Integrating primary care practices into provider networks.

As financial forces continue to mold the American healthcare industry, formal alliances between healthcare systems and physician practices are becoming increasingly common because healthcare executives and physicians see the opportunity for both to benefit from closer relationships and emerge

stronger in the face of healthcare reform and the burgeoning managed care industry. Healthcare systems and physician practices considering the formation of alliances hope that an integrated system involving physicians, hospitals, and other providers will lead to a system of quality care that is truly responsive to business, the community, and society at large.

Physician practice acquisition is one component of a comprehensive integration strategy. Primary care practices are in especially high demand by virtue of their gatekeeper positions in managed care scenarios. While most healthcare executives have recognized the advantages of having primary care physicians on their teams, establishing a primary care physician base through practice acquisition or development of new practices is a relatively new concept for healthcare systems.

Healthcare systems that acquire primary care practices without adequate planning may suffer setbacks that hinder their ability to successfully compete in the market. Acquisitions and other integration strategies should be regarded as major business decisions rather than quick fixes in the face of changing market conditions.

No magic formula exists for successful integration of primary care practices into provider networks. Differences in communities, hospitals, individual practices, and even the personalities of the participants involved rule out a "cookie-cutter" approach. However, by asking the right questions and focusing on the right issues during the initial stages of the integration process, healthcare executives can increase the odds of long-term success.

Evaluating acquisition candidates

How can healthcare financial managers decide if acquisition opportunities are worthwhile? The best place to start is with a review of their healthcare facilities' medical staff development plans. A medical staff development plan is the foundation for any acquisition initiative. It should include an analysis of the medical staff by age, utilization patterns, and practice skills, and can be used to identify which kinds of practices are good candidates for acquisition. When considering an acquisition opportunity, healthcare financial managers should ask a variety of questions, including:

* Does acquiring the practice meet a definite community need?

* Does the acquisition make sense strategically? Is it a defensive reaction rather than a calculated strategic move?

* Is the acquisition consistent with the overall goals of the organization?

* Is there likely to be a positive return on investment?

* Does the practice have effective leadership?

* Does the acquisition coincide with plans to reposition the healthcare system in terms of primary care and managed care?

* Does the healthcare system have the proper personnel and resources to effectively manage the practice once it is acquired?

* What physician succession and transition issues will the acquisition create or resolve?

* Will the transaction withstand scrutiny from the Internal Revenue Service (IRS) and the Office of the Inspector General (OIG) regarding inurement and fraud and abuse issues?

Healthcare financial managers also should examine closely the practice they want to acquire. More is required of a practice than simply having the right specialty, being profitable, and having an attractive geographic location. Desirable physician groups are clinically stable, with strong, respected leadership. Another factor that increases the likelihood of smooth integration is mutual trust between the physician group and the acquiring hospital. Yet another sign of a good acquisition candidate is willingness on the part of the physicians to receive all types of patients.

When the acquisition candidate is a primary care practice, additional characteristics also are critical to success. The physicians should be well respected and trusted by their peers and have a strong referral network within the community.

Physician motivations and viewpoints

It is critical for healthcare financial managers to remember that their negotiating partners, the physicians, come to the table with their own agenda. Healthcare systems usually know why they want to acquire practices, particularly primary care practices. But it is equally important to know why physicians might be willing to have their practices acquired. In addition to the recognition that health care is moving in the direction of integrated healthcare delivery and that those who resist may get swept away, physicians have more basic reasons for considering acquisition by a healthcare system.

Among the items physicians hope to gain from acquisition are:

* Relief from administrative work,

* Freedom to concentrate on patient care,

* Steady income,

* The ability to transfer practice equity to a cash asset, and

* Access to capital.

Healthcare financial managers should interview physicians individually to explore their motives and find out if they understand on an emotional, psychological, and organizational level why they need to change from the private practice of medicine to employment by a large organization. This kind of career shift is a significant cultural transition for physicians, and if physicians are poorly prepared the results can be disastrous.

Ideally, some of the physicians' reasons for considering acquisition will coincide with the healthcare systems' reasons for pursuing an acquisition and integration strategy. For both sides, acquisition can result in a better competitive position from which to negotiate managed care contracts. Also, healthcare systems may want to gain influence with physicians, while physicians may welcome the opportunity to have more input in healthcare systems' planning and decision making. A well-planned acquisition can allow both of these goals to be achieved.

Because acquisition is a business venture, healthcare financial managers are likely to be key players in preparing proposals. However, financial managers should be prepared to step aside as discussions progress. During the course of negotiations, a physician leader usually emerges from a group, and this leader probably will expect to complete negotiations with a healthcare system's chief executive officer rather than with a financial manager.

Ability to adapt

During negotiations, healthcare financial managers (or other healthcare system representatives) should ensure that physicians understand what their roles would be after an acquisition and determine whether the physicians could adapt to the new system. The primary function of physicians is supervising and providing medical care; however, in an acquired practice, new considerations arise. Can physicians deliver cost-effective medicine? Can they make successful transitions from fee-for-service arrangements to managed care? Can they work with the healthcare system on setting service goals? Can they adjust to being salaried employees?

Healthcare financial managers also should be prepared for substantial discussion regarding physician compensation and ways to make sure practices provide desired return-on-investment rates. The compensation system in capitated medicine differs substantially from that of the fee-for-service system and involves bonuses and incentives as well as base salaries. In a private practice setting, physicians keep 100 percent of their profits. Financial managers may propose a new compensation format, such as keeping physician salaries, benefits, and pensions at pre-acquisition levels for some period of time and establishing a bonus pool.

Financial and legal details

Healthcare financial managers should carefully evaluate practice acquisition opportunities paying particular attention to various financial and legal issues. Financial managers should be certain that proposed acquisitions do not violate OIG fraud and abuse statutes or IRS private inurement guidelines.

Last fall, the IRS published guidelines for integrated delivery systems that healthcare financial managers should consult. Some of the key guideline provisions state that purchases of medical practices must be "at arm's length" and "at fair market value." Also, professional services agreements with physicians should not require them to refer patients to a specific hospital.

Healthcare financial managers should consult healthcare attorneys to ensure that terms of acquisitions comply with relevant government guidelines. In some cases, though, it may be best for attorneys to have little direct involvement in discussions with physician groups until agreements in principle have been reached. Instead, financial managers or chief executive officers should handle negotiations and make sure physicians understand all aspects of acquisitions.

One of the first steps in an acquisition process is to determine the market value of a practice. Elements to consider in this evaluation include:

* Noncompete provisions,

* Intangible value of a practice,

* The practice's geographic location in the market,

* Strategies to acquire incremental volume versus existing volume, and

* Case management capability.

Financial managers also need to determine the best ways to achieve desired return. The basic formula is to increase patient volume and decrease expenses, but accomplishing these goals may be difficult with some practices, since most practices are well run.

Considering the financial and legal aspects of proposed acquisitions helps healthcare financial managers determine if acquisitions would be worthwhile and successful. While primary care practices are vital to the success of a provider network, not every practice is a perfect match with a healthcare system.

Partnership, not takeover

To gain physicians' support during discussions on acquisitions, healthcare financial managers should emphasize that alliances will allow physicians to enhance their skills, learn new ones, and build on their strengths. Most practices are run very efficiently and are successful. Implications that practices are run poorly should not be made.

Healthcare financial managers and other healthcare executives also need to convey that they do not wish to control physicians once practices are part of healthcare system networks. Physicians should have a say in determining new practice structures and should be made to feel that they are part of a team while maintaining as much autonomy as possible.

Once a practice has been acquired, changes should be approached carefully. While a healthcare system will probably bring in a new administrator as a liaison between the physician practice and the system, the administrator should work closely with the designated physician leader. Respect for both the clinical expertise and the operational experience of the physician leader and other members of his or her practice (including the current practice manager) is important in maintaining physicians' support for and participation in the healthcare system's provider network. Bringing on an administrator who wants to change nearly everything is almost certain to damage the relationship.

On the other hand, the administrator should offer help in any areas where physicians indicate they want assistance and believe they can benefit from the healthcare system's expertise or resources.

Perils during integration

Even with the best intentions, acquisition efforts sometimes fail. The following are some typical problems that healthcare financial managers and chief executive officers should avoid, or resolve if they occur.

* The CEO is brought into negotiations too late.

* Physicians and the healthcare system mistrust each other.

* The purchase price is satisfactory but other financial issues are ignored.

* Physicians are dissatisfied with the distribution of earnings.

* The group is divided over issues such as employee status, loss of autonomy, governance, and the degree of change required.

* The process takes too long (in excess of a year), and physicians or healthcare system officials grow impatient.

Although other unforeseen pitfalls can derail a promising acquisition attempt, the long-range benefits of an integrated healthcare system to hospitals, physicians, and the community are strong enough that acquisition remains a viable approach to change.

During the process of acquiring a practice, the most important element is that an acquisition is made for the right reason: Because it fits a healthcare system's goals and objectives. Detailed planning and the advice of experienced healthcare attorneys are also essential to success. Using an objective third-party to conduct practice valuations also ensures the likelihood that figures used in negotiations are fair and that both parties will be willing to proceed.

While discussions should not drag on, enough time must be allocated to ensure that all parties understand the proposed organizational structure, including service standards, compensation, and incentives. Healthcare system officials must also be willing to dedicate appropriate resources to manage a physician practice once it is acquired. Finally, a system must be in place to evaluate the success of an acquisition and determine if goals are being met once a physician practice is fully integrated into a healthcare organization.

With careful planning, realistic expectations, and an external healthcare environment that needs change, financial managers, physicians, healthcare system administrators, and healthcare consumers can benefit from integrated care.

Randall B. Luster, FHFMA, CPA, is senior vice president and chief financial officer at Lutheran General Health System, and Rik Baier is senior director of finance and associate executive director at Lutheran General Medical Group, S.C., in Park Ridge, Illinois.