Over the past several months, there has been a growing trend: physician groups are selling their practices to hospitals. This trend appears to be heating up as hospitals frantically compete to own and control the most practices. Many of my physician clients have asked if they should sell out, and they want to know exactly how these deals are structured. Unfortunately, my response always varies. You see, it depends on the type of practice and the actual deal being struck. Since that’s not a very helpful response, I decided to write a brief piece about the recent phenomena of hospitals purchasing physician practices and the reasons behind this movement.
There are a number of factors causing the recent rash of physician practice acquisitions. The main reason is fear of what lies ahead in the world of health care. Physicians are afraid of what it’s going to look like to be an independent practice, and hospitals are afraid of being marginalized if they don’t own and control physician networks. Let’s take a look at each of these fears and what is driving them.
For independent physician practices, the future is starting to look like a very dark and scary place. Medicare reimbursements could go down significantly, health care reform is still a big unknown, and we are stuck in a terrible economy with more uninsured and under-insured. Additionally, technology advances in the form of EMR’s and practice management systems require significant technical resources, government fraud audits have made coding compliance more complex, and Accountable Care Organizations (which may dramatically change the way health care is reimbursed) are all weighing heavily on the minds of physicians. When you consider just how many factor are changing in the world of health care and the negative impacts these factors could have on physicians, it’s easy to see why so many physicians have decided to just throw in the towel and sell out to a hospital.
Hospitals on the other side of the fence are worried about a health care future that includes Accountable Care Organizations or other health care delivery structures. These structures (that revolve around physicians) don’t necessarily require hospitals. At the end of the day, a hospital without physicians to admit patients is not much more than a very expensive hotel with bad food.
These fears and the significant change that is being felt in health care right now are driving physicians and hospitals to combine at a break neck pace.
So what do these deals usually look like? Well, there are a variety of terms and conditions that are negotiated into these arrangements and it’s likely that no two deals will look 100% alike. That being said, there are some basic structures that are present in most of these deals. The most significant is that hospitals this time around are not actually “buying” the practice, rather they are “assuming” the practice. What I mean by that is: unlike physician acquisitions in the past, the hospitals are not giving the doctors a check for the purchase of the practice or any good will built up by the group. Rather, the hospitals are taking over the practice. This is typically done with the hospital assuming all practice leases and employing most or all of the practice’s employees. The practice starts billing under the hospital, or some other entities’ tax id number and then falls under those payor contracts. Equipment owned by the practice is either leased by the hospital or purchased outright. At this point you are probably wondering why a practice would just give their business to a hospital. In other words, what’s in it for the doctor? Well, in most of these deals, the hospital will show the practice that its contracts with the payors are much better and that by selling to the hospital, the practice will be more profitable immediately. In addition, the hospital may give the physicians an income guarantee for a fixed number of years. Finally, the hospital can shows the practice all of the administrative services that it can provide such as IT, HR, legal etc.
So what’s in it for the hospital? Well, the hospital gains control of physicians in the community, which puts it in a good position to become an Accountable Care Organization in the future Medicare world. They also typically get an “administrative fee” from the practice. In most of these deals, the practice pays a percentage of the gross collections to the hospital to cover the administrative services provided by the hospital.
What’s the down side? Well, for doctors there can be several down sides. First and foremost is the fact that doctors will go from being independent to being an employee of a larger system. This may or may not create problems. Personally as a patient, I like the fact that my doctor works for me and not some larger organization. I like the peace of mind that comes with knowing that my doctor is doing what is right for me not what is right for some hospital or other organization. Another down side may come at the end of the income guarantee. What happens three or five years down the road when the income guarantee is expired? Could doctors suddenly find themselves taking a huge pay cut at the end of that time? Also, some of these deals have non-compete clauses that make it very difficult for physicians to leave the employment contact if they wanted to. What if the future isn’t what we think it’s going to be and hospitals decide in the next three to five years that they don’t want to own physicians anymore?
I’m not saying this movement is either good or bad. It really depends on the situation. I am sure that some of these hospital/physician organizations are going to work out very well and at the same time I am equally sure that some or many of them will be horrible failures. It’s not that the strategy is either good or bad, but rather it’s going to come down to execution.
My only advice to physicians who are contemplating this type of move is to make sure you have accurately and completely evaluated it from all sides. This is a major decision! Get good advice, have someone help you evaluate and negotiate the deal and by all means don’t get caught up the frenzy if it’s not the right thing for you to do. If you make a mistake on something like this, the morning after hangover could really be a killer.
There are a number of factors causing the recent rash of physician practice acquisitions. The main reason is fear of what lies ahead in the world of health care. Physicians are afraid of what it’s going to look like to be an independent practice, and hospitals are afraid of being marginalized if they don’t own and control physician networks. Let’s take a look at each of these fears and what is driving them.
For independent physician practices, the future is starting to look like a very dark and scary place. Medicare reimbursements could go down significantly, health care reform is still a big unknown, and we are stuck in a terrible economy with more uninsured and under-insured. Additionally, technology advances in the form of EMR’s and practice management systems require significant technical resources, government fraud audits have made coding compliance more complex, and Accountable Care Organizations (which may dramatically change the way health care is reimbursed) are all weighing heavily on the minds of physicians. When you consider just how many factor are changing in the world of health care and the negative impacts these factors could have on physicians, it’s easy to see why so many physicians have decided to just throw in the towel and sell out to a hospital.
Hospitals on the other side of the fence are worried about a health care future that includes Accountable Care Organizations or other health care delivery structures. These structures (that revolve around physicians) don’t necessarily require hospitals. At the end of the day, a hospital without physicians to admit patients is not much more than a very expensive hotel with bad food.
These fears and the significant change that is being felt in health care right now are driving physicians and hospitals to combine at a break neck pace.
So what do these deals usually look like? Well, there are a variety of terms and conditions that are negotiated into these arrangements and it’s likely that no two deals will look 100% alike. That being said, there are some basic structures that are present in most of these deals. The most significant is that hospitals this time around are not actually “buying” the practice, rather they are “assuming” the practice. What I mean by that is: unlike physician acquisitions in the past, the hospitals are not giving the doctors a check for the purchase of the practice or any good will built up by the group. Rather, the hospitals are taking over the practice. This is typically done with the hospital assuming all practice leases and employing most or all of the practice’s employees. The practice starts billing under the hospital, or some other entities’ tax id number and then falls under those payor contracts. Equipment owned by the practice is either leased by the hospital or purchased outright. At this point you are probably wondering why a practice would just give their business to a hospital. In other words, what’s in it for the doctor? Well, in most of these deals, the hospital will show the practice that its contracts with the payors are much better and that by selling to the hospital, the practice will be more profitable immediately. In addition, the hospital may give the physicians an income guarantee for a fixed number of years. Finally, the hospital can shows the practice all of the administrative services that it can provide such as IT, HR, legal etc.
So what’s in it for the hospital? Well, the hospital gains control of physicians in the community, which puts it in a good position to become an Accountable Care Organization in the future Medicare world. They also typically get an “administrative fee” from the practice. In most of these deals, the practice pays a percentage of the gross collections to the hospital to cover the administrative services provided by the hospital.
What’s the down side? Well, for doctors there can be several down sides. First and foremost is the fact that doctors will go from being independent to being an employee of a larger system. This may or may not create problems. Personally as a patient, I like the fact that my doctor works for me and not some larger organization. I like the peace of mind that comes with knowing that my doctor is doing what is right for me not what is right for some hospital or other organization. Another down side may come at the end of the income guarantee. What happens three or five years down the road when the income guarantee is expired? Could doctors suddenly find themselves taking a huge pay cut at the end of that time? Also, some of these deals have non-compete clauses that make it very difficult for physicians to leave the employment contact if they wanted to. What if the future isn’t what we think it’s going to be and hospitals decide in the next three to five years that they don’t want to own physicians anymore?
I’m not saying this movement is either good or bad. It really depends on the situation. I am sure that some of these hospital/physician organizations are going to work out very well and at the same time I am equally sure that some or many of them will be horrible failures. It’s not that the strategy is either good or bad, but rather it’s going to come down to execution.
My only advice to physicians who are contemplating this type of move is to make sure you have accurately and completely evaluated it from all sides. This is a major decision! Get good advice, have someone help you evaluate and negotiate the deal and by all means don’t get caught up the frenzy if it’s not the right thing for you to do. If you make a mistake on something like this, the morning after hangover could really be a killer.
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