7 steps for evaluating primary care practice ownership: burned by physician practice ownership in the past? Chances are your strategy was ill-fated from the start

Healthcare Financial Management, Nov, 2004 by Michael C. Boblitz, Jon M. Thompson

AT A GLANCE

Hospitals shouldn't dismiss a primary care practice ownership strategy from the outset. Instead, it's important to learn from past missteps and conduct a thorough analysis of the opportunity by focusing on population growth and demographics, hospital utilization rates, disease and illness rates, physician supply and demand, market share, case-mix index, other hospital-owned physician practices, and concerns pertinent to the potential development site.

It's been said that everything old is new again, and such is true with the trend toward primary care practice ownership. You probably recall the surge during the 1990s, when many hospitals rapidly pursued vertical integration by acquiring or developing their own primary care practices.

Hospitals saw ownership as a way to maintain a competitive primary care network, maximize referrals for inpatient and outpatient services, generate new volume to support new services, increase both market share and the geographic mix of patient origins, and improve the organization's negotiating position with managed care payers. Physicians at the time were eager to join these ventures, with the incentives of increased access to capital, reduced overhead due to economies of scale, and improved power in payer contract negotiations.

Then the '90s came to an end--and so, too, did the boom.

Financial performance from these ventures never lived up to the hype. In 1997, Coopers and Lybrand Ltd. reported mean losses for acquired practices of $97,000 per physician per year, resulting from inferior performance in volume, revenue, and costs ("Restructuring Employment Relationships between Healthcare Organizations and Primary Care Physicians," Journal of Healthcare Management, July/August 2000).

Despite these failures, primary care physician practice ownership shouldn't be mistaken as poor strategy. Close examination of the myriad factors at play shows that, in many cases, hospitals' pursuit of ownership was not appropriate from the start. In "Laying the Foundation for Successful Physician-Health System Partnerships," in the Journal of Healthcare Management, healthcare strategists Craig E. Holm and Stuart P. Brogadir, MD, suggest that the environment lays the foundation for all successful physician--health-system partnerships, and all too often this principle was simply overlooked. Essential areas that needed to be studied included population growth and demographics, hospital utilization rates, disease and illness rates, physician supply and demand, market share, case mix index, other hospital-owned physician practices, and potential development sites. Failure to study any one of these key areas easily translates into an outcome that is less than expected.

These days, as ambulatory care services continue to move to physician practices, it's imperative for hospitals to reevaluate their attitudes toward primary care physician practice ownership. To passively allow market share to be stolen may be compromising future financial performance--or even long-term viability.

Yet how to avoid the pitfalls of the past?

By following a seven-step approach that effectively examines the influence of environment, today's hospitals can best determine whether primary care practice ownership can offer competitive advantage.

1. Analyze Population Growth and Demographics

The best way for a hospital-owned practice to break even is through high volume or visits. Therefore, understanding population growth in a target geographic area is fundamental. The greater the population that is projected to grow over the next 10 years, the higher the probability for a successful physician practice. In areas where the population is projected to either remain flat or decrease, there is more risk and difficulty in building a strong practice patient base. Population projections are available through multiple sources, including the U.S. Census Bureau, various slate agencies, and private organizations.

2. Identify Hospital Utilization Rates

When considering the possibility of new practice acquisition, hospitals should initially select as many as four to five desired locations. The hospital then should determine the different utilization rates (the number of patients that used a hospital service during the most recent year divided by the focal area's total population for that year) for each target area's population and compare those rates with the utilization rate experienced by the population inside the hospital's primary service area. Private firms can provide these data.

Areas where utilization rates are higher than those in the primary service area tend to be most attractive for practice integration. Frequently, the area with highest utilization represents the most potential for high patient volume--and thus revenue.

3. Identify Disease and Illness Rates

State departments of health typically publish annual disease and illness incidence rates by county along with statewide averages. Examples of such statistics are:

* Teenage pregnancy rates