For a number of solid reasons, your hospital has decided to pursue a physician employment strategy. You clarified your goals and identified a physician group that you think is a good candidate for acquisition. Now comes the hard part.
How do you bridge the gap between hospital and physician economics? How do you negotiate with an organization that in some ways is more a collection of individuals than a unified group? Hardest of all, how do you overcome the historical conflicts that often characterize hospital-physician relations?
Hospital leaders across the country are finding that physician acquisition takes more than just dangling the right carrot. You need to iron out hundreds of financial, organizational and often personal details before you can reach a workable agreement.
Although the issues are complex, working through them does not have to be chaotic. The key is to focus the negotiation process on addressing each party’s priorities, concerns and values.
The challenge in most practice acquisitions is that the stakes are high. That was the situation faced recently by Northern Michigan Regional Hospital, a 243-bed facility in Petoskey, Michigan.
Like many referral hospitals, Northern Michigan depends on its cardiology services both financially and strategically. In 2004, the hospital opened an $11 million heart and vascular center. In 2007, cardiology generated 22 percent of net revenue. At the same time, the hospital’s cardiac care program has been facing increasing competition from other regional providers. In spring 2007, Northern Michigan’s leadership assessed the challenges facing its cardiology program. One issue that stood out was the fact that the service line’s success depended almost entirely on a single seven-member cardiology practice, Michigan Heart and Vascular Specialists (MHVS). The problem was that MHVS was experiencing significant challenges, including serious difficulty recruiting new physicians.
Compensation was not competitive on a national level, several members were nearing retirement and a recently recruited cardiologist was considering leaving the group. In addition, internal conflicts meant the group was not well positioned to deliver on the hospital’s service, quality and operational goals.
Together, these problems were a major threat to Northern Michigan. Without the ability to grow and move forward on service goals, the hospital’s heart and vascular center was in serious danger. The only way to ensure the level of service the hospital depended on was to employ the physicians directly. In August 2007, Northern Michigan entered discussions with MHVS about acquiring the practice.
Obstacles & Concerns
From the start, the negotiations faced many obstacles, and each party came to the table with serious concerns.
On the hospital side, apprehensions centered around economic and organizational risks. The board was ambivalent about the acquisition concept, and several members expressed the need for assurance that the physicians would align themselves with hospital goals.
On the physician side, concerns focused on control and independence. Although the cardiologists were interested in employment, they were not quite ready to become “employees.” They also had multiple concerns related to compensation.
One complicating issue for Northern Michigan was what to do with the approximately 50 staff members employed by MHVS—from the practice administrator to receptionists, coders, billers and others. Adding these employees to the hospital benefit structure would make the group financially unsustainable.
Each side also brought its special handicaps to the table. Hospital administration had little understanding of physician practice management. At the same time, the cardiology group did not have an effective leadership structure. Decision making among the physicians was a difficult process and it was not clear who, if anyone, was empowered to negotiate on behalf of the group.
Underlying all these issues was a history of mistrust between the hospital and the cardiology group. Each party brought wariness to the negotiations and a fear of becoming trapped in a bad agreement.
1. Open up the lines of communication
Physician acquisition is a major step for both sides of the transaction, and it can supply the perfect environment for suspicion and rumors. To keep mistrust from sinking the deal, hospital and practice leaders need to keep everyone fully informed at all times.
During the recent employment negotiations, Northern Michigan and MHVS created several lines of communication:
Was it an impossible situation? Actually, in less than 12 months Northern Michigan and MHVS were able to overcome the obstacles to create a comprehensive, hospital-owned, fully integrated cardiology practice.
Goodwill played an important role—and so did careful management of the negotiations. During the process, six practical points emerged as guideposts for developing a successful physician employment agreement:
- Biweekly teleconferences. The hospital and the medical group held a 7:30 a.m. teleconference every two weeks to provide updates on decisions and next steps. All physicians were invited to phone in for the conference.
- Whole-group meetings. Practice administration held several all-physician meetings to discuss concerns and vote on interim agreements.
- Compensation committee. A working group made up of three physicians and one hospital representative met regularly to study and refine compensation plan models. The physicians reported back regularly to the rest of the group.
- Overnight retreat. At a critical point, hospital leaders and all seven physicians convened for an offsite, day-and-a-half retreat to hammer out the details on the most difficult outstanding issues.
In addition to verbal interaction, written communication proved to be very important. Written meeting minutes, written work plans—even written invitations to meetings—provided clarity and an extra layer of credibility. Documenting decisions was critical for keeping the process moving forward.
One of the most effective communication tools was simply good data. During compensation discussions, national and regional benchmark data and historic practice data were instrumental in persuading physicians that the agreement would have a positive financial impact.
2. Build strategic and financial goals into compensation
The biggest danger in a practice acquisition is the risk that the employed group will fall short of critical economic and service-related goals. Northern Michigan minimized this risk by incorporating financial and operational targets into the physician compensation plan.
The finalized physician pay plan has three components—a base salary, a productivity incentive and a quality incentive. All three components work together to align physicians with hospital goals:
- The base salary, a percentage of a national benchmark, provides group members with a degree of stability in compensation.
- The productivity incentive is based on practice revenue targets.
- The quality incentive rewards physicians for achieving specific organizational quality and service goals (improving patient/referring physician satisfaction, core measure compliance, outreach participation, cath lab operations, etc.).
Both incentive components are based on group—not individual— achievement, minimizing the risk of internal competition and giving physicians additional motivation to work together to meet financial and servicerelated goals.
The compensation plan also supports the hospital’s recruiting goals. It includes a first-year salary guarantee for new physicians and support for current physicians impacted by practice expansion.
Most importantly, the complete package is competitive within the national cardiology market. By providing both pay stability and the opportunity to increase compensation, the plan supports the long-term viability of Northern Michigan’s cardiology service line.
3. Leave day-to-day operations to physicians
While many physicians today are interested in employment, most do not want to give up their autonomy. At the same time, the typical hospital administrator does not have the expertise to run a physician practice. Northern Michigan and MHVS addressed both issues through governance design.
Under the employment agreement, decision-making responsibilities for the practice are divided between two bodies—a physician oversight committee and a board of trustees.
The physician oversight committee consists of three doctors selected by the physician members of the practice. The committee has full control over all day-to-day operations. Responsibilities include office administration (hours, staffing, expenses), physician scheduling (call, vacations), physician performance reviews (including bonuses) and other internal issues.
The group’s board of trustees is made up of three hospital administrators, three physicians and the medical director of the heart and vascular center. The board is responsible for enterprise-level decisions, including budgeting, physician recruiting, hospital operations, compensation planning and strategic planning.
Delegating operational issues to the practice preserves physician autonomy, keeps the doctors active in performance- related decisions and retains ground-level practice management expertise. Vesting overall authority in a hospital-controlled board ensures that practice decisions are aligned with organization-wide goals.
4. Take advantage of the peer effect
When it comes to issues like care standards and clinical workflows, hospital leaders have little credibility with physicians. The only way to make headway on these matters is to leverage the perspective of other physicians.
Northern Michigan addressed its service concerns by contracting with a cardiologist from outside the area to work with the MHVS physicians on a peer-to-peer basis. The consulting cardiologist conducted several group teleconferences and spent two days meeting with every physician individually.
He evaluated the group’s service model and made recommendations regarding patient access, call responsibilities, referral relationships and clinical processes. Most importantly, he was able to win the trust of the other physicians. They accepted his recommendations and incorporated several changes into their practice model, including the optimal use of mid-level providers.
The peer effect was also important in persuading physicians to embrace organizational change. During the MHVS negotiations, one member of the group emerged as a strong advocate for employment. An internal physician champion can help build trust, smooth communication between physicians and the hospital, align agendas and facilitate the acquisition process.
In general, outside experts who are independent of the hospital can be effective at resolving issues that are hard to address head-on. As part of the acquisition process, MHVS engaged an industrial psychologist to work on internal dynamics.
Through facilitated discussions, the psychologist was able to help the physicians improve their communication and sense of teamwork, ultimately positioning them to be more valuable as an employed group.
5. Create safeguards against common pitfalls
There are many reasons why a physician employment arrangement can fail. One of the most important tasks of the negotiation phase is to build in protections against those pitfalls.
One common hazard is neglecting to perform complete due diligence. If a hospital does not fully grasp a practice’s financial situation, it could be making a big investment in a costly problem.
Due diligence should include an audit of the physician group’s revenue cycle performance. A revenue cycle audit lets a hospital gauge not only the current value of a practice, but also the time and resources required to maximize the organization’s investment.
In addition, financial planning for an acquired practice requires special attention. Hospital budgeting is different from medical group budgeting. Formulating a realistic five-year projection based on medical group reimbursement performance will help ensure that the acquired practice contributes predictably within overall hospital finances.
Practice management is another common pitfall. While daily decision making is best left to physicians, hospitals need to pay careful attention to the hospital side of practice operations.
Northern Michigan hired a cardiac service line director to keep the entire heart care enterprise on track. The director is responsible for making sure the heart center achieves quality and service targets and meets hospital goals for volume and growth.
An additional pitfall is the risk of disrupting the acquired practice’s organizational infrastructure. To maintain group business operations, Northern Michigan retained more than 95 percent of MHVS’s office staff.
To accommodate these employees without overwhelming the practice’s expense structure, the staff were employed (along with the physicians) in a separate non-profit corporation with a separate set of benefits. The employee benefits of the new corporation mirror the package formerly offered by the group.
6. Create multiple exit pathways
One of the biggest obstacles to putting together a practice acquisition agreement is the fear of getting stuck in a bad arrangement. Negotiation leaders can mitigate this risk by clearly spelling out how each party can exit the employment agreement if it simply does not work out.
The agreement finalized between Northern Michigan and MHVS includes a three-year non-compete clause. It provides an avenue for physicians to return to private practice as part of an organization that does not compete (and is not affiliated with an entity that competes) with Northern Michigan.
While it may feel pessimistic, a clear exit strategy actually helps both parties come together with confidence and maintain the positive attitude necessary to work out problems that arise along the way.
Because negotiating a physician practice acquisition is detail-intensive, the process rewards organizations that are patient, focused and willing to work together to discover solutions.
Thanks to the careful approach pursued by Northern Michigan and MHVS, the employment arrangement they forged is working well, with strong physician commitment to meeting organizational objectives and effective collaboration between physicians and hospital leaders.
Taking the time to structure a strong employment agreement can ensure that all parties achieve their strategic, financial and professional goals.