Marc D. Halley

For decades, the patient referral path has led from primary care physicians to specialty physicians and hospitals and back to primary care physicians.

At each stop along the referral path, revenues have been generated, and at the hospital, some of that revenue has made it to the bottom line to become capital available for reinvestment in the community. In fact, the hospital is the capital-generating engine for the community healthcare system, and the fiscal "health" of the hospital is an indicator of the strength of that local system. Although medical practices generate revenue, they rarely amass any significant capital, relying instead on short-term borrowing to fund their capital needs. Physicians do, however, contribute significantly to the generation of hospital operating capital through their referrals and their personal work. A hospital without its medical staff is simply a purveyor of beds.

Medical care is largely a referral business. Because most patients do not (and will not) have the knowledge to self-diagnose or self-refer, we are (and will be) dependent on our primary care physicians for the foreseeable future-even with the Internet and healthcare reform. The patient-centered medical home concept acknowledges the critical role of primary care physicians in the future of health care. Primary care physicians hold "market share," consisting of healthy patients and families, for specialty physicians and hospitals that see patients when they need services not provided in a primary care office. A large number of thriving primary care practices is in the best interest of specialists, hospitals, and the communities they serve.

The Importance of Physicians

Having a cadre of high-quality specialty physicians who can attract primary care referrals is essential to the health of patients, to the success of the hospital, and to the community healthcare system. Without access to local specialists, patient referrals must leave town, taking with them the potential capital that might be reinvested locally. Consequently, the right number of specialists providing access to patient care is in the best interest of primary care physicians, hospitals, and the communities they serve.

The fiscal strength of the local hospital is also essential to the viability of the community healthcare system, including the medical staff. A hospital with capital can invest in strengthening primary care services, in broadening specialty services, and in the hospital facilities and equipment. Although a hospital can use long-term borrowing, local taxes, or investor dollars to beef up its capital stores, it must ultimately produce an operating margin sufficient to sustain itself and the communities it serves. Otherwise, it is capital starved and is not able to fund the community healthcare system-or does so marginally. A fiscally healthy hospital is in the best interest of primary care physicians, specialists, and the communities they serve.

There has been much debate over the value to hospitals of "downstream revenue" emanating from patient referrals for diagnostic, inpatient, and outpatient services. Estimates ranging between $1 million and $2 million per physician per year are common. Some physicians feel that they should get a piece of that action, which, of course, has legal and regulatory implications. Some hospital executives have jumped into money-losing ventures with physicians assuming that those losses would be offset by downstream revenue. Other poor decisions have been justified by a related contribution margin argument. Finance officers understand that downstream revenue is not capital, and it is ultimately the ability to generate capital on operations that counts. Operating capital is generated by relationships founded on and adhering to correct business principles rather than compromising those principles.

Hospital Executives as Market Managers

In the good old days, relationships among the providers of medical services (e.g., primary care physicians, specialists, and the hospital) were largely left to chance. Each feathered his own nest, sometimes at the expense of the others. Hospital administrators were "plant managers" who built workshops on large campuses. Primary care physicians and specialists used the workshops as members of a volunteer medical staff. Sometimes, physicians and administration got along and all prospered. Often, they simply tolerated one another. Some situations were openly adversarial.

Regardless of the ultimate form of healthcare reform, three known factors will drive the healthcare industry regardless of who is in the White House or who has control (if there is such a thing) on Capitol Hill. First, payment for medical services will continue to decline. There is no scenario in which overall payment for physicians or hospitals will increase. Second, compliance with an ever-widening set of regulations and regulators will ensure that these costs (among others) of providing medical care will continue to increase. Third, like an accelerating freight train, 78 million baby boomers are descending on the healthcare system-and we are not growing old gracefully! These three factors are quickly becoming a "perfect storm" that has the potential to bring the current healthcare system to its knees. Given our resilience as a nation, new forms of delivering care and caring likely will emerge and new payment mechanisms will evolve, but the transition (like all transitions) will result in only the survival of the fittest.

In all likelihood, the fittest will be those who understand the importance of successfully building and purposefully maintaining relationships among primary care physicians, specialty physicians, and hospitals. Such relationships will likely be facilitated by hospital CEOs who see themselves as market managers rather than as plant managers. They will invest strategic capital to build and maintain relationships all along the referral path, which will facilitate the accumulation of additional capital to maintain the community healthcare system.

The market managers will personally visit primary care physicians to understand the health of those affiliated practices (independent or hospital-owned) and to solicit their feedback regarding access to affiliated specialists and to hospital departments. They will work with specialists and service line leaders to enhance access, communication, service quality, and, of course, clinical quality to ensure that they are the specialists and hospital of choice for referring physicians.

Depending on the size of the medical staff, market managers will leverage their relationship management efforts through other senior executives (including physician executives) and physician liaisons. They will maintain a relationship database to coordinate and record their medical practice visits, as well as positive and negative feedback. Performance issues will be documented as part of an action plan managed by the market manager to ensure that they are addressed in a timely manner.

The days of the traditional "build-it-and-they-will-come" hospital administrator are gone. So, too, are the days of the traditional small group practice where the "young guys" fund the retirement of their predecessors. Today, success requires the ability to capture and retain market share in primary care practices, the ability to attract that market share to specialists and hospitals of choice, and the ability to amass and reinvest capital in the entire community healthcare system. Physicians and hospitals can achieve these objectives only by working together to ensure the success of all "stakeholders" for the benefit of the communities served.

How CFOs Can Drive the Economic Value of Medical Practices

Hospital CFOs play an important role in driving the economic value of their organization's medical practices. In organizations that own their medical practices, CFOs can support productivity for ambulatory care and encourage ancillary and procedural revenue.

Support productivity in the ambulatory setting. The ambulatory medicine business is won or lost on the revenue side of the income statement. Revenue is a function of volume, which is a function of productivity. Enabling the practice to have adequate support staff so the physician does what only the physician can do is the essence of high productivity in the medical practice setting.

Encourage ancillary and procedural revenue. It is increasingly difficult to succeed in a medical practice based on cognitive services alone. Adding ancillary services and new procedures to the ambulatory setting can attract and retain market share (a convenient one-stop-shop for patients) and revenue for the practice. A financially viable practice does not require infusions of precious capital that should be used for strategic purposes. The economic value of this strategy must, of course, include an assessment of patient preference/convenience, physician preference and convenience, additional revenue per ambulatory visit, and the potential for higher payment in a hospital setting.

CFOs can take steps that help drive efficiency and promote integrated service lines for all affiliated practices.

Drive efficiency. Whether physicians are independent or employed, it takes time for them to provide their services. Maximizing efficiency in the hospital setting offers physicians the gift of time. Efficiency is, of course, affected by policy, procedures, technology (e.g., electronic medical record and equipment.), training, scheduling, management, and attitudes. Making the most of every physician visit to the hospital increases economic value for both parties and promotes a reputation as the preferred hospital.

Promote integrated service lines. Engaging physicians as partners in designing and implementing key services lines can have a significant positive impact on clinical quality, service quality, productivity, and financial viability, all of which yield sustainable economic value.

Ensuring strong relationships between the hospital and its affiliated physicians can benefit the hospital, the patients, and the community healthcare system.

Marc D. Halley is president and CEO, The Halley Consulting Group, Westerville, Ohio, and a member of HFMA's Northwest Ohio Chapter (mhalley@halleyconsulting.com).


Publication Date: Tuesday, November 01, 2011

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