Hospital Acquisitions of Physician Practices: Put People First

Keeping the human component in mind can help the merging entities handle issues involving referrals, physician satisfaction, and compensation.

Physicians and hospitals go together in patients’ minds like chefs and restaurants—they are both part of the same operation. But hospital executives and physician practice leaders know that the reality can be different. When hospitals and physicians join forces, especially when health systems acquire physician practices, complications often arise.

“The success rates of hospital acquisitions of physician practices are quite variable,” says Peter Angood, MD, the CEO and president of the American Association for Physician Leadership. “The success stories arise when both sides of the arrangement have been up front about setting their expectations for the relationship. Those that are less successful make a lot of assumptions.”

The unexpected consequences of physician practice acquisitions can be costly and disruptive. But, experts say, those consequences often can be avoided, and remembering the “people” side of the transaction is key.

Referral Complications

Referrals are the source of some of the most common issues that occur when a health system acquires a physician practice. Naturally, the promise of increased referrals is a key reason for systems to acquire practices, but the reality doesn’t always meet that promise.

For example, if the acquired physicians have solid relationships with specialists who are not part of the system, they may prefer to retain those referral relationships rather than switch loyalties to the health system’s specialists. And the health system cannot compel them to do otherwise.

“Hospitals and universities cannot force referrals, and they have to be careful not to put too much pressure on physicians to make referrals,” says Debra Phairas, president of Practice & Liability Consultants, LLC in San Francisco. “I’ve had three physicians [clients] leave hospital foundations because they felt pressured to keep referrals within the hospital.”

The reason health systems cannot compel their physicians to refer within the organization is liability, Phairas explains. If a patient dies after being referred to a specialist, for example, and the patient’s family learns that the physician felt compelled to refer to that specialist despite not thinking that specialist was the best choice, a lawsuit could ensue.

So how can a health system persuade its doctors to voluntarily refer within? It should make sure the best specialists are part of the system, of course. It should make the referral process as easy as possible. And it should discuss the expectation of referrals early in the acquisition process.

“Hospitals need to drive revenue from these physicians,” notes Katharine Halpin, principal of The Halpin Companies, a mergers-and-acquisitions consulting firm. “If the physicians are referring patients to other facilities for tests or treatments, the forecasted goals and metrics cannot be achieved. The reasons vary, but typically they relate to poor quality of the services, weak structures that make referrals difficult for the physicians, or simply a lack of awareness by the physicians of this key expectation.”

But even when health systems have excellent internal referral procedures and the expectations are clear, the system should recognize that compulsion is not an option.

“If the community has a mix of employed and independent physicians, the referrals all come down to relationships,” Angood says. “So there’s no guarantee that if a hospital buys a practice, it will get all the referrals. In some cases the physician says, ‘OK, I’m comfortable referring to your physicians,’ while others say, ‘No, I prefer referring outside the system.’ This should be a point of discussion during negotiations but not a contractual obligation.”

Dissatisfied Doctors

Another potential issue with physician practice acquisitions is job satisfaction among newly employed physicians. Physicians are accustomed to being in charge and to commanding respect when they own a practice.

“Physicians often enter hospital employment because they want to decrease their bureaucratic burden, focus on patient care, get better compensation, and have a better work-life balance,” Angood says. “They may make the mistake of thinking they’ll get all of that and still maintain their autonomy and decision-making power. So it’s a shock when that doesn’t happen.”

Halpin concurs. “If leaders could engage the physicians at a granular level before the acquisition and build not only a shared vision and a commitment to agreed-upon expectations but also routine methods for consistent, honest communication, the success rate of these acquisitions could skyrocket,” she says.

Health systems should discuss expectations early, offer leadership positions to the acquired physicians, be transparent in decision making, and treat physicians with respect.

“It’s important to understand that the approach with the physician can’t be the same as with any other employee—you need an equitable partnership with them,” says Adhi Sharma, MD, chief medical officer of South Nassau Communities Hospital in Oceanside, N.Y. “You have to make sure they are partners, not simply drones.”

Monty Porter, JD, a member of the Health Care and Finance Practice Group at law firm Jackson Kelly PLLC, says one key is ensuring physicians still have a voice in their future.

“It’s obviously important to try to make physicians feel involved, and that they have a voice that can be heard and will allow them to continue to have some influence as to what happens to them going forward,” Porter says. “I think they understand that many final decisions rest with the hospital, but it serves the hospital well to realize that this is a big change for physicians.”

One way health systems can help physicians make the transition from being practice owners to being employees is by ensuring they have convenient and regular access to hospital leaders. Physicians may be uncomfortable having to follow a long chain of command to discuss a potential problem.

“If physicians feel they have access to the people who are higher up, and those people will hear their concerns, it will go a long way toward a successful transition,” says Heather Delgado, JD, a partner with the law firm Barnes & Thornburg who handles many physician practice acquisitions.

Providing a path to leadership roles and listening to concerns are important approaches, but little things also matter.

“I had a physician tell me that one of the things he loved about us was that our parking lot was less than a minute’s walk to get into the facility,” Tony Tedeschi, MD, the CEO of the Chicago market for Tenet Healthcare and CEO of Weiss Memorial Hospital, said in December at a panel discussion of hospital executives. “For physicians, those are precious moments—they’re moments that take them away from their family, they’re moments that take them away from patient care. Everything we do, we try to really do with a recognition of the importance and the respectfulness of that relationship.”

The location of the parking garage may not be something a hospital executive can change, but other small issues can go a long way toward demonstrating respect to physicians. For example, the time physicians need to spend documenting care these days can be draining; a $20-per-hour scribe could lighten that load.

Naturally, the ultimate result of unhappy physicians is turnover.

“Employed doctors do not have the same emotional and financial stake in their practice as independent doctors,” says Travis Singleton, senior vice president of physician search at consulting firm Merritt Hawkins. “For doctors, it’s a seller’s market. If you don’t like the way things are going, it is not too difficult to find greener pastures elsewhere. That’s why any acquisition program must have a strong retention element.”

Compensation Concerns

Physicians may seek employment with a health system in large part for the opportunity to have a steadier income. But the cost structure of a health system is different from that of an independent physician practice—systems frequently lose money on their physician organizations—and granting physicians a pay increase following a merger is not always feasible.

“If you look at a hospital’s balance sheet, a lot of times physician practices are not huge money makers,” Delgado says. “They do provide physician integration into the system and increase the physician network, so there’s a lot of good that comes from an acquisition. But if you acquire a primary care practice and you pay the physicians and their staff a competitive salary and benefits, ramp up their electronic health record (EHR) system, and buy new equipment to get the practice up to hospital standards, you have a lot of costs.”

Some of the costs may not be obvious, Delgado notes. For example, the health system may need to lease new space to accommodate the practice, or it may find itself on the hook for insurance overpayments to the practice that took place prior to the acquisition.

The result is that physicians are sometimes unhappy with their new income, while health systems may feel they are not getting enough value from the physicians. Establishing a transparent compensation program, with incentives, is key to avoiding disappointment on either side.

Commonly, employed physicians are paid a base salary that represents a percentage of the median salary for that specialty—as determined by the Medical Group Management Association or physician compensation consulting firm Sullivan Cotter—combined with a bonus based on the number of RVUs the physician achieves above the corresponding percentage of median RVUs.

“For example, say the median work RVUs for internal medicine is 4,795 and the median salary is $222,000,” Phairas says. “If they set the base salary at 80 percent of that, the physician would have to achieve 3,836 work RVUs for the base. Anything over that base is going to be paid at a dollar amount per work RVU to incentivize them to be productive.”

Phairas says the bonus should not be capped— physicians who are highly productive should be highly compensated.

“I looked at one agreement in which the [physician] foundation capped the bonus at 10 percent over baseline,” she says. “I asked the hospital CEO, ‘Why would you do this? You are encouraging the doctor to do no more than he has to. The hospital loses and the doctor loses. You want them to be as productive as they can be.’”

However, the work RVU formula is designed for the fee-for-service world. The need to evolve the model as value-based compensation takes hold adds a new layer of complication to physician practice acquisitions.

Value-based payments encourage different activities from providers, of course. Rather than aiming for a greater number of procedures, hospitals and physicians theoretically aim for healthier overall patients. But that can be hard to measure, and consequently it’s hard to motivate caregivers in that direction.

Phairas has worked with healthcare organizations on value-based compensation programs. For example, she prepared one package in which 70 percent of compensation was based on the work RVU formula, 20 percent on quality metrics, and 10 percent on good citizenship, such as willingness to participate on committees.

Where to Focus

Perhaps the best advice on making physician practice acquisitions work is simply to pay close attention to the human components.

“Because the focus of most due diligence processes is the legal and financial aspects of any merger or acquisition, the most important components are omitted,” Halpin says. “Without the right people in the right roles, focused on the right projects, no transaction will be successful. The key to success is to address the people side of the transaction.”

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Ed Avis is a freelance writer based in Chicago who frequently writes about healthcare management topics.

Interviewed for this article:

Peter Angood, MD, CEO, American Association for Physician Leadership; Heather Delgado, partner, Barnes & Thornburg; Katherine Halpin, principal, Halpin Companies; Debra Phairas, president, Practice & Liability Consultants, LLC; Monty Porter, JD, Health Care and Finance Practice Group, Jackson Kelly PLLC; Adhi Sharma, MD, chief medical officer, South Nassau Communities Hospital, Oceanside, N.Y.; Travis Singleton, senior vice president, Merritt Hawkins.