MD practice purchases by hospitals seem to be slowing down, experts say

Your MSO will profit from smart decisions

Hospital purchases of physician groups may not be a dead concept, but it’s certainly a candidate for the intensive care unit. The question remains as to whether there is a cure for the illness.

Many hospital-owned medical group practices lost millions this past year, and experts interviewed by Managed Care Strategies say this has doused most of the enthusiasm hospitals had for buying these groups and forming management services organizations (MSOs).

MSOs often are the vehicle hospitals use to manage their physician practices. And both MSOs and physician-hospital organizations (PHOs) have helped hospitals increase their integration with physician groups.

Hospitals are not alone in having financial problems with physician practices. Physician practice management (PPM) companies fared as poorly or even worse in 1998.

This year has been a time of turmoil for organizations that own physician practices, says Michael J. Eberhard, president and chief executive officer of Medical Pathways Management Corp. in Torrance, CA. Medical Pathways is a managed care consulting and management company that manages medical groups, MSOs, independent practice associations (IPAs), and HMOs.

Both MSOs and PHOs have been losing a lot of money, sometimes as much as $1 million to $2 million a month, Eberhard says.

"The hospital-owned MSOs and PHOs that are managing medical practices have been sustaining substantial losses; and the question is Why? And what can you do to stop it?" Eberhard says.

At least one survey of hospital-owned MSOs suggests the anecdotal evidence of hospitals losing money.

Only 13% of hospital-owned MSOs made a profit in 1997, according to a recent study conducted by New Health Management of Cleveland, and AmeriNet of St. Louis. The study analyzed survey results of 95 hospitals, including 19 that have MSOs.

The study showed that 13% of the MSOs broke even, and 74% lost money.

"A lot of [MSOs] are looking at what they should do in terms of fixing it, restructuring it, or getting rid of it," says Tom Hardy, director at New Health Management in Cleveland. New Health Management, which cosponsored the study, is a consulting firm that focuses on health care provider integration. The company also has an office in Denver.

Some experts say these types of problems are widespread.

The PPM industry has changed so rapidly that it’s difficult to predict where it will head next, says Robbe Rygg, executive vice president of UniMed Management Co. in Burbank, CA. UniMed is a large for-profit MSO that was formed by UniHealth, a non-profit integrated health care company also based in Burbank.

Rygg says he realized how fast things had changed when he recently cleaned off his desk and found a year-old brochure reporting positive PPM industry growth.

"The industry is at one of those nexus, where it can go a couple of different ways," Rygg says. "You have an industry that has not done well for a variety of reasons, but expectations of physicians, hospitals, and other capital sources have become more realistic as well."

Hospitals and PPMs will analyze their failures and change what needs to be changed, Rygg asserts. "Physicians are still key to the health care delivery system and the correct formula will emerge."

Physicians who have built up a distrust of PPMs in recent years might be more inclined to sell their practices to hospitals in the future, says Mark Moser, MPH, chief executive officer of City of Hope Medical Group in Duarte, CA. The medical group is a 125-physician, multi-specialty medical group that is affiliated with City of Hope Medical Center.

But do hospitals still want to own physician practices?

Some experts say hospital executives are changing their minds about the value of owning doctors’ practices.

"We think there has been a real slowdown in the acquisition of physician practices by hospitals," says Stephen Hatch, a partner with Arista Associates in Northbrook, IL. Arista Associates provides consulting services to the health care industry.

"At least here in the East, the interest in purchasing physician groups has declined considerably," states Nellie O’Gara, president, First Health Associates Inc. in Avon, CT. First Health Associates is involved in multi-specialty medical group development, physician-hospital integration strategies, and interim management of HMOs.

Hospitals lost interest mainly because many of the quality physician practices have already been acquired, Hatch says. That reason is overshadowed by the more obvious problem, Hatch adds. "The whole world knows that managing these practices on a profitable basis has been a real disaster."

Meanwhile, some providers are trying to fix their MSOs and make them profitable.

Medical Pathways Management Corp. has had some experience in making MSOs profitable, having turned four MSOs from financial black holes into profitable ventures, Eberhard says.

One key to making an MSO profitable is to make the physicians accountable for results, Eberhard says. "Doctors must be involved in the day-to-day medical management." (See story on how to succeed with MSOs, p. 123.)

Experts say another reason MSOs have lost money is because the investment cost is so high.

The hospital-owned MSOs featured in the New Health Management survey showed an average first year investment of $930,850; with an average investment per physician of $39,700 in 1997. Losses per physician for 1997 averaged $24,000. That figure, multiplied by 30 (which is the average number of physician participants), totaled substantial losses in 1997.

"This survey gave us a baseline," Hardy says. "We’re going to continue the survey to look for revenue trends."

Interestingly, the New Health Management survey showed that hospitals in 1997 continued buying physician practices. About 36% of the hospitals not having MSOs (64 respondents) said they have plans or are considering forming an MSO. The survey has not yet followed up to see if the hospitals’ plans had changed near the end of 1998.

One reason why some hospitals continue to be interested in forming MSOs is that hospital executives believe physician employment is the most effective model for increasing integration with physicians, according to a recent Arista Associates survey that was cosponsored by Modern Healthcare. The survey included responses from chief executive officers (CEOs) of 61 multi-hospital systems.

Ironically, the same survey also showed that hospital CEOs believe direct physician employment is the least profitable model in increasing integration with physicians, Hatch says.

"There is going to have to be a change because the boards of these organizations will be patient for only so long," Hatch says. "While I think these systems can operate their own practices at a slight loss and tolerate that, there’s no way they’re going to continue to tolerate the huge losses now being experienced."