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Physician integration proves costly for some hospitals

One in three executives say hiring doctors increases expenses. Consultants cite pricey contracts and technology upgrades at newly acquired practices.

By — Posted July 22, 2013

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Although physician integration with hospitals and health systems is intended to reduce costs, it is increasing expenses in some instances in the short term, according to an online survey of hospital executives.

About a third of 459 executives said integration has caused hospital expenses to rise, said the survey of members of the American College of Physician Executives.

Sixteen percent said their bottom lines remained the same, 5% said their costs decreased and 12% said they were unsure of the financial impact. The remainder said physician integration didn’t apply to them.

Physician integration consultants said technology upgrades and care coordination were supposed to lower expenses for hospitals that began aggressively acquiring physician practices about five years ago. Some doctors have entered into integration business agreements that fall short of full employment but still require hospitals and physicians to work closely together.

Several issues are preventing integration gains at some hospitals, consultants said.

Significant up-front investments in technology and equipment made by some hospitals and health systems for newly purchased physician practices figure into practices’ expenses, which affect revenues.

Other issues are increased operating expenses and loss of revenue after acquisition. For instance, medical liability premiums for hospital-employed doctors tend to be higher than for physicians in private practice. Hospitals are becoming more generous to physicians’ support staff by offering more expensive benefit packages.

Some of the net losses hospitals experience are due to these one-time investments, said Peter Angood, MD, ACPE’s chief executive officer. After the losses are absorbed by the acquiring hospitals during the first few years, the practices will generate greater revenues because their overhead costs are lower.

“Like any sort of investment, you can have up-front costs,” Angood said. “Amortization [of physician practices] is a three- to five-year process. In some cases, it’s a 10-year process.”

Pacts cause tension

In other cases, loss of revenue can be traced to physician contracts, consultants said. That’s because some hospitals paid too much for practices when trying to lure doctors to come on board.

Some hospitals made deals where they were paying physicians more than what they made in private practice, said Marc Halley, president and CEO at Halley Consulting Group, a management and consulting firm in Westerville, Ohio, that focuses on hospital-owned medical practices.

These types of compensation agreements can create friction between hospitals and employed physicians when they disagree about how much money the practices should generate, he said.

“Physicians must cut a sustainable deal, otherwise they will be fighting with the hospitals” about revenue, Halley said. “If they cut fair deals around sustainable business models, they can pay attention to the [medical] needs of their communities. If not, after a three-year contract, hospitals and physicians may come to hate each other.”

Some hospitals that are losing money from physician integration may become more cautious about the practices they seek to acquire and how they draw up contracts, consultants said. This ultimately would be a good trend because it ensures practices that are purchased by hospitals will be financially sustainable.

“It may result in a lower [practice] purchasing price, compensation and a more formal conversation [by hospitals] about acquiring practices,” said Luke Sullivan, vice president of Kaufman Hall, a financial consulting firm in Skokie, Ill. “But over time it should mean greater stability for physicians.”

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