Making physicians pay off

Like many hospital systems, Bon Secours Health System has been on a physician buying spree.

As of last May, the 13-hospital system employed 708 physicians and midlevel providers, representing a nearly 30% increase since fiscal 2011 and an 86% jump since fiscal 2009, according to its most recent financial filing. And it continues to acquire physician practices. Employing doctors is just one prong of Bon Secours' physician integration strategy aimed at preparing the system for greater care coordination.

“We think that to do population health, especially in chronic disease, you have to have an integrated system,” said Dr. Marlon Priest, executive vice president and chief medical officer of the Marriottsville, Md.-based system.

But Bon Secours' acquisition of physician practices hasn't been without bumps. In its fiscal 2013, ended Aug. 31, the not-for-profit system took $158 million in losses as a result of its physician employment strategy, according to Moody's Investors Service. Employing more physicians has meant a 5.2% increase in salary and benefit expenses, as well as added costs related to renting and staffing office space. The system has been working with a consulting firm since fiscal 2012 on a cost-reduction plan, focusing on better integrating its employed doctors, according to its financial report.

Systems across the country have been rapidly buying physician groups to expand their referral networks and prepare for a not-too-distant future where they will have to manage the health of their patient populations and be held financially accountable for meeting cost and outcomes goals. The hope is that stronger physician alignment will leave systems better positioned to meet the demands of payers, particularly as more health plans move to narrow networks. In addition, some systems are launching their own managed-care plans and are using employed physicians to offer a broader and more attractive network.

The systems also hope that during the current transition from fee-for-service to outcomes-based payment, employed physicians will essentially serve as loss leaders. Hospitals and systems on a physician practice acquisition binge are gambling that by acquiring practices, especially in specialties that drive hospital admissions, hospital beds will remain full during the transition.

But that bet hasn't paid off in the short run. For every physician practice that a hospital or system absorbs, it must upgrade information technology, pay comprehensive benefit packages and assume the costs of maintaining office space, equipment and staff. Meanwhile, hospital utilization rates across the country are dropping. Systems have become trapped between the current fee-for-service imperative of using physician affiliations to boost hospital volumes and the coming goal of coordinating care to reduce unnecessary utilization and improve quality.

The median loss for employing a physician in 2012 was $176,463, according to a 2013 report from the Medical Group Management Association, its latest on the subject. As a result, some analysts are predicting a pullback on physician practice acquisitions this year as costs have increased faster than revenue.

Moody's 2014 outlook report, which offered an overall negative outlook on the not-for-profit hospital sector, called physician employment “a principal driver of hospitals' margin pressure.” But it saw no signs of a slowdown.

“Hospitals historically have not done a good job of managing physician practices,” said Dr. Mike Schatzlein, CEO of St. Thomas Health, a Nashville-based system under the Ascension Health umbrella that has shied away from buying practices.

But many other hospital leaders say they plan to continue their physician buying binge. They argue that the balance sheet numbers fail to take into account downstream revenue opportunities from having physicians under their integrated umbrella.

“You have to bring them in—and then you have to bring them in as efficiently as you can,” said Dr. Alan Kaplan, president and CEO of UnityPoint Clinic, the physician arm of UnityPoint Health, a 12-hospital system based in West Des Moines, Iowa. “It's really a strategic asset that requires investment.”

Some observers think the financial results associated with employing doctors will improve with time. “I think it's a little early to be measuring a return,” said Jeff Swearingen, a managing director at investment bank Edgemont Capital Partners who predicts that health systems will continue buying physician practices this year.

UnityPoint Health employs 640 physicians, with another 400 in line to join the group. The physician acquisitions are defensive, Kaplan said. Fewer primary-care providers want to be in private practice, and if UnityPoint doesn't offer them employment, its competitors will. UnityPoint's average loss per physician is about half the MGMA average because it focuses on maximizing physician productivity, he said.

Back in the 1990s, hospitals also rushed into employing doctors, and they racked up big losses, making many hospital leaders leery about trying it again. But some experts say this round is different, at least partly because systems are using more sophisticated, productivity-based compensation models. They also are trying hard to avoid paying inflated prices. “That was a mistake that was not repeated,” said Dr. Brett Spencer, a partner at Boston Consulting Group.

Another difference is that the Patient Protection and Affordable Care Act presents opportunities for health systems with integrated physicians to participate in potentially lucrative alternatives to fee-for-service payment, such as accountable care and bundled payment programs. Having a strong physician network makes such alternative payment and delivery models more viable, experts say.

Finally, systems are diversifying away from acute care. Outpatient care is an increasingly important contributor to both the top and bottom lines, and will continue to be central under both current and future payment models.

“That's not what happened in the '90s,” said Dr. Mitch Morris, who leads the national provider practice at Deloitte Consulting.

For now, some systems are using physician acquisitions to drive referrals, since fee-for-service rewards volume. UnityPoint is realizing downstream revenue opportunities such as revenue booked from ancillary testing and outpatient procedures, Kaplan said.

Systems can bill for those outpatient services at higher hospital rates, though there are proposals in Washington to limit or eliminate that. “That's new revenue for the hospital,” Spencer said.

The prices that systems are paying for physician practices vary by market and are highly dependent on the specialty involved. But those amounts, which generally are not publicly disclosed, can be significant. The larger the physician group, the more attractive it is for buyers, Swearingen said.

For example, Northwestern Memorial HealthCare in Chicago recently committed $230.5 million—plus annual payments of $118.5 million through 2016—to acquire the 900-physician Northwestern Medical Faculty Foundation, in what is believed to be one of the largest sums for a medical practice in the U.S. The deal closed in September.

Health system leaders hope that employed physicians will increase efficiency by coordinating care for patients, helping to avoid the costs associated with unnecessary or avoidable procedures. That model might work for value-based contracts, but hospital revenue is still largely generated from performing procedures, not preventing them.

“Most systems have a certain book of business that's fee for service,” said Daniel Steingart, an analyst at Moody's. “That type of care coordination actually reduces revenue. There's a transition period (when) you're managing two different models.”

Losses from physician employment were a common theme in Moody's reports last quarter on not-for-profit hospitals.

One system facing a financial struggle in integrating physicians is Baptist Health, Louisville, Ky. In fiscal 2013, Baptist added 60 physicians in five physician practices to prepare for managing a patient population and accepting financial risk for outcomes and costs. The acquisitions were one factor that dragged down its credit rating last quarter, when Fitch Ratings downgraded three series of bonds to A+ from AA-. The agency cited Baptist's losses of $89 million in 2013, which are expected to increase to $109 million this year.

Carl Herde, Baptist's chief financial officer, acknowledged at the time of the bond downgrades that losses were higher than expected. But he described physician employment as the “inner step” in moving from being an acute-care provider to an overall manager of patient health. “We need to go out and support our larger integration strategy,” he said. “This is the cost associated with employing physicians in this market.”

Other systems—including some involved in accountable care models and managing population health—remain unconvinced of the benefits of employing physicians. “We're not aggressive employers of physicians,” St. Thomas' Schatzlein said.

St. Thomas, which employs only 150 physicians, has taken a different approach for integrating physicians into its delivery system. It launched the MissionPoint Health Partners accountable care organization in 2011. The ACO offers independent, community-based doctors who participate in its provider network access to malpractice insurance, billing and collection services, electronic health records and group purchasing.

Physician practices “do better on their own, by and large,” Schatzlein said. “We actually see MissionPoint as one of our strategies for keeping doctors independent.”

James LeBuhn, an analyst at Fitch Ratings, predicts that more health systems will move to similar types of physician partnership and alignment strategies instead of outright employment. On a client call to discuss industry trends, he said that the costs of employing physicians are going up and systems aren't seeing the expected boost in volume.

Deloitte's Morris, however, said there is an advantage to forming tighter alliances for value-based delivery and payment models. Studies of early ACOs show that one key factor for success is stronger ties with physicians, he argued. Systems are looking at all types of alignment strategies, he said, but “of those, the contractual alliances are the weakest because there are ways to end the contract.”

Moody's Steingart said health systems that have stuck with their physician integration strategy since the 1990s have been successful. “It's the ones that have gotten into it in the last couple of years that are unprofitable,” he said.

Spencer of Boston Consulting Group advised systems to establish a clear plan for creating value from their physician buys, including working with payers to set expectations for the shift to value-based payment models. He cautions against employing certain types of specialty physicians, who will be in less demand under accountable care and capitated payment models.

Health systems will begin to see a return on their investment in physician practices when a critical mass of payers finally shift to new payment models aligning financial incentives with patient outcomes, Priest said. But to get ready for that moment, Bon Secours already has reduced its readmission rates, improved palliative care for terminally ill patients, and brought down blood-sugar levels for its diabetes patients.

Employed physicians are “part of the overall effort to provide a service to the community,” Priest said. “I don't think you can do that if you don't have an integrated model of care.”

Follow Beth Kutscher on Twitter: @MHbkutscher