Give Physicians a Chance to do Something About Improving Healthcare

For a number of years federal laws and legislation related to anti-kickback restrictions, often referred to as “Stark Laws”, have restricted the ability for physicians to own inpatient healthcare facilities, such as acute-care hospitals, long-term care facilities, etc.  The primary impetus behind the Stark Laws was to limit the ability for physicians to refer patients to an entity that the physician has a financial interest of some sort; this could include equity ownership, creditor or incentive-based compensation arrangements based on referrals.  In case you are not familiar with the inner workings of the healthcare industry, this is generally referred to as “self-referrals”.

Just recently the Centers for Medicare and Medicaid Services (CMS) released a “final rule with comment period” relating to regulations around physician-owned hospitals.  The changes were relatively minor, making slight modifications to the “process through which physician-owned hospitals can apply for an exception to prohibited expansion of a facility’s capacity,” according to Becker’s Hospital Review.

In essence this means that a physician-owned hospital must provide notice to and receive approval from CMS for any expansions that can increase the facility’s capacity.  For instance, this could be an expansion of procedure or operating rooms, the number of available beds (the general patient capacity).  This was received as an uneventful change, due to the fact that the current healthcare reform law included the same language for this process.

These changes also included reducing the requirements around how many years in advance that physician-owned facilities must satisfy their eligibility criteria.  Originally, healthcare reform laws called for three fiscal years of meeting eligibility criteria; however, the latest ruling has reduced this to only the prior fiscal year.  The full CMS ruling can be found here.

While the recent changes will likely have a relatively minor impact in the ability of physicians to own hospitals, perhaps the more important consideration to gleam from this news is how the government’s stance on physician-owned hospitals could continue to change in the future.  Throughout the US, there has been a significant amount of activity involving groups of physicians coming together to build what are, essentially, their own mini-health systems.

Multi-specialty physician groups will often come together with groups of primary care physicians and launch one or more entity that allows them to collectively take advantage of a wide range of fees from procedures that they could not do otherwise.  These ancillary services provide major streams of alternative revenue, beyond the basic professional fees, which these days are often not enough to keep a single physician in business.  Even with the multiple slashes in reimbursement for ancillary procedures that physicians have experienced in recent years, there is still a tremendous amount of value that physicians can achieve by integrating into a multi-specialty environment.

In many cases, what has evolved out of the multi-specialty environment is an integration of services that eventually make sense to move into a single (or more centralized) point of care model.  This form of “clinical integration” is something that hospitals have pursued for decades; however, now we are seeing physicians taking this page from the hospital’s playbook.

The challenging nature of the current healthcare landscape has resulted in many physicians either going out of business entirely or being driven into alignment situations (i.e., employment) with hospitals.  As a result of these trends, we have often said that the days of the individual, independent physician practice are numbered and likely will not be around within the next five to ten years.  Some groups of doctors, however, have been able to remain nimble enough to explore other market alternatives.  Orthopedic surgeons, urologists, ENT physicians, general surgeons and some gastroenterologists are among those that have not experienced such harsh reimbursement cuts from the Federal Government.

Specialists cannot maintain their strength and growth in their respective markets without having good relationships with primary care physicians and other valuable referral sources.  For decades, this relationship between specialists and primary care doctors has mostly functioned as a business-to-business marketing relationship; however, the multi-specialty clinic model emerged as more innovative providers explored a closer, formal alignment between these groups of doctors.

After specialists and primary realized that successful integration was possible, the ability to integrate those valuable ancillaries into the mix for the group to share came quickly.  In many cases, these physician-led groups grew to outsize many rural and urban-based hospitals, racking up hundreds of millions of dollars in revenue and dominating market positions to compete with major health systems.

These physician-owned health system entities often include surgical operating rooms, but ancillaries are not limited merely to the traditional ambulatory surgery center (ASC).  There is a tremendous amount of potential in facilities that can provide less invasive procedures, such as endoscopy, oncology / infusion, echo, nuclear imaging, interventional radiology and traditional imaging, sleep centers, and numerous other procedures.

It is not all about procedures.  The more a group can expand and diversify their services, the greater overall depth and reach their network of care will provide.  For instance, there are often very competitive markets for physical therapy, rehabilitation, allergy therapy, behavioral care, ophthalmology, cosmetic procedures, sleep therapy, as well as services that help patients fit for devices, such as hearing aids, orthopedic devices, etc.

I have observed numerous physician-led entities with revenues well over $300 million, more than 200 physician partners and facilities spanning hundreds of miles, with an overall market footprint that is larger than a traditional health system could ever hope to achieve.  The common trait in these facilities is a business office that rivals the operations of many publicly-traded corporations and certainly most of their competing hospitals.  Anyone who has ever worked in a healthcare facility with numerous physicians and a wide range of services and sites involved will tell you that a clinic will never be able to achieve such levels of growth without maximizing every single operational and financial efficiency possible.

The most recent economic downturn has also had a unique impact on the evolution of physician-owned hospitals.  Many of the groups that were adequately stabilized when things went south found themselves in a position to pay pennies on the dollar for an old hospital that could be converted into any number of types of ambulatory procedure facilities.

For instance, there were multiple situations where a physician network could go into a new market and purchase a critical access hospital – a rural medical center with 25 beds or less – that was distressed (i.e., one that was no longer able to sustain itself independently and often times the local municipality could not afford to carry the facility either).  They would shut the facility down, re-fit and license it for the services that the group could provide and re-open it to provide healthcare services to the public.  Thus far, the statistics that we have on these situations have shown that these facilities did not provide the same volume of services that were historically provided at that facility, the quality of those services, however, has skyrocketed with very favorable patient feedback and satisfaction.

With the understanding that this general description has provided as to how the physician-owned hospital has evolved, what can we expect for this particular segment of the overall healthcare market going forward?  I believe that one of the most interesting aspects of the recent CMS ruling is not found in any revised language or changes of regulations.  The most important element of these rulings could be the simple fact that we could legitimately expect the government’s stance toward physician-owned hospitals to change dramatically in the near future.

Perhaps the most compelling factor driving this presumption is the fact that the government seems to have resolved to the fact that the most effective and efficient way of expanding access to medical care and improving the quality of healthcare services is through the idea of clinical integration.  In an overly simplistic sense, this model takes what has been done in essentially every other industry and sector in the global marketplace today and applies it to healthcare.

A great deal of the multi-trillion dollar amounts of value and quality that is lost in our nation’s healthcare delivery system is due to the lack of scale and integration.  It is safe to say that no two patients are alike and even patients with the exact same illness or need must be treated uniquely and individually.  Standardization of processes is challenging when you have to consider the many different clinical specialty services, ancillary services, outpatient vs. inpatient services, acute-care vs. emergent care, long-term care and other variables that make integration difficult.  However, if we could find a way to integrate the delivery of healthcare across the multiple variables, or as many as possible, then what the manufacturing sector did with vertical integration could be achieved similarly with healthcare in this notion of clinical integration.

With all of these different drivers of volume, utilization and cost within our healthcare system, it is often easy to miss the one of the most critical core drivers of value in that system, which is the physician.  Meaning, if you want to achieve improved quality, greater access to services and other value points of clinical integration, then the barriers should be limited.  Otherwise, we are all just wasting our time and getting our hopes up for nothing, while politicians continue to make promises they cannot keep and the federal government continues to talk in circles without any real action.

Another area of conflict between policymakers’ proposed solution for the healthcare crisis and what the actual laws say lies in rulings on antitrust and anticompetitive regulations.  The Accountable Care Organization (ACO) has come and gone faster than anything else I have seen in the healthcare reform landscape before; however, this idea of a centralized entity that can effectuate clinical integration is not going anywhere.

This is troubling, though, because when one looks at the details of what the government recommended for ACOs (and I did as a co-author of a book on clinical integration and ACOs due to be released at the beginning of 2012) and compare them to the current antitrust regulations, you will find that the two are directly in conflict with each other.  Either we have to update the antitrust laws, which we all know are outdated in many ways already; or, we can forget talking about ways to make clinical integration a reality.  What will it be?

It’s safe to say that from a pure perspective of numbers, more physicians out there are struggling than not.  The critical value point of the healthcare system will always lie with that dynamic between the patient and the provider.  Moreover, those groups of physicians that have been able to take advantage of market opportunity, operational synergies and alternative financial and strategic investments, while at the same time putting themselves out in a position of risk in an already tenuous marketplace, are likely the most critical component of a system that is truly integrated.

But until we can change the things that tripped us up in the past, how can we expect to not continue facing the same and/or similar challenges in the future?  Perhaps this means that we should think about what barriers currently present could be removed and stabilizing our foundation before trying to build walls on shaky ground.  Or, maybe we just need to take a step back and open ourselves to out-of-the-box thinking that has created so much value and opportunity in countless other market situations.

Whatever approach we take we must learn to trust those actors who are the ultimate source of what this entire industry is about – the providers.  The only ones we can easily look past are those who claim to know everything about everything.  I have found that not all medical providers are that way.  More importantly, I have come to understand the tremendous amount of value that we could collectively benefit from many providers if we stop talking and just listen for a minute.

Mark Reiboldt is an economist and co-director of the Financial Advisory Services (FAS) group in the Coker Group’s investment banking division, where he specializes in merger and acquisition transactions for hospitals, health systems and other healthcare facilities.  He can be reached at markreiboldt@cokergroup.com.

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