Small practices: Adapting to survive

With more physicians choosing to join or sell to hospitals and larger practices, many wonder if the traditional physician practice is dying.

By Victoria Stagg Elliott — Posted June 27, 2011

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When she began medical school, Delicia Haynes, MD, a family physician in Daytona Beach, Fla., envisioned a practice of her own where she could care for those with and without insurance.

Dr. Haynes opened Family First Health Center in early 2009. Most days are devoted to primary care, although she provides some aesthetic procedures. The financial model is basic fee for service, but she is looking at setting up some form of hybrid concierge care.

"My peers think I'm brave," she said. "It's not for everybody. If someone needs the safety of a guaranteed paycheck, then it's not for you. It's a lot of headaches, but they are all mine."

A few decades ago, the majority of physicians were hanging out a shingle or working in a small practice with some sort of ownership stake. Today, more doctors are choosing to work in large groups or those owned by hospitals.

"Obviously, small practices are diminishing," said Paul Settle, MD, a family physician who recently sold his two-physician practice, Piedmont PrimeCare in Danville, Va., to Centra Medical Group, a regional health care system in Lynchburg, Va. "I'm not sure medicine is going to be a cottage industry going forward."

According to data released June 3, 2010, by the Medical Group Management Assn., 65% of established physicians hired, and 49% of those finishing residencies, landed positions in hospital-based practices in 2009. The most recent American Medical Association figures show that 25% of physicians were in solo practice from 2007-08. An additional 21.4% were in groups of two to four. Previous AMA data are not directly comparable, because different survey methods were used. But they do indicate that the number of physicians in small practices is declining. Slightly more than 37% of self-employed physicians were in solo practice in 2001, and nearly 26% worked in groups of two to four.

Just about any expert watching practice trends will say the numbers of physicians in hospitals and large practices only has gone up since these numbers were released. Management consulting firm Accenture on June 13 released a report that based on its read of MGMA and AMA numbers, health system hiring of independent physicians will increase 5% each year for the next three years, leaving only 33% of doctors self-employed.

Why practices are getting larger

Most surveys suggest that the current generation of physicians coming out of residency is more interested in work-life balance than previous generations, and has more of a need for stable incomes to pay off student loans. That usually means taking a staff job.

Students who graduated medical school in 2010 left with an average of $157,944 in loans, an increase of 1% from 2009, according to the Assn. of American Medical Colleges. About 13% carried debt of more than $250,000.

"I did harbor fantasies of my own practice when I started medical school, but then I realized that I didn't have an appetite for risk," said John Schumann, MD, an internist and assistant professor of medicine at the University of Chicago. He finished residency more than a decade ago; few of his peers are in private practice.

"I'm very pleased with my decision not to go into private practice. It just seems harder and harder. I don't have a lot of control over my practice, but my malpractice is paid. I have young children, and I very much like having a work-life balance," Dr. Schumann said.

In addition to a generational shift, there are economic pressures that make it more likely physicians who are more established will sell. Small practices are faced with declining reimbursements as well as the challenge of complying with a growing list of regulatory requirements and installing EMRs.

Many small practices are having problems recruiting new doctors.

"I have been my own boss for 25 years, but physicians have become more difficult to find. I obviously have mixed emotions, but [joining Centra Medical Group] is a good way to ensure longevity of the practice. I'm 58 years old. At some point, you have to figure out how to keep things going," Dr. Settle said.

Before Family Medicine Clinic in Sibley, Iowa, was sold to Avera McKennan & University Health Center, based in Sioux Falls, S.D., the practice had two physician-owners and one employed physician, but it used to be a group of five doctors.

The owners, family physicians Douglas Miedema, DO, and Gregory Kosters, DO, sold the practice primarily to recruit and retain physicians after attempting to do so unsuccessfully for a year. From the hospital, they have received help integrating an EMR system and securing locum tenens coverage.

"We were not particularly interested in selling, but, with physicians leaving, we really had a difficult time recruiting. We needed to do it," Dr. Miedema said.

The ownership change has been in place for half a year, but Dr. Miedema said Avera has allowed the practice to continue doing what it does.

"A lot of our concerns were probably, in the end, more perceived than real. There's been some loss of independence, but little change in the patient-physician relationship."

In his GlassHospital blog on April 25, Dr. Schumann compared the demise of the solo and small practice to the easing out of the "yeoman farmer" in favor of large agribusiness.

"Also being relegated to mythic status is the yeoman doctor. ... The same kinds of issues are in play as with agribusiness: Consolidation brings leverage in negotiating contract prices; working for a large organization means economies of scale. The corporate entity takes care of overhead like malpractice, computer systems, even paying the nurses and medical assistants.

"The health care reform legislation ... passed by Congress in 2010 will only accelerate this process. Organizations that integrate care to provide high quality mean that the little guy will be left out in the cold. The sheer bureaucracy of the new changes (e.g. building 'accountable care organizations' and 'gainsharing risk') will make it harder and harder for solo practitioners and even small groups to survive on their own."

A study in the March 30 New England Journal of Medicine suggested that the recent wave of consolidation most likely would not be reversed, as happened in the 1990s, when there was a spate of hospitals buying practices and physician practice management companies forming as managed care took off.

"Because of all the changes in reimbursement, it will be harder to go back into practice exactly as they did it before," said co-author Robert Kocher, MD, director of the McKinsey Center for Health Reform and a nonresident senior fellow at the Brookings Institution. "It will be a different business than the one you would have left."

Many experts suspect that reimbursement pressures will become only stronger, especially in the wake of the 2010 health system reform law and other federal legislation that may reward or penalize physicians for integrating potentially expensive information technology and integrating practices for quality bonuses through accountable care organizations.

How small practices will keep going

Despite the pressures on small practices, no expert believes they will go extinct. However, if they are to survive and thrive, they aren't going to look like the small practices of even five or 10 years ago -- and they probably will have a strong relationship with a larger organization.

"It's really incumbent on each individual practice and each individual doctor to decide how they are going to adapt. Health care is adapting, and there's no question that we have to make adjustments," Dr. Miedema said.

Most experts believe that a small practice able to maintain independence will need stronger connections to other small practices or a large health system through some sort of physician organization, a common EMR or other affiliation arrangement.

"In a sense, it's the end of the small fragmented physician practice," said Paul Ginsburg, PhD, president of the Center for Studying Health System Change.

Brett Hickman, a partner who works on health care system integration issues in the Chicago office of PwC, said: "We're moving away from fragmented models of care to affiliated models. There are models by which practices can maintain some level of independence and still integrate in a way that is strategically and financially going to make sense for both parties."

A small practice may need to fill a specific marketing niche, such as Dr. Haynes' branching out into aesthetic and, possibly, concierge care. Small practices may operate in rural areas that can't support larger operations, or take advantage of a models that focus on keeping overhead to a minimum. Experts say profitable small practices most likely will incorporate the latest technology and hire nurse practitioners or physician assistants to provide some care.

"I'm sure there will be some successful small practices," Dr. Kocher said. "Small practices that are exceptional at caring for certain types of patients or certain types of diseases will do very, very well. The small practices that are going away are those that don't have some certain clear value for a group of patients."

No matter what the level of consolidation, most experts expect that there always will be some physicians who attempt to make independent practice work. Other industries have been through similar periods of consolidation, but there always are some who remain independent.

For example, the independent pharmacy used to be a staple of a community. Large chains bought many small pharmacies in the 1980s and 1990s, and three chains -- CVS, Walgreen Co. and Rite Aid -- tend to dominate in most metropolitan areas, with nearly 20,000 stores combined nationwide, according to the National Community Pharmacists Assn.

However, the NCPA survey found that 23,117 independent pharmacies were in operation in 2009, a modest increase from the 22,728 in 2008. Most offer services that the large chains do not. Likewise, there will be some doctors who will chose to stay independent and be able to do so.

"Thirty years ago, when I first went into practice, they said solo practice was going to be extinct," said Doug Iliff, MD, a family physician who has been in solo practice in Topeka, Kan., since 1986. "It hasn't happened obviously. It may go down to 2 or 3% of physicians, but it will never go away completely. There will always be people like me."

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The way things were?

Industry analysts agree that solo and small practices are becoming less common, and more physicians are becoming employed by hospitals and large groups. This is an AMA analysis of physician working environments by type of practice in 2007-08.

Type of practice Physicians Percent of total physicians
Office-based owners and employees, including independent contractors 439,574 75.5%
Solo practice 143,451 24.6%
Two- to four-physician group 123,924 21.4%
Five to nine physicians 75,091 12.9%
10 to 49 physicians 70,254 12.1%
More than 50 physicians 26,854 4.6%
Institutional employees 123,410 21.2%
Teaching hospital 60,597 10.4%
Nonteaching hospital 34,755 5.9%
Other institutional employer 28,058 4.8%
Other unspecified employee 19,200 3.3%
Total 582,184 100%

Source: "The Practice Arrangements of Patient Care Physicians 2007-2008: An Analysis by Age Cohort and Gender," American Medical Association, 2009 (link)

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What to look for in a hospital partner

Physicians and hospitals are looking at many different ways to work together. The first step for both parties is to identify an appropriate partner.

Experts recommend that physicians consider the following when deciding whether a hospital or large health system is a match:

Physician leadership. Can physicians make decisions that will influence how the institution is run?

Cultural fit. Does the hospital's style mesh with the practice's?

"You have got to look at the culture of who you are going to be working with," said Paul Settle, MD, a family physician who recently sold his two-physician practice, Piedmont PrimaryCare in Danville, Va., to Centra Medical Group in Lynchburg, Va.

Trust. Does the physician trust the hospital? What is the history of any previous relationship?

Goals. Can the hospital or large health system meet the needs of the practice? For example, if the main reason to sell the practice is to gain help with recruitment, can the hospital help with that?

"You must agree on what the practice is looking for," said family physician Douglas Miedema, DO, who was part-owner of Family Medicine Clinic in Sibley, Iowa, before it was purchased by Avera McKennan & University Health Center.

Whatever the arrangement, doctors should not expect huge sums for their practices, experts said. Hospitals are buying practices based on fair market value for the hard assets, with little or nothing paid for goodwill.

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External links

American Medical Association's Center for Economic & Health Policy Research for reports on medical practice (link)

"Hospitals' Race to Employ Physicians -- The Logic Behind a Money-Losing Proposition," The New England Journal of Medicine, March 30 (link)

GlassHospital, the blog of John Schumann, MD, a general internist and assistant professor of medicine at the University of Chicago (link)

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