How can you protect your hospital contract in the midst of intense competition?

Hospitals and large group practices are killing physicians’ opportunities

Emergency physicians are facing stiff competition for hospital contracts. Group practices are nervously eyeing the future as cost-conscious hospitals step up efforts to squeeze savings out of unprofitable departments. New physician professionals and para-professionals, including hospitalists and physician extenders, are choking off traditional contract opportunities.

Meanwhile, large physician groups that include well-known names, such as MedPartners and PhyCor, are beginning to collapse under their own weight and vaunted ambitions. While these entities cut back on their once-aggressive expansion drives, small, independent practices are still being gobbled up in record numbers by larger, more efficient ones.

And in the midst of all this, hospitals themselves are banding together, terminating providers and cherry-picking among competing medical groups in search of the low-cost producer.

Is this fact or fiction? This is today’s managed care reality, according to Philip Stoffan, JD, a former official of the American College of Emergency Physicians in Dallas, TX. The ground is shifting in emergency medicine, says Stoffan, who is now an attorney with law firm Lague, Newman and Irish in Muskegon, MI.

Everyone knows an out-of-work physician

The balance of power has tipped toward the savvy survivor. Physicians who can become the most cost-efficient while keeping a wary eye on quirks in their provider contracts will be the ones left standing, Stoffan warns. What is happening among hospital-based providers is a wake-up call, others say. Unlike other practice specialties, emergency physicians are intricately linked to the fortunes of hospital. Therefore, their incomes and futures are tied to more than demands of a third-party payer.

"We emergency physicians are tied to the fortunes of the hospital. We live or die together," observes L. Scott Larsen, MD, president of Emergency Medical Consultants, a 120-member group practice based in Livingston, NJ.

Indeed, the shake-up triggered by managed care is rapidly shrinking professional opportunities, according to a cross-section of observers from consultants to practitioners. Undoubtedly, hospitals are driving this trend. And emergency medicine, a late arrival to the game, is being hard hit by a well-tested hospital mantra: Either deliver on expectations or get replaced.

The number of displaced independent practitioners who are out of work and having difficulty landing employment is rising. Although figures are hard to obtain, almost every emergency physician knows at least one colleague who is looking for work. Some know entire medical groups that have been terminated by a hospital.

The trend has become one of the specialty’s darkest secrets, according to an emergency physician from California, who until recently was himself unemployed, cut by a hospital contract termination. Why is this happening? Here are two principal reasons:

• A draconian contracting system

Independent practice and physician hospital organizations (IPAs and PHOs), two of the most common physician managed care organizations (MCOs), essentially control contract negotiations with hospitals and health plans. Individual medical groups and physicians generally are left out of the process.

In most cases, these entities don’t look out for the interests of emergency providers, and the emergency medical group, itself, hesitates in playing a more aggressive role in the process. One reason for this is that the practice isn’t invited to the negotiations with the IPA or PHO. Another is that medical directors often don’t have the track record to negotiate effectively, according to Stoffan.

The result is that emergency medical groups are cut off from managing their own destinies in a range of contract issues, including productivity quotas and reimbursement levels. The exceptions are quite rare, Stoffan says.

• Provider shortsightedness

Medical group administrators are caught in a dilemma over their contracts with hospitals. The dilemma involves either agreeing to a hospital’s condition for staffing its ED or risking the loss of the business. Partly by tradition but chiefly due to shortsightedness by physicians, most of the power over contracting has been placed in the hands of hospitals and MCOs, according to Stoffan and others.

The situation, Stoffan says, is of the medical group’s own making. "They’re so excited about landing the contract, they don’t bother to anticipate what will happen if the relationship goes sour," Stoffan adds.

Termination-without-cause’ contracts hurt physicians

• Physician practice management groups

Although physician practice management groups (PPMs) are struggling with a host of management and financial problems, hospitals have been attracted to their claims of lower costs and better service. They have effectively pushed out smaller independent groups and forced many into mergers, which haven’t always saved a physician from termination at a hospital, according to some observers.

In many cases, PPMs have been a positive factor, according to Gordon W. Josephson, MD, MPH, chief operating officer of Baystate Medical Practices, a 180-physician multi-specialty group based in Springfield, MA.

"In a merger, the owners of the practice are able to take out the cash or stock value of the practice. An acquisition also gives the group access to management expertise and centralized billing. But does it guarantee to save the hospital contract? No," Josephson, an emergency physician, says.

• Escape clauses in the agreement

The chief culprit is the "termination-without-cause" provision that inherently gives a hospital a quick solution to an undesirable physicians or contract group relationship. Why are these escape clauses in the contract? It stems again from physician shortsightedness, says Stoffan.

An alternative to the "without-cause" provision would be a "first right of refusal" that physicians can negotiate during initial discussions with the hospital. The option of first refusal does two things: It allows the group to be asked first whether they will accept changes in the contract or relationship with the hospital.

But more importantly, it suggests that the hospital may have specific reasons for wanting to end the contract, beyond a simple dislike for certain physicians or political sentiments, Stoffan says. These reasons then can be contested during a peer review hearing or other legal due process procedure.

• The industry’s obsession with performance

What drives a group’s survival essentially involves two performance parameters—clinical quality and cost-effectiveness. Obviously, "when a contract is terminated, it usually means the hospital feels it can do a better job by going with an outside firm," Josephson observes. But more importantly, it can also mean the failure of the existing group’s ability to convince hospital officials that it can do better than the rival organization, Josephson says.

• Productivity demands

Part of the reason for this potential failure lies in a standard contract feature that ties physician payment rates to often arbitrarily fixed productivity standards set by the group practice. Although the payments are derived from a pre-determined fee-schedule, the rates themselves are set based on the group’s ability to meet the hospital’s quality and cost expectations, says Stoffan.

"The docs are generally paid by the practice based on their ability to hit a target, so patient volume is key," Stoffan adds. Often, the physicians have no control over the number of patients they see in the ED. And a problem arises when a financially strapped practice reduces its payment rates to physicians regardless of patient volume. "There’s a finite number of patients you can see, no matter how efficient your triage or department’s efficiency is," Stoffan concludes.

Hospitals aren’t necessarily the villains

But some physicians believe that times haven’t changed that much for emergency providers. Hospital-based practitioners have always been judged by a different standard, says Josephson. It isn’t a characteristic in any way unique to emergency medicine but long shared by other sub-specialties, including pathology and radiology, Josephson adds.

Furthermore, neither hospitals nor PPMs are necessarily the villains in this three-way relationship, according to some authorities. Hospital themselves are struggling with reducing over-capacity and costs, while payers are demanding tougher patient-care standards and reducing payment levels. "Physicians often lose sight of these factors," says Larsen. "It doesn’t benefit anyone to be an antagonist," he adds.

So what can physicians do to preserve their hospital contracts? These are business practices, Stoffan concludes. Once the contract is terminated, nothing short of a miracle is likely to salvage it. And cancellations based on vague opposition or politically charged dislikes between administrators and physicians are usually insurmountable.

But efforts to preserve the contract can and should begin before the relationship with the hospital begins, according to a consensus of sources. Setting up ground rules early in the relationship, such as due process guarantees for physicians and a role in the hospital’s medical staff leadership and governance committees can head off future problems.

Helping the institution reach its financial goals and negotiating policy changes that will affect the ED’s operation are also important, says Josephson. Of course, hospital officials should play an equally constructive role in the effort. (For a more detailed list of way to preserve a provider agreement, see the article on page 133.)

But if physicians run into a stone wall with an unreasonable administration, the likelihood that the contract is worth saving becomes questionable, says Stoffan. "Why try to save something that may not be worth saving?" Stoffan adds.