New reasons for hospitals to buy practices

It used to be that hospitals saw marketing opportunities and dollar signs when they purchased physician groups. Employed physicians in satellite clinics meant a steady flow of referrals for the hospital, which were crucial to securing revenue in competitive markets.

However, when San Luis Valley Regional Medical Center, a hospital located in a rural community in southwest Colorado, acquired the community's premier multispecialty group a few months ago, protection and survival were the motivating factors.

If the group, San Luis Valley Medical PC, was to fail, that would mean the community would lose all of its surgeons as well as several other specialties.

"What we saw initially was this group is important to the hospital, and we can't allow them to not be successful," said Russ Johnson, CEO of the hospital. "We moved from being a 'How do we work with this group' situation to a 'How do we create a model to preserve the specialty services for 45,000 people in this community?' "

Other hospitals around the country have taken a fresh look at an old strategy, as they look to acquire physician groups to save them from financial trouble and protect services for the community.

It's a symbiotic relationship that is vital to the hospital's livelihood as well; a failing practice means fewer patients, which means less revenue for the medical center.

"It's gone from a marketing to a survival perspective," said Darrell Schryver, a Denver-based consultant and principal with the Medical Group Management Assn. Consulting Group. "Rather than controlling the market and referrals, it's looking at how to protect and maintain a broad spectrum of services."

Hospitals were part of the initial physician group buying wave in the 1990s, as they developed business models that incorporated employed doctors into their plans. However, the flaws in the business model -- which were most evident in the number of failed physician practice management companies in the late 1990s -- convinced many hospitals to sell the practices back to the physicians.

But as reimbursements continue to decline and costs grow, some physician groups these days are looking back to hospitals to help keep them afloat. And since it can take more than a year from the point you approach the hospital about a purchase agreement until a deal is completed, you can't wait until a demise is imminent if you want to keep working seamlessly, doctors said.

"You can't wait until you get to the crisis point," said William W. Wheeler, MD, a general surgeon and a former president of San Luis Valley Medical PC. "People have to be forward thinking. If they look ahead and think they're going to have problems, unless they plan on shutting it down, they need to start looking at other options."

Because of the current economic climate surrounding health care, this phenomenon is not specific to only rural locations. For example, High Point Regional Health System in High Point, N.C., was not a part of the buying frenzy of the last decade, but it is in a unique situation now. It actually is using a two-pronged strategy of buying struggling primary care practices in its primary market, while at the same time employing physicians and placing them in satellite clinics in contested secondary markets, with hopes they can draw more patients to the hospital.

"We've had three practices in our market with fewer than six physicians that said they couldn't make it anymore," said Linda Roney, vice president, business and market development for High Point Regional Health System. "In our secondary markets, our competitors did get into the practice market and strengthened their referral base in some communities."

Because the motivations for buying practices have changed, the methods of valuing them have changed as well. Hospitals are no longer paying exorbitant amounts for intangible assets. Doctors who sell now, especially if they approach the hospital, can expect a deal that includes selling their assets at fair market value and an employment agreement, but little else.

The former San Luis Valley Medical PC, for example, was compensated for its equipment at fair market value and for its supplies at cost, but the hospital didn't pay for charts or goodwill.

"They've assumed a lot of risk, so I understand their desire to keep their front-end costs low," Dr. Wheeler said.

Physicians with the former group had tried everything to save their practice. They had already invested in several ancillary revenue opportunities, such as a laboratory and imaging equipment, and their overhead costs were better than national averages in every category.

"We had picked all the low-hanging fruit," Dr. Wheeler said. "It was an issue of our payer mix."

A growing number of Medicare, Medicaid and uninsured patients, combined with the departure of some high-producing doctors, sent the practice into a steady decline.

Recruiting and retaining physicians was already a challenge, and doctors knew their incomes would have trouble rebounding.

The hospital, while it had never been in the business of running physician practices, knew the importance of the situation, and the comparative cost it would have incurred if it had to develop a practice from scratch and recruit a whole new stable of doctors.

The acquisition was one that had to be made, but there were benefits for everyone involved.

"If they were to dry up and blow away, we would have virtually no surgery," Johnson said. "It's not like this was 10% or 15%. This was all of [the surgeons]."