Creating Sustainable Physician-IDS Relationships - management strategies

Healthcare Financial Management, August, 2001 by Marc Benoff, Richard Afable

IDSs that have faced financial difficulties as a result of owning physician practices need to assess whether employing physicians remains the best way to maintain effective relationships with the physicians. IDSs should evaluate each owned physician practice individually, asking a series of specific questions. First the IDSs should assess the value of the physician practice to the organization to determine whether a future relationship is desirable. If so, the IDS should determine whether the relationship needs to be formally established. If the relationship is likely to remain productive whether or not it is formal, the IDS should consider divesting the practice. If, however, a formal business relationship is required, the IDS needs to decide whether employment is preferable to an alternative approach, such as involving physicians in joint ventures or equity relationships.

For a period in the 1990s, the conventional wisdom was that the best way for an IDS to obtain a loyal and supportive physician network was to build its own. A few IDSs began to employ their medical staffs. Others adopted an approach in which owned networks were supplemented with a larger voluntary base. By the end of the decade, significant losses associated with owned networks were commonplace. Many IDSs now are evaluating whether to continue practice ownership.

Before the 1990s, hospital-physician relationships generally had been grounded in the intersecting mutual interests of independent entities. Although there were important exceptions, the basic rule was for hospitals and physicians to remain focused on their separate, but related, roles.

In the 1990s, however, the increased penetration of managed care into many markets supported the view that practice ownership was the most efficient means to achieve sustainable market success. Further, to realize the potential of risk contracting, IDSs perceived that it was necessary to lock in their primary care networks. Ownership seemed the surest way of doing this. With greater emphasis on primary care physician network development, competition for practices became intense, forcing many IDSs to join the fray or lose their affiliated physicians to competing health systems.

Yet, for a variety of reasons, the anticipated gains from practice ownership often were not achieved. IDSs, on average, experienced losses as high as $100,000 per physician per year. Further, risk contracting did not become the dominant financing method it was expected to become. Finally, referrals were slow to develop. Many IDSs found themselves losing money on practices, which traditionally had been loyal to them. A few organizations successfully reinvented themselves as completely integrated entities, and some gained access to new geographic and/or clinical markets, but these results were not typical.

IDSs learned many important lessons from owning group practices. Among these lessons was the realization that managing a group practice is very different from managing a hospital's operations.

Another important lesson was that ownership does not equal control. Physicians are not typical employees. Although an IDS may own a practice, it cannot easily control the practice's operations or referral patterns. Great effort and political will typically are required to influence physician activities.

IDSs also came to realize that compensation is a chief driving factor in achieving positive financial performance. During the first round of practice development, physician compensation often was guaranteed and/or disconnected, at least in part, from actual performance. Not surprisingly, this strategy resulted in substantial losses, as physicians generally lacked incentives to achieve desired results. IDSs found that the more the compensation method resembles that of an independent practice, the more likely it is that the physician will meet the organization's financial targets.

In addition, IDSs learned that it is critical to effectively manage the politics of complex physician relationships, particularly when there is a relatively small employed network and a larger voluntary medical staff. The IDS must ensure that it does not alienate either party.

These and other challenges have prompted many IDSs to pursue alternative approaches to ownership to gain a committed and supportive medical staff without assuming undue financial and management risk.

Assessing a Practice's Value

Ideally an IDS should review the lessons learned from practice ownership and redesign the relationship accordingly, seeking other means of affiliating with physicians where necessary. (For many healthcare organizations, the status quo does not afford this luxury; they already employ physicians, and the cost of divestiture at this point may outweigh the cost of ownership.)

In deciding a future strategy the IDS should evaluate a practice's overall economic value to the organization. The evaluation of the group practice's value should consider:

* The practice's financial performance (net income, cash flow);