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As doctors leave hospital practices, some are finding a 'soft landing'

From the January 2001 ACP-ASIM Observer, copyright 2001 by the American College of Physicians-American Society of Internal Medicine.

By Deborah Gesensway

Leaving a hospital practice? Plan ahead

As the integration mania of the 1990s gives way to a flurry of disintegration, many physicians are leaving the hospitals that purchased their practices and returning to private practice.

Sometimes the change is initiated because physicians are miserable working for a hospital. In other cases, hospitals are desperate to staunch the financial blood loss they attribute to owning physician practices.

More often, however, the break is mutual and is set off by a hospital that offers untenable renewal terms, such as a low salary, or proposes to waive restrictive noncompetition clauses. Unhappy doctors who have been looking for an out then seize the opportunity and leave.

Ellen Campbell, ACP-ASIM Member, is a fairly typical example. While the Reston, Va., general internist was planning to leave Columbia HCA Reston Hospital Center in mid-1999, the hospital actually made the first move. Dr. Campbell explained that the hospital offered her a contract that encouraged her to leave the network.

She said that the new contract, among other things, would have changed her compensation formula from straight salary to a percentage of the profit earned by the practice. The problem with that formula, she said, was that "there would never be any profit" because of the way the hospital does its bookkeeping.

To further encourage physicians like her to leave, the hospital agreed to eliminate any roadblocks that would keep her from setting up a competing practice in town. "The hospital put in writing that it would not enforce my restrictive covenant, so I was able to open a new practice a block away," Dr. Campbell recalled. "They facilitated me taking my patients with me, and when people called my former office, they were told where I was and how to reach me."

Practice consultants describe the hospital's strategy of encouraging Dr. Campbell to return to practice without actually firing her as a "soft landing." The idea is simple: Hospitals are anxious to break with physician practices that aren't profitable, but they want to avoid angering those physicians—and threatening a valuable source of referrals and admissions.

"They are not dumping anybody or leaving anybody in the lurch," Dr. Campbell said about her hospital's adminstrators, "but they want physicians to leave."

Trimming physician practices

While there are no statistics on exactly how many hospitals are dumping physician practices, practice consultants say the trend is very real. A Georgia-based consultant at last fall's annual meeting of the Medical Group Management Association (MGMA) cited one survey that showed 35% of health systems were considering "partial divestiture" of their physician networks. Another 5% said they want out of the business of owning doctors.

Tenet Healthcare Corp., one of America's largest for-profit hospital chains, is reducing the number of physician practices it owns nationwide by 75%. At its peak in 1998, Tenet owned 1,000 doctor practices. By May 2001, it expects to own only about 250.

Harry Anderson, Tenet's Arizona-based vice president of corporate communications, explained that Tenet's hospitals were losing $100 million on its physicians. "We're not alone," he said. "Virtually every hospital chain has reported the same experience. Obviously, something was wrong with the model because everyone has failed with it."

Most analysts see several factors in that breakdown. First, most hospitals proved incompetent at managing physician practices, and few learned from their mistakes and adjusted. Second, most acquired physician practices have proven to be less productive than when they were when independent.

The MGMA's 2000 "Cost Survey," for instance, found that hospital-owned multispecialty group practices lost more than $50,000 per full-time equivalent physician in 1999, while other similar practices not owned by a hospital earned a profit of just over $2,000 per full-time physician. MGMA figures also show that hospitals lost nearly $80,000 on those practices in 1998 and more than $90,000 in 1999. (Analysts say that hospitals' losses have tapered off in recent years largely because many hospitals have dumped underperforming practices in the last year or so.)

Health care consultant James Unland, president of The Health Capital Group of Chicago, said that mismatched expectations created problems with hospital purchases of doctor practices. "In some cases, a subset of older physicians' practices were acquired," he said. "The older physicians saw this as a way to wind down, when the hospitals wanted them to keep working. Another group of physicians in their prime sold out to a hospital to lighten their schedule. And a huge set of practices had physicians new to the practice of medicine, and a lot of them simply underperformed."

The physician perspective

Dr. Campbell, who came to her hospital-owned practice in Virginia directly out of residency, fits into Mr. Unland's third group of physicians. She acknowledged that her practice was losing money because it paid its doctors a straight salary, but believes the problem wasn't one of productivity. Instead, Dr. Campbell said, she had no incentive to think about the other side of the ledger and practice cost-effectively. "It wasn't that I wasn't working hard," she said, "but that I wasn't working wisely."

Sandra Adamson Fryhofer, FACP, a general internist in Atlanta and President of ACP-ASIM, had a different experience. Dr. Fryhofer sold her private practice to a hospital-owned physician group practice in 1995 expecting better billing services, state-of-the-art computerization and overall management expertise to lessen her administrative burden. The better practice environment and decreased management responsibilities, however, never materialized.

"It was supposed to be more efficient, but it wasn't," Dr. Fryhofer recalled.

So when her five-year employment contract ended last November, Dr. Fryhofer left the large group practice and re-entered solo practice. She said that the transition has worked well. She continues to see many of her previous patients, and new patients are joining the practice every day.

More importantly, she said, she is a much happier doctor. In addition, she explained that many patients say they prefer the change to a smaller, more personalized environment.

Dr. Fryhofer began thinking about the prospect of re-entering private practice several months before she gave her group the required three months' notice. Practice consultants say that in general, the transition from working for a hospital-owned group to private practice will take three to six months or longer. (For tips from practice consultants on how to make the transition from employee to independent physician, see "Leaving a hospital practice? Plan ahead," this page.)

For Dr. Fryhofer, having previous experience with starting a practice from scratch made her transition easier. For Dr. Campbell, however, who had no private practice experience behind her, the year since she embarked on her own has been extremely difficult, at best characterized by a steep learning curve.

In addition to learning to practice cost-effective medicine, her first year in private practice included some quick lessons in billings and collections (she didn't know the difference between ICD-9 and CPT when she left the hospital group), hiring and firing (she is now on her fourth office manager), and computerization (she spent too much on an electronic medical records system that has been an abject failure).

She joked that the best decision she made in that first year was finding an aggressive and helpful bank that gave her a line of credit. The emotional and financial support from her doctor husband during her first year alone has also been essential.

Dr. Campbell is optimistic that her practice will make some money this year. She said she feels lucky that Reston's hospital has been understanding and obliging. She said that today, she has a much better relationship with the hospital now that it is no longer her boss.

Soft-landing strategies

Drs. Campbell's and Fryhofer's improved relationships with their hospitals echo those of other physicians who left or were cut loose from employment contracts with hospitals. Analysts say that hospitals are working hard to ensure that physicians keep admitting inpatients and referring outpatients to their ancillary services. In most communities across the country, they point out, angry physicians can easily steer their patients to another hospital.

According to Mr. Anderson from Tenet, for instance, his hospital chain's goal in "exiting" its physician employment contracts is to create a win-win situation for both doctors and hospitals. "We want to be physician-friendly, but we don't want to own practices," he said.

In Tenet's case, soft landings are taking many forms. In the Philadelphia market, for example, the hospital system has helped organize an independent practice association (IPA) in the area to help its former employee-physicians with everything from group purchasing of malpractice insurance to negotiating managed care contracts.

In Wilkes Barre, Pa., another hospital system has used a similar strategy to cut some of its physician practices loose. Mercy Health Partners' hospitals in Northeastern Pennsylvania developed an alliance with the largest privately owned medical group in the area. The hospital then gave most of its 45 employed doctors the option to join that group and to acquire stock in a management services organization (MSO) company jointly owned by the hospital chain and the physician group. In exchange, the physicians had to give up what remained of their often lucrative hospital employment contracts.

"This is one way that one hospital figured out how to create a soft landing and not just put their doctors out on the street," explained Stan Zagorski, vice president and CEO of InterMountain Health Group, the MSO owned jointly by Mercy Health Partners Northeast Region's three hospitals and the InterMountain Medical Group, which included 20 primary care doctors before the whole process began.

About 15 to 17 of Mercy's employed doctors eventually opted for this deal, joining InterMountain Medical Group starting in mid-1998 and accepting stock in the management company owned jointly by the doctors and the hospital, he said. Then, beginning in summer 2000, the area's other major hospital system—Wyoming Valley Health Care System—decided to divest itself of its physician network. Some doctors from that system have also decided to join InterMountain.

"Wyoming Valley is an excellent example of a soft landing," Mr. Zagorski said. "The doctors were told that as of Jan. 1 they were gone, but the hospital said, 'We'll give you your accounts receivable, let you buy back your equipment at fair market value, give you six months' severance pay and let you leave earlier if you want to.'"

The strategy, however, doesn't always work. Some doctors felt so burned by their group practice and hospital ownership experience that they wanted to avoid any other group practice and either return to solo practice or get out of medicine altogether, he said. But for others, having a group practice looking for new partners was a welcome alternative to starting anew on their own.

Downside for patients?

While many of these disengagement deals are designed to be transparent to patients—like arrangements that allow physicians to stay in their old offices—some consultants warn that the disengagement phenomenon may include a big downside for patients and the health care system as a whole.

Robert C. Bohlmann, a Texas-based consultant for MGMA's Health Care Consulting Group, said he has seen physicians who return to private practice cut the amount of free care they provide to poor and uninsured because they suddenly become responsible for watching the bottom line.

"When physicians go into their own practice, they can no longer underwrite satellites in remote areas or take as much charity care or Medicaid as they used to," he said. "I just worked with a group that closed three satellites, which means that patients in areas unable to support a practice really have a void now."

Dr. Campbell said that Mr. Bohlmann's concern rings true to her experience. As she pays more attention to billings and collections, she is realizing that she has to pay more attention to write-offs. "If somebody didn't have insurance, I've always thought that we can't charge them," she said. "But now, I'm learning this isn't true."

Dr. Fryhofer in Georgia has joined a growing number of physicians who have decided that they will simply no longer participate in any form of managed care. All the patients who follow her to her new private practice must pay for services at the time of visit and then seek reimbursement from their own insurance company.

"I decided I can either be a billing service or a physician," she explained. She said that she does worry that, while many patients have followed her, some just won't be able to afford to. The bottom line, however, is that she felt she had no choice if she is ever to regain the joy of practicing internal medicine without managed care's artificial constraints on referrals and treatment. n

Deborah Gesensway is a freelance writer in Glenside, Pa.


Leaving a hospital practice? Plan ahead

Disengagement, whether initiated by the hospital or the doctor, can be traumatic. To land of their feet, physicians need to give themselves at least three to six months to plan their exit strategy, especially if it involves going into private practice back in their communities.

Practice management consultants often work through checklists of 50 to 100 items with physicians in these situations. Here are some of the items they say are most important:

  • Location. "Did the hospital have a lease with a landlord that can be signed over to you?" asked Mark E. Kropiewnicki, JD, a lawyer and consultant with The Health Care Group in Plymouth Meeting, Pa. If your office is in a building owned by the hospital and you want to stay there, the hospital is going to have to charge you fair-market rent, he said. "That's usually not a problem because if a lot of space is available, the fair market value goes down, and you might pay less this year than last year."
  • Payer contracts. You'll have to renegotiate all contracts with insurance companies, HMOs and other payers. In some markets, warned Maryann Szostak-Ricardo of The Ricardo Group in Los Angeles, panels may be closed. You might be excluded, despite the fact that you participated with certain plans for years as part of a different group practice. In addition, expect to wait three to six months for a new Medicare provider number.
  • Furniture and equipment. Hospitals are frequently willing to sell back office equipment to doctors. After the hospital does a valuation, you can usually negotiate a price. Be aware, however, that hospitals cannot just give you back your equipment.

    Health care lawyers warn that practices generally need to be valued and sold back at fair market prices-which often can be significantly lower than they went for five years ago-or federal regulators and the IRS may scrutinize the deal. Tax officials may be concerned with issues of "private inurement," which come up with not-for-profit hospitals.

    The HHS Inspector General has been investigating whether some of the hospital "givebacks" of physician practices are nothing more than illegal remuneration, or a kickback designed to encourage physicians to continue referring patients to the hospital.

  • Line of credit. One of the most important things you can do is develop a good relationship with a bank, because you'll probably need to borrow a fair amount of money the first few months. Be sure to have enough funds to pay for rent, equipment and buying back the practice from the hospital.

    Accounts receivable is another problem. Although you will start billing patients from day 1, collections will not start coming in for 60 or 90 days.

    Depending on whether you expect to be paid or whether you want to cover your operating expenses and pay staff, MGMA consultant Robert C. Bohlmann recommends that primary care physicians who are starting over borrow $75,000 to $150,000 per doctor.

    Different banks, depending on how well they understand the medical business, will vary widely in their willingness to give doctors loans based on future cash flow rather than collateral.

  • Patients and employees. Steven Harris, JD, a health care lawyer in Chicago, warns that common law and contractual prohibitions can prohibit you from telling patients or staff you are leaving and asking them to come with you. Negotiate this point with your hospital.
  • Insurance, malpractice coverage, employee benefits, retirement plans. Some doctors find it worthwhile to continue contracting with the hospital's medical services organization for some of these items, but only if the hospital was doing a good job of procuring these services in the first place.
  • Assistance and advice. Most physicians find they need to hire consultants, accountants and lawyers to help them through this process, particularly to make sure that the idea of starting anew is viable and to make sure all legal issues raised by their old contract are handled. ACP-ASIM's Center for a Competitive Advantage (www.acponline.org/cca) has information that can help.

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