It’s a New Generation
Hospitals and Physicians Seek Out New Investment Capital

Danielle Gilbert

Doctors, hospitals and delivery systems are spurring new payment models that reward organizations for keeping patients healthy and impose penalties for patient readmissions to hospitals. They also are reconsidering the acquisitions and strategic partnerships that they first tried 20 years ago.

Operational problems were encountered in the 1990s when hospital executives who were aiming for rapid growth in market share acquired large numbers of physician practices. They usually overpaid for the practices, realized that they had no competence in managing physicians or their practices and saw physician productivity fall after they began compensating them through salaries. Often, the original physician owners ended up repurchasing the practices. So, what’s new?

A New Landscape

Decades later, the health care landscape looks very different and key players are much wiser. Physicians want more than a quick capital gain on the sale of their practices and the chance to practice a 9-to-5 day when entering into collaborations with hospitals. They are more interested in a partner with deep pockets who offers investment capital to finance the EHR systems and other technologies required by accountable care organizations and new value-based reimbursement models. It is an added benefit if the partner has existing expertise in these areas.

The process by which hospitals and physician practices get to know each other as they contemplate working together has become more businesslike. Hospitals are making sure they find the right physicians, pay them appropriate compensation and ensure they make a positive contribution to the combined organization.

In its due diligence, a hospital will assess how well a practice’s services complement the hospital’s current offerings. They also want to see a match between the physician’s expectations for the partnership arrangement and the hospital’s vision for itself.

Shared Savings

Shared savings programs are being promoted by CMS for all providers. To participate in this new generation of partnerships, physicians and their staffs must be able to work effectively under such initiatives. To do this, they must be open to new practice management systems, re-engineering workflow patterns and modifying processes.

Physician productivity is of great interest to hospital partners. The best partnerships recognize that there is an initial period of adjustment and they allow new physicians time to bring themselves up to speed. One approach that physicians may encounter is a fixed-year contract with which, perhaps three years, followed by an assessment of the physician’s productivity and apparent commitment to the organization’s goals. Renewal of the contract depends on that assessment. Productivity through full transparency is promoted by your partner hospital.

Partnership Negotiations

Extensive demands for data and documents can be expected by physicians entering partnership negotiations. They will be asked to provide financial statements going back several years, including tax documents. In some cases, the hospital may use this historical data to project the practice’s likely experience within the partnership.

More attention will be paid to creating the groundwork for successful integration of the physicians and their staffs into the larger combined organization when a viable match seems imminent. The hospital partner will be looking for solid physician leadership coupled with a robust governance structure.

During this stage, final agreement will be reached on productivity expectations for the physicians. They, and members of their staffs (such as billers and coders), will be given the opportunity to meet their counterparts within the hospital and observe their performance of common tasks.

Focus on the Numbers

Financial advisors should be involved if you are considering collaborating with hospitals in order to tap into some investment capital.

Sidebar: Planning Ahead for Potential Strategic Partnerships

Preparations should begin now if a physician practice believes that its future lies in a strategic partnership with a hospital or health system. Here are some ways to accomplish that goal:

Identify practice leaders and offer them leadership training. Your partner wants to negotiate with responsible individuals and admit them to the leadership team of the integrated organization.

Get your books and records in order. Make sure necessary documents are readily accessible. Financial statements should be cleaned up and resolve any anomalies. Be aware that your partner may not wish to acquire your accounts receivable.

Engage in a little introspection with your prospective partners. Your visions for the future and your philosophies of health care delivery should be determined. Come to understand the cultures of your practice and the hospital and appreciate the patience it will take for them to merge.

Avoid radical changes during the negotiation process. Dramatic proposals may lead the hospital to reconsider other issues in the arrangement.

When you find an appealing partner, begin the due diligence process. You are ready to bring the negotiation to a conclusion.

Interview key hospital decision-makers. Gather data on the hospital’s history and current operations as the hospital is gathering data about your practice. A pro forma analysis leading to financial projections should be conducted in cooperation with hospital personnel.

For more information, contact Danielle Gilbert at [email protected], or call her at 312.670.7444. Visit ORBA.com to learn more about our Health Care Group.

Buried Under a Mound of Work? Then Call in the Cavalry

Jason Flahive, CPA

As health care gets even more complicated, it is vital that management and office staff keep up to speed. The problem, however, is that many physician offices are just keeping their heads above water when it comes to billing and collections and day-to-day management of the practice. Fortunately, there are outsourcing options that may improve operating efficiency and even reduce costs for the practice.

In-House or Outsource?

The decision to outsource a particular function is a big investment and management should weigh the pros and cons before making the leap. Outsourcing job functions in the health care industry is not uncommon, as I have evidenced in my blog about third-party billing and my blog on physician practice management companies.

Outsourcing requires performing a cost-benefit analysis. For some tasks, the direct cost of outsourcing will be clearly less than that of performing the task in-house. However, for other tasks, the direct cost may be close to — or even exceed — that of performing the activity in-house. The question then is whether outsourcing those tasks will improve results that positively affect the practice’s bottom line, reduce indirect costs or provide other valuable benefits.

An effective outside billing service or professional management firm may help increase the practice’s cash receipts and reduce its accounts receivable. Cash that your practice generates from more effective billing and follow-up may easily exceed the incremental direct cost increase of an outside billing service.

Is Keeping Everything In-House Feasible?

Regardless of the task your practice is considering to outsource, there are certain factors that will help you determine the initial feasibility:

• Does my practice have the required expertise needed to perform the task?
• Are the physicians in my practice interested in, and committed to, participating in management decisions and oversight of the task?

How Outsourcing Works

Outsourcing offers several primary benefits: improved results from a company specializing in a particular activity; a potential for reduced costs; and the elimination of responsibilities and hassles for physicians and administrators.

Not Just Admin

Outsourcing does not necessarily have to be limited to administrative tasks. Specialty group practices performing diagnostic and therapeutic services may outsource not only the administrative responsibility and equipment maintenance, but also the technical personnel or the entire technical component of those services to a niche company that specializes in them.

A cardiology group may, for instance, choose to outsource its cardiac stress tests. This type of outsourcing can provide expansion opportunities — often without the risk, capital expense and lead time required to develop comparable in-house capabilities.

For more information, contact Jason Flahive at [email protected], or call him at 312.670.7444. Visit ORBA.com to learn more about our Health Care Group.