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Nonprofit hospitals buying up cardiology practices
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Economic and political pressures are threatening the historic separation between nonprofit hospitals and independent cardiologists.
According to Suzette Jaskie, MBA, who is a frequent speaker at cardiology practice seminars around the country and CEO of Western Michigan Heart, an independent cardiology group, more than 50 large cardiology practices have been sold to nonprofit hospitals during the past two years. Members of groups with 10 to 60 cardiologists in Tulsa, Okla.; Atlanta; Nashville, Tenn.; Milwaukee; Akron, Ohio; Boise, Idaho; Minneapolis; Charlotte, N.C.; Louisville, Ky.; St. Louis; Oklahoma City; Gainesville, Fla.; and Albuquerque, N.M., have become full-time hospital employees. Many other cardiology groups have entered into close relationships with hospitals that do not include direct employment but integrate management and share services and revenue using other models.
Direct employment of physicians by hospitals is a relatively recent phenomenon. Although contracting for hospital-based physician services such as pathology, radiology, anesthesiology and cardiology services such as ECG and echocardiography interpretation has been commonplace, most physicians in community practice are independent contractors, not directly employed by hospitals. Academic medical centers, government hospitals and a few large integrated health care systems and staff model health maintenance organizations have always employed physicians as well as owned hospitals, but most nonprofit, community hospitals have had open, voluntary medical staffs, with minimal if any direct financial relationship between the hospital and the physicians providing care in the hospital. Physicians bill independently for services they provide in the hospital, and run their outpatient office practices as completely separate businesses, often offering office-based services such as echocardiography and nuclear cardiology that compete directly with hospital-based departments. A few cardiology groups even own outpatient cardiac cath labs or entire for-profit heart hospitals.
Why are cardiologists selling?
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Many cardiologists sense great economic uncertainty in the current environment. Their incomes have fallen significantly during the last five years. Further reductions seem likely. The Sustainable Growth Rate for Medicare has resulted in the need for Congress to temporarily override programmed 10% reductions in Medicare physician payments every year for the last several years, with a continuing threat of an eventual “cliff,” when even more drastic cuts will be needed to pay back these temporary reprieves. The Deficit Reduction Act has resulted in drastic reduction in the payment for imaging. Regulations governing self-referral and in-office imaging continue to be tightened. Bills have been introduced in Congress to prohibit physician ownership of hospitals.
Cardiology office overhead has increased steadily with no increase in fees received and the threat of even more rapid increase in practice expense due to mandatory implementation of the electronic medical record and compliance with various governmental and insurance company quality initiatives.
Cardiologists are no longer able to compensate for declining reimbursement for their services by increasing the number of services they provide. Better drugs, better devices and better diagnostic procedures have led to improved health. The volume of coronary interventions performed in most institutions and by most interventional cardiologists is declining, just as the number of heart surgeries has been declining for several years. Recently, the volume of nuclear stress tests performed has also declined. Insurance companies are requiring pre-approval for coronary CT angiogram, nuclear imaging and other procedures. As better evidence is developed, more definitive appropriateness criteria are being implemented to ensure we deliver effective, valuable care — and contain costs.
Newspapers are full of headlines proclaiming that the United States spends twice as much on health care per capita as European countries and Canada with no measurable improvement in health. Quality of hospital care and use of services are highly variable. Rand surveys report that 20% of hospital procedures are unnecessary. Hospitals are dangerous places. Waste is rampant. Costs are out of control.
As the average age of practicing cardiologists is now in the 50s, it is no surprise that some groups and some cardiologists are looking for an exit strategy. It can be a simple calculation of increasing costs, increasing regulation and declining revenue, with more of the same on the horizon.
Why do hospitals want to buy cardiology practices?
Hospitals need patients and they need doctors to refer these patients to their hospital, to care for them in the hospital — and to help them make a profit on these services while complying with the hospital’s community service obligations. Controlling referral patterns through employment of referring physicians closes the loop and allows much more freedom to organize efficient delivery of high quality, appropriately compensated services. Competition for increasingly parsimonious reimbursement is fierce. Profit margins are thin. As care continues to move from the inpatient to the outpatient setting, emphasis is shifting from payment for individual procedures and single incidents of care toward payment for acuity adjusted Diagnosis Related Groups (DRG) and bundling payment for related services, rather than paying piecemeal, a la carte, for each individual detailed element of every test and procedure performed. Payment for disease management, chronic care and prevention, documenting quality, proving value and preventing errors is replacing fee for service medicine. MedPac, an advisory arm of Congress, has even discussed merging Part A (hospital insurance) and Part B Medicare (medical insurance). The CMS already has pilot projects in place that bundle hospital and professional payment for 28 inpatient cardiac surgical services.
These fundamental changes in how hospitals are reimbursed require management of complex interactions between patients and a team of health care providers — a daunting task under any circumstances. Many hospitals perceive the need to be closely aligned with a dedicated, loyal medical staff that can help design and implement systems of care to meet these new requirements. And what better way to ensure loyalty, align incentives and control costs than to employ physicians. Direct employment avoids many of the pitfalls of the Stark regulations and results in a common financial bottom line. It is much easier to co-mingle revenues from professional services generated by hospital employees with those generated from hospital and technical services, although still subject to legal scrutiny. The tax exempt status of some nonprofit hospitals has also been challenged in part because of these conflicts.
One size does not fit all
In many communities, the compelling argument for consolidation and integration of cardiovascular services is leading to solutions other than hospital employment of cardiologists. Small groups and solo practice prevail in some areas, multispecialty practices in others. Collaborative arrangements falling short of full employment work are more palatable to many. Sharing of cost savings between cardiologists and hospitals working together, joint ownership of facilities and management contracts are alternatives to employment, but legal and regulatory compliance can be tricky. Although employment removes many of these barriers, entirely new spectra of challenges appear. Managing groups of cardiologists has never been easy. Different skills are needed to manage outpatient offices and care for patients with chronic disease than the traditional skills needed to manage hospital inpatient departments. Physicians must play an active role in the management of any effective system of health care delivery.
The success of various approaches for integration of physicians and hospitals in controlling costs while maintaining or improving quality remains to be demonstrated. What seems clear is the need to update current business and care delivery models.
Samuel L. Wann, MD, MACC, is Chairman of the Department of Cardiovascular Medicine at the Wisconsin Heart Hospital and Clinical Professor of Medicine at the University of Wisconsin Madison and Medical College of Wisconsin Milwaukee. He is also Editor of the Practice Management and Quality Care Section of Cardiology Today.