Is the Independent Practice of Medicine Going the Way of the Dinosaur?

There is nothing new under the sun. Back in 1995, former surgery center executives were flying high buying physician practices for Phycor, MedPartners and other public and private companies. The White House was leading the governmental effort to "reform" the industry. Hospitals were bidding for physician practices to control their patient flow. The physician industry was seen as the next "roll up" opportunity, following the same path as waste dumps, funeral homes, and other fragmented industries.

But something went terribly wrong. The models were flawed. Public companies paying out huge purchase prices to physicians saw physician productivity drop. The promise that the corporate partner could replace the income that the physician gave up in the partial sale of their practice was never fulfilled. They could not add income through better contracting nor lower expenses through better management.

After the public companies failed, the hospitals saw their bottom lines crushed by HMOs. Each doctor practice "lost" $70,000. Consequently, the hospitals pushed the physicians out the door. Physicians bought back their practices and resumed running them as independent businesses with little consolidation until now.

How is 2010 different from 1995? The real question is: How is it the same? First, commercial insurance carriers have learned to act like HMOs and compress physician pay. This has caused the physicians to see their standard of living erode. This time, Congress succeeded where the previous Administration failed. They passed a reform law. However, the country is so upset with their leadership that the likelihood of sending Democrats packing in November is high. If President Obama is not reelected in 2012, the reforms will be reworked in a major way. Some of the provisions will survive, but many will be reversed.

Physicians are seeking security and hospitals want to control their patient flow. Many are flocking to the hospital employment model that did not work in 1995. Have physicians suddenly become model employees? Are they compliant and team oriented? I don't think these are the characteristics that enabled physicians to achieve their academic and professional accolades.

But what is different than 1995? CMS is much more aggressive in its desire to control costs. They have the power to roll out those demonstration projects without Congressional approval. One with the most upside is the bundled payments – paying hospitals one payment for an episode of care and allowing them to divide among the various providers. This will bring an alignment of interests and foster competition between health systems. However, in many markets, there is only one hospital. In others, there is a dominant, high quality provider that patients will go to even if it costs more.

CMS has to control costs. Medicare is the single largest unfunded liability in America. It was estimated at $109 trillion shortfall over the life of the current enrollees. The present value is $39 trillion before the healthcare reform bill passed. Social security, which gets all the press, is a mere $9 trillion unfunded liability. Our entire economy produces $15 trillion per year in gross domestic product. This is an unsustainable social program. Will the government crush medical providers to pay for the program? Will they inflate away the problem by printing money? Will they back off on Medicare benefits?

Uncertainty is a productivity killer. The economy is frozen with uncertainty about tax policy, regulatory threats, and economic stagnation. The greatest challenge in times like these is to keep one's perspective. Trees don't grow to the sky. Things are never as bad as they seem. We will see adjustments in the reform bill. It will not be as bad as we think. As small businesses, we enjoy the flexibility of adjusting.

This time feels very much like 1986 when I was in the commercial real estate business. Tax law changed, laying the groundwork for nearly every savings and loan in America to go out of business. This train wreck took 10 years. The best news is it took 10 years! My firm became the repo specialist for downtown Chicago. We had some of our best years during this disaster. We believe there will be opportunities in healthcare in these times. We just need to keep our heads, take the temperature of the industry at each step of the way, and adjust to the winds that blow over us.