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Want a bigger partner?

January 2014

Published in the January 2014 issue of Today’s Hospitalist

AFTER A DECADE OF OWNING HIS OWN PRACTICE, Adam Flynn, MD, decided last year that being independent was no longer worth the long hours and headaches. He and his partner, John Womack, MD, decided to sell the hospitalist group in Wichita, Kan., that they had started right out of residency.

They sold to hospital medicine’s behemoth IPC The Hospitalist Company Inc. While the two had backed out of a similar decision once before, 2013 seemed different.

Roller-coaster recruiting and retention had lost its thrill. They were tired of fighting a losing battle for respect from their hospital. As full-time clinicians, the day-to-day management of 28 providers was taking its toll, while the unknowns of health reform introduced new anxieties.

Eight months later, Dr. Flynn says that selling to the Los Angeles-based IPC “was the right decision. It would be difficult for us to be dealing with some of these issues” “staffing is the first that comes to mind “”if we were still on our own.”

Consultants claim that there is no groundswell of independent groups stampeding to sell to large hospitalist organizations. But market-watchers say many factors may be driving some successful local groups to consider cashing out.

They point to hospitalist entrepreneurs, like Drs. Flynn and Womack, looking for business partners with bigger pocketbooks, more infrastructure and more diversified offerings. Such groups may be the leading edge of an era of more inpatient physician consolidation.

“As a group owner, it makes sense to consolidate because it is getting too complicated with CPOE, 24/7 coverage, core measures,” says Raj Mahadevan, MD, the owner of Cape Coral Hospitalists in Ft. Myers, Fla. “And hospitals want to streamline and standardize care. They seem to think they have no control with independent groups.”

Last July, Dr. Mahadevan sold part of his business to IPC, although he continues to own the practice that cares for patients in hospitals in Ft. Myers and Naples. He may consider partnering with larger groups.

Other challenges for independent practices include ICD-10, pay for performance, and gearing up for accountable care organizations and population health.

“As hospitals’ demand for performance goes up, it is going to be harder and harder for hospitalist groups to stay independent,” predicts Robert Bessler, MD, founder and CEO of the Tacoma, Wash.-based Sound Physicians, which employs more than 1,000 physicians in about 100 hospitals across the country. The infrastructure that hospitalists need, he adds, includes sophisticated IT services, comprehensive compliance education and oversight, informatics to assess performance, and professional development for physicians. “Plus, the unit costs of everything from benefits to health insurance are going through the roof for small businesses.”

And just around the corner, Dr. Bessler says, are ventures with risk-sharing, “which a small group can’t do. It can’t happen without scale.”

Much higher demands
Most of Sound Physicians’ growth doesn’t come from buying independent groups. But it did announce one acquisition last fall.

In Akron, Ohio, a pulmonary and critical care physician group that owned a local hospitalist division decided to get out of the hospital medicine business. It sold its group of 15 hospitalists, who see patients at Akron General Medical Center and Summa Akron City Hospital, to Sound Physicians in November.

Why? “The hospitalist business is a difficult one to manage,” explains Sanjiv Tewari, MD, a pulmonary intensivist, president of the pulmonary group and chair of the department of medicine at Akron General Medical Center.

While recruiting and retaining hospitalists was a chronic challenge, he says, it was increasingly difficult to collect and manage the data needed to thrive under various pay for performance programs. If the hospital wanted the hospitalists to help reduce lengths of stay to particular goals, for instance, neither the hospital nor the group had the resources or know-how to reach those goals.

“It takes a lot of time, money and energy to refine processes and achieve various endpoints in the hospitalist arena,” Dr. Tewari explains. “To do that effectively, you need information technology that we, quite frankly, lacked.”

In the five years since the group founded its hospitalist division, hospital medicine “has changed, and the demands are much higher than they used to be,” he notes.

“Even in terms of regulatory compliance and chart auditing, it requires a lot of oversight and management. That’s why I believe there will be increasing consolidation.”

The writing on the wall
As Sound Physicians’ Dr. Bessler explains, hospitals and health systems are worried that their own existence may be at risk if they can’t coax more high-quality, low-cost care out of their physicians. As a result, hospitals are demanding that hospitalist programs offer new tools and services like leadership support, training, clinical processes and integrated transitions to post-acute care.

Even the most well-respected groups are under the gun to meet these new expectations. “Groups realize they aren’t in a position to invest to get that performance,” Dr. Bessler says. “They see what is coming.”

Another large national company “Knoxville, Tenn.-based TeamHealth “also sees interest among independent groups in cashing out now. Last October, TeamHealth announced the acquisition of MESA Medical Group in Lexington, Ky., a group that includes emergency physicians and hospitalists working in 10 facilities.

The group was driven to sell “largely by the idea that to keep growing, they need more,” explains Jasen Gundersen, MD, MBA, president of TeamHealth Hospital Medicine. (TeamHealth also owns emergency medicine and anesthesia groups.) As with the Akron group bought by Sound Physicians, MESA wasn’t struggling; instead, the owners saw the market changing.

“They knew the only way they would be able to adapt is to join a group like ours with the resources to help them adapt,” says Dr. Gundersen. “They saw the writing on the wall that in their current model, they probably weren’t going to be successful going forward unless they joined a bigger group.”

Hospital-based multispecialties
Group acquisitions are a small part of TeamHealth’s very busy mergers and acquisitions operation, Dr. Gundersen adds. That’s because many hospitalists are employed by their hospitals, and hospitals generally are not in the business of selling their physician groups. Instead, when looking for more infrastructure and management, some hospitals contract with outside companies to manage their doctors.

Because all hospital-based physicians share many of the same management challenges, Dr. Gundersen sees growth in managing what essentially becomes a hospital-based multispecialty, encompassing not only hospitalists but ED and anesthesiology as well.

“You have to be diversified across multiple specialties, not only to provide better services but to deal with the type of risk we are going to have to manage,” says Dr. Gundersen. “That broad spread can help insulate you against market changes.”

Nearly half (48%) of all full-time hospitalists who treat adults are employed by their local hospitals, according to the 2013 Today’s Hospitalist Compensation & Career Survey. Just over 15% report working for a national hospitalist management group, while 17% are part of a local hospitalist group and 12% are part of a multispecialty or primary care group. (Survey results also indicate that 8% work for a university or medical school, more than 3% work for the Veterans Administration, and more than 1% work locum.)Along with IPC, Sound Physicians and TeamHealth, national companies include Cogent Healthcare (formerly Cogent/HMG), Eagle Hospital Services (which includes the former large hospitalist staffing companies IMI and PrimeDoc), EMCare (part of Envision Healthcare), Hospital Physician Partners, In Compass Health and Apogee Physicians.

There are also some growing regional companies, and considerable regional differences in how many hospitalists work for larger companies. According to the 2013 survey, 25% of the hospitalists in the Southwest and just over 20% of those in the South report working for a national company. The percentage in the Midwest, on the other hand, is just shy of 10%, while only 12% of hospitalists from the Northeast work for a national company.

A big year for transactions
Although IPC’s growth is primarily through hiring, the company has reported more than 80 transactions in the last five years, says R. Jeffrey Taylor, IPC’s president and COO. IPC’s latest acquisitions bring its hospitalist roster to about 1,600 physicians in 28 states.

Every year since 2007, Mr. Taylor explains, IPC has closed anywhere from nine to 17 group acquisitions, ranging in size from only two- or three-doctor “tuck-in” acquisitions, where IPC buys a small, independent group that’s already working in the same hospital as another IPC practice or contracted program, to groups with as many as 70 providers “and everything in between.”

According to Mr. Taylor, 2013 may be one of IPC’s biggest years, both in terms of the number of transactions (16) and the number of annualized encounters.

“My suspicion is that there will be more transactions, and I think they will start skewing to being more sizable, simply because a group that was founded in 2009 with three doctors now has 20,” Mr. Taylor says. “At some point, size drives the need for infrastructure. Pressures are expanding to perform as a hospitalist, and hospitals have become demanding clients.” As a result, he says, many independent groups “need help to meet those demands.”

Business cycles
And it is not just independent groups seeing the appeal of a potential sale. The same management challenges and performance needs may drive some hospitals and health systems to look beyond outsourcing just the management of their hospitalist group. For instance, IPC last fall acquired some hospitalist operations of Massachusetts’ Steward Health Care System, including seven of the system’s previously employed groups.

“I see the trend toward hospitals employing their own hospitalists beginning to reverse,” Mr. Taylor says. “It began with the for-profit hospitals because they do the math. They are beginning to realize that they are subsidizing these programs for millions of dollars a year and maybe not achieving the clinical results they desire. So they figure they need professional management by someone whose expertise is managing a hospitalist group.”

But where some see a trend, others see an exception. Some buying and selling is part of a “natural cycle,” says hospital medicine business consultant Martin Buser, MPH, a founding partner of Hospitalist Management Resources in Del Mar, Calif., and Colorado Springs, Colo. Plenty of hospitals are still buying physician groups and bringing hospitalists in-house, while “new private hospitalist groups continue to start up around the country.”

It is certainly not time to write the obituary on the private, independent hospitalist group. “The key,” Mr. Buser says, “is staying relevant and continually adding value. That brings out the entrepreneurial skills in the hospitalist leadership.”

In Southwest Florida, for instance, Dr. Mahadevan wonders if the Affordable Care Act may mean good times ahead for groups like his, as more uninsured patients get coverage. “If I add 10% more revenue to my practice,” he points out, “that’s a lot of money.”

New angst and regulations
But other independent groups worry that health reform will have the opposite effect on their bottom line, given the inevitable shift in their payer mix.

“There is a lot of angst out there,” Mr. Buser says. “If you are an independent group, you have to watch your environment closely these days “and don’t fall into a false sense of security. Remember the old adage: ‘You are either green and growing or ripe and dead!'”

Independent groups should ask themselves the following questions, he points out: Has their group peaked in value? Is their hospital subsidy at risk of being reduced? And are they the weakest link among several hospitalist groups in their hospital or hospital system?

They also need to remember, Mr. Buser adds, that “it takes capital and backbone to take on more and more responsibility.”

That’s particularly the case when doctors have to start operating in an environment of new regulations and reimbursement. According to IPC’s Mr. Taylor, the Medicaid parity ushered in last year “was a nice boost to hospitalists because it enabled us to be reimbursed at Medicare rates for Medicaid patients.” But to take advantage of that change, “there were a number of hoops that you had to jump through and attestations you had to make for each provider to qualify for those payments, “he explains. “We have talked to groups that didn’t even know it was happening, let alone how to qualify.”

Looking toward bundled payments
In Wichita, Dr. Flynn says that one big factor in deciding to sell was his desire to continue as a clinician. “It was really difficult to replicate what full-time practice management could do,” he says. “I didn’t want to do it, and I don’t think the other physicians in the group wanted to pay me to do it.”

Since the sale, he and his partner function as the group’s practice group leaders. That means, says Dr. Flynn, spending “several hours a week” on administration and management “instead of the 12 hours a week they spent pre-acquisition.

“The demands hospitals are placing on these groups are immense,” IPC’s Mr. Taylor points out. “If you are an independent group with no IT infrastructure, no training capability, no clinical oversight except the senior doc running around trying to look over everyone’s shoulder, no transition management, it’s very daunting. It’s a very complex environment to try to navigate on your own.”

Dr. Flynn agrees, noting that group members were worried that, without a strong player behind them, they wouldn’t be able to negotiate a position in whatever integrated system develops in his market.

“If payments get bundled, what is going to happen to us?” says Dr. Flynn. “We have always had in the back of our minds that the hospital could replace us with its own employed physicians. The idea that we could have a big brother like IPC watching over us when we go to interact with a large hospital system “that makes us a lot more comfortable.”

Deborah Gesensway is a freelance writer who covers U.S. health care from Toronto.

Who’s working with the big dogs?

ACROSS THE COUNTRY, 15% of full-time hospitalists treating adults report working for national hospitalist management companies. (That percentage is 10% among full-time pediatric hospitalists.) Hospitalists working for national companies are more likely than their colleagues employed by independent groups or hospitals to be among the following:

  • In smaller groups. One-quarter of hospitalists who work in groups with four or fewer hospitalist work for national companies.
  • In smaller hospitals. About 19% of hospitalists in hospitals with fewer than 250 beds are employed by national companies.
  • Working more shifts each month and seeing more patients per shift. Nearly one-quarter of the hospitalists who report working more than 20 shifts each month and one-third of those who see more than 20 patients during a daytime shift work for national companies.
  • Are new hospitalists. Nearly one-quarter of hospitalists working only two years or less work for national companies.