Return Engagement-- Hospitals, physician practices find reasons to partner again

By Mike Scott

Legal News

The 1990s saw a wave of physician practice acquisitions by hospitals. With many of those acquisitions considered failures, the trend petered out and has been much less noticeable over the past decade.

Now, with major changes in the health care industry at hand, experts predict an uptick in purchase activity with area lawyers working closely with their physician and dental clients to determine which acquisitions might make strategic sense.

The financial reasons to consider such partnerships more than 10 years ago were that primary care physician (PCP) practices -- such as family practitioners, OB/GYNs, and pediatricians -- were in higher demand from hospitals. That's because HMOs and other managed care plans relied on PCPs to serve as the primary gatekeepers for specialty referrals, said Thomas Van Dis, a principal in the Health Law and Corporate group practices for Miller Canfield in Detroit.

''You had a situation where if you purchased PCP practices, you were virtually assured of getting more referrals within your hospital system,'' Van Dis said. ''There wasn't a lot of thought about true partnerships.''

The referral motivation remains a secondary reason why hospitals are interested in purchasing physician practices today, he indicated. But physicians themselves are now motivated by declining income, caused primarily by lower reimbursements from Medicare, Medicaid, insurance companies, and more, Van Dis said. Due in large part to the unsettled economy, more patients are putting off certain checkups, procedures, or surgeries, he indicated.

Another physician fear that is driving the increase in partnerships is that many expect they will not be able to survive the pending health care reform on their own. Many desire a system partner to help them navigate the changes.

''The main concern that physicians have now is to find a way to replace traditional practice income,'' Van Dis said. One of the ways they can do this is to add ancillary services such as an ambulatory surgical center, an MRI and/or CT imaging center, sleep clinics, and physical therapy clinics.

Large specialty practices are also targeted and many of these deals are as complex as a typical merger and acquisition, said Linda Ross, a partner with the Detroit office of Honigman and chair of that firm's Health Care Department. ''Hospitals typically need to obtain a third-party evaluation of the value of these practices because most hospitals are exempt from (federal taxes) and must not pay more than fair market value for the practice,'' Ross said. ''But it's a negotiation where benefits, human resources, and technology all need to be discussed. You need both parties to be clear regarding any expectations.''

While that creates added income for the physician practices, it also promotes new competition for the hospitals and health systems themselves, Van Dis said. And this is where some of the hospital and health system motivation comes in -- to reduce competition for such ancillary services.

''The motivator of the hospital in this case is to eliminate competition,'' Van Dis said.

There also is the motivation of financial incentives. For example, there are certain requirements for how accountable care organizations (ACOs) must be set up, Ross said, and there is an opportunity through ACOs for a shared level of financial savings by hospitals and physicians. Technology incentives also are available.

The Patient Protection and Affordable Care Act of 2010 directs the Centers for Medicare and Medicaid Services (CMS) to create a national voluntary program for ACOs by January 2012. ACOs are provider groups that accept responsibility for the cost and quality of care delivered to a specific population of patients cared for by the groups' clinicians.

But just because a practice purchase is suggested, there is no guarantee that such a relationship will work. Both parties, particularly the physicians, need to consider how the new arrangements will affect the day-to-day conduct of their practice. For example, if a sale is made, physicians may no longer need to manage their practice but they may need to manage the hospital relationship, which can be a complex process, Van Dis said.

''It is the structure of the post-sale agreements that separate the good deals from the bad,'' Van Dis said.

That is where the expertise of a health care lawyer is invaluable to physicians. While some clients work with lawyers like Van Dis and Ross to just complete the transactional details, many rely upon them for counseling and advice. One of those main decisions that a lawyer can help decide is whether physicians would be comfortable being employees of a hospital or whether they desire a physician enterprise model, which can help maintain a high level of bargaining power with a health system.

''There is interest on both sides because hospitals want to ready themselves for health reform and be viable competitors and because many physician practices don't have the economies of scale available as part of a health care system,'' Ross said. ''Health care reform offers new opportunities and, as employees, there is more latitude with (how physicians) can be compensated.'' As a result, an employee agreement is often developed to help set certain standards for both parties, Ross said. This can lead to increased accountability on both sides.

The types of specialty practices in demand will be different in each market, and will be based upon the types of specialties a health system needs, and demographics of the local population. Two specialties that are often in demand by hospitals are cardiology and orthopedics. The reason is simple - those specialties are often very profitable because of the nature of the care provided, Van Dis said.

When assessing the validity and value of a practice and hospital deal, Van Dis will look at such factors and variations as patient populations, who are the primary third-party payers, and whether there is a financial overlap between the two parties. There are some services where a hospital might be able to get a better rate for a procedure than a physician practice because of how reimbursement is handled, and for such reasons a partnership may make sense.

''What you do have to be careful of is to not be accused of price fixing,'' Van Dis said.

Not all issues, however, are economic in nature when considering the purchase of a physician practice. The responsibility of managing employees such as nurses and technicians may be better handled by the physicians than the hospital. The culture of the two parties may or may not match. Even physical location could be an issue.

In the 1990s, the model for hospitals acquiring practices often resulted in a loss of productivity and poor management, where neither party felt they were receiving the necessary return on investment, Ross said. ''The physicians were disappointed in many cases in the (red tape) and how long it took to make decisions,'' Ross said. ''Hospitals felt like they weren't always getting what they thought they were paying for.''

Published: Thu, Sep 9, 2010