Buyers want strong, vital practices, not fixer-uppers. ... The maxim "sell your horse before it dies" applies here.
Medico-legal doctrine has long been ambivalent regarding the employment of physicians by anyone else besides other physicians. For most of the last century, it was considered unethical. Critics, led by doctors themselves, claimed it lent medicine a dubious profit motive, divided physician loyalty between employer and patient, and gave unqualified laypersons excessive control over physician behavior. To this day prohibitions that ban doctors from employment except under special circumstances—certain charities, for example—exist in the form of state laws, medical licensing statutes and case-law precedent in almost every state. It’s known as the ban against the “corporate practice of medicine,” or CPM.
Not until the rise of managed care did policymakers reconsider this barrier. Trying to stem the rising tide of health-care costs, legislatures waived the ban on CPM for HMOs, allowing them to hire physicians. Soon exemptions were everywhere: teaching hospitals; community clinics; narcotic treatment programs; non-profit hospitals; etc. Consolidation became all the rage. And where exemptions did not exist, doctors developed such a complex web of financial relationships with business-like enterprises that medical fraud and abuse laws became necessary (e.g., the Stark law).
By now the pendulum has swung all the way back. Few lawmakers today raise an eyebrow as hospitals, physicians management firms, even insurance companies, splurge on epic practice-buying sprees. The CPM bans still extant often go unenforced. Even the AMA no longer views physician employment per se as an ethics violation. Indeed, employing physicians has emerged as one of the central strategies for achieving the goals set forth by the Affordable Care Act.
Where does this leave ophthalmology? Mostly sidelined, it turns out. Hospitals, the main force behind the employment boom, have little interest in eye care. Nevertheless, many ophthalmologists, particularly younger ones, are taking matters into their own hands. Increasingly concerned about the viability of small solo practices, seeking a more stable work environment and eager to avoid ever-multiplying office-work hassles, these practitioners are banding together in group practices that pay physicians a salary.
Now and Then
When reforms failed to materialize and managed-care capitation plans gave way to preferred-provider type products, buyers were left holding catastrophic losses. PPMs alone took an estimated red-ink bath of $12 billion in market capitalization.1
As industry sifted through the wreckage of these failures, one of the things it soon discovered was salaried physicians were grossly less productive than their practice-owning colleagues. According to one white paper, despite lower expenses among hospital-owned practices, they still performed much worse: “[P]hysician productivity in hospital employment was far lower. Net collected revenues for hospital-owned practices were more than $100,000 per FTE physician lower than revenues for physician owned practices and an impressive 35 percent lower than better-performing practices—a result of dismal billing and collection practices and markedly lower physician productivity.”2
Hard-knock lessons learned, this time round is proving more a buyer’s market—and for other reasons as well. Hospitals and employers hold stronger cards as physicians flee from the mandated rigors of the ACA, meaningful use EHR cuts, pending shifts away from the fee-for-service model, the looming implementation of ICD-10, and much more. Gone are the days of overpaying for practices, and negotiations are tight. Less-tangible assets like “goodwill” and “brand recognition” hold far less sway. Instead of a lump sum, buyers might spread payment for a practice over several years to maintain employee incentive. Flat salaries, essentially a thing of the past, have been largely replaced by productivity-based compensation, usually some scheme involving relative value units.
Perhaps the first question a private practitioner should consider before selling is this: Should it even be considered at all?
One school of thought suggests not all physicians are well-suited for the essentially subservient role of employment. “It depends on their specialty a bit, but most surgeons—and I’ll include ophthalmologists on this—do not respond well to being told what to do,” observes Jeffrey J. Denning, a partner in the consulting firm, Practice Performance Group, in La Jolla, Calif. Among the smartest and most accomplished members of society, surgeons, who spent many years learning to perform the most complicated, difficult, stress-inducing work the world has to offer, are seldom inclined to snap to attention over fussy pieces of minutiae like the proper way to fill out medical records.
“Most doctors, once they pull the plug and sell their practice, they hate it,” notes Mr. Denning. “The doctors who like working at the VA and places like that go there right out of training and stay because they like that environment and can adapt to that. But I see a lot of doctors get out of training, join a big group practice, and hate it. Two years later they quit and go into a more traditional-style practice.” Mr. Denning says his firm spends a lot of time extricating physicians from employment-type contracts. Indeed, many of the discontented physicians who sold their practices in the first wave of hospital buyouts over the past few years end up on his doorstep, he says.
And physicians who hope an employer will be better equipped to handle the management side of the business are often disappointed. Hospitals, for example, are notoriously inept at accounts receivable. “There is a close relationship between the billing people and the front desk staff,” he says. “When you take the billing people and move them off-site, to a hospital, the accountability and communication between those groups suffers.”
Hospital administrators seldom approach ophthalmic practices offering buyouts. Eye care accounts for only 3 percent of hospital revenue, and large employers are more interested in locking down access to bigger earners. However, ophthalmologists do occasionally find homes at hospitals. For example, Mercy Clinic Eye Specialists, an eight-member eye-care practice in Springfield, Mo., is owned by Mercy, a multi-site hospital system.
Specialists such as cardiologists, orthopedists and gastro-intestinal surgeons field more employment offers from hospitals. These physicians tend to command high salaries, and hospitals have made no secret about losing money on every physician they employ—somewhere around $150,000 to $250,000 per year, per full-time physician in the first three years of employment.3 However, it is important to note that these figures do not include the enormous technical and facility fees such high-volume surgeons generate for hospitals.
The much higher technical and facility fees charged in a hospital setting compared to those that can be charged in a doctor’s office account for the one area of interest hospitals do seem to have for vision care—ambulatory surgery centers. Eye surgeons pioneered the use of ASCs. At one point in the 1990s, ophthalmologists owned more than half of ASCs, and the specialty continues to maintain a dominant presence in the field. Hospitals have purchased ASCs and continue to investigate the possibility of purchasing more. A popular strategy is to repurpose eye-care ASCs to include additional surgeries such as orthopedic and GI ones. Depending on state law and various insurance regulations, in some cases these centers can produce exponentially more revenue simply by having their titles of ownership changed over to a hospital.
Accountable care organizations, an important creation of the Affordable Care Act, have also emerged as a physician employer, but they too have shown minimal interest in wooing ophthalmic practices. However, there could be an exception here as well. In absolute dollars, vision care ranks as the third largest expenditure for Medicare, and ophthalmologists make the largest part of their revenue from Medicare. Hence, at least theoretically, an ACO that specializes in Medicare patients may have more use for ophthalmologists, since ACOs offer greater opportunity to take advantage of shared savings rebates via ACA provisions.
Some of the larger commercial insurers have joined the trend as well. A few years ago, Humana purchased Concentra, a national chain of worksite health- and urgent-care providers, and Senior Bridge, which specializes in home care for Medicare patients. OptumHealth has acquired risk-bearing physician groups, and is said to control more than 800,000 lives in Texas, Florida and California. WellPoint owns CareMore, a Los Angeles-based special needs plan/Medicare Advantage provider with a network of 26 primary-care clinic sites.2
For physicians keen to sell and become an employee, here are a few factors to consider before walking, so to speak, down that aisle:
• Generally speaking, the more money an employer offers you and the more of it that is guaranteed, the more that employer will expect autocratic control of your actions. On the other hand, when your compensation is based more on production factors, such employers will tend to offer more leeway, control-wise.
• Paper charts are generally seen as a liability and will usually lower the value of your practice’s hard assets.
• Buyers want strong, vital practices, not fixer-uppers. Selling is usually not a viable bailout strategy. If you are thinking about selling as a transitional phase prior to retirement, do not reduce work hours before doing so. The maxim “Sell your horse before it dies” applies here.
• Leave an exit strategy. Consultants will tell you to avoid signing a non-compete contract, but given the current market, and ophthalmology’s low standing within it, a non-compete contract is almost a foregone conclusion. However, that does not mean you have to sign whatever is put before you. Have your lawyer parse it carefully. Negotiate wiggle room if possible.
• Scrutinize your potential partner. What are its short-term and long-term goals? Are they congruent with yours? Ask other physicians employed by the organization their opinions. If it is a hospital, look to its mid-level managers. If they have been there eight or nine years, that is a positive sign.
Among the most significant questions facing large entities buying up practices—ACOs, hospitals, insurers, PPMs, group practices, etc.—is how all these much-hoped-for economies of scale will coexist with anti-trust laws. In public statements, the department of Health and Human Services, the Federal Trade Commission and the Department of Justice have all vowed to create “safe harbors”—in other words, make exemptions in the law—for large integrated health-care systems, but how this will play out in real-world scenarios is still very much an open question. Moreover, consider the fact that anti-trust actions can be initiated by non-government entities. Rival health-care systems can file suits, for example. And it is difficult to imagine powerful organizations like the National Association of Manufacturers, AdvaMed and PhRMA standing around idly while some of their largest customers engage in what will almost certainly be perceived as price fixing.
A strategy often espoused by consultants and industry watchers who specialize in ophthalmology holds that eye-care practitioners should hang back and decline to join large integrated, multi-specialty organizations such as hospitals and ACOs. Health-care is so tumultuous right now, the future so uncertain, that to join these organizations, when they clearly have so little interest in vision care anyway, would be premature. Advisors tell ophthalmic practices instead to join forces among themselves, form large group practices, become a more unified profession. That way, if these giant multi-specialty consolidations turn out to be successful, the ophthalmic world will be in a position of strong bargaining power. After all, sooner or later patients are going to require eye care. On the other hand, if these large colossi turn into colossal disasters—a genuine possibility, given all the challenges noted above—ophthalmology will have avoided going down on a sinking ship.
Broadly speaking, for practitioners eager to avoid the ever-increasing hassles of practice ownership, large group ophthalmic practices have been among the most popular and welcoming employment options. Organizations like Minnesota Eye Consultants, in Minneapolis, with a mix of 25 practitioners (MDs, ODs and PAs), founded by Richard L. Lindstrom, MD; Ophthalmic Consultants of Long Island, based in Westbury, N.Y., six surgeons including outgoing ASCRS President Eric D. Donnenfeld, MD, with 30 MDs and four ODs at 11 locations throughout Long Island; and Barnet, Dulaney, Perkins Eye Center, in Phoenix, founded by the late David Dulaney, MD, a pioneer of refractive surgery, with 15 MDs and 22 ODs, are always on the lookout to expand.
“You kind of want to be a size where you are too big to ignore,” says Candace S. Simerson, president of Minnesota Eye Consultants, citing the cautionary tale of several solo ophthalmologists who were excluded from a new, so-called “narrow network” plan initiated on the East Coast by the commercial insurer United Healthcare. “Physicians are feeling more comfortable being part of a larger organization that maybe has the talent and the strength and the size that will enable it survive.”
According to Tom Burke, CEO of Ophthalmic Consultants of Long Island, a big misconception among physicians considering merging with his company is their fear they will lack control of their geographic office location and of hiring and firing decisions. In fact, Mr. Burke stresses, it is in his best interest to give physicians as much autonomy as possible. “We don’t want to do anything so drastic that it changes the culture of the practice,” he says. “They have patients who are loyal to them and are used to a certain style, and we do our best to maintain that.”
Doomed to Repeat It?
With so much rapid change occurring right now, it is impossible even to guess at the long-range effects of increased physician employment. But when reflecting on the secure future offered by vast, equity capitalized, umbrella conglomerates, it never hurts to turn an eye toward past events.
In the 1990s, when the PPMs and their ilk went belly up, after the corporate officers had resigned in disgrace, and untold billions had been lost, the inevitable flock of lawyers swooped in to clean up the mess. These attorneys were shocked—shocked!—to discover the physician employment contracts at issue represented textbook violations of the sacrosanct and time-honored ban on the corporate practice of medicine. Because of this, they argued in court case after court case, such agreements had been illegal from the outset and were therefore null and void.
In many cases, they were successful.4 REVIEW
Mr. Celia is a freelance health-care writer based in the Philadelphia area.
1. Burns LR, Goldsmith JC and Muller RW. History of physician-hospital collaboration: Obstacles and opportunities, in Crosson FJ and Tollen LA. Partners in health: How physicians and hospitals can be accountable together. San Francisco: Jossey Bass, 2010.
2. The Future of Medical Practice: Creating Options for Practicing Physicians to Control Their Professional Destiny. By Jeff Goldsmith, Ph.D. Published by The Physicians Foundation, July 2012. Accessed at www.physiciansfoundation.org, March 27, 2014.
3. Kocher R, Shani NR. Hospitals Race to Employ Physicians—the Logic Behind a Money-Losing Proposition. N Engl J Med 2011;364:1790-1793.
4. CMA Reports: Court Upholds Bar on Corporate Practice of Medicine, published July 27, 1999; CMA Alert (a publication of the California Medical Association.) Accessed at www.cmanet.org, April 6, 2014.