V i ew po i n t

A perfect storm may threaten

the private practice model
should you sell or merge your practice
before it’s too late? [ By Joel Sauer ]
Getty images: Randy Allbritton

T
he reimbursement pressures on private physi-
cian practices are very well documented.
Payment trends are down, precipitously in
some specialties, or at best stagnant. At the same time,
practice expenses continue to inflate. It may be that
these dual financial pressures are the greatest threats
to the private physician practice, but they are hardly
alone. Myriad nonfinancial forces, such as govern-
ment regulation and physician workforce shortages,
also can affect a practice’s stability. So much so that

76 Medical EcoNoMics May 10, 2011 MedicalEconomics.com ModernMedicine.com

 PERFECT STORM

Figure 1
it brings the long-term viability of the current private
practice model into serious question. Like the Tyran- Medicare charges and receipts trend
Figure 1
nosaurus Rex, will the private practice soon disap- Medicare Changes & Receipts Trend
pear entirely? More importantly, are some physicians $3,500,000
waiting on the sideline watching these trends as their
$3,000,000
hard-earned assets plummets in value?
$2,500,000
Reimbursement
$2,000,000
Pressures are Real

L et’s start with a quick review of the reimburse-

ment burdens. In short, physicians are working
harder for less pay. Figure 1 illustrates this point with
$1,500,000

$1,000,000

a more than 10-year trend for charges (blue line) and $500,000
receipts (red line) for a real Midwestern multispecial-
$-
ty group. As can be seen, the group continues to work 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
harder, as evidenced by the upward sloping blue line. Charges Receipts
However, the real income gain on this extra activity Source: Financial reports from a 60-physician multispecialty practice in the Midwest.
is greatly diminished, illustrated by the more gentle
slope of the receipts (red line).
As the delta between these two lines grows wider,
so does the return on extra work performed by physi- insurers on first-time preauthorization requests for
cians. These data represent just Medicare, but the tests and procedures. Additionally, 57% of physicians
trend for other payers is nearly identical. Certain spe- experience a 20% rejection rate from insurers on
cialties have seen dramatic decreases in reimburse- first-time preauthorization requests for drugs. Beyond
ment, particularly for diagnostic testing, which has just the volume impact, these requests have real prac-
historically been a lucrative practice revenue stream. tice cost effects too, manifested in additional staffing
For instance, cardiology has seen anywhere from a requirements.
15% to 35% reduction in reimbursement on certain
echocardiography tests. Similar reductions in office- A Dramatic Increase in Patients’
based nuclear testing have also occurred. Share of the Cost
Further depressing income is the fact that prac-
tices’ expenses are increasing at an average annual
rate of 6%. Because of the high fixed cost (those costs
P atient demand too has negatively impacted vol-
ume. This is largely due to two factors: signifi-
cant increases in out-of-pocket costs and a severe
that don’t fluctuate with volume) nature of private recession.
practices, this inflation is paid entirely out of physi- During the past several years, health costs have
cian compensation. been shifting away from health plans over to indi-
viduals. In his Health Affairs article, “The Growing
Just Increase Production Financial Burden of Health Care: National and State

T he main strategy employed by physicians over

the years to combat these economics was simply
to work harder, in terms of hours and units. This
presumed that there were additional units to be
performed, which—until recently—was largely true.
Several forces, however, have been eroding volumes,
particularly in the spectrum of more lucrative tests
and procedures.
Increased pre-authorization and pre-approval
processes have become so onerous for the ordering
physician that tests may not get done, either because
of denials or bureaucracy fatigue. According to a sur-
vey of 2,400 physicians conducted by the American
Medical Association (AMA) in November 2010, 37%
of physicians experience a 20% rejection rate from
Trends, 2001-2006,” Peter J. Cunningham, PhD, noted
in significant increase in the percentage of Ameri-
cans with a “high financial burden.” In 2001, his data
showed that 14.4% of Americans spent more than 10%
of pretax income on healthcare premiums and care
(the threshold considered “high financial burden”).
By 2006 this percentage had grown to 19.1%, a 33%
increase in just 5 years. The author noted that this
change took place while the American economy as a
whole was expanding, suggesting that this trend has
most likely accelerated during the current recession.
A presentation at the 2008 American Society of
Clinical Oncology annual meeting showed similar in-
creases in cancer patients’ out-of-pocket costs (OPCs).
The study found that OPCs grew by 109% from 2003

ModernMedicine.com MedicalEconomics.com May 10, 2011 Medical EcoNOMics 77

 perfect storm

Figure 2
tion was thrust on private practices that added costs
Workers per hospital insurance beneficiary and managerial complexity and introduced terrifying
Figure 4
Workers per HI Beneficiary
fines and penalties. Beyond Stark— which has grown
5.0 in scope, complexity and number (we’re now up to
4.6
the fourth Stark Rule), there have been many others.
4.1 4.1
4.0
4.0
3.7
Although each well-intentioned, the cumulative effect
of these laws is the need for an infrastructure beyond
3.0 2.9 the financial means of most private practices—un-
2.4
2.2 2.2
less they choose to ignore them. Below are the most
2.1
2.0
2.0
significant acts.

1.0 ■■ 1996: The Health Insurance Portability and Accountability

Act (HIPAA); a comprehensive piece of legislation
- covering patient privacy and billing transaction standards;
1970 1980 1990 2000 2010 2020 2030 2040 2050 2060 2070
■■ 2000: the Office of the Inspector General (OIG) Template
Source: U.S. Government Accountability Office Compliance Program for Individual and Small Group
Physician Practices introduced suggested ways groups
could combat both intentional and unintentional criminal
to 2006, while during the same time period cancer- acts;
related healthcare expenses overall grew by 57%. In ■■ 2009: Recovery Audit Contractor (RAC) Reviews;
other words, for every $1 increase in overall health- incentives for whistleblowers to find inappropriate
care expenses, nearly $2 of cost was shifted to indi- payments to health entities.
vidual patients. It is logical to assume similar shifts in
other healthcare areas. Further complicating the management of a
The impact of this cost shifting is that patients physician group is the necessity to implement an
are much more selective when fulfilling physician electronic health record (EHR) system. It used
orders, particularly for expensive tests where the to be that this was a discretionary endeavor, but
results are more “peace of mind” than diagnostic. with passage of the Medicare and Medicaid EHR
An example would be nonchronic stomach pain incentive program participation, practices will see
where all front line testing has come back negative reduced reimbursements if they are not electronic
and risk factors are absent, but the doctor notes a by 2015. If by this date groups cannot demonstrate
computerized tomography scan could be done “just meaningful use of an EHR system, they will face a
to be sure.” Other examples include reduction of payment up to a maxi-
delaying annual tests, such as echocar- mum of 5%. Although up to $44,000
diography and nuclear spectroscopy Power per physician over 5 years is available
Points
for cardiac patients, by several months. from the incentive program, reductions
Elective surgeries for chronic foot, Physicians are working in productivity and temporary cost
knee or hip ailments are also being put harder for less pay. increases can offset this assistance.
off or abandoned altogether, as families New legislation was
cope with rising health costs and stag- thrust on private Things Will Get Better,
nant—or even eliminated—paychecks. practices that added Right?

Managing a Physician
Group is a Real Challenge
costs.
Young physicians D
ownward pressures on reimburse-
ment show no signs of abating. The
number of American workers paying for
who want to be

M anaging the private practice

business has become dizzyingly
more complex over the years. Just 20
years ago, the rules were pretty straight-
forward and informal, and could be
followed without the need for extra staff
and committees. Beginning in 1992 with
enactment of the first Stark Rule limiting
self-referral, a blizzard of new legisla-
entrepreneurs and
own a business are
becoming quite scarce.
each hospital insurance (HI) beneficiary
is projected to drop from 4.0 in 2000
to just 2.4 in 2030 (Figure 2). This will
The apparent lifeboat cause tremendous financial pressure on
will be hospitals, health the system, which will undoubtedly re-
systems and, in some sult in further cuts. Thomas Dolan, PhD,
markets, very large president and chief executive officer of
multi-specialty groups. the American College of Healthcare Ex-
ecutives put it this way, “We know we’re

78 Medical EcoNoMics May 10, 2011 MedicalEconomics.com ModernMedicine.com


“Young physicians who want to be entrepreneurs
and own a business are becoming quite scarce.”
going to get less money, but we just don’t know how
we’re going to get less money.”
On the positive side, with recent passage of the
Patient Protection and Affordable Care Act of 2010,
Medicare is projected to remain solvent until 2029,
12 years longer than before its passage. However, it
achieves these gains through assumptions that will
require significant innovation in current payment
policies. One such innovation may be the advent of
global payments, either based on patient popula-
tions or on diagnoses. Primary care Patient-Centered
Medical Homes also are being piloted throughout the
country and may become mainstream. Regardless, the
ability to manage a successful enterprise will become
exponentially more complicated.
Succession Planning
S o let’s for a moment assume a group survives.
Eventually physicians are going to want to retire
or move on, so a succession plan is needed. Young
physicians who want to be entrepreneurs and own
a business are becoming quite scarce. According to
the Medical Group Managers Association (MGMA),
65% of physicians who changed jobs in 2009 moved
into a hospital employment model. This same survey
reports that nearly half of new fellows in all speciali-
ties accepted hospital-employed positions. A 2009
poll conducted by the MGMA survey of practice
managers found that the number-one rated challenge
facing groups was not reimbursement, but succession
of aging physician leaders. Further, a joint survey of
2,400 private practice physicians by The Physicians’
Foundation and Merritt Hawkins found that just 26%
said they would continue practicing the way they are
in the next one to three years. Nearly three-fourths
of the respondents said they would retire, cut back to
part-time, close their practice to new patients, and/or
seek administrative positions.
All of this comes at a time when the demand for
physicians is expected to peak, due in large part to
America’s population aging at an exponential rate. The
Department of Health and Human Services’ Administra-
tion on Aging projects sharp increases in the number of
Americans over the ages of 65 and 85 during the next
20 years (see Figure 4). The number of geriatricians
required to treat this ­population bubble will exceed
14,000, while at present this number sits at 7,600 and
has actually declined by 22% over the past decade. Esti-
ModernMedicine.com
PERFECT STORM
Figure 3
American population projections
Figure 5
American Population Projections11
90
80 65+
85+
70
60
50
40
30
20
10
0
2010 population (in millions) 2050 projected (in millions)
Source: The U.S. Department of Health and Human Services’ Administration on Aging
mates by the Association of American Medical Colleges
are that America could face a shortage of more than
150,000 physicians in the coming years. Further stress
on demand may come from the national healthcare plan,
which will dramatically increase the number of insured
Americans.
Conclusion
A “perfect storm” seems to be working against the
survival of the private physician practice. The
apparent lifeboat will be hospitals, health systems and,
in some markets, very large multispecialty groups.
Some physicians and groups appear willing to hang
in there, but the consequences of this strategy may be
lost leverage and value if the practice is ultimately sold.
Because of the confidential nature of these transac-
tions, it is difficult to obtain empirical data to quantify
these potential losses, but anecdotal evidence suggests
they are very real. Both the data and current migration
trends suggest that, at best, the number of physicians
in private practices will continue to decline. It remains
to be seen whether that means the private practice
disappears or whether the model will be reinvented.
The author is owner of Sauer
Consulting, a management advisory
firm, in New Haven, Indiana. Send
your feedback to medec@advanstar.
com.
MedicalEconomics.com May 10, 2011 Medical EcoNOMics 79