Physician practice acquisition: A good deal or not?

Tool helps IDNs evaluate the profitability of the practices they’ve purchased

For hospital systems, acquiring physician practices makes sense for a lot of reasons. It’s a way to capture a primary care access point, and to ensure the “loyalty” of physicians to the IDN. It makes sense for physicians too, particularly for those who want to hand off the financial responsibilities of running a practice. The key question for hospital systems is, Does it make sense financially?

VHA Inc., the national health care network, has added a new, web-based offering to help member hospitals analyze and improve the revenue and profitability of acquired physician practices. It’s called Physician Downstream Analyzer, and is part of VHA’s Physician Strategies and Services consulting service.

Analytical tools needed
Hospital executives interested in improving the financial performance of their acquired physician practices lack analytical tools to help them measure the true impact a physician has on revenue and profitability in the health system, according to VHA.

“Many hospitals endure operating losses after acquiring a physician practice based on the assumption that the physician downstream revenue can make up for the direct losses,” says Don Hicks, vice president, VHA Physician Strategies and Services. “Using the Downstream Analyzer, along with VHA advisory and consulting services, the guessing game turns into precise revenue tracking and forecasting using evidence-based analytics.”

The tool, developed by Salt Lake City, Utah-based Equation Consulting, integrates hospital and physician office billing data at a patient level.

Research suggests that healthcare organizations can generate an enterprise-wide profit enhanced by acquiring physician practices, “but until the Downstream Analyzer, there hasn’t been a way to tie to the financial numbers,” says Hicks. The big reason is that the hospital’s IT system typically differs from that of the acquired physician practice, which differs from that of the organization’s skilled nursing facilities, which differs from that of the radiology department, etc. “Most frequently, none speak to each other,” he says. Given that, it’s almost impossible for the IDN to gather what Hicks calls “longitudinal information” on each patient, as that patient moves through the system. Downstream Analyzer “creates a master patient index on steroids,” which [yields] longitudinal information on each patient, each doctor, each location, each date, each service line,” he says. As a result, the organization can tie downstream revenues to its financials.

The data can help IDN CEOs get hard data on the financial performance on their acquired practices, and it can help physicians improve their performance, says Hicks.

Right numbers drive right behavior
“It gives the medical group a rich data repository, so they can slice and dice information across location, by doctor, by service line, etc.,” he says. It lets physicians know from a business perspective where their business is coming from, and can link it to the organization’s general ledger. Physicians respond well to data, being trained in the scientific method, says Hicks. Combined with clinical outcomes information, Downstream Analyzer sparks physician’s competitive nature. “Physicians are competitive, and they have been their entire lives. They are drawn to the right numbers to drive the right behavior. This is the good news about what’s happening to healthcare in the future.”

But data alone won’t change actions. Physicians have traditionally been independent thinkers; they don’t like to be on the bottom of the pyramid, fielding directives from those above them, says Hicks. That’s why hospital administrators must move away from the pyramid model of doing things, and instead, invite physicians to the proverbial oval table.

“There is a huge need to involve physicians in the leadership of both clinical management and financial management,” says Hicks.

“Hospital CEOs need to work with doctors not by edict, but by influence. If you have the information, share it with physicians, and they will get onboard.”

But it won’t happen overnight. “This is not a one-size-fits-all solution. It’s an educational process. People are busy doing other things; it could be a two- to five-year process.


Profitable or not?

Data indicates that hospital systems can lose as much as $150,000 to $250,000 per year over the first three years of employing a new physician. But that doesn’t necessarily mean the acquisition was a bad deal, says Don Hicks, vice president, VHA Physician Strategies and Services. That’s true for a number of reasons, with these three being the primary ones:

  • Ancillary services. One of the first things hospital systems do after acquiring a physician practice is strip out ancillary services (e.g., imaging, lab, infusion therapy, etc.) and incorporate them into the hospital’s ambulatory operations. The dollars may still be flowing, but the revenues are no longer attributed to the physician practice.
  • Employee benefits. Hospital systems are typically more generous than physician practices in terms of the benefits packages they offer their employees. So, in one fell swoop, the benefits packages for the staff of acquired practices go up, making the practice’s profitability go down.
  • Electronic medical records. IDNs often switch newly acquired physician practices to the electronic medical records system being used by their existing practices. “Any major change like that creates an immediate hiccup in terms of productivity,” notes Hicks.

There are other reasons physician practices can quickly lose some of their profitability after being acquired by a hospital system, including:

  • The IDN overpays for the practice, often for “goodwill.” (The fact is, this happened much more frequently in the 1990s, that is, during the last wave of hospital acquisitions of physician practices, than it does today, says Hicks.)
  • Physicians’ productivity historically drops when they become employees. That’s true unless the IDN can construct ways to keep them as productive as they were prior to the acquisition.
  • Productivity of older physicians wanes. Without a strong recruitment program, there may be slippage in terms of the revenue of acquired practices.
  • The hospital/IDN bureaucracy is inherently bigger than that of most physician practices, adding costs to the equation.
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