Fixing the quick fixes to physician relations - management of hospitals and physicians' groups strategic planning processes - includes related articles

Healthcare Financial Management, Nov, 1991 by Gerald R. Peters

Throughout the past decade, hospitals and physicians tried several half-heared measures at working together, such as joint ventures, but were not always successful. Generally, hospitals and physicians have remained separate, with hospitals operating hospitals and physicians operating their practices.

Two traditional avenues for hospital-physician cooperation--physician recruiting and management service organizations (MSOs)--have not been particularly effective at aligning the strategic interests of providers or improving third-party payer contracting.

Payer contracting. Healthcare payers often have more market power than providers, and they use this power to demand price discounts. In addition, payers often play hospitals and physicians against each other in negotiating price and other contract terms. Hospitals and physicians increasingly recognize the need to work together to obtain more market clout.

Second in a

three-part series

At the same time, managed care payers seek physicians who have organized themselves into groups capable of receiving risk-sharing payments. Hospitals that seek managed care contracts often assist physicians in organizing themselves into risk-sharing groups. Hospital assistance typically takes the form of capital transfers from a hospital to physicians.

Physician recruiting and capital transfers. Physician income, physician recruiting, and capital transfers from a hospital to physicians are interrelated issues.

Physicians are the key to healthcare delivery, and most of them expect significant income in exchange for their work. Generally, however, physician incomes appear to be declining or stagnating. Payer contracting exacerbates this problem and leads physicians to examine practice options offering higher incomes. Physicians' willingness to relocate their practices, meanwhile, causes hospitals to institute physician retention and recruitment programs.

Because they are in short supply in many communities, primary care physicians enjoy increased market power that allows them to demand more compensation. On the other hand, specialists are fighting hard to maintain their income levels.

Many recruited physicians seek high incomes and the security and convenience of physician groups or integrated delivery systems. To meet income expectations, physicians take home most if not all net income earned in their practices, leaving no income for capital development and practice expansion. Consequently, many physicians cannot develop or expand a group practice, and hospitals do not meet their security and convenience expectations.

Hospitals often seek to transfer their capitals to physicians to subsidize incomes and to recruit or retain physicians. Hospitals also may want to transfer capital to physicians to help form a group practice (meeting payer demands and recruiting demands). But Medicare anti-fraud and abuse laws and tax-exempt status laws prohibit or restrict hospitals' ability to transfer their capital to physicians. Consequently, hospitals and physicians do not have complete freedom to transfer capital between themselves.

During the past decade, hospitals have been able only to trickle capital to physicians through mechanisms such as physician recruiting, joint ventures, MSOs, and services agreements. Trickle-down approaches, however, are unacceptable to an increasing number of providers.

Strategic planning. Hospitals and physicians are beginning to recognize that the traditional cottage industry style of delivering health care is ineffective. Health care is the largest industry in the country, and it must be operated by its participants with the efficiencies of big business.

As long as hospitals and physicians develop separate strategic plans, little coordination in delivering healthcare services to a community will occur. Instead, duplication of services often results. A hospital and a group of physicians each may acquire a magnetic resonance imaging scanner, even though the community needs only one. Sophisticated providers try to solve the problem by aligning their strategic planning.

Income guarantees

Hospitals offer several incentives to recruit or retain physicians, including income guarantees, guarantees of a commercial bank loan, direct lending of funds, services or management agreements, and subsidized leasing arrangements (office and equipment leases). Perhaps the most common is an income guarantee.

An income guarantee arrangement comprises two distinct transactions, a loan and a service agreement. Generally, income guarantees are structured as follows:

* A hospital and a physician determine how much income the physician should earn during a specific period of time;

* The hospital promises to "loan" the difference between this guaranteed amount and the physician's actual earnings during a specific time period; and

* The physician promises to practice in the hospital's community for a specified time to "pay back" the loan. This is the services agreement component.

For example, the parties may decide that the physician should earn $10,000 per month during a one-year incentive period. If the physician's actual earnings during a given month were $4,000, the hospital would pay $6,000 to the physician for that month. The physician would continue to practice in the community for a specified time to earn forgiveness of the $6,000 loan.