Faced with few ACO options, physicians are increasingly considering merging their practices, which would enable them to reduce expenses and wield more clout in negotiations.
This article originally appeared in Managed Care Contracting & Reimbursement Advisor, July 2013.
Physician practices are beginning to feel the changes in managed care forced by the Affordable Care Act (PPACA), and are looking for ways to stay profitable as the payer landscape shifts. In the coming 12 months, as more components of the PPACA kick in, there will be increasing consolidation of practices, says John D. Fanburg, JD, managing member and head of the healthcare practice at the law firm of Brach Eichler, based in Roseland, N.J.
The development of accountable care organizations is moving at an extremely slow pace in most of the country, Fanburg says. That is leaving many physicians with no ACO to align themselves with, or few choices when it comes to selecting one, he says. As a result, a substantial number of practices are considering merging their practices to grow larger, which would allow them to reduce expenses and perhaps increase clout in negotiations.
The mergers can involve physicians from similar specialties, or disparate specialties coming together to form a multispecialty practice, Fanburg explains. Some practices also are considering selling to hospitals to avoid having to worry about managed care at all.
"What I see coming in the next year is further consolidation of physician groups," Fanburg says. "I don't necessarily think we will have significant consolidation in the hospital area, but we're going to see more physician practices banding together into single specialty or multispecialty groups."
Smaller practices may face the toughest choices because they already operate on a thin margin that leaves little room for absorbing losses during a transition, says Marc Halley, president and CEO of Halley Consulting Group in Westerville, Ohio. But larger practices are still facing challenges.
"It used to be the small groups trying to come in out of the cold, but today we are seeing some very good-sized medical practices—60 or 70 providers—having to come in and have formal talks with one or more hospitals, and others trying to sort out what they're going to be in the future," Halley says. "They're struggling to remain viable."
Physicians are challenged now because they have so much on the line but so few clear paths from which to choose, he says.
"Healthcare reform is literally upon us, with certain portions already in effect, and there is a lot of experimentation going on at this point," Halley says. "If you've seen one accountable care organization, you've seen just that—one. It will be very interesting to see how many of them actually turn out to be financially viable."
One thing is clear, however. Reimbursement for physicians is going to be lower in the future.
"There is no scenario in which we see reimbursement going up. The federal government is very clear, state governments are going bankrupt, and they're all worried about the fact that we have many more enrollees under the Affordable Care Act that will come on to the Medicaid rolls," Halley says.
"Regardless of the shenanigans on Capitol Hill and whatever else goes on, reimbursement is going to go down and we know we're going to have to do more for less. Not just what we're doing now, but more for less."
Healthcare also is increasingly under the microscope for regulatory compliance. The cost of compliance for a medical practice continues to rise, Halley says, and many physician practices are not even aware of some of the requirements.
The aging population and the wave of retirees also is changing the future for physician practices. For the next two or three decades, baby boomers are going to play a major role in healthcare in terms of demand, Halley says. As a group, those retiring baby boomers tend to expect more from healthcare providers and are willing to spend more for what they want, he says.
"Those factors—decreased reimbursement, increased expenses, and increased demand for services—will be what we call the perfect storm as we move forward in this healthcare arena," Halley says. "Healthcare reform will determine how we get paid, but those other factors are still the main drivers in healthcare."
Choose your path carefully
The right choice for your practice, if you decide that any move is necessary, will require careful analysis of the options available to you and the particular factors that are important to your success.
"Depending on the specialty of the physician, you may move in a certain direction," Fanburg says. "If you're a specialist, you'll want to keep an eye on where your primaries are going. If the primaries are forming a large group, then either you can join that group as a specialist or you can form a specialty group and still receive those referrals. A lot of that will depend on your particular specialty and how you interact with other practices, how you get most of your referrals."
But if the primaries are aligning with a hospital or selling practices to a hospital, a specialist physician practice can have more of a challenge, he says. The hospital will want the primaries to refer patients to the hospital's specialists, which can interrupt referral patterns that you depend on for patient flow and revenue.
"From a managed care standpoint, we're seeing the evolution of larger single-specialty or multispecialty practices, with the thinking of getting enhanced rates and enhanced leverage with third-party payers," Fanburg says. "Sometimes that does happen that your larger size gives more bargaining power, and sometimes that does not happen. A lot of it depends on where you are geographically, the demographics of your patient base, and how active the third-party payers are in that area. If one payer is dominant in that area, you may not see as much improved leverage from being with a bigger multispecialty practice."
Even in that situation, merging to form a larger practice can be the right move, Fanburg says. The larger practice will save money through economies of scale.
"You can share the cost of an electronic health record, which can be significant. Your administration should be more efficient with the elimination of duplication of efforts," he explains. "You can consolidate office locations also. The savings can be significant."
Be proactive with contract negotiations
Some practices also are finding that this is a good time to get creative with contract negotiations. Fanburg recently discussed options with a large orthopedic group and he suggested the group approach payers with a plan for shared savings. All payers are focused on reducing the cost of care without sacrificing quality, so they should be willing to hear your proposal, he says.
"I told them now is the time. You're not under a lot of pressure yet," Fanburg says. "They should reach out to the larger payers and negotiate some shared savings. The point of discussion will be that as an orthopedist you have a lot of decision points that will impact the cost of care. To the extent the payer wants to incentivize you to reduce costs, then it is incumbent on the payer to share those savings with the doctor."
The PPACA is pushing healthcare providers and payers to partner more, so collecting and analyzing data on your practice performance will be more important than ever, Fanburg says. You may be competing with other practices for inclusion in the best ACO, so you will need to be able to show that you can deliver high-quality care at a lower cost than other practices.
"The practices that are effective with collecting and analyzing that data will be able to negotiate stronger contracts that help stem the tide of increasing insurance premiums and at the same time make the doctors and hospitals accountable for the wrong decisions," Fanburg says.
In some areas, however, hospitals will be competing for practices. Depending on the geographic area and demographics, there might be three or four hospitals competing to dominate the market, Fanburg says.
"If that is the case, they will be bidding up the acquisition price for practices against either other hospitals or multispecialty groups," he says. "That's where you want to be, but that's either already your situation or you can't change it now."
Watching the trends in your area is important, but Fanburg cautions that you can't blindly follow others in lieu of doing your own research and making a decision that fits your own practice. Fanburg recently worked with a colorectal surgery practice that was considering a new contract to join a hospital system, and when he asked why they were thinking about the move, the response was, "Because everyone else is doing it."
"I told them they need a better reason than that, but they don't really," he says. "Hospitals can still pay doctors more than what they would get under the existing fee schedule, but these arrangements are very short-lived. What happens three, four, or five years from now when these employment contracts expire? Either they're going to terminate the relationship or they're going to renegotiate a much lower rate."
Many practice leaders respond that they'll just wait and figure out that problem later.
There are both advantages and disadvantages to entering a hospital system, the same as there are with joining a physician group. With the latter, the prime benefit is that you can be an owner, Fanburg says. With a hospital alliance, that is difficult or impossible. When hospitals are nonprofit, physician ownership is not possible.
"Even for-profit hospitals are not looking for physician ownership," Fanburg says. "So you're somewhat abdicating some decision-making and authority going forward. If you are emotionally and mentally prepared to relinquish that to a hospital administrator, then perhaps it is not so bad."
The other advantage to joining a multispecialty group is that, as long as you adhere to the Stark antikickback laws, you can share in the revenue of those other physicians.
"You're not going to share in that revenue in a hospital setting," Fanburg says. "Additionally, in a hospital setting you have IRS rules that require an ongoing analysis of fair market value. That means the potential increases are limited by that analysis."
As a general rule, Fanburg tends to steer physicians toward joining a multispecialty group rather than signing on with a hospital, primarily because the physician will have more control and more opportunity to direct the future of the multispecialty group. But he also notes that those are not top priorities for some physicians, who are more comfortable handing over the reins to someone else. It can be less work and less stress, as long as you choose carefully when handing over control, he says.
Another of Fanburg's clients is a cardiologist who was trying to decide his next move. He was concerned because the hospitals in his area were acquiring the primaries, which were his referral base.
"He felt it was more important to follow his referral base to the hospital than to join a multispecialty group," Fanburg explains. "He weighed the benefits of joining in the revenue from the ancillary specialists, but he realized that he would have no one to send him referrals. So there can be appropriate reasons to go the hospital route, depending on the circumstances of the doctor."