Faced with the loss of a high-volume medical group to an independent outpatient clinic or a rival hospital, Integris Baptist Medical Center in Oklahoma City took a bold step three summers ago, carving out its entire cardiology service line to create an intricate and enduring financial collaboration with one of the city's best-known cardiology practices.
Instead of battling the physicians as corporate adversaries somewhere down the line, Integris formed a rock-solid partnership that provides the doctors with an annual management fee, performance incentives, four of nine seats on the independent company's board of directors and critical roles in day-to-day decisionmaking--clinical and otherwise. And even though the physical structure of the hospital's cardiology department did not change, the facility was transformed into the Integris Heart Center--a blending of disparate interests that serves the purposes of both patients and providers.
This symbiotic alliance, which first took root in July 2000, is just now gaining momentum as one more model for physician-hospital relationships, those oftentimes awkward unions that can be as perilous and turbulent as a tropical storm. For hospitals like Integris, this new linkage is being widely embraced as one of the most effective ways of countering the exodus of footloose physicians lured by the profit potential of independent outpatient clinics and ambulatory surgery centers.
"The reality is that you've got more and more specialty clinics and independent hospitals popping up all over the place," says Anthony Long, president of the Integris Heart Center. "There's always the potential of losing a specialty line, or losing a large percentage of physicians to an independent niche player.
"A lot of hospitals out there are doing nothing. We adopted this model to deal with that reality. It's a model based on working together, on close collaboration. It's a win for the physicians, and it's a win for the hospital."
Indeed, hospitals across the U.S., reacting to competitive threats from all sides, are becoming more creative in dealing with a relatively new era of physician empowerment. To meet the daunting challenge posed by specialty surgery centers and outpatient clinics, more and more hospitals are developing the same kind of partnerships as Integris, forming their own joint venture management services agreements for specific lines of patient care, particularly high-margin departments like cardiology.
In the case of 505-bed Integris, this relationship involves the formation of a management company joining the two entities and providing doctors with an annual, fair-market fee for administrative duties. For other facilities, including 307-bed West Jefferson Medical Center in the New Orleans suburb of Marrero, La., the joint venture model includes relinquishing a portion of the ownership of the facility to physicians.
For many observers, this trend--the establishment of a separate legal entity within the hospital organization, tethering the healthcare facility to its doctors as long-term business partners--is a self-evident testament to the true source of power in healthcare, experts say.
"Physicians hold the cards," says Brett Hickman, national director of the healthcare consulting practice at PricewaterhouseCoopers, who has seen a surge of interest recently in service-line joint ventures. "Physicians control 70% to 90% of the resources consumed in hospital departments. They control capacity issues. Staffing issues. Medical supplies. In other words, the entire supply chain. Unless physicians are working with you in a truly collaborative way, you have little ability to influence operations."
A new level of collaboration
There's nothing new or even particularly revolutionary about hospital-physician alliances, of course. For years, healthcare facilities have enjoyed mutually beneficial outsourcing arrangements inside the hospital with anesthesiologists, emergency room physicians and radiologists. About 80% of all hospitals now have outsourcing arrangements in their emergency departments. The bonds of partnership also have extended to physician-hospital organizations, which have closely aligned the financial interests of the two entities in negotiating managed-care contracts and underwriting administrative costs.
But this newer joint venture model has taken these contracting alliances and the more traditional forms of outsourcing to a heady new level, increasing the stakes for the two partners and helping hospitals cement a long-term relationship with physicians who might otherwise be lured into a profitable outside venture.
"Hospitals have used a variation of this model for many years," Hickman says. "But it wasn't a real partnership. Under this model, hospital administrators aren't just going to the surgeons, throwing up their hands and saying, 'Hey, we're tired of managing this department--will you take it off our hands?' It's a true, legal partnership within the hospital."
Legal experts warn that these kinds of collaborations must be carefully structured to avoid violating federal regulations governing fraud and physician self-referrals to hospitals, in addition to issues involving not-for-profit status. In most cases, says Scott Becker, a lawyer with Chicago-based Ross & Hardies, hospitals that have created these joint venture arrangements as a way to stem a competitive threat provide an annual management fee to medical groups to run high-margin service lines.
Any management fees, Becker says, should reflect what the hospital would pay any other company, including those operated by nonphysicians, to oversee a particular department.
"Those fees have to be fair market value," Becker says. "To be safe, they should be fairly fixed, and they should reflect what any other management company would be paid. You have to make the argument that it makes sense to hire this physician entity as opposed to a management company that has expertise."
In the late 1980s, Becker recalls, some hospitals created similar partnerships, called "revenue stream joint ventures," carving out departments and sharing proceeds with the medical groups that ran them. Those arrangements were "knocked out," he says, by an Internal Revenue Service ruling in the early 1990s. Under IRS rules, charitable organizations cannot use not-for-profit dollars to benefit private individuals or for-profit entities. The Stark law, which took effect in 1995 and further delineated prohibitions on self-referrals, dealt another blow to many hospital-physician joint ventures, Becker says.
"Now, we hear people are being a little more creative," Becker says. "We're very wary of them. We want to make sure they're strictly fair market value, and that there's clearly no reward for more revenue or more profit. In a true joint venture, doctors are putting in some of their own money--they're basically investing their money, putting up a new facility. Here the concern is: Is it really just intended as a scheme to retain business and referrals?"
As always, this trend is being driven by the bottom line in most cases.
With the vast majority of physicians in private practice, the entire profession has been empowered--if not enriched--by the swift shift to outpatient services. A decade ago, Hickman says, about 70% of hospital revenue was related to inpatient services, healthcare's bread and butter. Hospitals enjoyed a reliable revenue stream and faced competition from a single source: other hospitals.
Now that ratio has been turned on its head. Almost 70% of hospital revenue is related to ambulatory services, opening an entire frontier for entrepreneurial physicians who have carved out a big, booming business in outpatient services, experts like Hickman say. Competing against modern, convenient ambulatory surgery centers, many hospitals are watching helplessly as that once-predictable revenue stream continues to erode.
Hickman and others say they believe hospitals can't compete with physicians who have the economic wherewithal to finance and build their own outpatient surgery center, specialty hospital or diagnostic facility. In many cases, hospitals can't provide the same kind of incentives offered by potential for-profit partners such as MedCath Corp., the Charlotte, N.C.-based company that builds for-profit heart hospitals. And that's why more hospitals are embracing the notion of what Hickman describes as an "on-campus, physician-partnership model."
It might not be as lucrative as teaming with a MedCath, but these joint venture partnerships provide physicians with the power and control over administration, financing, patient care, scheduling and staffing they've always craved.
"Hospitals aren't ceding control of anything--they're not giving away departments," Hickman says. "You're developing the best kind of partnership with your physicians. In the long run, hospitals have to realize that in order to succeed, they have to secure a relationship with their physicians. What this does is develop that trusting relationship. It aligns incentives and it gives hospitals and doctors the ability to comanage and work together.
"These days, hospitals must build a delivery model where their No. 1 customer is the physician," Hickman says.
For both economic reasons and quality considerations, this type of joint venture partnership is attracting considerable interest as physicians continue to flex their muscles in the marketplace. That economic clout was presciently forecast in a mid-1990s report by the Healthcare Advisory Board, an authoritative organization that charts trends in healthcare, says Gregory Mertz, president of the Horizon Group, a Virginia Beach, Va.-based consulting company that works with doctors.
"Without fail, if your doctors go in competition with you, you're going to lose--that was the gist of the report," Mertz says. "The brightest hospital administrators read that report and took it to heart. They realized that the physicians are the ones with the patients. And they realized that it's a lot better to be their partners than to be their enemies."
The message, coming through crystal clear to hospital administrators, is that physicians, struggling with static federal reimbursement, marginally higher operating costs and sky-high malpractice premiums, are finding new ways to peel off more and more revenue from hospitals. At the same time, physicians--more sophisticated and better-organized than ever before--are enjoying access to capital to help fuel the rise of outpatient clinics. Despite the risks, a doctor-owned specialty hospital is a strong allure in the relentless push for more revenue.
"Physicians are showing an ability to organize an economic enterprise of their own," says Stephen Messinger, a principal with ECG Management Consultants in Washington. "They're doing things to allow themselves to become more hospitallike but on an outpatient basis. There are lots of temptations to trigger physicians' entry into competition with hospitals.
"And that's why I think we're going to see more and more of these ventures where physicians are given management control over an entire service line," Messinger says.
Integris was motivated to work out its deal with the cardiology group after rumblings about a frontal assault in Oklahoma City by MedCath. Though MedCath did not open a specialty hospital in the city, the threat of a new cardiac center at a nearby hospital forced administrators to do whatever they could to sew up a lasting relationship with physicians through the joint venture management group.
"They basically gave physicians control to manage the cardiology service line," Messinger says. "Basically they told the physicians, 'Why don't you take this (service line)? We'd rather partner with you than have you partner with somebody else.' "
"Until recently," he says, "we've seen hospitals be very reluctant to give up control. Not anymore."
Charles Bethea Jr., a cardiovascular surgeon who is now a partner with Integris, says the doctors in his medical group viewed the collaboration as a way to control their own destiny--as well as that of their patients--without having to raise the capital and deal with the risks of developing their own specialty facility. The physicians, however, committed about $2.5 million, primarily to purchase disease-management software, and now own 40% of the management company that operates the not-for-profit Integris Heart Center. The management company's nine-member board includes four doctors, allowing the physicians to exercise considerable control.
"The economics of this model are kind of weak compared to a heart hospital, but we really didn't want to be owners of a hospital," Bethea says. "We wanted a more structured way of taking care of patients, more of a disease-management approach. We felt we could achieve most of what we wanted to do through a better organization."
A controlling interest
The joint venture arrangement hasn't been a windfall to the physicians, Bethea says, but the doctors--13 cardiologists and three surgeons in Plaza Medical Group--are pleased with their ability to exert more control over hospital operations. He characterized the finances as a "medium return" for the physicians, who receive 40% of all revenue, after expenses, as a management fee. He says the group also created what he calls a "fee-for-performance scheduling," providing incentive payments for attaining certain standards of care and treatment outcomes. In this way, doctors are paid for clinical time as opposed to administrative or management duties, he says.
"The advantages (of owning a stand-alone facility) is that you're likely to get a much larger return on your investment," Bethea says. "The disadvantage, of course, is that you have to be an owner. You have equity exposure. And you have to worry about whether if you're doing cases it's because it's (boosting) business or because there's a medical need.
"The bottom line is that our level of satisfaction went way up. Doctors feel like they have a lot more control over how care was delivered. We think we can force the competition based on quality. If you have good outcomes, hopefully you'll be rewarded by having more patients use the facility."
Bethea says the two partners each have spent "as much as $200,000" in legal fees to help navigate the choppy regulatory waters involved in such a complicated arrangement. Michael Joseph, a lawyer with McAfee & Taft, one of Oklahoma City's oldest law firms, expresses confidence that the arrangement meets the test of several major legal concerns, including Stark and antikickback rules. But the IRS, he says, still has not responded to a request for a ruling on whether the joint venture meets certain standards that prohibit physicians from receiving any "excess private benefit" for their management duties over and above the fair-market value of their nonmedical duties. The IRS also has not yet responded to a request for what is known as a "private-letter ruling," or advisory opinion, on the joint venture, Joseph says.
"We have obtained two independent valuations establishing that the management fees being paid in the venture represent fair-market value," Joseph says.
Adds Bethea: "Everything is completely transparent. But if it turns out that the IRS gives us a negative ruling, we would disband it."
St. Francis Hospital and Health Centers, Beech Grove, Ind., and Indianapolis in a state where the absence of a state certificate-of-need law has triggered a flurry of new heart hospitals in the Indianapolis area, formed a new joint venture almost a year ago with a group of about 35 specialists in cardiac and vascular surgery, cardiology and interventional radiology. The physicians receive a consulting fee and share in all aspects of business development under a radically retooled organizational structure that will serve as the foundation for the new $65 million St. Francis Cardiac and Vascular Care Center, a 120-bed facility expected to open in November 2004 as the only heart hospital on the southern side of a city with four significant cardiac programs.
"The doctors--the specialists--are the ones who are really tasked with the questions of how do we make our operations more efficient, and how do we make them better," says Tom Malasto, executive director of the new cardiac center, who helped forge the new partnership over the past year. "Doctors have always been engaged as medical directors. But we'd never developed more of a team approach to managing a service line."
Under the organizational structure at St. Francis, physicians enjoy majority representation on all committees involved with the new cardiac center. Involved in everything from staffing shortages to technology issues, physicians "aren't just being sought out for their opinions, but they're actually a key part of the process," Malasto says.
The physicians receive consulting fees based on an hourly rate of their nonclinical work at St. Francis, where staffers must meticulously document these schedules so as not to blur the lines between the doctors' work as part of the medical staff and their involvement in management issues, Malasto says. Officials, he adds, are confident that the fees, which are renegotiated on an annual basis, fall well within the reasonable range of fair-market value for the physicians.
Can such a system be duplicated elsewhere?
"The devil is in the details," Malasto says. "The real question is: Can hospitals and physicians come together and work on a daily basis to make this a success? In theory, it's absolutely the right model. From a practicality standpoint, the challenge falls back to the leadership of the hospital and the leadership of the physician groups."
In January, a renovated and expanded former surgery department at West Jefferson Medical Center reopened as a for-profit joint venture between the hospital and 15 physicians. The hospital's old ambulatory surgery center was rechristened in an adjacent medical office building, expanded from four rooms to six, and is now used by the 15 co-owner doctors and about 40 other physicians with privileges.
The partner-physicians, who invested a "substantial" amount in the new corporate entity, West Jefferson Ambulatory Surgery, own 50% of the operation and have three of six seats on its board, helping run the operation in every way, says Gary Muller, president and chief executive officer of the hospital. A group of 14 other physicians formed a second joint venture with the hospital, West Jefferson MRI, Muller says.
"They were being run by the hospital as departments of the hospital, in the medical office building," Muller says. "What we did was actually carve out the MRI (department) and the surgery center into separate joint ventures."
Muller and Mark McGinnis, the hospital's chief financial officer, say hospital administrators averse to this kind of a partnership are missing the larger picture--the increase in business triggered by satisfied physicians and improved patient outcomes. Though the hospital initially gave up 50% of the business in this arrangement, the surgery department has doubled its profits per case, McGinnis says.
"So we're more than 100% of what we had before," McGinnis says. "That's why the model works. Doctors make better business decisions as partners. If we hadn't done this, the doctors probably would have gone out and built their own facility across the street from us."
One potential drawback of the model involves resentment from physicians who are effectively shut out of this kind of a profitable arrangement within the hospital. While cardiologists, oncologists and orthopedic surgeons enjoy elite status, will internists and other primary-care physicians--in other words, the generalists who have little or no bargaining power--begin to feel like second-class citizens?
"The hospital is always going to be the target of this kind of resentment," Messinger says. "Historically, hospitals have tried to play the role of Switzerland, saying they don't favor one physician over another. But they're now being forced to make a hard decision about who they're going to do business with and how they're going to make investments. They may alienate some doctors. But it's a decision that has to be made."
The best part of these joint venture management collaborations, Messinger says, is the message it sends to its physicians.
"Hospitals have to build physician loyalty. To do that, they have to be close to their physicians. This is a way to do it. Without a loyal medical staff, you are never going to build market share."
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