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While hospitals pour time and energy into physician alignment strategies, they continue to struggle with true physician integration. Hospitals are buying physician practices as a reaction to competitive pressures and market forces calling for more coordinated care, but they are not fully considering the strategic and financial implications. The last time hospitals moved aggressively to employ physicians in the 1990s, they eventually reversed course. Today, the landscape is different, and the consequences and financial risks of failure are higher for hospitals. Yet, a similar barrier to integration remains: Hospitals are still struggling to understand why their physician practices lose money.

Impact, Not Cost

"Why are we losing money?" seems like a harmless question, but it often leads to an incomplete view of the situation's true economics. Instead of focusing on the impact of partnership, it focuses on siloed results that lead to the wrong solutions and builds tension between the two parties. In one hospital, for example, senior leaders asked employed physicians and practice managers why productivity per physician was down. But at the same time, the organization was rapidly recruiting new physicians and deploying existing physicians to new office sites to expand market presence. These are good strategies, but they risk short-term physician productivity. One of the reasons physician acquisitions in the 1990s failed was that hospitals mostly ran practices as independent businesses. Practice results were viewed in isolation: They weren't integrated to provide unified operations and accounting or a more seamless patient care continuum.

Effectively managing the economics behind employed physician practices requires understanding what drives the losses, differentiating between investment and improvement opportunities, and putting the cost in context with the hospital's total return. It's common for practices to lose thousands, or sometimes millions, of dollars after being acquired by a hospital. For hospitals to succeed today, they must change how they look at their financials to assess the results with the organization's larger strategy in mind.

Half of the losses from a physician practice may relate to supporting strategic goals for the broader organization and, therefore, may not bubble up under a segmented reporting approach. The specific drivers of practice losses must be examined carefully. It's not often that one hears that losing is winning, but it can apply to physician practice ownership. For instance, the practice may experience a loss in utilization that can be attributed to procedures being shifted to the hospital, or physician rates may be offset for better hospital rates. Until the loss is put into context with the total enterprise investment, it's unfair to claim that the practice is losing the hospital money.

Business Intelligence

The crux of the problem is data. The key to making good decisions is having good business intelligence. However, financials and other data from acquired practices largely remain fragmented within different systems that don't communicate or integrate well with a hospital. And there are other challenges. Often executives feel limited in the data they can access to aid decision-making, either because it takes too long to pull the necessary details or the hospital may not have the necessary expertise or resources to synthesize different data streams. However, these challenges are not impossible to overcome, and do not necessarily require spending millions of dollars.

One way to start removing the barriers to integration is to take a different approach to reporting practice results. Rather than reporting the results in terms of just losses or loss per physician, report practice performance including offsets from the hospital because of practice ownership. Hospital executives need to understand the impact on revenue of moving the physician ancillary procedures from their office income statement to the hospital income statement. They also should consider the impact of increased hospital payer rates offset by lowering access rates for ordinary established office visits. Rather than reporting the practice results separately from the hospital results, combine them to look at service or product line margins and the roles the practice, inpatients and outpatients play in those results.

A new view on reporting can refocus board conversations on how the combined entities are working together to create value and identify more meaningful areas for improvement.

Engage Physicians

A robust reporting system alone won't magically fix the physician integration problem; it will only help to provide a more informative guide on how and where to make improvements. Serious progress toward goals can't happen without the full partnership of physicians. Of course, physicians and hospital executives are not known for seeing eye-to-eye. However, health care organizations no longer can afford this conflict. Here again, data can be the bridge that connects the two islands.

Data can be the common language when executives and physicians talk, but they come at it from two different perspectives. Executives must understand the importance of data transparency in building trust with physicians; meanwhile, the more physicians understand the methodology behind the numbers, the more credibility they'll give the data. It's not enough to throw out numbers or question them without giving context on how they are calculated.

Physicians aren't the only ones who need to be fully engaged. Board members accustomed to asking for — and getting — only an overview should reframe their thinking and demand to see the data. There is a wealth of business intelligence that resides in hospital databases, but so much of it lies untapped for critical decision-making. This will create a common language from top to bottom, and drive a culture where data become the foundation of every critical decision.

Time for Change

Numerous factors are forcing health care providers to develop a more holistic picture of a patient's care across multiple providers. Once executives stop fretting about the physician-practice cost factor, they can open the door to assessing and affecting real change around quality and patient outcomes. Change must be initiated at the top of the house by setting the right approach and using data to engage physicians in becoming partners in the process. Those hospitals that can leverage their data effectively to truly integrate employed physicians into the bigger picture will win.

Rick Carter (rcarter@equationconsulting.com) is president and senior consultant of Equation Consulting, Salt Lake City.

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