Not so many years ago, health systems considered physicians a commodity they could purchase and control for the systems' own financial gain.
The idea was to align physician and hospital interests and together beat the competition by leveraging managed-care contracts and boosting referrals.
It didn't work out that way.
"Doctors are very smart; otherwise they couldn't become doctors," says Kirk Gorman, chief financial officer of Universal Health Services, a King of Prussia, Pa.-based hospital company that avoided the physician practice buying craze of the mid-1990s.
Fewer than 1% of admissions to Universal's hospitals come from physician practices that the company owns, Gorman says.
"The concept of having a larger, more bureaucratic organization take control over the doctor's office, turning the doctor into an employee and making the whole thing work more efficiently--it takes quite a bit of imagination to make that sound like a good idea, and we never had sufficient imagination," he says.
But plenty of hospital companies did use their imaginations and bought physician practices. Unfortunately, imagination seldom transformed the concept into a profitable reality.
High purchase prices for the practices, poorly conceived compensation arrangements, a lack of infrastructure and culture clashes all conspired to doom many arrangements in terms of making money; now the same attorneys and consultants who were helping doctors sell their practices to hospital systems are helping those same doctors re-establish practices after getting the boot from those systems.
Not only were there financial setbacks to these arrangements, but some hospital companies have encountered legal scrutiny of their physician dealings that have sent them scurrying from any kind of relationship with incentives that could be construed as kickbacks. One such example is HCA-The Healthcare Co., which has been divesting physician practices since the federal government began a civil Medicare fraud probe into the company in 1997. HCA has reached a tentative partial settlement, but the parts of the case related to alleged physician kickbacks remain unresolved.
"I was very busy in the '90s selling (practices), and I'm very busy right now taking them out of systems," says Joan Roediger, who is an attorney at Obermayer Rebmann Maxwell & Hippel in Philadelphia.
"I think on the one hand the rationale behind many doctors joining health systems, whether as employees or joining their practices, was removing administrative burdens," she says. "But some found that being hospital employees actually imposed more administrative burdens on them than they had before."
Roediger says some are thrilled at the idea of going back into private practice while others are fearful.
Reality check. Whatever the case, they'd better get used to it, because that's where medical economic trends are going.
"I think this is the reality of where we are today," Roediger says. "We're going to see hospitals and physicians part ways as owners and employers and move back more toward collaborative partners in healthcare delivery systems rather than equity owners."
William Zavod, a Philadelphia-area pediatrician, had a clause in his employment contract with Tenet Healthcare Corp. that gave both parties an out with 90-day notice. About three months ago, Tenet said it would be terminating the contract with Zavod's three-physician practice July 31. Last week, the three pediatricians returned to private practice.
Zavod's practice was originally purchased by Allegheny Health, Education and Research Foundation in August 1995; Tenet inherited it when it bought AHERF's Philadelphia hospitals out of bankruptcy in 1998.
Zavod says the parting with Tenet for the most part has been amicable.
"They've tried to be helpful overall," he says. "It's fully understandable. It's a business, and Tenet realized that it's an area where they're not going to be making money."
Zavod says even with some guidance from Tenet, it will be difficult to shift back to private practice, where there's no salary guarantee and the physicians are responsible for handling their own leases, managed-care contracts and back office functions.
While Zavod says it's tricky to predict the economic effect of the move, he expects to earn less compensation overall.
"It's of some concern," he says. "We'll do it and we'll do it well, but sure, it's of some concern."
In Greenville, S.C., Bon Secours St. Francis Health System recently announced it has hired consultants to help it divest about 12 practices with 55 physicians. The hospital spent about $15 million between 1994 and 1997 to buy practices, says hospital spokeswoman Margaret Clark.
"The trend of capitation in particular made integration with physicians extremely important," she says. "In our marketplace here we also had a competitive situation."
Other Greenville hospitals were buying practices and physicians were forming their own independent practice associations, so the purchase of practices made sense at the time, Clark says.
But the managed-care trends did not pan out as anticipated and the practices lost money.
"I think all hospitals have found it a financial drain," Clark says.
Expensive switch. For some of the hospital companies, the short-term cost of owning and then getting rid of physician practices has been significant. Santa Barbara, Calif.-based Tenet, for example, recorded a $177 million charge in its third quarter ended in February related to unwinding 440 contracts with physician practices the company hoped to end within 18 months (April 3, p. 4). In its most recent quarter, the company did not publicize additional charges, but officials said the shedding of practices was hurting patient volume, and that there would likely be more charges in future quarters.
Physicians who have been bought and sold by hospitals often feel a sense of betrayal, says Laurence Wellikson, M.D., senior partner at MedQuest Partners, a physician group turnaround firm based in Irvine, Calif. Wellikson is also on the board of regents of the American College of Physicians-American Society of Internal Medicine.
"Either the hospitals or the people that were helping them portrayed a competence that they didn't have," he says.
In addition to a guaranteed salary, promises included help with hiring and firing, billing and other administrative tasks.
"What the doctors saw was a lot of change that didn't lead to any benefit," Wellikson says.
Tenet spokesman Harry Anderson says the company is ahead of schedule on untangling itself from the physician practice arrangements it wants to divest within the next year.
Although there is an upfront cost, ultimately unloading the physician practices should eliminate losses that some consultants have estimated to be as high as $75,000 to $125,000 per physician per year.
Analysts view the move to divest as one that will have a positive effect on hospital company earnings.
When a hospital company owns a physician practice, it inherits a fixed cost related to each physician that it needs to offset with additional patient volume, says Matthew Ripperger, a healthcare research analyst at UBS Warburg in New York.
"The incentive structure becomes misaligned," he says.
In Tenet's case, the company has recorded the cost but not yet realized the significant gains from setting its doctors loose.
"I think the real benefit from their physician initiative is still to come," Ripperger says. "I think that's another potential contributor to better earnings growth in fiscal 2001."
Still, Tenet does not plan to get rid of all its physician practices.
"We will clearly continue to manage practices where it's in the strategic interest of Tenet and our hospitals and where it makes the most sense for the doctors," says Tenet's Anderson.
David Burik, president of the Chicago-based Tiber Group, a healthcare strategic consulting firm, says he is trying to persuade clients to be thoughtful about their physician practices and not to divest them just because everyone else is.
"We're trying to be more systematic about it," he says. "For example, you can change the compensation structure or invest in the ones that are working."
Alternatives. Some health systems are moving toward more joint ventures and partnerships with physicians; and in some communities health systems need to employ physicians to ensure that adequate services are provided, Burik says.
"At the end of the day, hospitals and physicians work together all the time, so you want to have a go-forward strategy that continues to be mutually beneficial," he says. "Sometimes that's difficult if guys are scratching their heads wondering what happened."
In Tenet's case, one example of hospitals' evolving relationships with their physicians was the formation of the Delaware Valley IPA, an independent practice association Tenet helped launch a little more than a year ago.
In February 1999, after acquiring the AHERF facilities, Tenet officials went to each of its recently acquired Philadelphia hospitals and polled physician representatives on what the doctors needed to do their jobs better. From these talks, Tenet created a steering committee that would later become the IPA's governing board.
Today there are about 900 physicians associated with the IPA, which is totally physician-controlled, says Alan Glenesk, vice president of managed care for Tenet's Pennsylvania region. There is also talk of expanding the IPA beyond the Tenet facilities into New Jersey or other parts of the Delaware Valley.
Tenet's role in the IPA, funded with a $300 application fee from each participating physician, has been to provide management support through a five-year management contract. Tenet has helped the physicians negotiate professional liability insurance contracts at lower rates and obtain discounts for medical and surgical supplies, Glenesk says.
Among its physicians are about 420 from the faculty of MCP Hahnemann School of Medicine and about 200 physicians whose practices Tenet owns. The remainder are community physicians in private practice.
The IPA had budgeted for a $60,000 loss for this year but is probably going to report a loss of about $50,000, Glenesk says.
Barry Wolfman, senior vice president of Tenet's Pennsylvania region, says the IPA is one example of how Tenet is trying to maintain congenial relationships with its physicians.
"It's a model we have used successfully throughout the country," he says. "We try to create a wonderful place, a wonderful environment for a physician to practice."
Howard Miller, M.D., an internist affiliated with Tenet's Hahnemann University Hospital and president and chairman of the board of the Delaware Valley IPA, says physicians have a fierce sense of independence and that Tenet's role in the IPA has been one of adviser and manager, not owner.
"Hospitals owning physician practices are an atrocity," he says. "It doesn't work. . . . There are physicians who sell their practice, and then the management is either not up to the task or the physicians decide they don't need to work as hard."
Ultimately, he says, hospital systems and physicians have to come up with a way to join forces to address their common goals. For example, when the hospital companies and physicians join to deal with insurers, they often have greater leverage than they would separately.
"From that standpoint, I think us getting together has some merit," he says.
Tenet's Anderson says the hospital company is also trying to make physicians' lives easier in other ways. The company has begun a pilot program it hopes to expand to at least 40% of its hospitals by the end of the year. Called "tenetmd.com," it allows physicians to access laboratory results, patient records and other clinical data electronically through the Internet.
Zavod, who had not heard about this initiative, says that it is the type of effort hospital companies should be making to allow physicians to do their job more efficiently and more comfortably.
Daniel Bernick, vice president with the Health Care Group, Plymouth Meeting, Pa., a law firm and consulting practice for physicians, agrees that these are the types of solutions hospital companies need to bring their physician relationships into the modern age.
"If I can't tell you what to do, I have to find some other way to make you want to affiliate with me. I want you to be friendly and to continue to use our facility."