transition. Because the physicians' employment contracts were being terminated prior to their completion, the hospital offered "consideration" in exchange for early termination, Zimmerli says, although he declined to say how much assistance was offered. The short-term financial assistance helped them through those first few months.
Michael Anthony, head of the health law division for McDermott, Will & Emery in Chicago, says many health systems may handle the management and back office duties for the physicians on a transitional basis, for a flat payment or monthly fee.
"Typically there will be some sort of transition agreement that would be entered into to allow the physicians management services, back office support, receptionists and professional staffing on a fee basis," he says. "The larger the group, the more wherewithal they have to immediately take on some of the administrative functions. The smaller the group, the longer the transition plan, or at least a stronger transition plan that has the health system playing a role over a longer period of time."
It's not out of kindness that health systems are offering to manage those responsibilities but rather an attempt to recoup their investment, Benedict says.
The hospital may have invested in a billing system, software, staff and facilities for managing acquired physician practices. If the physicians become completely independent, the hospital management system will be left with nothing to manage. Meanwhile, physicians may not have the resources or inclination to take over the billing and back office duties.
Benedict says hospitals typically charge 6% to 8% of revenue generated for such services. The hospital could also continue to run the human resources and administrative services for physicians for a monthly fee.
The newly independent physicians and the health system will need to negotiate office space and staff, Benedict says.
"Many systems built nice facilities for their physicians, but the rents may be higher than the physicians would be willing to pay. The health system obviously wants to keep them in their signature buildings, so they will have to negotiate with the doctors," he says.
Typically, staff members are given the choice of staying within the health system or being rehired by the physician group. St. Louis internist Greg Penilla, M.D., recently bought his solo practice back from BJC Health System.
Some of his staff was transferred within the organization, and one nurse was rehired by Penilla.
No matter what terms are negotiated in a divestiture, Southwind's Deane advises physicians to bring some good faith. For the most part, he says, systems are eager to stop their financial losses and realize some short-term payouts may be necessary to achieve their long-term financial recovery.
"Health systems are saying we're happy to help you land in private practice, but what you must understand is we're not willing to lose (yet another) $100,000 on your practice."