James J. Pizzo
Todd Fitz

At a Glance

Before embarking on a physician-integration strategy, hospitals and health systems should perform a detailed analysis of the following four critical areas to ensure that the strategy is competitive and sustainable:

  • Strategic objectives
  • Financial resources
  • Requisite experience and functional capabilities
  • Organizational structure, culture, and commitment

Hospitals and health systems require sustainable strategies for integrating with physicians if they are to achieve continued success in the nation's future valued-based healthcare delivery system.

The nation's ongoing transition to a value-based care system poses a significant challenge for healthcare providers. The goals of value-based care-improved quality, access, service (patient satisfaction), and efficiency-require a meaningful level of hospital-physician integration to meet the future expectations of patients, payers, employers, and providers themselves. Hospitals and physicians must jointly develop and execute strategies that bring them closer over time.

Moreover, once implemented, integration strategies also will need to evolve if they are to achieve measurable improvement. Current integration strategies intended to achieve short-term tactical advantages related to market share or financial performance are unlikely to be advantageous under a value-driven system.

For example, acquiring and employing a dominant single-specialty practice may help a health system's short-term financial performance. But unless compensation metrics are restructured to meet value-based goals, the acquired practice may drive up total costs in the longer term. Hospitals and physicians should pursue integration strategies that will work under both the current business model and the very different emerging market environment (see sidebars1 and 2 below).

Informing Strategic Choices

Given current trends, market activity, and practice-integration results to date, for long-term success, physician-integration strategies must be sustainable operationally from the standpoint of quality, access, service, and efficiency, as well as from a financial perspective. Unsupportable strategies risk inflicting damage to the organization's relationship with its medical staff. The organization may have only one chance to "get it right" with an overall integration strategy, with the consequences of failure being permanent loss of trust and credibility with physicians. Well-positioned organizations may be able to pursue numerous integration strategies simultaneously, but achieving and maintaining continuous improvement and alignment are critical.

Integration strategies should be tailored to the organization's markets and competitors. In some markets, physician employment has become the dominant or sole strategy, resulting in employment of up to 80 percent of practicing physicians. When a majority of the physicians who support an organization are employed, a formal clinical integration program, as described in the web extra, may not be needed to drive improved quality, access, service, and efficiency. In markets that are more fragmented, leading organizations may be advancing rapidly toward clinical integration and development of an accountable care organization (ACO) model to best meet the health needs of their communities. In such markets, there may be no need for hospitals to pursue an employment model with physicians. Typically, in most markets, however, organizations will need to have multiple integration strategies to meet the differing needs of their medical staff.

Improved alignment and integration can be achieved across any of the four categories of physician integration strategies currently in use-i.e., customer service programs, contractual ventures, joint venture or other ownership arrangements, or employment approaches. (See a detailed discussion of each of these options.)

No matter which of these strategies an organization decides to pursue, the decision should be informed by a detailed analysis of four critical considerations to ensure that the strategy is competitive and sustainable.

Exhibit 1


Strategic objectives. Examples include establishing or enhancing clinical integration capabilities, employing physicians to staff a captive model of care, recruiting primary care physicians to establish and staff a medical home program, providing geographic or specialty coverage where gaps may exist, meeting enhanced service or charity care coverage requirements, and supporting physician call rotations. Employment, contracting, establishment of a contracting entity, and other approaches are all tactics used to support legitimate strategic objectives.

Financial resources. Different strategies have materially different financial requirements. Before committing to any strategy independently, the organization should assess each strategy to determine its required level of capital commitment in the context of the organization's portfolio of strategies. Further, the operating impact should be assessed to ensure that the strategy does not impair financial performance to the point where it would dilute or eliminate the organization's access to capital.

Requisite experience and functional capabilities. Many of the current integration strategies require new intellectual capital, operating infrastructure, and business savvy related to managing the risk of a population's health. The required "infrastructure" includes the right technology (for example, utilization management and enrollee membership management technology) and the right management expertise (for example, risk contracting and actuarial experience) to successfully integrate and support physician activity.

Organizational structure, culture, and commitment. Organizational transformation to a value-based model will require new and innovative thinking and risk taking. When considering alternative strategies, organizations must evaluate existing leadership structures, management incentive programs, and reporting relationships to ensure their support of the change required to be successful. Empowerment of physicians in both corporate and operating governance is critical. A commitment is required to support these initiatives even if the existing culture must be changed.

Evaluating Sustainability

As hospitals and health systems develop and pursue integration strategies, they should focus on building a sustainable program that improves quality, access, service, and efficiency in a financially responsible manner. To be sustainable, physician-integration efforts must be grounded with a well-defined strategic and financial plan and implemented with well-defined performance expectations and sufficient resources.

Sustainability also depends on leadership's careful assessment of all available types of integration options based on numerous criteria, including:

  • Capital requirements
  • Impact on financial performance in aggregate, within the practice, and across the enterprise
  • Implementation risk
  • Impact on the current operating model
  • Impact on clinical care delivery
  • Staffing, care management, and infrastructure support requirements
  • Contracting implications
  • Ability to accommodate geographic coverage and other programmatic needs
  • Ease of model replication

The most prevalent strategy today, acquiring practices and employing physicians, provides a good basis for illustrating some of the aspects that an organization should review as part of its planning process.

Assessing the financial impact of practice acquisitions starts with estimating the total up-front capital required to consummate the transaction and the transitional costs incurred during the first year. These factors should be reviewed both in the context of the individual acquisition being pursued and overall, as part of assessing the strategic impact on the balance sheet, operating margin, debt capacity, and credit rating. Because the capital required for many of the costs related to physician acquisition does not qualify for tax-exempt debt financing, acquisitions are dilutive to cash, operating income, and future debt capacity.a  

The exhibit below shows expenditure categories that typically contribute to the total capital impact of a practice acquisition, including up-front and transitional costs.

Exhibit 2


Most health systems realize that bringing any more than a limited number of physicians on board can lead to impaired financial performance and access to capital. Moody's Investors Service has identified five credit risks of physician strategies:b  

  • Up-front and ongoing financial subsidies for physicians
  • Capital costs for construction of facilities
  • Inability to back-fill any volumes shifting from hospital to physician joint ventures
  • Cultural risks associated with migration to a clinic model from an independent model
  • Inability to meet demand or replace retiring physicians

Practice losses are inevitable as health systems have higher operating costs and requirements than private physician practices, but these losses need to be balanced against value-based improvements in areas of quality, access, service, and efficiency. In the future, metrics focused on these areas may drive a level of value throughout the health system that will more than offset the practice losses. Leading systems are beginning to measure these contributions to seek equilibrium in performance for the system as a whole while mitigating the business risks of an independent medical staff.

The strategic allocation of capital to practice acquisitions is critical. Health systems need to proactively identify the physicians that they believe are essential to driving the value-based metrics and preserve capital for pursuing them in the future. Often, the first physicians to approach a health system about buying their practice offer the lowest strategic advantage. The drive for value tends to erode marginal practices first, whereas high-quality, efficient practices often retain the wherewithal to continue striving for independence. Saying "no" to medical staff is not easy, but hospitals should reserve capital for high-value practices.

When planning practice acquisition and employment efforts, consideration should be given to achieving the right mix of primary care physicians and specialists, geographic coverage issues, quality leaders, referral patterns, and community/patient preferences. All of these factors will help to determine whether the organization can meet internal goals while still serving the communities in which it operates.

Larger organizations absolutely require a formal acquisition program, but all organizations require a disciplined acquisition process, covering all stages of acquisition, from the preliminary screen through to the final due diligence and presentation of an offer. Again, the employment model should be selected based on its ability to meet the requirements and objectives of both the hospital and physicians.

With each practice acquisition, the organization should identify potential efficiency opportunities and operating risks related to 10 considerations:

  • Quality
  • Access
  • Structure
  • Governance
  • Leadership
  • Information and practice management systems
  • Managed care contracting
  • Terms of employment
  • Practice support personnel
  • Infrastructure

Use of relevant benchmarks for operational efficiency, physician productivity and compensation, revenue enhancement, quality, and health outcomes is essential. For example, among the performance measures for evaluating physician productivity in a prospective acquisition, organizations can compare with benchmarks:

  • Operating margin performance
  • Visits and work relative-value units (wRVUs)
  • Compensation and productivity levels
  • Average wait times from dates of scheduling to dates of service
  • Standards for hours scheduled and patients per hour

Compensation-based incentives should include productivity, quality, efficiency, and service metrics. Although many leaders are debating the role of productivity incentives in a value-based model, organizations that have experimented with eliminating productivity measures typically encounter problems immediately with access. A number of proven incentive models can enable organizations to achieve improvements in quality, access, service, and efficiency metrics. Participation in operating governance is also a key enabler to drive change within the medical group.

A disciplined approach to practice acquisitions takes time-typically, six to nine months-but the benefits make the effort worthwhile.

A common pitfall of practice acquisitions is a failure to have a well-defined transition plan to operationalize the acquisition after the transaction. To avoid this pitfall, proper incentives must be built into the compensation plan and effective practice governance and management must be established.

Hospitals and health systems can improve the consistency and success of their practice acquisitions by developing a physician-acquisition "playbook" and a post-acquisition 100-day transition plan. The purpose of the playbook and plan is to bring physicians into the organization in a seamless and consistent manner that is not disruptive for patients. (See discussion of the components of a well-executed playbook and plan.) A long-term plan for operations after the first 100 days should also be an integral part of acquisition planning.

Exhibit 3


Maintaining Flexibility

Sustainability of an organization's physician strategies clearly requires careful consideration of how "deals" are structured to allow for response to changes, whether in care delivery models, payment, technology, performance reporting, customer/patient involvement, and/or in the overall competitive landscape.

Flexibility is a key issue, particularly as it relates to employment contracts and terms of employment. Although shorter-term contracts offer the hospital or health system more flexibility, they typically do not give the physicians the level of security they seek in an employment agreement. A longer-term contract (five years), with metrics that recalibrate compensation annually after the second or third year, works well for many organizations.

Typical indexed metrics include published survey data, net collections per wRVU, and budgeted practice performance. Where upside and downside swings are limited in any given year, it may be appropriate to "bracket" agreements, limiting the level of upward or downward adjustment that can occur in a single year. Program development should balance the needs of the physicians, the hospital, and the patients they serve. Success depends on achieving parity; if any party feels unfairly treated, the agreement will not be sustainable.

Securing Success

Local, regional, and national healthcare markets are undergoing dynamic change as a record level of consolidation is occurring among hospitals and physicians nationwide. The emergence of value-based business models is challenging hospitals and health systems to build a truly integrated care platform that can transform care delivery. By approaching transformation as an evolutionary process and not as a discrete event, organizations can better shape their own destinies. There is a "first mover" advantage, but the learning curve is steep, so time is of the essence. Integration models that work under multiple forms of payment can help ensure sustainability of an organization's physician strategy during the transformation process.

James J. Pizzo is a managing director and leader of the physician strategy practice, Kaufman, Hall & Associates, Inc., Skokie, Ill. (jpizzo@kaufmanhall.com).

Todd Fitz is a vice president in the physician strategy practice, Kaufman, Hall & Associates, Inc., Skokie, Ill. , and a member of HFMA's First Illinois Chapter (tfitz@kaufmanhall.com).


a. Hospitals with appropriate credit can access bank financing for funding of fixed assets and net working capital.

b. Designing the Healthcare Delivery System of the Future, Moody's Investor Service, May 22,2007.

sidebar 1

The Current Environment  

Physicians face a difficult operating environment today, characterized by declining payment, rising costs, and significant capital investment requirements. Coupled with physicians' changing work and lifestyle expectations, these pressures are causing physicians to seek closer relationships with hospitals and health systems. Recognizing that such pressures are unlikely to subside, proactive hospitals and health systems are developing and refining physician integration strategies that can address the needs of a diverse medical staff.

Integration efforts are accelerating nationwide across practices of all sizes. Practices both large and small are pursuing alternative physician integration models not only with hospitals and health systems but also with nontraditional partners, such as payers, contracting entities, retailers, and other new entrants in the provider space. For example, late in 2011, insurance giant UnitedHealth Group, which insures 75 million people worldwide, acquired Monarch HealthCare, a major physician group with 2,300 providers in southern California. The stated purpose of the acquisition was to "bring patients, physicians, hospitals, and healthcare payers closer together in the mission to increase the quality and affordability of care."a  

Traditional hospital employment of physicians has grown 32 percent since 2000 (AHA Hospital Statistics, 2012 Edition, American Hospital Association), and physician-recruitment activity during 2011 and 2012 was focused almost entirely on hospital employment, with recruitment into small practice or solo settings significantly down or entirely absent (2012 Review of Physician Recruiting Incentives, Merritt Hawkins, July 2, 2012).

a. Larry Renfro, CEO of Optum (UnitedHealth Group's health services division), as quoted in Blesch, G., "UnitedHealth to Acquire Monarch HealthCare," Modern Healthcare, Aug. 31, 2011.

sidebar 2

An Uncertain Future


sidebar 3

Typical Elements of a Practice Acquisition Package  

A typical practice acquisition package will include the following:

  • A three- to five-year term for the initial employment agreement
  • An asset purchase agreement, specifically outlining assets to be purchased and those that will remain with the practice
  • A custodial agreement between the practice and the health system for access and use of patient medical records post transaction
  • A two- to three-year fixed compensation plan with productivity based on work relative-value units at the group or individual level and indexed to recalibrate
  • Employment of practice support staff under the hospital or health system's wage and benefit plans
  • Establishment of a practice advisory committee ("operating board") that gives physicians a voice in operations and strategy development
  • Malpractice insurance provided by the health system with funding of tail coverage commonly provided as well
  • Noncompete restrictions

Source: Kaufman, Hall & Associates, Inc. 



Publication Date: Thursday, November 01, 2012

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