Integration 2.0: Does Health Care Reform Signal the Twilight of the Private Physician Practice?
Integration 2.0: Does Health Care Reform Signal the Twilight of the Private Physician Practice?
- July 14th, 2010By Carole D. Christian and Theodore T. Myre, Jr. Partners, Wyatt, Tarrant & Combs, LLP.
The recent passage of the Patient Protection and Affordable Care Act (“PPACA”) is likely to accelerate physician employment by hospitals. Because of added burdens, requiring administrative time and monetary outlays, some have predicted the demise of solo and small physician practices. Coming on the heels of the 2009 law requiring adoption of electronic medical records, private practitioners may find that PPACA’s push toward integration of health services is a force too powerful to resist.
During the mid-1990s, hospital acquisition of physician practices (usually primary care practices) was in vogue. This acquisition frenzy was driven in part by the belief that managed care, with full capitation, was just around the corner, and that linking hospitals and physicians through full integration would greatly enhance the market position of both. While this objective was typically the driver, the parties also believed that certain other goals could be aligned and great efficiencies could be achieved, all to the better good. On the grand scale, these lofty outcomes seldom came to pass. Full-blown managed care never made an appearance in most areas, and hospitals often found to their dismay that they were not capable managers of physician practices. Some transactions were defectively structured in the first place and doomed to fail from the outset. By the end of the decade, many hospitals were finding that losses generated from their owned physician practices could not be sustained, while at the same time physicians oftentimes struggled with the bureaucracy of and other frustrations occasioned by a large organization. Thus, many of these deals were unwound, some painfully.
Another alliance strategy that arose in the 1990s involved the formation of physician hospital organizations, or PHOs. These were collaborative entities formed by hospitals and physician groups to negotiate with employers and insurance companies. The effectiveness of these organizations was limited by structural constraints imposed by antitrust laws. Most PHOs were compelled to use what is called the “messenger model” approach, which met with varying degrees of success. This integration strategy has fallen into disfavor in recent years, but could be revived, at least in some form or fashion, by PPACA-inspired integration objectives.
In recent years, hospitals have commenced employing physicians again; not just primary care physicians, but specialists as well. In a study undertaken by the Center for Studying Health System Change, it was reported that thirty out of forty-three hospital systems had increased the number of employed physicians between 2005 and 2007, with a particularly notable increase in the incidence of employed specialists (eighty-three percent of the systems). A study by MGMA projected that, at the current rate of conversion to hospital-owned practices, more than half of physician practices in this country will be owned by hospitals within the next ten years. PPCAC may speed that up further.
Many hospitals (and physicians) have learned from past mistakes and are avoiding some of the problems encountered in the first go-round, and sharp-toothed laws, such as the Stark law, have made other integration models (such as joint ventures, “under arrangements,” physician recruitment) impossible, riskier, or conditioned upon inhibiting requirements. The snuggest and safest fit under a myriad of potentially nasty laws is the old and the relatively straightforward employment model. With the passage of time, physician attitudes have also changed. Doctors coming out of training are more amenable to employment by a large organization, and are willing to relinquish a little independence in exchange for a little more security. The massive avalanche of new laws and penalties, voluminous paperwork demands, dauntingly complex billing standards, mandatory costs (such as rising malpractice insurance costs and the cost and complexity of electronic health records), shifting alliances, all under stagnant or even decreasing professional fees, add to the anxiety of trying to go it alone.
In terms of added costs, one large and looming example comes from requirements imposed under the 2009 HITECH Act, which essentially will force physicians to invest heavily in equipment (and perhaps, more dauntingly, in organizational changes) necessary to achieve “meaningful use” of electronic medical records. Physicians who do not achieve this still-ambiguous standard, clarified to some extent by recently issued regulations, by the year 2015, will see their government program payments decline automatically. And, of course, in Kentucky, there is the continuing failure to achieve malpractice reform, which means that malpractice insurance will be a rising and unpredictable expense for many specialties, and those costs will compound the HITECH burden.
At the same time, hospitals have their own pressures forcing them to re-evaluate employment of physicians. Hospitals are at the mercy of their medical staff members, whose powers over a hospital’s economic success are multi-faceted. Physicians largely determine whether patients are treated, and physicians, through their admission and discharge decisions, patterns of ordering tests, preferences for medical supplies and prescription decisions, determine how much of a hospital’s resources will be used in caring for a patient. One hospital administrator recently commented that running a hospital is the only business in which “you have to pay the grocery bill but you have no control over what gets put into the cart.” Hospital managers appreciate physicians who are loyal referral sources, active medical staff participants and good stewards of hospital resources, but are limited in their ability to show appreciation by overly-broad federal fraud and abuse laws that impose government scrutiny on any gesture that could be perceived as a reward for referrals. They also limit the ability of hospitals to align cost-cutting objectives with individuals who have significant control over many hospital costs.
For hospitals, then, employing physicians offers the prospect of increased control over physician behavior, plus a bond that cements a physician’s loyalty and referrals. Because the referral laws generally favor employment relationships, employment is sometimes the only viable strategy for a hospital to secure a lasting bond with important physicians.
With the implementation of PPACA (the “War and Peace” of health care legislation, at least if measured in number of words), it is likely that the pressure on both sides to integrate will increase exponentially. In addition to the goal of expanding insurance coverage, PPACA’s 2400-plus pages contain a good deal of new law aimed at changing a cost trajectory indicating that, unless something is done, health care costs as a measure of gross domestic project will grow from sixteen percent in 2007 to a projected one hundred percent (!) in the next seventy years (that assumes that the system wouldn’t crash first). Even PPACA’s critics are in agreement that our traditional fee-for-service payment system is inefficient and results in fragmentation among providers and unnecessary costs while producing relatively poor outcomes.
So, one of PPACA’s overarching goals is to change the delivery system by seeking to put everybody (i.e., providers) in one boat.
PPACA establishes numerous new payment models and authorizes a number of demonstration projects, all designed to bring about collaboration among providers across different levels of care. One model that has received great attention is so-called “accountable care organizations” (ACOs), which are entities designed to coordinate physician, hospital and other services for large pools of Medicare beneficiaries and to receive a share of the savings if they can in fact reduce costs to Medicare that would be incurred under the current payment system. ACOs will have to have administrative infrastructure, and must achieve critical mass in size and meet certain reporting requirements, making it likely that larger and sophisticated organizations, such as hospitals, will be the driving force in their creation and success. But ACOs will not succeed, and in fact cannot exist, without physicians.
PPACA also introduced the value-based hospital purchasing program, which will provide for enhance hospital payments for meeting certain quality measures. Like the ACO concept, this model will require providers at all levels to find new ways to collaborate in order to reduce costs and share revenues. Other new approaches introduced by PPACA will include bundled payments (to be split amongst providers), gainsharing arrangements (still under demonstration project status), medical homes and much else.
In the early stages, most of the new models engendered by PPACA are experimental and optional, with the participants gaining the opportunity to earn incentives if they succeed in cutting costs and/or improving quality. In the longer term, however, successful models and demonstration projects will become the new norm, and both government and private insurers’ aggregate payments for services will be reduced based on the demonstrated cost efficiencies achieved by the successful experimenters. In other words, these models soon will cease to be optional, and the ability to adopt, adapt and live under the emerging system will be necessary for survival.
In this reconstituted health care system, then, hospitals and physicians will be partners under the mandate of delivering better health care at less cost. The model best suited to achieve positive results under these PPACA initiatives is the physician employment model. This is in part due to the fact that, although Congress enacted these new programs, it did not loosen the laws that otherwise stand in their way. These laws (the Stark law, the anti-kickback statute, antitrust laws, the civil monetary penalty law and others) present much less of a problem where the physician or physician group and the hospital are fully integrated. Independent physicians and physician groups will have a much more difficult time linking up with hospitals due to these constraints, and hospitals may find it more difficult to share in any bounty produced through common effort. Unlike the integration phenomenon in the 1990s, the mounting wave of physician-hospital integration appears to bear the look of permanence, and will be an inevitable component of systemic change in our health care delivery system for the foreseeable future. Rather than being merely a trend, it will be a survival strategy for both sides.
It remains, of course, possible for this new level of collaboration to occur between providers who are independent of each other. Subsequent legislation or regulations may loosen the restraints that block many of the PPACA reforms. Even so, the immense costs that it will take for providers to achieve standards that will be forced upon them sooner than later will induce many smaller providers, including physicians but not just physicians (small hospitals may also have difficulty weathering this alone), to seek the shelter of a large organization that can bear more economic risk and carry out an increasing variety of duties and functions that are being foisted on the provider community. This large organization does not necessarily have to be a hospital. Large multi-specialty groups, especially those with strong hospital alliances, may well endure, but the future is not promising in the long run for smaller independent practices to stand on their own.
Ms. Christian and Mr. Myre are both Partners with the law firm of Wyatt, Tarrant & Combs, LLP. Both serve as co-chairs of Wyatt’s Health Care Service Team. Ms. Christian can be reached at 502-562-7588;, and Mr. Myre can be reached at 502-562-7278; tmyre@wyattfirm.com.
