One of the primary reasons hospitals acquire physician practices is to improve strategic alignment. If the acquiring hospital or organization is looking to secure its marketplace, having aligned physicians and supportive positions can help to further those aims. Robert G. Gift, director of IMA Consulting, one of the largest privately-held healthcare provider consulting firms in the country, offers three considerations for hospitals looking to acquire practices.
1. Avoid acquiring a practice that has no plan to sustain the business. Hospitals want to avoid acquiring practices that are in their late life cycle, because these practices often don’t have a plan for how they are going to continue their business, says Mr. Gift. “Oftentimes what has transpired is a physician on the brink of retirement, well-regarded, with long-term community standing, goes to a hospital and asks it to buy the practice. The hospital ends up with nothing when he retires.” In today’s acquisition practices, hospitals look at the true assets of the practice, as opposed to 15 to 20 years ago when the facility would pay a lot of money just for goodwill, says Mr. Gift.
2. Ensure the practice has an appropriate business model. When hospitals buy up practices they first go through the work of performing an objective performance evaluation to make sure the practices are financially sustainable. The most sustainable business model for practices includes productivity-based compensation for physicians, says Mr. Gift.
Mr. Gift further cautions that, once acquired, hospitals are responsible for ensuring the practices are sustainable. “Hospital managements historically complain about buying a practice that has been making money, and then all of a sudden they get mad at the physician practice because they’re losing money,” he says. In these situations, the root problems can often be linked back to decisions made by hospital management. Mr. Gift offers three common problems hospitals encounter after acquiring practices:
1. Physicians suddenly start working part time. Just because they’ve been acquired it doesn’t mean they can stop working as hard as they were previously. Compensation should be based on continued productivity, which encourages physicians to maintain previous levels of productivity.
2. Stripping out and overlaying hospital costs. Hospitals often threaten the practices’ financial viability by removing the ancillary services revenues, such as lab and imaging, and instead require patients to have their testing performed at the hospitals’ sites. This move and a tendency to allocate indirect expenses to the practice can render the practices unprofitable, says Mr. Gift. Hospitals can help financial liability by not stripping out and overlaying hospital costs.
3. Not making a conscious decision about whether or not to bring corporate structure to the practice. The incoming physicians and hospital employees may be on different benefit planes with different pay scales. This is a historical challenge. Hospital benefits are usually better than those offered in physician offices, so when the hospital begins doling out more money it is seen as a greater loss brought on by the practice. More cost is negatively layered on the practice. Hospitals must make a conscious decision about whether this is something that needs to be transferred to the practice.
3. Engage physicians in decision-making to avoid “culture clash”. Hospitals and physician practices are different. As hospitals buy up practices to prepare themselves for politically integrated networks, they must remember to engage physicians in the decision making and address cultural differences between their organizations, says Mr. Gift. Physician culture tends to be a bit more entrepreneurial and autonomous, because they have real need for decisions to be made quickly. On the other hand, hospitals tend to be a little bureaucratic, more deliberate in decision making, and their focus tends to be in a longer time frame. They talk in terms of mission values, and while physicians can embrace that, they have to decide quickly and work independently, says Mr. Gift. “The clash of traditions, culture and background needs to be acknowledged, considered and addressed as a big part of it. Doing so is going to help make the acquisition smoother and make life post-acquisition much better.”
1. Avoid acquiring a practice that has no plan to sustain the business. Hospitals want to avoid acquiring practices that are in their late life cycle, because these practices often don’t have a plan for how they are going to continue their business, says Mr. Gift. “Oftentimes what has transpired is a physician on the brink of retirement, well-regarded, with long-term community standing, goes to a hospital and asks it to buy the practice. The hospital ends up with nothing when he retires.” In today’s acquisition practices, hospitals look at the true assets of the practice, as opposed to 15 to 20 years ago when the facility would pay a lot of money just for goodwill, says Mr. Gift.
2. Ensure the practice has an appropriate business model. When hospitals buy up practices they first go through the work of performing an objective performance evaluation to make sure the practices are financially sustainable. The most sustainable business model for practices includes productivity-based compensation for physicians, says Mr. Gift.
Mr. Gift further cautions that, once acquired, hospitals are responsible for ensuring the practices are sustainable. “Hospital managements historically complain about buying a practice that has been making money, and then all of a sudden they get mad at the physician practice because they’re losing money,” he says. In these situations, the root problems can often be linked back to decisions made by hospital management. Mr. Gift offers three common problems hospitals encounter after acquiring practices:
1. Physicians suddenly start working part time. Just because they’ve been acquired it doesn’t mean they can stop working as hard as they were previously. Compensation should be based on continued productivity, which encourages physicians to maintain previous levels of productivity.
2. Stripping out and overlaying hospital costs. Hospitals often threaten the practices’ financial viability by removing the ancillary services revenues, such as lab and imaging, and instead require patients to have their testing performed at the hospitals’ sites. This move and a tendency to allocate indirect expenses to the practice can render the practices unprofitable, says Mr. Gift. Hospitals can help financial liability by not stripping out and overlaying hospital costs.
3. Not making a conscious decision about whether or not to bring corporate structure to the practice. The incoming physicians and hospital employees may be on different benefit planes with different pay scales. This is a historical challenge. Hospital benefits are usually better than those offered in physician offices, so when the hospital begins doling out more money it is seen as a greater loss brought on by the practice. More cost is negatively layered on the practice. Hospitals must make a conscious decision about whether this is something that needs to be transferred to the practice.
3. Engage physicians in decision-making to avoid “culture clash”. Hospitals and physician practices are different. As hospitals buy up practices to prepare themselves for politically integrated networks, they must remember to engage physicians in the decision making and address cultural differences between their organizations, says Mr. Gift. Physician culture tends to be a bit more entrepreneurial and autonomous, because they have real need for decisions to be made quickly. On the other hand, hospitals tend to be a little bureaucratic, more deliberate in decision making, and their focus tends to be in a longer time frame. They talk in terms of mission values, and while physicians can embrace that, they have to decide quickly and work independently, says Mr. Gift. “The clash of traditions, culture and background needs to be acknowledged, considered and addressed as a big part of it. Doing so is going to help make the acquisition smoother and make life post-acquisition much better.”