Patient Protection & Affordable Care Act

October 4, 2010, 2:38 PM

This is the first in a series of blog posts that will look at the impact of the Patient Protection and Affordable Care Act (PPACA) on our local providers and employers. In light of the gloomy forecast for our physician clients, many of them are considering selling their medical practices to a hospital system. Thispost outlines the pros and cons of the sale of a physicians practice to a hospital system.

Pros

Stability of Income. As economic pressures mount on physicians in the form of reduced reimbursement from third-party payors and increased operating costs, physicians are looking for ways to stabilize their incomes. Because hospital systems have greater economies of scale and greater access to capital, they can pay physicians fair market value salaries and bonuses for a guaranteed period. The length of these guaranteed salary periods has been reduced drastically in the past couple of years and particularly after the passage of PAACA. In some cases, these payments also involve some form of sign-on and/or retention bonuses.

Removal of Practice Management Headaches. Most physicians prefer the practice of medicine but not the business of medicine. The hospital systems relieve them of this burden and have built-in expertise in the areas of human resources, compliance, health care regulatory matters and the like. Employing hundreds of physicians also gives these hospital systems a broad range of experience in dealing with physician-specific issues.

Improved Third-Party Reimbursement. Many of the health systems have been able to negotiate better third-party payor reimbursement rates for their larger medical groups. It is imperative that a physician joining such a group receive the benefits of these higher reimbursement rates.

Shoring-Up Referral Relationships. If a physician counts on the referrals from physicians in the larger hospital-system medical groups, then it behooves him or her to consider joining such a medical group to shore-up his referral base. If a hospital system threatens to cut off its referrals to a physician if he or she does not join its medical group, such an action could implicate the Medicare/Medicaid Anti-Kickback Statute and/or the Stark Law.

Economies of Sale. Most hospital systems have greater buying power than individual medical practices. Theoretically, this greater buying power should result in operating savings to the individual physician's practice within the larger hospital-system medical group.

Recruitment of New Physicians. Because of the financial demands of new physicians and the reduced number of physicians entering certain specialty areas and the primary care field, many practices (especially those in Hampton Roads) are struggling to recruit and retain top medical talent. As a general observation, new physicians are less entrepreneurial and more risk averse than the physicians who entered the medical field twenty years ago. Consequently, they want more flexibility in the workplace and larger medical groups are better equipped to provide this flexibility.

Cons

Loss of Control. The biggest concern physicians have with joining a hospital-system medical group is the loss of control. The physician is no longer his or her own boss and is subject to the whim of the larger corporate mentality of a hospital system. Strict rules typically replace rules of reason as hospital-system medical groups tend to deal with problems by passing rules and not addressing the problems directly with the individuals causing the problems. Consequently, it is essential to have strong contractual protections to ensure satisfactory working conditions and freedom in making medical judgments.

Onerous Restrictive Covenants. Without exception, all major hospital-system medical groups insist on onerous restrictive covenants in their physician employment agreements. It is imperative that a physician negotiate appropriate triggering events and carve outs to these restrictive covenants. If a physician is part of a larger group joining the hospital-system medical group, he/she and his/her partners should insist on an appropriate exit strategy if things do not work out.

Allocation of Overhead. One of the biggest traps in joining a hospital-system medical group is the allocation of the hospital system's general and administrative expenses to the physician's cost center. These expenses can be extremely high, especially if they involve EMR and billing systems, and can reduce a physician's net profit drastically.

Micro-Management. Some of our physician-clients who have sold their medical practices to these hospital-system medical practices have experienced seller's remorse because of the intense micro-management to which they are subjected. In short, it can be a rude awakening to the world of corporate medicine.

In considering whether to sell his medical practice to a hospital-system medical group, it is essential for a physician (or his/her group) to weigh the pros and cons involved in taking such a major step. Insisting on strong contractual protections is a must to gain the benefits and to avoid many of the pitfalls described in this post.
T. Braxton McKee