Affiliation Options for Physicians

Current and Future Strategies

Max Reiboldt

• Publisher: American Association for Physician Leadership
• Year: 2020
• ISBN:
  9780984831104
• Edition: 1
• Topic: Medicine
• Subtopic: Medical Theory, Practice & Reference

In this book, Max Reiboldt, CPA, and his team at Coker Group, equip physicians, physician leaders, health system administrators and private investors with an abundance of knowledge and effective strategies for making sound decisions based on the current and future environment of healthcare practice and delivery.

Reiboldt and team presents those myriad possibilities in an organized and easy-to-digest format that explores the what and how-to applications of each option, and by providing an historical review of various physician affiliation transactions over the past 20 years, including:

• Physician to physician.
• Private group to private group.
• Private group to hospital-health systems.
• Private group to private equity/outside investors, and more.

Using history as a basis, Reiboldt and his team of experts explain how the past has shaped the current state of affiliation models and associated transactions. As a user-friendly resource for those weighing their affiliation options, Reiboldt also explains professional services agreements, joint equity opportunities, private equity transactions, clinical co-management alignment, clinically integrated networks and value-based reimbursement structures, legal and regulatory compliance considerations, capital procurement options, the role of IT, and the mechanics of putting together and closing the deal.

As president and CEO of Coker Group, Max Reiboldt, CPA, and his capable team have first-hand experience in the ongoing changes of healthcare providers, which uniquely equips them to handle strategic, tactical, financial and management issues that health systems and physicians face in today's evolving marketplace.

TABLE OF CONTENTS

• Chapter 1: Overview of Physician Affiliation Options--50 Years of History
• Chapter 2: Evolution of Economics of Physician Affiliation Models
• Chapter 3: Reasons for Affiliation
• Chapter 4: Summary of Current Models
• Chapter 5: Physician Employment
• Chapter 6: Professional Services Agreements
• Chapter 7: Joint Equity Ventures
• Chapter 8: Private Equity Model for Hospital/Physician Transactions
• Chapter 9: Private Equity-Like Transactions
• Chapter 10: Clinical Co-Management
• Chapter 11: Limited Affiliation Structures
• Chapter 12: Clinically Integrated Networks and Value-based Reimbursement Affiliation Models
• Chapter 13: Group Mergers
• Chapter 14: Information Technology Due Diligence in Mergers
• Chapter 15: Legal and Regulatory Considerations
• Chapter 16: Options for Capital Procurement
• Chapter 17: Transaction Mechanics and Key Steps of the Deal Process
• Chapter 18: What Lies Ahead?

Chapter 1

Overview of Physician Affiliation Options—50 Years of History

Through the years, the presence of physicians, hospitals, and other healthcare investors or partners has increased the complexity of the healthcare delivery system to what it is today. Though not entirely extinct, single-ownership physician practices, small locally owned hospitals, and other private healthcare entities are rare in today’s multifaceted organizations. Providers at all levels are compelled to affiliate with others to function and thrive in such a complex environment, and the options for affiliation seem almost endless.

In this chapter, we will consider how we arrived at the current array of affiliation models. They did not emerge overnight; they are the result of literally decades of societal and economic issues and realities that have changed the healthcare landscape in America, including the increased involvement of state, local, and federal governments.

We learn from history; thus, we begin by looking back 50 years and working our way to the present. Some of the models we discuss in the following chapters have been around for years; they are merely repackaged to be more responsive to present-day settings. Others are newer and a reflection of the dynamics within our healthcare industry, which is still largely private-entity-based.

Additionally, our healthcare providers (mostly hospitals and health systems) are significantly represented as not-for-profit, tax-exempt entities. Physicians and related providers, if private, are likely for-profit entities, but they work closely across the aisle with not-for-profits. When they become fully affiliated/aligned with not-for-profit health systems, however, they may not be officially not-for-profit entities. Likewise, for-profit health systems should be considered within the various transactional structures of affiliation.

Finally, there is an abundance of private practicing physician groups and related ancillary service entities. Note: In this context, we define ancillary service entities as those that provide healthcare services directly to the provision of professional care, but ancillary services are in addition to (and billed as such) professional services. Examples include imaging, surgical, and diagnostic testing services.

With history as a basis, let’s explore how the past has shaped our current (and projected future) landscape regarding affiliation models and associated transactions. By definition, we are broadening our consideration of transactional relationships to include physicians and hospitals/health systems; physicians with other physicians; physicians and health systems with for-profit investor entities, including private equity (PE) firms; and all other forms of potential affiliation, including insurance companies/payers. In short, the universe of potential partners in today’s healthcare affiliation transactions has virtually no limitations.

Figure 1.1. Traditional Alignment Model Descriptions

Figure 1.1 serves as the foundation for this discussion and is referenced in detail as we explore the specific models presented throughout this book. Moreover, all these examples are applicable as we consider the history of transactional affiliation models. Many are not new or untried, though some are more recently developed and incorporated in the transactional affiliation structures.

Now, let’s take a walk down memory lane and consider how our healthcare system has changed in the context of physicians and related providers and their affiliation structures over the past 50 years.

The 1970s and 1980s

We group these two decades because they have similar characteristics relative to affiliation transaction models and structures. The U.S. economy during the 1970s was somewhat volatile, with high interest rates and inflationary economic trends. The economy slowed in the latter part of the 1970s, with inflation and interest rates often reaching double digits. Economic trends improved in the 1980s, allowing greater affluence and better financial times. Overall, the healthcare industry mirrored these trends.

With this economic backdrop, the relationships between healthcare providers—physicians and hospitals/health systems—were mostly at arm’s length. Transactional integration was rare. Most physicians were in private practice; many were in small groups or solo practices. Physicians who were just out of training and ready to start their career in medicine generally considered two options: working within a private group with aspirations to become a partner within that group or starting a solo practice.

Although some physicians practiced in larger groups, little emphasis was placed on mergers. The reimbursement model was fee-for-service, though some areas of the country introduced risk-based contracts tied mostly to capitated models, also called managed care, in the late 1980s. Typically, the capitation models were with primary care; specialists were rarely involved in capitation arrangements. (See “A Short History of Managed Care” in the sidebar.)

A Short History of Managed Care Government intervention to control cost in the healthcare market has a long history. The Health Maintenance Organization Act of 1973 directly promoted the development of HMOs. In the 1980s, the prospective payment system (PPS) for Medicare was introduced in an effort to curtail healthcare costs in hospitals. Hospitals were reimbursed a pre-determined amount for each diagnostic-related group (DRG). DRGs were intended to motivate hospitals to increase efficiency and minimize unnecessary spending, as they would only be reimbursed a set amount for each diagnostic category. To provide a way of measuring provider efficiency by DRG category, resource-based relative value units (RBRVU) were introduced. Each RBRVU corresponded to a DRG. RBRVUs, however, continued to reimburse physician providers on a fee-for-service basis and reflected a highly complex set of calculations. In the 1990s, private organizations and employers sponsored HMOs, PPOs, and physician hospital organizations (PHOs) as part of their managed-care efforts to reduce costs by eliminating provider incentives for inappropriate care and excess productivity. Many MCOs entered capitated arrangements with contracted physicians, wherein such providers would receive a fixed amount per patient month per member (PMPM). Capitation was intended to emphasize primary care as central to improving healthcare and keeping hospital costs under the budgeted amount. Yet capitation created a perverse financial motive to deny access to care and limit utilization, which was detrimental to patients. Because payment was not tied to outcomes, capitation arguably encouraged providers to cut spending without enough concern for patient welfare. “A Short History of Managed Care.” Medical Device and Diagnostic Industry, September 15, 2011. https://www.mddionline.com/short-history-managed-care. Accessed January 26, 2020.

Hospitals were keenly aware of the need to work with physicians and allied healthcare providers, but the relationship was mostly through medical staff membership and more distant affiliations. Referring to Figure 1.1, the relationships among physicians and hospitals are captured in the Limited Integration column. Many physicians were members of medical staffs of various hospitals—usually competing facilities. Physicians may have looked to hospitals for financial assistance but usually in the context of recruitment support and/or medical directorships and possibly some compensation for specific contracted services, depending on the specialty and overall needs of the hospital. There were few mega-groups. Some multi-specialty groups existed and even a few larger single-specialty groups; however, private practicing physicians’ ability to realize a level of reimbursement that allowed them an acceptable bottom line (i.e., take-home pay) left few desiring anything more than an at-arm’s-length relationship with hospitals. Similarly, hospitals saw no pressing need to employ or closely integrate with physicians.

Hospital of Yesterday: The Biggest Changes in HealthCare In years past, the hospital experience included lengthy stays, severe blind spots in prevention, and a lack of patient respect, according to medical historians and health care professionals. https://health.usnews.com/health-news/hospital-of-tomorrow/articles/2014/07/15/hospital-of-yesterday-the-biggest-changes-in-health-care

Hospitals were more concerned about medical staff relations and overall responsiveness to their physicians who often had a choice of which competitive hospital facility to work with and refer their patients to. Consequently, hospitals became acutely aware of the need to provide customer service to private physician groups through improved responsiveness and support of the patients the physicians admitted to the hospital, which was not the typical model at the time (see “Hospital of Yesterday: The Biggest Changes in Healthcare” sidebar). Fewer outpatient services were provided than is currently the case. The delivery of inpatient services that called for inpatient stays was still the dominant form of care, especially in surgical cases (see “Long Stays” sidebar.)

Long Stays It once was common for a woman to spend 10 days in the hospital after giving birth, rather than today’s more-standard 24-hour turnaround. Other heal...

Table of contents

• Acknowledgments
• About the Authors
• Preface
• Chapter 1
• Chapter 2
• Chapter 3
• Chapter 4
• Chapter 5
• Chapter 6
• Chapter 7
• Chapter 8
• Chapter 9
• Chapter 10
• Chapter 11
• Chapter 12
• Chapter 13
• Chapter 14
• Chapter 15
• Chapter 16
• Chapter 17
• Chapter 18
• Chapter 19