November 2014

Employment, Mergers and Joint Ventures: More Radiology Groups Exploring New Ways to Work With Hospitals
By Timothy W. Boden, CMPE
Radiology Today
Vol. 15 No. 11 P. 20

From 2010 to 2013, the ACR Commission on Human Resources’ annual workforce survey reports a 10% drop in radiology groups—from approximately 2,100 to some 1,900. Edward Bluth, MD, the radiology department chairman emeritus at the New Orleans-based Ochsner Clinic Foundation, serves as the commission chairman. He attributes some of the reduction to groups getting larger through consolidation, but he also sees many radiologists leaving private practice to accept institutional employment.

Bluth says the commission is following the physician distribution numbers closely to see what trends emerge. This year’s survey reports that approximately 53% of members still work in private, single-specialty practice, while some 16% are now hospital employees. Another 21% work in academic settings; the remainder work in a variety of arrangements: Eight percent practice in multispecialty groups, 2% in corporate settings (such as teleradiology services), and about 1% are federal employees.

“We have heard of some groups approached by their local hospitals with employment offers carrying a threat to come on board or ‘kiss your service agreement good-bye,’” Bluth says. He knows of cases where longtime contractors have indeed been replaced by hospitals’ newly formed radiology departments.
In those situations, Bluth says, it feels like there’s a job shortage for radiologists. He adds that there really isn’t a surplus of physicians; rather, many groups are taking a cautious approach to recruiting while they wait and see how the Affordable Care Act and other aspects of health care reform affect them. Radiologists who might have hired a new physician in the past are putting up with heavier workloads as Obamacare comes online. For radiologists, that translates to: “If your group refuses to play ball with the local hospital, somebody will take that job,” Bluth says.

Merger and Acquisition Fever
Time-tested, conventional wisdom would have you believe that radiology practices have a special immunity to the present outbreak of “merger and acquisition fever” that seems to have afflicted the entire health care industry. While radiology groups may not be as desirable targets as primary care groups or specialties that control more patients, hospitals and health systems of all sizes have aggressively pursued strategies of consolidation, alignment, and control in order to strengthen and grow their market positions.

Large hospitals seek strategic partners in outlying markets, and remote hospitals seek resources and market clout provided by major players. And all hospitals—or so it seems—are pursuing tighter alignment with their medical staffs. That has translated into a wave of medical practice acquisitions. Hospitals are buying practices and employing their physicians at a rate unseen since the 1990s when everyone was scrambling to position themselves for the imminent arrival of “Hillarycare.”

Hospitals’ often panic-driven, ill-conceived practice acquisitions of the 1990s ended badly for various reasons. Suffice it to say, hospitals generally had little idea how to run outpatient medical practices, and fiercely independent physicians weren’t prepared to become employees in the traditional sense. When the dust settled, many physicians returned to their private practices without even having to buy them back from the hospitals.

Twenty years later, health care industry players are trying to position themselves for the Affordable Care Act—but it’s more than just Obamacare stirring up today’s consolidation frenzy. Other factors driving these trends include the following:

• Stagnant reimbursements: Fee-for-service (FFS) payments have never been the same since the health care finance industry delivered its “one-two punch” in the late 1980s and early 1990s: Medicare implemented its resource-based relative value scale for payments, and the commercial insurance industry introduced preferred provider organizations. Medicare’s new payment system cut some fees in half. Commercial insurers convinced providers to accept discounted reimbursement in exchange for increased patient volumes. Often those increased volumes did not materialize.

• Shifting physician demographics: The largest cohort of practicing physicians—the baby boomers—has begun to enter retirement age. Not only will this naturally reduce the number of active physicians, but it also will shift industry leadership to the next generations, which have not shown a notable interest in owning and running a practice. Younger graduates increasingly express a preference for institutional employment and a better balance between their work and personal lives.

• Anticipated payment reform: Most experts agree that the traditional FFS payment model is waning, though how fast and complete the shift will be is not clear. Policymakers remain convinced that the system will never rein in overutilization until FFS payments go away. They’re pursuing a solution using the latest reincarnation of the health maintenance organization (HMO): the accountable care organization. With assurances that this is not “your daddy’s HMO,” the Affordable Care Act designers have built in financial incentives to create these new delivery systems. Payments will be based on quality and outcomes rather than procedure and admission volumes.

Hospital and health system administrators assuredly say that it will be different this time around. While it’s too early to tell, early indications point to mixed results. Hospital employment seems to work better for some specialties than for others.

What About Radiology?
“But we’re different!” insist most radiologists when someone brings up hospital practice ownership and physician employment. Few other medical specialties have been more tightly bound to hospitals while maintaining ownership of their own practices. While corporately independent, most groups have been quite dependent on hospital service agreements to survive. Freestanding imaging centers and creative alternative revenue streams notwithstanding, most successful groups need the symbiotic relationship with their local hospitals.

Where those relationships function healthily, hospitals and radiologists seem to have taken a position of not fixing what isn’t broken. In less harmonious situations, hospitals and radiologists have little desire to integrate more thoroughly. In fact, groups having trouble with their service-agreement relationships often work under a constant threat of being replaced, which teleradiology has made easier to accomplish.

Shawn McKenzie, president and CEO of Ascendian Healthcare Consulting, points out that it’s not just the radiologists who recognize their difference from many other specialists. He has found hospital administrators similarly reluctant to bring on radiologists—but for the following different reasons:

• Diagnostic radiologists don’t bring many patients to the system. Unlike other medical specialists who refer and admit patients to the hospital, diagnostic radiologists serve patients and referrers who are already there. Interventional radiologists can bring substantial referrals and admissions to hospitals, but they usually represent a smaller portion of most groups’ revenue.

• Radiologists expect a very high purchase price for their practices. Physicians often have invested huge sums in equipment and buildings over the years. They understandably want the purchase price to offset that investment. Unfortunately for radiologists, it may not make good business sense for the hospital to purchase technology or real estate that doesn’t fit its strategic plans.

• Imaging IT systems don’t integrate easily into the hospital’s information systems. Getting some PACS and related data systems to share data seamlessly across existing EHRs can be an expensive, challenging task.

Considering obstacles like these, it’s no wonder that outright purchase/employment arrangements between hospitals and radiology groups are still relatively rare. While no two deals are exactly alike, the end product in a hospital acquisition and employment model usually resembles an academic practice, says Dan Corbett, Radiology Business Solutions’ chief of business development.

“In those organizations, you’ll have a radiology department chairman as the ‘boss’ who controls everything,” Corbett says. “In the department, doctors often have individual employment contracts with different pay rates and different terms based on the training, experience, and prestige they bring to the organization.”

Corbett points out that employed physicians usually don’t have much control over how, when, and where they practice. The decisions come down from the administration through the department chair. Some physicians can function well in this setting, but many feel frustrated and restricted.

Mergers and Joint Ventures
Blending two companies in a true merger usually requires certain similarities between the entities. Hospitals and medical practices don’t merge in the usual sense of the word—the businesses are too disparate in size, purpose, organizational structure, ownership, and funding. In a merger, the partners or shareholders in each company usually have an ownership position in the merged entity, an arrangement almost impossible for physicians joining forces with a hospital.

A radiology group looking to team up with a group practice will more likely consider a merger because the radiologists will have the same opportunity for ownership as the other physicians.

Another model, the joint venture, can work in either of these scenarios. The radiology group agrees to form a new, third entity along with its partner(s). In a joint venture the medical group doesn’t necessarily disband, but it restructures the way it does business. For example, the new venture commonly takes on the real assets (buildings and equipment) and responsibilities for business operations. The new company employs support staff, and the old medical group typically employs the physicians and provides professional services as a contractor.

The joint venture has its own board of directors designed to represent each participant (hospital and medical group). Typically in these arrangements, the hospital brings access to necessary capital, and the medical group brings the professional expertise necessary to provide patient care.

Hybrids and Cooperation Agreements
Richard Divers, CEO of Ambulatory Integration Concepts in Charleston, South Carolina, has seen variations on traditional themes work in different situations. In one case, a hospital approached its contracted radiology group to find a way to align more closely. The hospital was interested in purchasing the practice and hiring the physicians, but the sizeable group couldn’t reach a consensus about a selling price, nor could they agree on employment contract terms.

Exercising considerable flexibility and creativity, the hospital proposed a solution: It created a joint venture corporation with another hospital with which it was already strategically aligned, and that corporation bought into the physician practice as a majority shareholder. The physicians who weren’t comfortable with selling out retained their ownership shares, and the group practice continues to operate much as it always has. Those who wanted to cash out simply sold their shares to the new partner. And as a bonus, the practice will now enjoy much improved access to capital, thanks to its new majority shareholder.

Cooperation agreements and hybrid arrangements can appear quite complex on the surface, but once in place, they can work very well. Corbett champions a hybrid model his company has successfully set up in Altoona, Pennsylvania. The hospital purchased the medical group, created a wholly owned subsidiary, and invited the physicians to apply as employees of the subsidiary.

The key to the company’s success has been in the organizational structure. The physicians operate very much like a private practice, determining clinical operations and making most decisions with considerable autonomy—much like an independent, private practice. The hospital contracts with Corbett’s Radiology Business Solutions to provide management services that include contractual, financial, and strategic direction. The company serves as a neutral third party, not just the proxy of the hospital nor the radiologists. The physicians enjoy both the security of employment and a sense of self-determination. To the physicians, this practice sale doesn’t feel like a “sellout.”

Understanding Alignment
Simply agreeing to do business together hardly constitutes the kind of alignment sought by policymakers, payers, and providers.

When approached by a hospital for acquisition and employment, Corbett cautions radiologists to watch for these red flags suggesting potential misery ahead:
•             The hospital has already chosen a chairman and/or other key leaders.
•             The hospital pushes for an agreement before hammering out the details about how to pay the physicians.
•             The hospital refuses to consider anything other than an inflexible, traditional employment model.

Divers encourages radiologists not to forget about the value they bring to the negotiating table. He personally witnessed a 15-year-old private practice walk away from an intransigent hospital wanting to absorb the practice into its 50-doctor radiology department. “There are good reasons that radiologists have successfully competed against local hospitals,” Divers says. “The successful alignment strategies are those in which the hospital administrators come down from their ‘big-dog-in-town’ pedestals and acknowledge that success.”

Hospital administrators who demonstrate flexibility and outside-the-box thinking will craft the best-performing deals with radiologists. They will engage the physicians as leaders and learn from their time-tested best practices.

McKenzie believes that true regional interoperability and community exchanges are at least 15 years out because of health care’s highly competitive business culture and political landscape. But for now, he says, “Radiologists who really want to hold onto a joint venture must become more than a high-priced commodity, more than ‘report brokers.’ They have to become engaged in the care continuum as active, consultative physicians.”

McKenzie says radiologists who become so engaged find that their expertise makes them the “eyes” of the physicians. So he advises: “Be that. Become the eyes. Create good decision-support capabilities. Be there. Round with the other physicians to get a fuller picture of the patient and his or her needs.” Ironically, groups employing this kind of strategy often are actually able to maintain independence, while being more closely aligned with hospitals in meaningful ways.

— Timothy W. Boden, CMPE, has spent 27 years in medical practice management as an administrator, consultant, journalist, and speaker. He resides in Starkville, Mississippi.