By Bob Bohlmann, FACMPE
Principal, MGMA Health Care Consulting Group
I believe that the rumors are true – medical group practices that affiliate with hospital systems immediately begin to produce red ink. But it's not as bad as you might think – if you get the facts straight.
The pressures of the nation's economic downturn have entered boardrooms and executive suites in hospitals and integrated delivery systems (IDSs). The integrated movement surfaced in the 1980s, stalled out in the late '90s and rekindled in 2004-2005. Now, with the economic downturn, the Obama administration and anticipated margin losses, boards of directors are getting nervous.
IDS leaders have tended to accept red ink reflected on operating statements as a reality of affiliating with medical practices. After integration, medical groups continue to apply their private-practice processes, but they're being measured now by a different set of rules – the hospital's – which can result in red ink. I've observed annual losses in excess of $100,000 per physician that may occur in the first year of integration. Hospitals perceive that they're losing money, but if you look at all the factors, they're not losing money to the degree that they think they are.
Even if physicians remain productive and don't add unnecessary cost, hospital-owned groups typically show cash-flow losses in the first year as credentialing and collections ramp up, and the newly integrated practice starts from dollar-zero accounts receivable. The resulting delay in revenue lasts for about six to 12 months. Then it's up to the practice and hospital leaders to minimize loss.
I've actually never seen a practice make a profit, but that's due to factors such as installation of electronic medical records, paying for new facilities and setting up satellite clinics. These are things that would normally not be done had the group not integrated with a hospital system.
So why integrate at all? There are a number of reasons:
- Physicians want to integrate.
- The hospital gains a sense of security in the marketplace.
- Private groups can no longer sustain themselves.
- It may make strategic sense.
Today's hospital system-medical practice integration is closer to a merger than an acquisition.
Success largely depends on aligning physicians and physician compensation with the IDS' goals, and setting expectations and accountability that the medical practice and hospital agree upon. Being proactive and understanding the full implication of integration can help you prepare for red ink, among many other things.
For my clients, I developed a 25-point checklist (that's how many things there are to consider) to get both organizations on the same page. In essence, both parties sign a "prenuptial" agreement based on these points.
Before signing off, here are four key things from my list that a medical group should do to ensure a successful hospital integration:
- Identify the advantages, opportunities and goals of the integration.
Are they individualistic or mutual? The financial, structural and operational details are broader than most medical groups (and many hospital systems) realize. Define goals and expectations up front and in detail to increase the chances of a smooth integration once the marriage takes place.
- Identify the areas most affected.
Understanding must be predicated on fairness for both sides. The obvious major points are compensation arrangements and purchase and/or lease of practice assets. Equally as important, but less obvious, are the effects of professional liability insurance and internal accounting methods. A financially solid pre-affiliation practice plan prevents misunderstanding of post-affiliation losses and forestalls the collapse of an otherwise productive relationship. No one wins when an affiliation or merger goes sour.
- Identify the steps necessary to close the practice.
Confusion related to property ownership, payments and ongoing commitments can occasionally scuttle a potential deal.
- Consider getting help with the integration.
If you're unsure about the areas you should review, consider seeking help. It will likely pay for itself in the long run. Consultants, such as those with the MGMA Health Care Consulting Group, specialize in this type of work. They can help you identify key issues up front and facilitate informed decision-making.
For more information on IDSs, check out MGMA's upcoming book: Integrated Delivery Systems: Ensuring Successful Physician-Hospital Partnerships. You can preorder for its release this fall.