New physician practice business models

By Thomas Reinke & John Hobson, M.D.

http://www.physiciansnews.com

The pendulum is beginning to swing in favor of physicians. Several factors are contributing to a shift in the balance of power away from payers, multi-hospital systems and for-profit providers. Part of the physician resurgence is due to the indomitable nature of physicians who have simply worked their way out of the abyss created by managed care, failed vertical integration strategies and the charlatan schemes of publicly traded physician practice management companies. Consider these recent developments that serve as examples of physicians creating new business ventures that expand and enhance their practices.

Example 1: A cardiology group has approached a group of internists, proposing to merge their practices. The underlying motivation for the cardiologists is not to lock in referrals from the primary care doctors, (i.e. to rekindle vertical integration), but rather to develop an internal capability to efficiently manage stable cardiology patients so the capacity for new patients can be increased. Business is booming for the cardiologists and they cannot accommodate the demand for their services. In addition to increasing the practice’s capacity, efficiency may be increased and coordination of care may be improved, thus improving patient satisfaction.

Example 2: Several orthopedic groups have joined a new generation health care management company aimed at increasing market share and expanding outpatient services. The participating groups have not lost their financial and organizational independence, but have partnered to expand their practices as new treatment methods or protocols emerge and as outpatient services replace inpatient procedures.

Example 3: A physician-driven IPA has been created, led by primary care doctors who are incorporating selected specialist groups. The model has the potential for a win-win situation among both the primary care and specialists groups. This new venture is feasible and driven by the large volume of capitated lives controlled by the primary care groups. The win-win situation results from the selective participation of the specialists who will have the opportunity to increase the referrals from the primary care doctors. While this initiative may appear to duplicate strategies from the mid-1990s, it is a fresh approach because it is driven by private practice doctors, not payers or hospitals.

Common Characteristics

These ventures are diverse, and on the surface they may seem to lack a consistent theme, but on closer examination they exhibit interesting characteristics traits that demonstrate physicians are more business savvy and are following more sophisticated approaches to driving the growth of their practices. Some of the characteristics that underlie these new initiatives are as follows:

• They are locale-specific and incorporate a detailed understanding of the structure of the local health care market.

• They are based upon an analysis of the market forces such as: the number of local physician practices, the specialty distribution of these practices, the strengths and weaknesses of local hospitals, an understanding of the contracting policies of third party payers, and patient demographics.

• They are aimed at changing the flow of patients and the delivery of health care services.

• They contain realistic financial arrangements, based on sound business principles.

• They came to life through a partnership between a group practice that is determined to be successful and a proven business developer.

Generally, the new generation of business ventures reflects opportunities that are primarily available to specialist physicians. These opportunities exist for specialists because of the way several industry factors have come together in local markets, including:

• Increasing demand for physician services because of changing patient demographics, an increased emphasis on health and wellness and increased patient knowledge.

• A continuing shift from inpatient services to outpatient services.

• Advancing medical technology and new treatment protocols.

• A shortage of physicians in certain specialties.

• Decreasing HMO restrictions on the utilization and the delivery of services.

In some cases, the business opportunity is to provide more comprehensive care. In other cases the opportunity is to streamline service delivery or restructure medical care. Both of these approaches can lead to a competitive advantage for physicians that may be sustainable on a long-term basis, as medical advances occur at an ever faster pace.

The focus on providing more comprehensive medical services or restructuring the delivery of care is a dramatic and positive improvement over previous generations of business ventures. During the 1980’s physician joint ventures focused on limited partnerships that built physician office buildings and other facilities, or attempted to exploit new diagnostic technologies and referral relationships. That era led to the Stark amendments, which limited referrals and financial arrangements. During the 1990s, ventures focused on managed care contracting and vertical integration strategies that were not based upon reality.

Physician Interdependence

In spite of the new business opportunities going mostly to specialists, there is an interesting fundamental change in the practice of medicine that may signal additional opportunities for all physicians, primary care doctors and specialists. Physicians have always been clinically interdependent but they are finally beginning to realize this and capitalize on the opportunities created by enhancing their interdependence. This interdependence takes several forms. First, specialists and primary care doctors are working more closely on matters such as the management of patients with chronic illnesses. Two of the three examples above incorporate strong relationships between specialists and primaries. Second, specialists are implementing closer working relationships as the result of medical advances that increase the complexity of each specialty. State-of-the-art care for patients with multi-system illnesses requires coordination among all of the specialists involved in the patient’s care. As physicians are drawn into closer cooperation and coordination across specialties, practice mergers may increase or new practice entities may form.

Goals

The dominant goal of these ventures is to increase practice revenues. Physicians have been working harder during the past several years and many are maxed-out. They understand that small group practices have limited financial opportunities. Leading groups have realized that the road to success is practice growth and development in the form of expanding the scope and volume of services.

The secondary goal is to increase market share. This is driven by competition among physicians, as well as an objective of increasing leverage with payers to negotiate increased reimbursement. Even in payer dominated markets, there has been limited recent success where specialist group practices have been able to negotiate increased HMO reimbursement because they are the dominant group in their particular geographic area.

Obstacles

In spite of the opportunities, the barriers to completing a new venture that have historically existed still represent significant hurdles. Doctors who are considering participating in a venture remain skeptical and distrustful of the motives of the developers. Often they cannot fully evaluate the business rationale or potential of a venture and therefore cannot reach a decision about participation. Furthermore, they are usually very reluctant to relinquish control over or share the revenue stream for services. And finally, they are almost always reluctant to contribute any or sufficient capital to a project.

The failed PHOs, IPAs and practice management companies of recent years have reinforced the skepticism and reluctance of physicians to new practice ideas, so the lead-time to develop a new venture has generally increased. However, in some cases, physicians who were involved in one of the 1990’s acronym organizations have developed enough business savvy to recognize current new opportunities and make a decision about their participation.

The health care industry is a growth industry, and it will remain so until the effectiveness of disease prevention surpasses disease treatment. The Health Care Financing Administration has estimated that the growth in expenditures for physician services through 2007 will exceed that of the 1988 to 1992 period, the last high growth era immediately preceding RBRVS and the cost cutting days of managed care.

Going forward the continued rapid growth in demand and the increase in health care expenditures will create new practice opportunities. However, the cautionary message is that the health care industry is complex and successfully completing a new practice venture remains difficult. A new practice idea that is viable in one community may be not work in another because all health care, like politics, is local. While national trends exist they are played out uniquely in each local market. New practice initiatives must be based on sound business principles that include:

• A business rationale or concept based upon medical needs, enhanced service delivery, or a viable new medical technology.

• Detailed planning of the entire project with sufficient time to obtain commitment and buy-in of other parties.

• Detailed analysis and understanding of the local health care market.

• Detailed financial feasibility analysis and equitable structuring of financial relationships and terms.

• Adequate management resources with a proven track record.

With these elements in place, physicians can be successful in controlling their futures.

Thomas Reinke is a senior consultant at BDO Seidman, LLP, Philadelphia, Pa. John Hobson, M.D., is a health care consultant and practicing internist in Bryn Mawr, Pa.

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