Physician Practice Acquisitions Growing

Las Vegas—With the costs of private practices growing and reimbursement rates decreasing, more physicians are now employed by hospitals, which are acquiring practices to adjust to a changing healthcare landscape. Still, the strategy is filled with risks, according to Gary Scott Davis, PA, a partner at Will & Emery, LLP. At the Fall Managed Care Forum, Mr. Davis said hospitals acquiring practices and employing physicians “sounds terrible” and did not work in the 1980s. However, if hospitals and physicians work together to implement delivery and payment reform, the collaboration could be successful. He said hospitals must listen to input from physicians and treat them as partners rather than ignoring their advice. “Physicians aren’t trained and don’t think like other employees of hospitals and health systems,” said Mr. Davis, who spoke at a session titled These Are Not Your Grandfather’s Physician Practice Acquisitions: Implementing Responsible Transactions that Lead to Accountable Care. “If you treat them like that, it will be a disaster.” Mr. Davis said the healthcare industry would be wise to learn from the mistakes made in the 1980s, when hospitals made acquisitions that were not financially prudent. The Patient Protection and Affordable Care Act (ACA) has already had a substantial impact, according to Mr. Davis. Physicians are getting paid less due to cuts in Medicare rates and reduced payments from insurers and other payers. Mr. Davis said there will be a decrease in the sustainable growth rate (SGR) used by the Centers for Medicare & Medicaid Services (CMS) to control Medicare spending. The cuts in the SGR and Medicare provider payments may be >25%, according to Mr. Davis. In addition, the costs of running a practice have grown based on new requirements for health information technology and quality data reporting as well as increased government regulation. He added that regardless of the results from the 2012 presidential election or the Supreme Court’s decision on the ACA, there will be an emphasis in the next several years on providing quality care. Mr. Davis also anticipates a change from a fee-for-service, volume-based model to a value-based model focused on bundled, capitated, and shared savings payments. Providers will be paid based on collaborating to meet quality and efficiency benchmarks and will assume more financial risk. “Fee-for-service is not economically sustainable,” Mr. Davis said. When considering acquisitions, hospitals must take legal and regulatory issues seriously, according to Mr. Davis. He said the environment has changed in the past few years. For instance, the government has had stronger enforcement of the Stark Law, a set of 3 provisions related to physician self-referral for Medicare and Medicaid patients, as well as the federal False Claims Act, in which physicians face harsher penalties for committing fraud. The Internal Revenue Service is also more stringent in enforcing rules. “Big Brother is watching,” Mr. Davis said. Before finalizing a transaction, Mr. Davis said it is important that hospitals undergo a detailed due diligence process. Although it may take time and be expensive, Mr. Davis said the process will help avoid future problems by identifying issues such as noncompliance with regulations, which he said are common in physician practices. He added that most physicians should not receive a guaranteed salary, a mistake that hospitals made in the 1980s and 1990s. Instead, they are now compensated based on their production, taking into consideration the revenues they generate and expenses they utilize during practice. They receive a lower base salary, but have an opportunity to earn more money through incentives for providing quality and cost-effective care. Their compensation also must meet the Stark Law exception and fair market value. However, Mr. Davis said there is no specific definition of or guidance for fair market value, but the salary physicians receive must be based on objective, independently published salary surveys. Mr. Davis said there are numerous compensation issues that arise during acquisitions. He suggested hospitals employing physicians establish an independent committee that oversees compensation. They should test models that align the reimbursement hospitals receive for physicians’ services with the salaries paid to physicians. A legal staff or outside counsel should also review each physician’s arrangement to ensure compliance, according to Mr. Davis. In addition, he said that administrators such as program directors or medical directors must earn their salary based on services they provide and cannot overlap with other work they perform, such as clinical work or being on call. Compensation agreements should include payments for being on call as well as providing services when physicians are called in. Mr. Davis also advised hospitals conduct an annual review of physicians with total cash compensation that is in the 90th percentile of the market. In the future, Mr. Davis said physicians will be rewarded for meeting quality and safety measures and achieving outcomes. He mentioned the industry has already shifted toward a model based on the Institute for Healthcare Improvement (IHI) Triple Aim, which IHI defines as improving the health of the population, enhancing the patient experience of care (including quality, access, and reliability), and reducing or controlling the per capita cost of care. IHI, a nonprofit organization based in Cambridge, Massachusetts, was founded in the 1980s by Donald M. Berwick, MD. Dr. Berwick resigned as the administrator of the CMS in December after >2 years in the role, during which he implemented many of the initiatives he created at IHI. Mr. Davis added that physicians will be asked to improve patient experiences based on the Institute of Medicine’s 6 domains of quality: safety (avoiding harm), effectiveness (providing services based on scientific knowledge), patient-centeredness (considering a patient’s needs, values, and preferences), timeliness (reducing waits and harmful delays), efficiency (avoiding waste), and equity (providing care of equal quality to every patient). To achieve many of these goals, the patient-centered medical home (PCMH) model will grow in popularity, according to Mr. Davis. In a PCMH, a physician leads a group of providers that care for patients throughout their life, including providing preventive services, treating acute and chronic illnesses, and assisting with end-of-life issues. By working closely together with a patient, the group is able to provide the right care at the right time in the most appropriate setting, according to Mr. Davis. He said a PCMH is developed to minimize overtreatment or undertreatment, efficiently allocate resources, improve the overall quality of care, and enhance access to care.