From Private Practice to Hospital Employment for Orthopedic Surgeons: Q&A With Nicholas Janiga of HealthCare Appraisers
Question: What trends are you seeing in hospital employment for orthopedic surgeons?
Nicholas Janiga: There's been a lot of transition into hospital employment for certain specialists, such as cardiologists, oncologists and even primary care physicians. With orthopedic physicians, we are seeing some transition, but not as much as other specialists. There have been some scenarios where there are a few hospitals that are acquiring larger orthopedic groups in certain local markets. These transactions usually are part of a larger strategic initiative, and include the acquisition of the practice and related ambulatory surgery center to bring outpatient orthopedic surgery to the hospital.
Overall, the transition to employment for orthopedic surgeons is quite a bit less than other specialists.
Q: Is it smarter for orthopedic surgeons to join a large group practice or hospital employment?
NJ: I work mainly with physicians in existing practices who have been seeking hospital employment — whether it is smart depends on the specifics of the practice and dynamics of the local market. Compared to heart or cancer programs at a hospital, the orthopedics program may not be as well developed. One factor that has caused other physicians to go into hospital employment is reimbursement pressures; orthopedic surgeons haven't experienced as robust pressures on reimbursement as cardiologists, oncologists, and others have.
We also have to consider ancillary revenue; a lot of orthopedic surgeons have ownership interests in ambulatory surgery centers, physical therapy/rehabilitation centers, and other entities in addition to their professional practices. If an orthopod chooses hospital employment, the ambulatory surgery center may also need to be sold to the hospital, or the physician will have to divest their interest before becoming employed because it would be a conflict of interest to maintain ownership of the ASC while being employed by the hospital. Here there may be an opportunity for a joint venture ASC.
Each individual physician has to consider what the future will look like for their practice and what it would look like under an employment scenario. Some of the most successful orthopedic surgeons don't want to give up their interest in an ambulatory surgery center.
Q: Is it possible for orthopedic surgeons to stay in a solo or small group practice these days?
NJ: Given the regulatory environment and significant level of fixed costs necessary to run a physician practice. A small practice is very uncommon these days. They must implement electronic health records, have the appropriate staffing levels, consider the cost of in-office diagnostic imaging, etc. All of those expenses involve significant economies of scale, likely leading the solo physician to join a larger independent physician practice or seek hospital employment.
Q: What are the biggest challenges for physicians who choose to become employed after having practiced in the independent setting?
NJ: There are several challenges, the biggest being a period of integration where they experience inefficiencies. They may need to change their practice management or electronic health record system(s), so they experience workflow issues. In addition to system integration issues, physicians are likely going to experience a shift in their respective practice patterns change. Depending on the competitive environment of the region, physicians may lose privileges at certain health systems post alignment. The other factor they have to consider before the transition takes place is the overall structure of the transaction. Most health systems do not structure the transaction as a stock purchase, as they do not want to assume any potential liabilities of the business. The physicians must collect accounts receivable in their practices, and hospitals won't provide separate services for each physician — it's done through the collections office all together.
Q: Despite these initial challenges, are there advantages to becoming employed by a hospital?
NJ: When physicians are employed by a hospital, physicians can focus more on practicing medicine – what they are trained to do – and let the hospital focus on the business aspects of running a practice. The everyday challenges of running an independent physician practice can have an impact on the physicians productivity and ability to practice medicine.
Orthopedists haven't experienced reimbursement pressures historically, but they may feel some of those pressures more sharply in the future. No matter how good your practice is at managing the business side, it's difficult when you are under constant reimbursement pressures.
Hospital employment also offers physicians more time for research and working cohesively with other physicians employed by the hospital. A physician, or group of physicians, may also be asked by the hospital to help manage a specific service line of the hospital.
Q: How long does it take from the decision to sell your practice to the hospital to close the deal?
NJ: The deal itself from the start of due diligence to the close and final sale of the practice can take anywhere from six months to two years. It varies based on the practice, hospital system, professionals (i.e., tax accountants, attorneys, etc.), and structure of the deal.
In some states, such as South Carolina, you have stringent certificate of need laws surrounding the sale of large ancillary equipment — such as CT scanners, or other assets over a certain dollar value — that extend the time to close a transaction. Once the physicians start practicing as part of the hospital-employed group, the integration can take anywhere from six to 24 months to reach its full potential.
It depends on the groups involved and how many different changes there are to the infrastructure and systems involved.
Q; What is important to know about the financial structure of the transaction?
NJ: It is important for physicians to focus on the up-front purchase price, but it is likely as important, if not more important, for physicians to make sure their compensation agreements make sense. You don't want the agreement so simple that it doesn't incentivize production, but you don't want a complicated agreement that makes too many assumptions either. The agreement shouldn't be hard to calculate or promote unproductive behavior. Focusing on the compensation agreement is an important component of the overall deal.
The physicians should make sure they are happy with their compensation going forward; that's an area where they could go down an unhappy road. If you are part of a group being acquired, you want to make sure there is still cohesiveness between the group of physicians.
More Coverage on Orthopedic Practices:
4 Strategies to Prepare for Changes in Reimbursement
Hospital Employment vs. Private Practice: What Makes Sense for Orthopedic Surgeons?
4 Improvements for Orthopedic Practice Waiting Rooms
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