Market consolidation seen as threat to doc-owned hospitals

The newest threat to physician-hospital ownership is market consolidation that has led to hospitals aggressively pursuing medical specialists, according to a speaker at the 12th annual conference of the physician-owned hospital trade association, Physician Hospitals of America, being held in Austin, Texas.

Kevin McDonough, a senior manager with Dallas-based consultant VMG Health, called specialists “the lifeblood of physician-owned hospitals,” and he said physician-owned hospitals are facing a growing inability to replace aging physician investors and recruit new doctors to their ranks.

Another speaker, Clinton Flume, a manager with VMG, said consolidation is being driven in part by a “herd mentality,” where one hospital is seen as “gobbling up practices” and competing hospitals become motivated to do the same.

Physicians are also driving consolidation, Flume said, as they seek employment as a way of being shielded from market forces, including reimbursement cuts—especially for cardiologists—and increasing costs for malpractice insurance and information technology.

Hospitals are also seeing physician employment as the answer to staffing and on-call shortages, he added.

Flume explained why a previous physician-acquisition trend in the late 1990s was “more or less a bust” as hospitals paid too much for practices and didn't receive a return on their investments while physicians became unmotivated because of a lack of decisionmaking authority and frustration with how hospitals managed their practices.

These pitfalls are being avoided in this acquisition cycle, Flume said, by basing future physician compensation on past productivity and developing arrangements that allow doctors to practice more independently than they did in the late '90s.