Recently, three clients called with concerns about a local multi-specialty practice that represented a major strategic challenge. Clients one and two were in competitive markets, and were being asked to recruit or subsidize physicians that were unprofitable. The implied threat was “If you don’t do this, we’ll talk to the other hospital”. In one instance, the subsidy model proposed by the practice would likely raise regulatory concerns, but this didn’t concern the practice.

Client three was losing key physicians to the group due to more lucrative compensation than offered by the hospital.The group focused recruitment on primary care physicians and key specialties with significant ancillary potential.The hospital was left to employ those specialties that were unattractive to the group, yet were dependent on referrals from the primary physicians in that group.The unspoken threat was that referrals could end if the hospital became a competitor.

The question each posed was the same.”What do I do?” Our discussions with senior leadership at each of these health systems revealed some similarities:

  1. Historically, most discussions between the group and the hospital centered on the financial needs of the group, and the hospital was viewed as a willing bank to address those needs;
  2. Hospital-initiated discussions were focused on a desire to get a larger share of the market referrals, but these talks did not explore why this might benefit the group; and
  3. Until this point, all three hospitals had accepted the arrangement and had not planned for any changes in the relationship.Our clients were unaware of significant changes in the financial model of multi-specialty physician practices.

Historically, large medical groups depended on revenue from ancillary services to support attractive physician incomes and recruit/retain a primary care base that would feed patients to the specialists.While hospital leadership may have been frustrated by the ability of the group to siphon services such as high-end imaging and profitable procedures, they also understood that challenging the group would mean a shift in referrals to “the other hospital”.

Things have changed.Group reimbursement for ancillary services has declined and a growing number of managed care companies require that these services be provided by larger regional or national vendors, especially in lab studies.The market is now moving toward total care for a population, and the specialty gaps in the group practice will create cost management challenges.The group that has been using ancillary profits to subsidize new recruits (we estimated that their annual income from ancillary care was close to $10,000,000) will be challenged when value replaces volume.

None of the clients had engaged their local groups in a discussion of these changes and how they might address the shifts together.There was also a common element on the private practice side of the equation, each group wanted to maintain its private status and assumed that they could always go back to the “bank (hospital) ” if funding was required.

Although the situations were different for each client, our message was the same.They needed to be the first in their market to initiate creative discussions with the local group.If a competitor offered an attractive solution first, they would likely lose some, if not all, of their business derived from group referrals.Doing nothing was not an option.

We proposed discussion that would focus on:

  1. development of a common understanding of where the healthcare market, and specifically reimbursement, was headed,
  2. the impact the most likely outcome would have on the hospital and group, and
  3. an affiliation model that would provide the group with meaningful autonomy but would allow for joint planning and coordination of resources.

We had developed a similar model that brought an academic practice plan, a community hospital, and a hospital-employed physician network into an integrated entity with a governance structure representative of all.

We can’t report on the outcome of these efforts since they are ongoing.What we have found is that the medical group leadership is typically comprised of senior physicians who joined during the time when things were good and they wanted to maintain that for a few more years until they retired.The younger group physicians have a better understanding about the fragility of their model.Engaging those junior physicians in discussions is key.

We also found that medical group administrative leadership was far more open to affiliation models than physician leadership.Those professionals can become excellent partners in the discussions.Finally, the greatest difficulty for our hospital clients was to accept the possibility of an integration model that they did not fully control.It would likely be far different from the physician employment model that had been in place until this point.

If you are facing a similar issue, now is the time to act.While each market will be different, we found the key issues to be the same.Be the first to initiate those discussions.


David W. Miller

Founder, Board Member