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Integrated hospital-physician arrangements, which align clinical and financial interests, will be critical to the future success of hospitals and health systems. Under the emerging value-based care delivery and payment system, hospitals will be required to manage care more efficiently and with a focus on outcomes. Improved care management depends largely on gaining physicians' active participation and collaboration.

In most areas of the country, the race is on to establish new hospital-physician structures, acquire practices and employ specialists and primary care physicians under various compensation arrangements. In many regions, physicians themselves are proactively seeking employment or other more formal alignment options. To achieve better results, alignment models must be different from those of the 1990s.

Evolving to Meet Goals

Given the readiness of physicians and hospitals for integration, the models now being developed and deployed can and should yield benefits for both parties. But successful integration is an evolution that will occur over years in most local markets.

Leading organizations will proactively develop, implement and monitor an integration strategy that will accomplish four objectives over time:

  • Support overall strategy
  • Help physicians prepare for continued shifts in practice
  • Provide access and coverage for an expanded population of newly insured patients
  • Ensure shared goals related to quality, cost and outcomes

Here are six strategies hospitals and systems should pursue to accomplish these objectives:

  1. Develop an integration plan that supports the organization's strategic goals and that uses multiple approaches. This plan must be integrated with an overall strategic plan, which includes service-line offerings, facilities, technology and other resources required to support the organization's goals. Alignment may take many forms, including physician employment, practice acquisitions, contractual arrangements, formalized customer service offerings that are focused on making an organization and its facilities more responsive to physician needs, and technology support and integration. It is important to ensure that alignment initiatives reflect organizationwide strategic goals, such as growth, securing or expanding existing market share, improving quality, driving efficiencies or developing new programs. Strategies must be quantified through detailed strategic and financial projections, which assure the availability of capital to execute the strategies. To maximize the investment in alignment initiatives, organizations must use a disciplined approach to allocating capital.Including physician leaders in the planning process is critical.


    To create a unified vision for growth, physicians must understand what drives the organization's ability to sustain itself, the role they play in the organization's success, and how hospital success will help ensure and fund physician success. Communicating these interdependencies will help the organization build sustainable programs that help support physicians through the post-reform era. Developing a solid hospital-physician alignment plan involves recognizing that one strategy will not be appropriate for all physicians. Five distinct physician groupings typically comprise an organization's medical staff and medical community at large (see "Potential Partners," below). High-performing organizations will have a well-developed and implemented pluralistic alignment plan, with employed, independent, clinically integrated and referring physicians.


  2. Ensure sufficient capital for physician-hospital integration. Because most hospitals and health systems have limited capital resources, it is important to ensure that capital spending needs are identified, quantified and prioritized. Organizations should focus their financial and human capital on those alignment options that most effectively support their quality, service line, geographic, access and other strategic goals. Before committing to a specific physician strategy, leaders must ensure that the organization has adequate capital to undertake the proposed initiatives. Integrated strategic financial planning is essential. Initiatives that will require significant amounts of capital include new physician recruitment and employment, practice acquisitions, technology for ambulatory physician settings, physician joint ventures, and many other asset-based arrangements. Thorough market-based planning is required to quantify the market and financial impact of such initiatives on volumes, revenues, expenses, investment in fixed assets and working capital, and downstream contribution margin. Solid analytics, using proven planning tools, will help leadership assess the required level of investment relative to the risk assumed.


    Few organizations will be able to employ many of their admitting physicians without considerable financial impact on their overall capital position, and few organizations adequately plan for the acquisition's total capital impact. Most view the investment as the up-front purchase price plus the transaction fees, which are straightforward and can be identified easily. However, the capital investment is much larger than the sum of these two components. In the early years following an acquisition, most organizations invest additional capital to enhance the practice's facilities, equipment and technology. Electronic health records and other technology investments are common. Moreover, because most acquisitions are pursued as asset deals, the acquiring organization must fund the ongoing net working capital out of its current liquid assets. In addition, practice operating leases for facilities and equipment must be capitalized and treated as a reduction in the organization's debt capacity. Leases assumed by hospitals through physician acquisition or partnership strategies often are characterized by short amortizations, relatively high costs, and difficult termination and renewal provisions, especially long-term real estate leases.


    Finally, practice operating losses can be significant. Most primary care physicians will lose $80,000 to $100,000 per year while specialty practice losses can reach $250,000 per physician for certain procedural-based specialties. Such losses will dilute both the organization's operating margin (increased revenue with a corresponding operating loss) and the day's cash ratio (required to fund the operating loss). When summed up, the capital impact of practice acquisition or employment can be $500,000 to $1.5 million per physician.


  3. Use a disciplined approach to practice acquisitions. This includes standardized activities that are completed at all stages of an acquisition, from the preliminary screen to the final due diligence. The timeline depends on the transaction complexity, availability of data and cooperation from the practice. In the current competitive environment, it can be challenging for organizations to take a long-term perspective about strategic goals and avoid reacting to immediate market pressures. Many organizations indicate that the most difficult part of physician acquisition and recruitment is having the discipline to say, "No."


    Some specific parameters for practice acquisitions include:
    • Specific specialties and geographic coverage goals in the context of organizational and service-line priorities.
    • Existing volumes and potential incremental volumes associated with proposed acquisitions.
    • Baseline quality metrics for selection.
    • Baseline financial performance requirements.
    • Strategic fit and sustainability analysis.
    • Cultural fit with the hospital or health system. Organizations also should consider the following questions during their analysis: Will the acquisition support the plan for geographic distribution of services? Under what corporate operating structure will the new practice operate? What governance and operating structure will be used? Organizations should develop a complete list of questions for each acquisition opportunity.


  4. Structure effective physician compensation programs. This is the most important factor driving the future performance of a hospital's physician organization. Several common principles to be addressed as part of the program's design have emerged and recently have proved successful in supporting organizational goals and providing physicians a fair and stable income. The most important principle is to apply the same compensation standards and metrics consistently across physicians, locations and specialties. Standards should cover quality, work effort and productivity, patient access and support of the organization's nonclinical objectives.


    But all standards are not equal in weight. Because clinical work effort often represents up to 95 percent of community physicians' time, productivity is the primary metric for incentive-based compensation programs, with quality, access and strategic alignment thresholds incorporated, but to a lesser extent. It is critical to align compensation closely with productivity and select the most meaningful metric of productivity. Some organizations did not learn the lessons of the 1990s and are offering guaranteed compensation, rather than compensation tied to productivity, resulting in practice losses. Productivity-based methods include compensation per work relative value units; as a percentage of gross charges; as a percentage of net collections; per encounter; or based on panel size or panel-size equivalencies.


    Compensation based on wRVUs is the preferred method for a number of reasons. First, it is directly linked to the patient activity level maintained by the physician and is neutral relative to the payer mix of the patients. Second, it is highly correlated to reimbursement for the services provided. Finally, it is flexible enough to allow "shadow" wRVUs to compensate physicians for achievement of quality goals, support of strategic initiatives, travel time to cover outlying sites, participation in administrative functions, or whatever other work efforts the organization deems important. Compensation agreements need to be structured competitively in a manner that is sustainable over the long term. Short-term agreements, which lead to major renegotiations after only a few years, have created real problems for both the health system and the physician involved. We recommend two- to three-year initial agreements with automatic renewals, requiring sufficient notice after the end of the first term; quarterly or annual rebasing or repricing of compensation metrics; noncompete clauses; and additional compensation metrics for nonclinical activities.


  5. Create effective clinical-integration programs. Clinical integration is a structured collaboration among hospitals, physicians and other providers to improve the quality and efficiency of care and patient and provider satisfaction. To accomplish these goals requires the participation and support of a significant portion of an organization's medical staff. Most organizations do not have the capital to employ enough physicians to accomplish these objectives. Therefore, many institutions choose to pursue a clinical-integration strategy, which is based on a number of contractual arrangements to improve quality and reward participating physicians for their efforts, without large capital investments and substantial impact on operating performance.


    Such integration requires the creation of a contracting entity that can set improvement targets and distribute incentive payments. In a discounted fee-for-service environment, these entities typically will take the form of one of the approved clinical integration programs currently in place. Although there are many small differences, the overall structure and intent of these entities are fairly consistent: a joint contracting entity is established to negotiate fees and set quality thresholds for improvement. Based on the attainment of these goals, incentives can be distributed to participating physicians. Typical components of clinical integration contracts include pharmaceutical cost savings through use of generics, disease management and bundled payment for clinical conditions. Alignment of physician and hospital economic incentives is key to achieving reduced costs and improved value.


  6. Manage employed physicians to achieve goals. Through connected planning and budget management, hospitals following the strategies recommended so far have assessed the revenue and costs associated with practice acquisition, determined the financial impact of growth strategies and developed compensation plans for employed physicians.


    As hospitals invest in physician strategies, managing revenue, productivity and costs related to integrated physician practices and their employed physicians will be mandatory. Organizations most likely to succeed in the next decade will define indicators of success, measure performance against these indicators, and devise and implement plans to respond to less-than-anticipated performance. Performance indicators for employed physicians and other physician strategies should focus on financial performance, quality, outcomes, market share, satisfaction and other metrics. Indicators must be specific, measurable, attainable, relevant and time-bound. And, they must be used on an ongoing, frequent basis.


    Unlike what occurred during the acquisition frenzy of the 1990s, organizations should develop detailed budgets prior to practice acquisition or employment. Physician compensation and wages and benefits of nonphysician personnel should be included. As the hospital integrates the practice, productivity, total revenue, physician compensation, nonphysician staffing and compensation levels, physician revenue-cycle performance, occupancy, supply chain costs, contracting, revenue cycle, overhead management, and technology costs should be monitored and managed on a regular basis. Financial systems must be able to link compensation to specific productivity and outcomes metrics. Budgetary review, monitoring and real-time reporting are imperative.


    The figure above illustrates how one hospital budgets and tracks physician-practice productivity, staffing efficiency, revenue and expenses by region. This level of detail is indicative of what is required. Prompt identification of areas of underperformance and the development of concrete improvement strategies will better enable the organization to attain performance targets.
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Staying Competitive

Organizations must achieve effective physician-hospital integration to sustain competitive performance into the future, but there is no one tried-and-true alignment plan that works for all organizations or all physicians. Physician needs are diverse; hospitals and health systems must be prepared to offer multiple engagement options, serving all physician constituencies. The common attributes of organizations most likely to gain and retain close integration with physicians are management expertise, shared hospital-physician leadership, and a well-developed integration infrastructure. Organizations that act early to build these attributes based on solid planning and monitoring are poised for future success in their markets.

James J. Pizzo ( is executive vice president, and Mark E. Grube ( is managing director, Kaufman, Hall & Associates Inc., Skokie, Ill.

Sidebar - Potential Partners