Hospital partnership — without the headaches

Virtual integration an option for practices

Although hospital ownership of physician practices has lost favor as far as many experts are concerned, savvy group practice leaders have found an alternative that brings the advantages of a hospital merger without the associated governance and physician productivity headaches.

The answer: virtual integration. In this scenario, a hospital and physician group can form a partnership without diving fully into a merger or ownership model. A case in point is a virtual integration formed between Arnett Clinic in Lafayette, IN, and Lafayette Home Hospital on Jan. 1 through a series of more than 15 contractual agreements.

"We had looked at forming an MSA with the hospital initially in 1995 and decided it wasn’t the best choice," says Gary Erskine, FACMPE, executive director of Arnett, a 120-physician multispecialty group serving 10 counties in northwest central Indiana. Erskine and other experts say physician hospital organizations (PHOs) and hospital owners of physician practices often experience organizational problems due to governance issues and/or problems with physician productivity down the road.

"What you’ll see more of in the future are arrangements where there will be more contract relationships and less physician employment," says Robert Lipson, MD, MBA, president of the Promina Northwest Health System in Atlanta. Lipson says he believes PHOs eventually will disappear, and virtual integration models will take their place.

A virtual integration model can take many forms. Here’s how the setup between Arnett and Lafayette Home Hospital works:

— Lafayette Home serves as the preferred hospital for Arnett’s HMO physicians and members. Erskine points out that the relationship is not exclusive, which makes sense given the way consumer preference is trending toward open access. (See insert in this issue.) "We’re trying to inform our physicians of the advantages of using that hospital and are stating a preference to our patients," he says.

— Arnett leases blocks of time to use the hospital’s imaging space and equipment for conducting MRIs, CT scans, ultrasounds, and mammography. Erskine says the agreement is a win-win situation for both the hospital and the clinic, bringing increased volume to the hospital and increased revenue for the clinic.

— Arnett and Lafayette Home have formed a joint venture to open an oncology institute in February 1998. The new freestanding facility will include what Erskine calls "a seamless delivery of services," including both professional and technical services. This will include chemotherapy, radiation, hospice services, and a wide range of other services associated with oncology. The hospital will construct the building, and Arnett will provide all professional services. The technical services will be split 50/50 between the two joint venture parties.

— The group is looking into leasing an ambulatory surgery center. The option is still being investigated because of the regulatory complexities posed by the Health Care Financing Administration and the state Board of Health.

— Governance is handled through both formal and informal arrangements. The agreement guarantees two seats on the hospital parent company’s board for Arnett (the clinic already had one board representative before the virtual integration) and one seat on the hospital board. In turn, Lafayette Home is guaranteed one seat on the board of Arnett’s HMO.

— An advisory committee made up of Lafayette Home and Arnett leadership meets every quarter to review the relationship. "It’s an oversight group to make sure things are running well. A lot of time, agreements can come down to the personality of the leaders and can get embroiled in power struggles," Erskine says. Because Arnett and Lafayette Home each have three representatives on the advisory committee, this should prevent misunderstandings from arising.

Less than a year after the virtual integration’s effective date, Erskine says the arrangement has worked well. "It’s an opportunity to avoid duplicating services. We could have built our own imaging and surgery centers and done some of these other things alone," he says. "Also, this way we don’t get embroiled with the organizational structure of the hospital. Each organization can keep its own cultural identity. And the advisory committee allows us to stay in touch and have a place to work problems out if they occur."