6 Key Issues and Trends Impacting Outpatient Services and Physician-Owned Facilities

This article briefly addresses six key issues impacting outpatient services and physician-owned facilities.

1. Covering more people will lead to the reallocation of limited healthcare dollars. With the goal of bringing insurance coverage to an estimated 30 million people, the healthcare reform law will necessarily reallocate some of the dollars spent within the healthcare system.

The individuals who will gain insurance coverage under the new law are likely to be low-paying, which means the system will have to absorb a great number of additional covered lives with very little additional aggregate reimbursement. Most new patients will be covered at amounts close to Medicaid reimbursement rates.

Over the next three to five years, the new law does very little to take dollars out of the overall system. However, in the longer term, the reallocation of dollars from this influx of newly covered individuals is likely to increase the pressure to cut costs. The likely scenario five years out is a very different distribution of healthcare dollars and potentially significant tax increases.

2. Erosion of independent medical practice. Against this backdrop, the independent practice model is losing its appeal for many physicians. While aligning with a hospital does not directly reduce physicians' overall outpatient workload, it does affect the entrepreneurial side of their outpatient business.

Available statistics vary on the percentage of physician practices currently owned by hospitals, but it is clear that the number of physicians seeking hospital employment is on the rise.

Physician search firm Merritt Hawkins indicates the percentage of physician search assignments it conducted involving hospital employment rose to 45 percent in 2009 from 23 percent in 2005. Tommy Bohannon, Merritt Hawkins' vice president of hospital-based recruiting, says he expects that figure to jump to more than 50 percent on the firm's next annual survey.

In certain sectors, such as cardiology, the trend is even more pronounced. In his blog, The Lewin Report, American College of Cardiology Chief Executive Officer Jack Lewin, MD, took an informal poll asking whether cardiologists had integrated their practices with a hospital in 2009. Some 12 percent responded that they had, while another 21 percent said they had concrete plans to integrate and another 50 percent said their practice was thinking about doing so within the next two years.

"A cardiologist that's part of a hospital system, the revenues they can produce for that system can be very, very good because of the use of ancillary services," says David Gans, MSHA, FACMPE, vice president of innovation and research for the Medical Group Management Association. "Consequently the hospital can support the physician well."

These shifts are likely to affect the prospects for physicians' entrepreneurial business endeavors. Independent practitioners have generally been the lifeblood of ASCs, physician-owned hospitals and other types of freestanding healthcare entrepreneurial ventures. Even slight changes in the total number of independent physicians can have a huge impact on the economies of scale of surgery centers and physician-owned hospitals. These businesses, like any type of business, work with a fairly fixed set of costs. A large portion of their profit accrues after a base number of cases are brought in to cover basic fixed costs. Thus, incremental cases drive their profitability. If the incremental cases are taken somewhere else through employment arrangements with hospitals and other systems, the physician-owned facility is left in a much tougher position.

Several factors are driving this trend in physician employment. The top four are:
  • Money: Hospitals can afford to pay physicians well due to the technical fees the physicians generate for hospitals. "The hospital can legitimately preclude its competition and bring those doctors in as admitters and users of ancillary services, so these are the same practices that are better revenue-generators for the hospital," MGMA's Mr. Gans says.
  • Money: Physicians are very concerned about the uncertainty of future reimbursements.
  • Money: Many physicians took a significant hit in the stock market and real estate crash and are seeking a perceived lower-risk practice environment.
  • Work-life balance: Many physicians who graduated over the past decade seem more focused on work-life balance and more predictable hours than a business owner would have.

Scott Gottlieb, MD, a practicing internist, former CMS official and current fellow at the American Enterprise Institute noted this trend in a recent opinion piece in the Wall Street Journal. "Doctors, meanwhile, are selling their practices to local hospitals," Gottlieb wrote May 18 in the WSJ. "In 2005, doctors owned more than two-thirds of all medical practices. By next year, more than 60 percent of physicians will be salaried employees. About a third of those will be working for hospitals, according to the American Medical Association."

Dr. Gottlieb goes on to mention that a hospital with which he is affiliated recently formed a new subsidiary to purchase local medical practices. "Nearby physicians are lining up to sell — and not just primary-care doctors, but highly paid specialists like orthopedic surgeons and neurologists. Similar developments are unfolding nationwide."

According to Dr. Gottlieb's analysis, salaried physicians and further consolidation of medical practices will leave patients with fewer options and longer waiting times.

3. There are roughly 5,200 Medicare-certified ASCs. While the number of Medicare-certified ASCs increased by over 50 percent from 2001-2008, the rate of growth has slowed significantly. According to MedPAC's June 2009 Data Book, there were 5,174 Medicare-certified ASCs in 2008, up only 3.7 percent from 4,991 in 2007. By contrast, in 2007, the number grew 6.2 percent, in 2006 it grew 5.8 percent, and in 2005 it grew 7.3 percent.

An industry expert and founder of a leading ASC company recently hypothesized 2010 might be the first year in which there is a net loss in the total number of ASCs across the country. Of the nation's Medicare-certified surgery centers, 20 percent to 35 percent have a hospital partner, and another 20 percent to 30 percent are rumored to be losing money at any given time.

4. Revenues for outpatient services will be under tremendous pressure. As discussed above, the erosion of the independent medical practice will likely lead to either a deceleration in or actual reduced case numbers, which will contribute to the pressure on revenue for outpatient services. In addition, reimbursements for services from commercial payors and Medicare will face significant downward pressure.

The hospital industry and the pharmaceutical industry are among the projected winners in the healthcare reform legislation. Each have secured a substantial portion of the healthcare budget for the foreseeable future and are somewhat protected from significant reimbursement risk. Here, the Federation of American Hospitals and PHRMA made big bets that healthcare reform would pass, paid big dollars to hire Chip Kahn and Billy Tauzin to negotiate their positions with the White House and Congress, and by all accounts seem to have succeeded in their efforts. That leaves other healthcare sectors more vulnerable to reductions as these big areas remain somewhat protected.

Insurance companies will also be exercising more authority over physicians. As Dr. Gottlieb notes in his Wall Street Journal opinion piece, the pending standardization of minimum insurance benefits in 2014 and mandates on insurers to fully cover certain primary care services will make it harder for them to control their expenses.

"One of the few remaining ways to manage expenses is to reduce the actual cost of the products," Dr. Gottlieb writes in the WSJ. "In healthcare, this means pushing providers to accept lower fees and reduce their use of costly services like radiology or other diagnostic testing."

5. Co-management arrangements on the rise. These alternatives to traditional hospital-physician joint ventures seem to be gaining momentum as a way for hospitals to align themselves with independent physicians. Under these arrangements, hospitals either hire physicians or groups to manage service lines or they actually buy a business line from physicians and then have the physicians manage the area. For example, a hospital may buy up an ASC from physician-owners (or develop one) and convert it to a hospital outpatient department. The HOPD then commands higher reimbursement rates. Physicians give up equity but take on less financial risk.

It is not clear how long these co-management arrangements will continue to be the new hot thing. It is likely they will remain important for some time to come.

Co-management arrangements also carry with them some legal concerns. Those that are structured with "aggressive" payment arrangements may well need to be rethought and possibly restructured if the federal government intervenes and raises objections.

6. Great management. It is likely that well-managed firms will continue to thrive even in a much tougher economy for surgery centers, freestanding imaging facilities and other physician-driven businesses. Several leaders have show that it is possible to thrive in a tough business line. One of the largest imaging companies, for example, continued to thrive at a time when most other imaging companies struggled to survive. At this time, it is more important than ever to hire great leadership and bring in top level management team.

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