The many hospitals and healthcare systems that have divested their physician practices could be forgoing tremendous long-term opportunities, squandering large capital investments and irreparably damaging relationships with their most important constituents--doctors.
Much has been written about the financial losses incurred by hospital- and health system-owned physician practices. The red ink has caused many to suggest that the acquisition of physician practices was a flawed strategy that should now be abandoned as quickly as possible. However, if one examines the causes of the losses and acknowledges the continuing need to align the incentives of hospitals and physicians, it can be persuasively demonstrated that it isn't the strategy that's flawed but its implementation. And that can be fixed. Sure, the Balanced Budget Act of 1997 decreased federal reimbursement levels to hospitals, further reducing operating income and making many hospitals less tolerant of the losses attributable to employed physicians. But is shedding the physician practices the proper reaction?
To help answer that question, we must identify the root causes of the financial losses. The causes are many, varied and complex, including:
* Merging divergent cultures has been much more difficult than originally projected.
* The envisioned managed-care environment that originally drove much of the physician practice acquisition activity has either not materialized or has developed much more slowly than anticipated in many markets.
* Hospitals frequently carved out ancillary revenue from the practices.
* Hospitals believed they could manage physician practices more effectively than the physicians, thereby achieving higher margins. But that didn't happen.
* Physician contracts were poorly structured, and many gave physicians few or no incentives to maintain productivity.
* Prices paid to acquire the practices were frequently too high, although the prices were often driven by competition among hospitals to acquire the practices.
I acknowledge that in some cases in which practices have been acquired the issues of physician work ethic, productivity and culture will never be resolved. Some physicians have become disenchanted with practicing medicine because of lower reimbursement levels, increased administrative hassles and interference from insurers and HMOs. Employed relationships with these physicians should be unwound. But those relationships represent a minority. Most physicians remain committed to practicing medicine, and those who are employed by a hospital or healthcare system should be retained. Terminating contracts with all employed physicians because of a few unsatisfactory relationships makes little sense. This could have dire consequences for the hospital or health system and create considerable acrimony among the terminated physicians and other members of the medical staff.
While recognizing the strategic benefits of owning physician practices, one can't ignore the huge financial losses hospitals and health systems have incurred because of these practices. And we must acknowledge that these losses are not sustainable. But the losses can be reduced and even eliminated without divesting the practices. An unvarnished assessment of each practice needs to be completed to identify the causes of the losses. Once that is accomplished, corrective measures far short of a complete divestiture will become evident. Implementing the corrective measures will require some difficult decisions, such as staff reductions and other cost-cutting measures, but hospital administrators make these tough calls in other areas of the hospital or health system on a regular basis. They should be willing to do the same with their physician practices. Those corrective measures will need to be sold to the physicians, but this will be easier when physicians understand the system's overall vision and how the finances of their practices make an impact.
For the most part, hospitals and health systems that are successfully collaborating with physicians have been able to retain market share and in many cases increase market share. They have improved their negotiating leverage with managed-care plans and have held down costs. And overall profitability has improved. Everyone talks about the financial losses hospitals have incurred because of their physician practice acquisitions. But it should be noted that the aggregate profit margin for all hospitals rose from 3.9% in 1990 to 6.6% in 1997, the period during which much of the physician acquisition activity occurred. Those margins have since dropped, but that's thanks in part to the balanced-budget law. Additionally, the incomes of employed physicians have generally been higher than those of their nonemployed peers. Could there be a connection?
Obviously, successful hospital-physician integration is a challenge. It can't be structured as a traditional employer-employee relationship. Rather, it must be a partnership in the true sense of the word (but not necessarily in the legal sense). Relationships must be structured with real strategic vision. Governing boards must have strong physician representation. Physician employment contracts need to be structured to provide physicians with appropriate incentives consistent with those of the hospital or health system. Increased partnering will reduce the tendency of hospitals and physicians to compete with each other and will enable both to refocus on the patient.
The acquisition of physician practices continues to be the right move for many hospitals and health systems. Those that own money-losing physician practices should concentrate on plugging the leaks. The problems don't mean we have to abandon ship.
Patrick Devereux is president of Group 21, a St. Louis-based consulting firm specializing in hospital-physician relations.