Physician Strategy News: November '06
Case Study: $10 Million Employed Physician Practice Turnaround
Problem. A client healthcare system employed about 90 physicians in 15 practice sites and was losing $12 million a year on those practices. The patient demographics and market areas were such that it was very difficult to recruit and sustain private independent physicians. The employment model was necessary, both to meet the healthcare needs of the community and to support the hospital. However, the significant operating losses were straining the organization’s ability to fund and manage future growth. The management team along with the board of trustees wanted to reduce operating losses and stabilize the practice network. Healthcare Strategy Group was engaged to help assess the operation and design and implement a turnaround strategy.
Result. The losses from this network of physicians were reduced to $1.5 million over a two-year period, allowing the system to sustain this strategically important strategy. Equally important, the physicians became reconnected with the day-to-day operations and took responsibility for performance improvement.
Our Solution. A turnaround of this magnitude is a major undertaking. All aspects of practice operations were reviewed and a turnaround plan was developed for each practice. The strategies focused on increasing revenues, managing costs to volumes, and providing quality patient care. To get there we employed five key strategies:
1. Focus on Billing, Collections and A/R Management.
Like many hospital employed physician practices, these practices were not collecting what was due them. The days in accounts receivable were twice the norm, and both insurance and patient balances were in disarray. Healthcare Strategy Group reviewed practice protocols and put consultants on site to focus on A/R and implement changes for improved performance. The result was improved cash flow, fewer denied claims, and a reduction in the days in A/R.
2. Change Compensation for Physicians.
Many of the physicians were not incented to be productive. In some of the markets served by the system, due to payer mix, it was not possible to recruit physicians if compensation was based solely on productivity. However, a new compensation plan was developed that was based on moderate base salaries, a productivity incentive, and a formula for salary reductions going forward if targets were not achieved. These changes were implemented as physician contracts were renewed and contributed to improved financial performance.
3. Selective Divestment of Practices.
The system was subsidizing practices that produced no strategic advantage. Three of the 15 practices were divested for this reason. Some physicians stayed in the community, some left, but the net impact was positive. The strategy was to consolidate practices into large practice sites to gain economies and scope of services.
4. Development of Practice Managers.
Developing stronger on-site managers was crucial. In two cases, Healthcare Strategy Group directly employed these individuals initially and then transferred them to the client. In other cases, our consultants worked with existing staff, both management and departmental directors, to enhance their skills and knowledge.
5. Physician Involvement.
The physicians had the attitude that the performance of the clinics was not their problem and essentially blamed the management team of the health system. Healthcare Strategy Group implemented a reporting process to the physicians of key practice performance standards and engaged the physicians in developing solutions to operational problems. The physicians were not allowed to be passive in the operation and management of the clinics. This resulted in the physicians becoming more involved and taking the initiative for improving overall performance.
While no two practice situations are alike, all practices will benefit from attention to these critical areas.
The board of this client was very focused on the losses, and was seriously considering dismantling the entire practice network. Long term that would have been detrimental to the organization and the communities it serves. By turning the situation around, Healthcare Strategy Group was able to help the organization preserve this key strategy and improve its overall performance.
Over the last decade, many hospitals and healthcare systems have dismantled integrated physician networks of employed physicians. Most have done so due to large operating losses and the drain it has placed on the organization. However, if managed properly, networks of employed physicians can make a positive contribution to your organization.
The employment model requires a long-term view, significant investment, careful nurturing, solid management, forward thinking, and meaningful collaboration to make it work.
The table that follows lists critical issues to evaluate when considering an employment model.
Critical Issues to Evaluate When Considering An Employment Model
- The strengths and weaknesses of your active medical staff relative to your strategic imperatives. Can deficiencies be overcome via independent practitioners or will it be necessary to employ key physician specialties?
- The political realities of an employment model. Will your active staff be supportive or will they view it as competitive and retaliate?
- The need for involvement of the medical staff, board of trustees, and management team in evaluating the options available. How will you insure their participation and provide for the communication and education vital to the process?
- The financial resources necessary to support subsidies. Do potential gains offset the risk?
- The skill set and infrastructure necessary for effective management of employed physicians. How will you get there?
- The governance model for employed physician groups. How will you insure physicians do not abdicate their responsibility for day-to-day operations?
- The compensation model(s) that will be used, including incentives. Is there alignment with objectives?
- The standards of performance and productivity requirements. How will they be measured and applied?
- The approach you’ll take when employing existing community physicians. Will you buy practices in total or just hard assets? Also, be prepared for increased challenges relative to compensation models and productivity requirements.
- Tail coverage for malpractice insurance when employing currently practicing physicians.
- Financial requirements for the employed practice. You’ll need to develop a detailed operating projection for the group complement, including a P&L and capital budget. How will you monitor for early warning signs?
NOTE: For guiding principles against which to filter potential employment opportunities, see “Deciding to Employ Physicians?”, Physician Strategy News, July 2006.
