Ignoring past financial failures and future legal risks, a number of hospitals across the country are revisiting an old strategy aimed at pumping up patient volume: buying physician practices.
"In the last couple of years, there's been a sea change in the way hospitals look at employing physicians," says Kevin Kennedy, a principal with ECG Management Consultants. After what happened a few years ago, most of them were saying, 'No way I'd ever employ physicians again -- I'm out of that business.' And now? They're doing it again."
Most of the information is anecdotal, and industry observers say there's no way to put a firm figure on the number of newly hired physicians. But experts suggest that many hospitals, including large systems, are back in the business of employing doctors -- or at least the right kinds of doctors.
In early March, for example, Carolinas HealthCare System in Charlotte, N.C., says it reached an agreement to purchase the Sanger Clinic, the largest cardiology group in the Charlotte area with more than 60 physicians. Terms were not disclosed. The purchase was expected to close by this month
Michael Tarwater, president and chief executive officer of Carolinas, says integrating Sanger Clinic and Carolinas would help both organizations keep up with the rising demand for cardiac services while controlling costs. Carolinas owns or leases 10 hospitals and manages six others under contracts.
Akron (Ohio) Children's Hospital is also back in the business of buying medical practices. The 224-bed hospital is busy snapping up selected physician practices and taking on the doctors as full-time employees. In mid-December 2004, the hospital hired two perinatologists who probably would have closed their independent medical practice and moved from Ohio's fifth-largest city if not for the security that came with their new status as salaried employees of the hospital. After hiring about 15 specialists in the past three years, the hospital is in the midst of searching for a pediatric gastroenterologist and two more high-risk obstetricians to join the perinatologists.
"We were faced with a choice of not having enough of the right types of specialists on our staff, or stepping up to the plate and doing something about it," says Bob Howard, director of planning at Akron Children's. "We decided on the latter. It is not our deepest desire to employ physicians. It just seems to be the most direct and efficient way of getting the job done at the moment. We felt we had to be more assertive in dealing with this issue."
Picky purchasers Olympic Medical Center in Port Angeles, Wash., is doing the same. "What I think is most different now about hospitals moving in and employing physicians is how deliberate we have been and how deliberate other hospitals that I've talked with have been," says Mike Glenn, Olympic's CEO.
Over the past 18 months, Glenn says, Olympic has hired a general surgeon, an OB/GYN, an orthopedic surgeon and four radiologists -- the first time the hospital had ever employed physicians. In the past, the 209-bed facility provided financial assistance to local medical groups as a way to help recruit physicians and guarantee the presence of certain specialists. A similar battle plan is being employed across the region.
"Moving forward, we're looking at getting away from being reactive and becoming more strategically focused," says David Brooks, chief operating officer of 369-bed Providence Everett (Wash.) Medical Center, which has added primary-care physicians to its payroll in the past three years but is now placing a focus on much-needed specialists. "In other words, how do we use (employed) medical groups to meet the needs of the community?"
Several weeks ago, Brooks says, the medical center hired a second neurosurgeon who was planning to leave the state because of high malpractice costs.
"I think the age of the independent physician, coming out of medical school and putting out a shingle, is gone," Brooks says. "Physicians are looking to be a part of something larger."
Historically, he added, hospitals could assist physicians by providing cash and other incentives to relocate and join medical groups. Tougher federal Stark II laws that took effect in July 2004 have limited these inducements -- a principal reason why hospitals are often being forced to employ physicians if they want them in the community. "We're much more restricted in what we can do," Brooks says. "So, hospital employment is now a safe harbor. We have a lot more flexibility (by employing doctors)."
Any hospital tempted to revisit those inducements rather than purchasing practices outright should consider the ongoing legal battle between Tenet Healthcare Corp. and the U.S. Justice Department in U.S. District Court in San Diego.
In February, a 12-person jury was deadlocked and failed to reach a verdict in the government's physician kickback case against a Tenet subsidiary, Tenet's Alvarado Hospital Medical Center in San Diego and Alvarado's former chief executive officer, Barry Weinbaum. U.S. District Judge M. James Lorenz declared a mistrial on Feb. 17. Lorenz later reinstated 18 of the 20 counts against the three defendants and the case is expected to be retried in May. In the case, the government claims that the defendants used physician-relocation agreements to funnel money to existing physician practices near Alvarado and ensure referrals from the practices.
Robert Salcido, a defense lawyer with Akin Gump Strauss Hauer & Feld in Washington and a former Justice Department lawyer, says the biggest lesson for hospital executives is to work with their lawyers to ensure that their physician-relocation agreements can withstand government scrutiny. "No one in the world wants to go through what Tenet and Barry Weinbaum are going through right now," he says.
But if a hospital thinks avoiding such inducements earns it a free legal pass, consider the case of Allina Hospitals & Clinics, which apparently got in legal trouble just for considering buying physician practices. In January, Minnesota Attorney General Mike Hatch filed an antitrust lawsuit against Allina, challenging its alleged physician-group purchases.
Allina officials deny the physician deals Hatch is challenging have taken place or are even planned. Hatch's office confirmed the lawsuit and alleges otherwise.
Hatch's 19-page lawsuit against Minneapolis-based Allina, which owns or operates 12 hospitals and 50 clinics in Minnesota and Wisconsin, accuses the system of conspiring to acquire the only two remaining sizable cardiology groups in the Twin Cities area. Hatch says the purchases would allow Allina to monopolize the lucrative cardiology-services market there. The lawsuit, filed in Ramsey County Court in St. Paul, Minn., challenges Allina's alleged planned purchase of the 26-cardiologist St. Paul (Minn.) Heart Clinic and the 16-cardiologist Metropolitan Cardiology Consultants in Coon Rapids, Minn.
Allina already owns the region's largest cardiology group, Minneapolis-based Cardiology Associates, with 42 cardiologists, and plans to open a 128-bed, $200 million heart hospital on the campus of its Abbott Northwestern Hospital in Minneapolis this year. Allina and the cardiologists from the St. Paul Heart Clinic and Metropolitan began discussing integration in 2003 and in January 2004 produced a report describing the principles, goals and terms of a proposed merger, according to Hatch.
He charged that the goal of Allina and its co-conspirators in formulating the proposed merger was "to acquire the largest share possible of the Twin Cities-area cardiology market and take business away from their competitors in that area" and "to expand the number of cardiologists over which it could exercise control, thereby creating for itself the ability to negotiate higher rates for cardiology services." Hatch alleged Allina offered "guaranteed salaries and bonuses in excess of $1 million per cardiologist annually" as incentives and threatened groups with financial repercussions if they refused.
No plans to buy
But Allina spokeswoman Terri Dresen says the system has not acquired the practices and has no plans to proceed. "We are not in discussions to merge or in any way acquire control of the two independent cardiology groups in the Twin Cities. There was an initial exploration of a merger last year, but we abandoned that effort," Dresen says. Dresen concedes that Allina is discussing quality issues with the two groups. "That's what we think has confused Mr. Hatch. But we're talking quality, not merger."
Hatch conceded in the suit that the parties said they abandoned the effort, but he argues that merger efforts are ongoing, despite warnings from his office the mergers would violate state and federal antitrust laws. Allina's motion to dismiss the lawsuit is expected to be heard later this month.
William Jessee, president and CEO of the Medical Group Management Association, says he thinks it is far too early to suggest hospitals will rush back into the business of buying medical groups and employing doctors on a large scale.
"I'm seeing some anecdotal evidence, but not really enough examples of this to say it's a new, emerging trend," Jessee says. "There are some circumstances where hospitals are selectively purchasing practices, or, in some cases, hiring physicians. I think it's more technical than strategic. It seems like a tactical approach to fulfill specific needs rather than a larger strategy."
The buying binge in the mid-'90s created a hangover for many hospitals and health systems, which spent too much money snapping up doctors and medical groups in an effort to pre-empt local competitors at a time when most administrators felt that a pool of primary-care physicians would create a guaranteed source of referrals. Meanwhile, national practice management companies like PhyCor were busy buying up practices, helping to inflate values across the nation.
In the end, many hospitals were losing $100,000 or more each year per doctor on the guaranteed contracts of their employed physicians. With improved management and a move toward incentive-based compensation, most hospitals have cut those losses to the $20,000 to $40,000 range.