Even though questions remain around the Affordable Care Act (ACA) and its replacement, the push toward value-based care delivery and payment is set in stone.
Between standing provisions in the ACA, mandatory programs administered by CMS and new value-based care incentives in the new physician Quality Payment Program (QPP), it’s clear that value-based payments are not just a fad, they are a fact. To manage in this new world, health systems are increasingly finding new ways to financially align with physicians and physician practices to drive higher quality and lower costs.
However, Premier physician practice data shows that internal medicine providers alone can lose more than $260,000 per physician per year if they aren’t managed effectively. Major factors contributing to these losses include provider productivity and compensation alignment, payer contract rates, revenue cycle management and support staff ratios.
Additionally, physician practice acquisitions are some of the most challenging business deals to execute. Understanding the critical success factors pre- and post-acquisition can mean the success or failure of the acquisition’s desired outcomes. In order to increase efficiencies, synergies and return on investment (ROI), health systems must carefully evaluate both the clinical and economic value of the acquisition target.
As the need to acquire physician practices continues, healthcare organizations should ensure they are following the right steps both pre- and post-acquisition to achieve success and long-term physician alignment.
Pre-Acquisition: Assess Income, Market and Cost Approach
Physician practice acquisitions often involve purchasing hard assets, such as real estate, furniture and equipment, assumption of existing leases, supplier contracts and payer agreements, and more. These necessities should be taken into consideration when determining the value of a practice and its potential revenue streams.
Fair market value (FMV) of a physician practice is best handled by qualified appraisers with experience in the healthcare industry. Appraisers employ several approaches designed to determine FMV of the entity, and adhere to the restrictions promulgated by the regulatory bodies overseeing the industry (such as CMS and the IRS). These approaches include:
- Estimating debt free cash flow to provide an outlook for the company’s revenue growth and earnings prospects.
- Developing valuation multiples using the operating data of comparable companies to derive an indication of FMV.
- Determining the value of the company’s identified fixed, financial and other assets.
Other aspects that should be taken into consideration during the evaluation phase include:
· Reduced productivity and poor compensation alignment;
· Increased practice expenses (e.g. increased support staffing levels);
· Reduced practice revenue streams (e.g. ancillary & technical services); and
· Other impacts to profit or loss.
Additionally, health systems should consider the penalties and bonuses that providers will be eligible to earn through the QPP to assess profitability potential. A system will be needed to evaluate performance and estimate financial impact in order to build appropriate employee contracts and avoid absorbing additional costs.
Post-Acquisition: Optimize Performance to Generate ROI
After acquiring a physician practice, it’s time to integrate and align physicians. Health systems must implement several strategies to engage physicians and become more process-oriented. This includes performance metrics that evaluate expected ROI. These strategies can not only help save dollars, but also reduce employed physician loss by as much as 30 percent.
Key performance metrics include:
- Physician Productivity
- Practice Expenses
- Provider Access / Patient Flow
- E&M Coding
- Ancillary & Technical Services
- QPP Penalties and Bonuses
Success metrics should be tracked and benchmarked on a real-time, ongoing basis. Understanding from the enterprise level down to the individual provider how operational performance results in ROI is critical to the optimization of the performance of every physician network.
As the trend toward provider employment continues, so does the need to be prudent in the pre-acquisition assessment, post-acquisition optimization and ongoing management of all physician practices. Having a clear picture of performance helps to model the future effects of both expected and unexpected changes to ensure success.