American College of Physicians: Internal Medicine — Doctors for Adults ®

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Uncertain times for doctors who sold

How some practices are being affected by post-acquisition blues

From the June 1998 ACP Observer, copyright 1998 by the American College of Physicians.

By Deborah Gesensway

Five years ago, OSF Health Care System, which owns seven hospitals in Illinois and Michigan, was very much part of the physician practice buying frenzy of the time. Those days are now over.

In the last year, OSF acquired only about two new groups. That compares to the preceding four years, when the health system was buying practices at a fast clip. Its medical group grew to just over 200 doctors—mostly in primary care—spread among 75 sites.

A few years ago, "everybody was saying I need 50 docs here, 50 there," explained Don Dadds, OSF's manager for affiliate services and business development. "It's gone from a buying frenzy to, now, how can we really operate as a group."

When it comes to selling a practice, the late '90s are worlds away from the mid '90s. Like health systems around the country, OSF is spending its energy and money on getting its doctors to operate as a single group rather than acquiring more doctors. Moreover, when OSF does buy a physician practice, Mr. Dadds said, its doctors are not getting the same deals that were so prevalent just a few years ago.

For instance, OSF is paying less up front to buy physicians' practices, and the compensation guarantees under the doctors' new employment agreements aren't as generous and are more likely to be pegged to productivity. In addition, the sale agreements are subject to intensified government scrutiny, with investigators looking for excessive deals offered to physicians by tax-exempt hospitals.

Why has the market for physician practices changed so dramatically? For one, fewer doctors are looking to sell; most who wanted to sell have already done so. In OSF's primary service areas, Mr. Dadds said, "the majority of the primary care physicians are now employed by a system."

Secondly, today's different kinds of deals are a result of hospitals that have become more business savvy. A number of studies in recent years have found hospitals more commonly report losses in the range of $50,000 to $100,000 per hospital-owned physician per year.

"Hospitals continue to be interested in acquiring practices, but with a little less zeal," explained Robert C. Bohlmann, a Texas-based consultant with the Medical Group Management Association. "They are not paying top dollar, and they are not giving the salary guarantees that they used to. It used to be that as a physician, you could almost just wiggle your nose and get a fantastic price and a salary guarantee."

Hospitals have learned that it can be very expensive to truly integrate their acquired practices and make them function as one group. That in part is why OSF has scaled back its buying activity, Mr. Dadds said. The system needs to spend its money on a common computer system for all the doctors and to standardize the way the groups operate administratively, bill for services and report data.

"The industry is waking up to the fact that so much money has to be spent on making these groups efficient," explained Adam Heavenrich, a Chicago-based practice management consultant. "They are finding they can't afford to pay both huge acquisition prices and huge money for integration."

Thirdly, physicians have many more options besides selling out than they did a few years ago. For instance, if a practice needs money to buy a new computer system, many hospitals are willing to give the doctors money in return for something less than outright ownership—perhaps a minority stake in the practice or the right of first refusal if the doctors ever consider selling.

Finally, there are other equity partners willing to invest in physician practices, ranging from physician practice management companies (PPMCs) to private investors. And if a practice's goal is to position itself for managed care, its physicians can join a physician-owned group—there are many more now than five years ago—or strengthen their local independent practice association.

"I think everybody is getting more sophisticated," Mr. Heavenrich said. "It's no longer that selling out is considered the magic elixir." Practices instead have learned to ask more pointed questions about what they really need and therefore who they need to partner with, he said.

Getting out

While many hospitals and health systems are slowing their acquisition of physician practices, some are taking more dramatic steps and getting rid of practices they have already bought.

For nearly four years, the big Blue Cross/Blue Shield insurance company, Anthem, was aggressively buying out primary care doctors throughout Indiana, Ohio and Kentucky as part of its business strategy to create a large integrated health care system. By the beginning of this year, American Health Network, the group practice of Anthem-owned physicians, employed 270 physicians in 110 different locations.

Because of financial difficulties, the giant insurer is now getting out of the doctor business. While Ben H. Park, MD, a family physician who has been the president and CEO of American Health Network in Indianapolis, is bound by a confidentiality agreement that forbids him from talking about details of Anthem's plans for its acquired doctors, he said it's no secret that "in no case will Anthem continue to own these practices."

In Louisville, Ky., for example, Dr. Park said, the 24 physicians who sold out to Anthem a few years ago have already had their contracts terminated. They have been released from any non-compete clauses that had been in their employment agreements and can go back into private practice. They can act as if they had never been part of Anthem, he said, and even sell their practice to another organization. He added that the fate of physicians in other markets has yet to be determined.

Industry experts say that Anthem isn't alone in deciding to cut its losses and get out of the business of employing physicians. "Where five years ago we were valuing practices for hospitals to purchase, today we're valuing practices for liquidation," said Maryann Szostak-Ricardo, president of the California-based practice consulting firm, The Ricardo Group. In many cases, she said, the doctors are being offered the opportunity to buy back their furniture and equipment and return to private practice in the same location.

In fact, said Michael McCaslin, CPA, of Whipple/Somerset Financial Services' health care division in Indianapolis, there are instances where doctors are finding that they can sell their practice a second—and even a third—time. "Consultants are telling docs to do the deals, that you may get your practice back in five years and you can sell it again," he said.

Bad breakups

For some physicians who sold out during the boom years, however, the breakup isn't turning out to be so amicable. Some of the health systems that acquired physicians in the Philadelphia area, for example, have been locking doctors out of their offices and enforcing non-compete clauses, according to Joan M. Roediger, JD, an attorney and practice management consultant with the Health Care Group Inc. and Health Care Law Associates in Plymouth Meeting, Pa.

She advises that physicians who have already sold their practice use this time—even if it is long before their employment agreements are set to expire—to evaluate how satisfied they are with their working arrangements. "Especially in situations where you know about the institution's financial problems, you might be able to go to the organization and say, 'Let's just cut our losses here,' " Ms. Roediger said. "They might be as unhappy as you and take you up on this." She noted that this strategy works particularly well in situations where physicians received the entire payment for their practices up front, not those where the payments were staggered for years.

In some instances, doctors are learning about the real downside of selling out. As in the case of Anthem, some hospitals and health systems are divesting themselves of their physicians en masse, often selling the entire physician network to a PPMC. Some of the big national PPMCs, including PhyCor, have created divisions that are specializing in buying hospital-owned physician practices.

"I always tell doctors when I'm reviewing their contracts that the standard 'assignment clause' means you can be traded like a baseball player," Ms. Roediger said. "Just because you love the XYZ Hospital System, that does not mean you are going to be working for it forever."

In Philadelphia, for example, physicians who had sold to Graduate Hospital earlier in the decade found themselves negotiating new employment agreements when Graduate sold the network to the Allegheny Health System. Now, Allegheny is making noises about selling off its employed physicians to another entity, and a PPMC isn't out of the question.

In general, the large PPMCs have been interested only in purchasing large groups of physicians, not solo practices or small primary care partnerships. A group that a hospital put together and wants to sell may present a golden opportunity to these companies.

Options

What if you are one of the many internists who resisted selling out during the buying frenzy of a few years ago—and you feel like you need to do something? Selling, say consultants, is still an option in many communities.

"If it's a practice that withheld selling out during the first round of acquisitions—and I do refer to it as the first round of acquisitions because I don't believe by a long shot that this is over—I would go back and apply the same analysis that you did then," Ms. Roediger said. "What is it that caused you to say 'no' in the first place? Is it that you did not want to be owned by a hospital? Then ask if your motives still are the same."

When it comes to options besides outright purchase—minority ownership by a hospital, for example—doctors should look critically at any offer and analyze why the hospital is offering them a deal. If the deal seems too good to be true, experts say, it probably is.

"See what other restrictions are built in," Ms. Roediger. "Are you obligated to participate in all the hospital contracts? Does it tell you can't sell your practice to any other entity? ... What are you giving up in return for the money? Obviously, they are not just giving you the money for no reason."

And, to avoid many of the pitfalls doctors who have sold out have encountered, many consultants recommend physicians consider selling to or merging with a doctor-owned group. As Ms. Ricardo pointed out, everybody has an ulterior motive to organize doctors: for hospitals, it's filling beds, while for PPMCs, it's increasing their bottom line so they can go public. "For everybody but doctors the focus is away from the doctor," Ms. Ricardo explained. "Personally, I think the doctors need to take control. They need to build their own groups."

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