It’s a New Generation: Why Hospitals and Physicians are Looking for Investment Capital

New payment models that reward organizations for keeping patients healthy and impose penalties for patient readmissions to hospitals are spurring doctors, hospitals, and delivery systems to reconsider the acquisitions and strategic partnerships that they first tried 20 years ago

In the 1990s, hospital executives who were aiming for rapid growth in market share acquired large numbers of physician practices but encountered operational problems. They usually overpaid for the practices, realized that they had no competence in managing physicians or their practices, and saw physician productivity fall after they began compensating them through salaries. Eventually, the hospitals ended up selling the practices, often back to their original physician owners. So, what's new?

A New Landscape

Decades later, the health care landscape looks very different and key players are much wiser. Physicians entering into collaborations with hospitals look for more than a quick capital gain on the sale of their practices, and the chance to practice a 9-to-5 day. They're more interested in a partner with deep pockets who offers investment capital to finance the EHR systems and other technologies required by accountable care organizations and new value-based reimbursement models. It's an added benefit if the partner has existing expertise in these areas.

The process by which hospitals and physician practices get to know each other as they contemplate working together has become more businesslike. They are making sure they find the right physicians, pay them appropriate compensation and ensure they make a positive contribution to the combined organization.

In its due diligence, a hospital will assess how well a practice's services complement the hospital's current offerings. They also want to see a match between the physician's expectations for the partnership arrangement and the hospital's vision for itself.

Shared Savings

Shared savings programs are being promoted by CMS for all providers. To participate in this new generation of partnerships, physicians and their staffs must be able to work effectively under such initiatives. To do this, they must be open to modifying processes, re-engineering workflow patterns and learning new practice management systems.

Hospital partners are also interested in physician productivity. The best partnerships recognize that there's an initial period of adjustment and they allow new physicians time to bring themselves up to speed. One approach that physicians may encounter is a fixed-year contract to start with, perhaps three years, followed by an assessment of the physician's productivity and apparent commitment to the organization's goals. Renewal of the contract depends on that assessment. Don't be surprised if your partner hospital promotes productivity through full transparency.

Partnership Negotiations

Physicians entering partnership negotiations can expect to receive extensive demands for data and documents. They'll be asked to provide financial statements going back several years, including tax documents. In some cases, the hospital may use this historical data to project the practice's likely experience within the partnership.

When a viable match seems imminent, more attention will be paid to creating the groundwork for successful integration of the physicians and their staffs into the larger combined organization. The hospital partner will be looking for solid physician leadership coupled with a robust governance structure.

During this stage, final agreement will be reached on productivity expectations for the physicians. They, and members of their staffs (such as billers and coders), will be given the opportunity to meet their counterparts within the hospital and observe their performance of common tasks.

Focus on the Numbers

If you're considering collaborating with hospitals in order to tap into some investment capital, make sure you get your financial advisors involved.

Planning Ahead for Potential Strategic Partnerships

If a physician practice believes that its future lies in a strategic partnership with a hospital or health system, it should begin preparations now. Here are some ways to accomplish that goal:

Identify practice leaders and offer them leadership training. Your partner wants to negotiate with responsible individuals and admit them to the leadership team of the integrated organization.

Get your books and records in order. Make sure necessary documents are readily accessible. Clean up your financial statements, and resolve any anomalies. Be aware that your partner may not wish to acquire your accounts receivable.

Engage in a little introspection with your prospective partners. Determine your philosophies of health care delivery, and your visions for the future. Come to understand the cultures of your practice and the hospital and appreciate the patience it will take for them to merge.
Avoid radical changes during the negotiation process. Dramatic proposals may lead the hospital to reconsider other issues in the arrangement.

When you find an appealing partner, begin the due diligence process. You are ready to bring the negotiation to a conclusion.
Interview key hospital decision makers. Just as the hospital is gathering data about your practice, do the same for data on the hospital's history and current operations. In cooperation with hospital personnel, conduct a pro forma analysis leading to financial projections.

For more information, contact one of our healthcare accountants at (973) 328-1825.