Find Strength in Numbers

Max Reiboldt, CPA, for HealthLeaders Media, April 24, 2008

Change is an indisputable fact of today’s healthcare environment. As a result, physicians must reconsider their long-term business strategies and be open to new attitudes, new relationships, and new roles. In particular, physicians must look for ways to come together to build integrated entities that allow for greater opportunities to solidify their positions relative to third-party reimbursement, centralized purchasing, and other synergies that can only be availed from a position of strength. That position of strength requires greater numbers of providers consolidated into legal structures as partners than traditionally has been the case within small medical groups.

Primary care physicians (PCP) and specialists alike need to consider opportunities to collaborate with other like-minded providers more today than ever before. Hospitals have been toying with this situation for years. In the mid-1990s, hospitals built employed physician networks only to disengage from many of them by the end of the decade. Now, as the first decade of the 21st century is well past midpoint, physicians (and again, hospitals) are looking to build upon their individual strengths by assimilating larger group entities. They will likely continue to do so for some time in the future.

But forming these integrated models is not easy as virtually every prospective “partner” holds differing points of view. For example, consider these potential conflicts:

  • Differing cultures in terms of the way the individual groups are managed, governed, and operated
  • Loss of individual group identity and ownership, deferring to the larger assembled entity
  • Removal of individual incentives, transferring these to more group-oriented incentives
  • Operational differences, creating inefficiencies and loss of economies of scale
  • Potentially significant working capital required to start up the new entity, including the cost of purchasing new equipment and technology
  • Differing perspectives as to the role of a for-profit investor versus the emphasis on patient care and needs

Although collaboration offers physicians a greater opportunity to make a living and look toward the future optimistically, physicians in the United States have long been independent, mostly operating as small organizations. Therefore, it is extremely difficult to reconcile such a colossal change in mindset and operative structure.

Nonetheless, physicians must band together with other like-minded entities—hospitals, for-profit investors, and other physicians—to respond to the pressures that confront them, both today and in the foreseeable future. For instance, without some degree of strength in numbers, the physician entity has little bargaining power for reasonable reimbursement in an era in which third-party payment is falling steadily. In addition, many payers, including the government, are currently offering or considering pay-for-performance incentives that reimburse higher amounts to providers with demonstrated clinical performance standards.

However, a sophisticated IT infrastructure, including an electronic health record (EHR), must serve as the foundation for reporting performance results to be able to generate additional reimbursement. Small entities (e.g., small practices) can seldom justify the cost of an EHR and other technology unless they are a part of a much larger entity. Despite the stresses involved in joining forces, mentioned earlier, physician groups must grow in order to respond to payers.

Many physician groups have done this by merging their practices. Others have formed integrated models that more closely resemble joint ventures than truly formed legal entities sharing a single provider number. Alternatively, hospitals may employ physicians and thus become the negotiator for services and reimbursement with the payers. Hospitals and physicians are also coming together to form aligned entities through joint ventures and some equity-model jointly owned entities. They also sometimes join forces by combining expertise through management services organizations.

Selecting a partner
Physicians who are considering the possibility of collaborating with other providers should consider the following eight overarching tenets when selecting a partner:

Financial performance and return on investment (ROI): Although economics are not the most important matters to physicians—and we clearly believe this is the case—financial concerns are a reality that must be considered and no apologies are necessary for targeting a certain ROI.

Patient care and quality: Developing the highest standards of quality and professionalism in their services certainly is at the top of the list for virtually all physicians and hospitals.

Relative acuity level of challenges: This will vary with the situation or even location of the physicians. In some areas, reimbursement is still reasonably good, and thus the relative acuity level of the problem is not as great. In other areas, partnering is an absolute must to build the strength-in-numbers fortress.

Reimbursement experience: One of the reasons partnering is a good strategy is because one or more of those partners usually have strength in negotiating and overall managed care experience.

Ownership and governance status and structure: When an affiliation is considered—whether it is a legally structured entity or more of a loosely formed affiliation—ownership and governance is a significant part of the success or failure of that entity.

Geographic and/or market penetration: When a prospective partner has significant geographic coverage and/or market penetration, it automatically strengthens the partnership; hence, the “strength in numbers” adage fits all the more.

IT sophistication and integration: In this day and age, a successful partnership relies heavily on IT. In fact, many partnerships are largely driven by the need for greater IT sophistication, especially between hospitals and physicians and among physicians forming larger groups. Moreover, one or more of the prospective partners may be much further along in IT development, enhancing the overall potential for success.

Legal and regulatory conformity: Regardless of the partnering structure, anytime healthcare is involved, the U.S. government is involved and its system of ever-growing regulations must be considered. Thus, not only must a potential partnership be structured in a completely legal manner, but also the individual partners must have an attitude of conformity and compliance in every area. The partnership may be even more effective if the partners take a somewhat conservative attitude toward regulatory compliance.

Our system is clearly stressed at this time and more innovative solutions are necessary. At the core of these solutions comes an attitude of partnering. The result is indeed the strength-in-numbers opportunities that are availed to both hospitals and physicians and to virtually all other professionals/investors in our healthcare industry.

Max Reiboldt, CPA, is managing partner and CEO of The Coker Group, a healthcare consulting firm based out of Alpharetta, GA, that authored the HealthLeaders Media book, Physician Entrepreneurs: Strength in Numbers.
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