Physician investors are finding little comfort in the familiar adage that healthcare is recession-proof. It seems 2009 might be the year that proves that theory false.
As with other industries feeling the pinch of an economy in a downward spiral, physician-owned businesses are scrambling to shore up declining revenue and make tough decisions to prepare for an uncertain, if not grim, year ahead.
Some physicians who have invested in their own practices, surgery centers, hospitals or other related businesses say that they can weather the storm with careful budgeting, but others see 2009 as the year when those that are on the margins might fold.
I think the economic pressures ... are likely to accelerate the trend weve already seen of physicians selling to hospitals, says William Jessee, M.D., president and chief executive officer of the Medical Group Management Association. A lot of it is doctors saying the economics of running a practice have become so difficult that I just want out. I want someone else to take care of all that stuff and just pay me a salary and let me see patients.
Data from the MGMAs annual Cost Survey report bears this out. The number of participants whose practices are hospital-owned has risen 2% to 3% per year during the past four years, Jessee says.
Certainly, I think well see more of that in 2009 because the economic situation will be worse, he says. In fact, if current trends continuea big if, to be suresome 60% of physicians will be in hospital-owned practices within 10 years, he says.
While the participants in the MGMA cost survey are different from year to year, in 2003, 18.9% of the 1,231 practices that responded were owned by a hospital. In 2008, 35.5% of 1,470 respondents were hospital-owned, according to MGMA data.
Sarah Holt, the administrator for the Cape Girardeau (Mo.) Surgical Clinic, a medical group of six general surgeons, says the group practice has put the brakes on plans to hire another general surgeon and instead plans to cover its growing workload with midlevel providers such as physician assistants.
Were not going to really know today how deep its going to go, so what we can do today is take all protection measures, Holt says. These include holding off on new equipment, new physicians and new staff.
The practice is also trying to improve its billing efficiency by turning patients over to collection agencies more quickly. We have to make people understand that we are serious about collecting our money, Holt says. The commitment to turn over more names to collectors has also enabled Holt to negotiate a lower price with the agency. If its red meat, it should be easier for them to collect, and if its easier for them to collect, I should get a lower percentage rate, she reasons.
Holt says that without question, there will be practices that crash and burn in 2009. These are likely to be the ones that have not gotten their houses in order by now. Even with all of the precautions the Cape Girardeau physicians are taking, Holt expects the practices revenue and profitability to decline in 2009, simply because it will be more difficult to collect coinsurance from patients who dont have the funds to pay.
Philip Rhoades, CEO of a 12-physician orthopedic practice in Pawtucket, R.I., says members of his practice, like others, are wondering how bad things will get. We have been under the gun for many years; every year we as administrators are asked to do more with less. Every time we do more with less, were wondering whether weve gotten to the bottom, he says. This year has put a whole new perspective on where the bottom might be.
Rhoades says the idea that healthcare is immune to economic downturns is a myth. Like Holt, he is concerned that high annual deductibles coupled with widespread layoffs will create a perfect storm that might make it increasingly difficult to collect payments from patients. The intent of the deductible is to get the patients more involved with the spending of their medical dollar, he says.
Its definitely working, but I dont think (insurance companies) intended it this way, nor do I think they anticipated the economy would be as bad as it is. The orthopedic practice has homed in on deductibles, dedicating a staff member to tracking them, working out payment plans with patients ahead of time, using automatic deductions from patients if they agree to it, and noting all payment activity on a detailed spreadsheet.
Rhoades believes that after an eight-year period in which his practice saw 15% revenue growth, there will be none to speak of in 2009. To plan for this, he has eliminated two positions this past year and put a freeze on raises and performance bonuses.
The prospects for physicians who own ambulatory surgery centers, hospitals and imaging centers do not look much brighter. In fact, an unfavorable and uncertain reimbursement environment may make their 2009 even more turbulent, some physician investors say.
Ophthalmologist David George, M.D., is the medical director of Physicians Outpatient Surgery Center, an ambulatory surgery center in Belpre, Ohio. He and a couple of other ophthalmologists opened the ASC in 1999 to gain greater control over their surgical environment. What seemed like a great idea at the time, leading to more efficient and specialized medical care and average annual profit growth of about 10% over the past five years, is no longer financially a sure thing.
The CMS pays surgery centers roughly 60% of what hospitals receive for the same Medicare-covered services, down from roughly 80% several years ago. There are definitely more concerns than there are opportunities right now, George says.
Beginning in 2008, the CMS started using the hospital outpatient prospective payment system as the baseline for ASC payment rates for services covered by Medicare. For 2008, ASCs were paid roughly 65% of what hospitals were paid for the same services, while in 2009, that average rate will drop to about 60%.
Within this framework, reimbursement rates for different procedures vary considerably. Some, such as gastroenterology, have been hit hard while payments for other service lines have risen.
Kathy Bryant, president of the Ambulatory Surgery Center Association, which represents some 2,800 ASC members, says single-specialty ASCs whose payment rates have declined will be the hardest hit in 2009, while the more creative and more flexible businesses, including multispecialty ASCs, might be better equipped to survive the economic downturn.
In Georges rural areaabout a two-hours drive from Columbus, Ohiopatients often drive 100 miles for procedures such as cataract surgery. The ASCs business slowed considerably in the first quarter of 2008 when gas prices were extremely high and patients couldnt afford the trip, he says.
Overall, business slowed about 5% in 2008, and George says he expects 2009 to extend that trend. In a big way, 2009 will be about how to manage expenses rather than how to manage growth, he says. Staff who have left are not being replaced, and hours are being cut, he says.
George says that ASCs, because of their inherent efficiency, should be part of whatever healthcare remedies President-elect Barack Obama and Congress seek. But he predicts that ASCs that are struggling financially, particularly in areas such as gastroenterology, may be tempted to sell off to hospitals, which will then turn them into outpatient departments and reap higher reimbursement rates from the CMS. And then there would be one less place where you can find healthcare at a lower cost, he says.
Bryant says her association is already seeing an uptick in the number of hospitals looking to buy out ASCs. Currently, there are some 5,000 ASCs around the country, with about 91% having some physician-ownership component. About 18% of that number have partnerships with hospitals. We see growth in that model, she says.
Meanwhile, doctors trying to buy hospitals are falling victim to a difficult credit environment. In October 2008, a group of physicians in Michigan had to back away from a deal to purchase North Oakland Medical Centers, a 137-bed hospital in Pontiac, Mich., that closed and then reopened after getting a three-month reprieve with interim funding from several Michigan state departments. Anil Kumar, M.D., a urologist involved in the deal, told sister publication Modern Healthcare in October 2008 that the group was unable to get financing because of the difficult economy.
Financing, thats a big thing for our hospitals right now, says Molly Sandvig, executive director of Physician Hospitals of America, an association that represents some 172 physician-owned hospitals. Many are under development. Theyd like to expand, buy hospitals, but receiving the financing that you need to do those deals is becoming harder and harder.
Physicians who have invested in imaging centers have already experienced a bumpy ride that could get even bumpier this year. The rates Medicare pays for imaging services provided outside hospitals dropped dramatically in 2007, thanks to provisions in the Deficit Reduction Act of 2005 that capped physician payment for the technical component of imaging at the lesser of the physician fee schedule or the hospital outpatient rate.
This led to a 12.7% drop in Medicare expenditures for physician imaging services from 2006 to 2007, following a doubling of such expenditures from 2000 to 2006, according to a September 2008 report by the Government Accountability Office.
That changed the game, says Daniel Corbett, chief of business development for Radiology Business Solutions, a Flint, Mich.-based radiology consulting and management firm. Its affecting everybody. Physician-owned imaging centers that remain profitable are doing so by increasing their volume and efficiency and by not upgrading equipment because of the high cost, he says.
And in addition to the growing competition among providers offering radiology services, physicians can expect further reductions in pay, Corbett says. We believe there will be another round of cuts over the next 18 months, because imaging is the most quickly growing cost in healthcare, he says.
Bibb Allen, M.D., a radiologist in Birmingham, Ala., who is also chairman of the American College of Radiologys Economics Commission, says the uncertainty about what the CMS is going to do on a range of healthcare issues is leading potential entrepreneurs to shy away from investing in outpatient imaging centers. As far as new opportunities, it seems that market has become saturated, he says.
Marc Kahn, M.D., a radiologist who manages Associated Radiologists of Clarkston (Mich.), a radiology practice owned by a group of primary-care physicians, has no ownership interest in the practice. And these days, hes glad.
That was a choice I made, Kahn says. My feelings are that in the current environment, a radiology practice owned and operated by a radiologist is not necessarily the best business model.
Barbara Kirchheimer, a former news editor at sister publication Modern Healthcare, is a freelance writer based in Highland Park, Ill. She can be reached at [email protected].