Hospitals and health systems have been on a rapidcourse of acquiring physician practices in the1990s. In a national survey published in 1995,Mill and Wild found that more than 36% of senior finan-cial executives noted physician acquisition activities fortheir institutions, with over 50% for hospitals withgreater than 300 beds. This trend is seen in all regions ofthe country.
Mospital executives give a number of strategic argu-ments for acquiring physician practices, especially primarycare practices (PCPs). Preparation for managed care andfor accepting global financial risk for populations are keyreasons. To develop a fully integrated delivery system,ambulatory services—including physician practices—areseen as a critical element, and acquisition is seen as aviable approach. Defensive positioning to protect marketshare for inpatient and ancillary services as well as to pre-empt competitors from "stealing" aligned physicians arealso common justifications for purchasing practices. Andfor some organizations, there is the hope that employedphysicians will be more loyal and more easily controlled.Once an acquisition strategy is adopted, it is often given atarget number of physicians considered necessary toachieve a critical mass to achieve the intended goals.
Enough practices have been purchased across the coun-try to identify a significant problem: in the majority ofcases, results are not meeting expectations. Hospital execu-tives are experiencing financial losses on purchased prac-tices far beyond their projections. In a 1995 suivey, only17% of finance executives reported a positive bottom line[1], A report of a 17-hospital survey noted annual losses of $97,000 per acquired physician [2]. This article exploresthe underlying causes of why so many hospital acquiredphysician practices are not successful, and offers possiblesolutions, in the form of recommendations, for improvingthe performance of acquired practices.
The Initial Focus of Practice Acquisition
When most hospitals begin discussions with their physi-cians about possible purchase of their practices, theemphasis is on organizational and governance issues andon contract terms and language. Questions addressedinclude how will the physicians and the newly formed medical group be organized; what will their governance structure be; and what will be the structure and represen-tation on the board of the medical practice organization?There are a number of questions physicians typically ask,such as will we also have representation on the hospitalboard; are we going to be told how to practice; what if wedon't like the practice executive director; and will we bepaid for administrative duties? Also, there is considerationof an array of legal opinions and organizational charts rep-resenting a variety of voting rights issues and organization-al structures. It is important work that requires a lot of timeand effort from everyone involved.
The other area that receives considerable attention is theactual contiact with each physician. These aie negotiated indetail for each practice, and, unless a disciplined approachis used, may result in a number of unique contracts that aredifficult to administer or may lead physicians to wonder ifthey were treated fairly. Physicians are concerned with anumber of issues in the contract, including which assetswill be purchased and at what price {eg, "What about mybuilding?"); will the office manager be guaranteed a job forat least a year; what salary guarantee is to be received andfor how long; what vacation and other benefits will bereceived; and what type of noncompetition agreement is tobe signed. Msually, the result is a salary guarantee for 2 to 5years with a productivity incentive. PCPs have been pur-chased at a cost of anywhere from $10,000 to $600,000,most commonly between $100,000 and $150,000.
While the purchases usually begin with a targeted groupof practices, once the process is in place and a critical massis identified, there tends to be a speeding up of acquisitionswhich may lead to less attention to quality or "fit" as a good partner. In addition, operational issues that aré categorizedas management services organization (MSO) functions areoften seen as relatively easy to do for an experienced groupof hospital administrators. The complexity of performingthese tasks well is often underestimated.
Article by Zachary B. Gerbarg, MD
Gerbarg & Associates Inc.,
3424 East Rovey Avenue, Scottsdale, AZ 8S2S3 USA
New Medicine 1998,2:23-26
Current Science Inc. ISSN I089-2S24
Copyright© 1998 by Current Science Inc.
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