To Sell or Not to Sell: a Guide for Orthopedic Practices Eyeing Deals With Hospitals

Orthopedic surgeons contemplating turning over their practices to their local hospital may view such a deal as a way to lock in lifelong profits while saying goodbye to all of the administrative hassles of managing a practice. But seller beware: If money is the primary motivator, the strategy could well backfire, according to physicians who have entered into such deals.

Some orthopedic surgeons interviewed say they are satisfied with deals they struck with their local hospitals and would do so again if given a chance. There are others who prefer to remain independent. But all agree that such deals are not get-rich-quick schemes, nor do they come without significant compromises and complications. That means surgeons should think long and hard about what they want to gain from aligning with a hospital before making the leap. They should also engage legal and financial experts to help make the most of the relationship, say those who have been through the process.

Alignment can bring financial gains
Several years into working for a hospital, Melvin Deese, MD, an orthopedic surgeon with Summit Sports Medicine & Orthopaedic Surgery in Brunswick, Ga., says he does not regret the decision to turn over his 6-physician independent practice to Southeast Georgia Health System in 2007.

With payors pitting hospitals against physicians and an unclear regulatory environment in the state that made it difficult to predict expansion possibilities, the physicians decided it was time to side with the local hospital instead of going against it, Dr. Deese says.

Here's what he says the physicians gained: the strength of the hospital system's backing from a marketing and financial standpoint, greater leverage with insurers and a compensation model that allows them to care for all patients regardless of who is paying the bill.

On the flipside, here's what they gave up: the autonomy of making decisions regarding the daily management of their practice, ownership of the practice's real estate and surgery center and the ability to act nimbly to improve the efficiency of their operations when they see opportunities to do so.

"We were a successful and profitable practice," Dr. Deese recalls. "We had as much chance as anyone to succeed. I just felt like what we did was the right thing to do long-term for delivery of care in our community. It allowed us to focus not so much on the changing administrative side of the delivery of orthopedic care, but more on the practice of orthopedics, with the hospital handling administrative components."

While there have been a few challenges along the way, the practice's physicians have been satisfied with the arrangement, he says.

Less practice oversight, more practice of medicine
Rocco Monto, MD, a Massachusetts orthopedic surgeon who turned over his private orthopedic practice to Nantucket Cottage Hospital in 2008, was feeling some of the same pressures as Dr. Deese. "When I felt like I was spending more time running the practice and less time being the practice, that's when I knew I had to make some sort of change," Dr. Monto says. His options, as he saw them at the time, were seeking out employment from a hospital, joining a larger orthopedic group or trying to revamp his practice to keep up with the changing times. Currently 49 years old, the mid-career physician wanted to stay put and do whatever he could "to get to the finish line in 15 years," he says.

"What I found out, to my dismay, was that my practice wasn't worth what I thought it was worth," he recalls. "As physicians, we fundamentally believe that, like other businesses, we have a goodwill value, but there really was no goodwill."

After overpaying for physician practices in the 1980s and 1990s and losing money on the deals, hospitals have become savvier about negotiating with physicians, Dr. Monto says.

Looking at his options realistically, Dr. Monto says he felt he had the greatest leverage with his local hospital system, which is part of Partners HealthCare in Massachusetts. He struck a deal to work for the Nantucket hospital with a salary and bonus compensation arrangement, with the hospital paying the lease on his office space. The arrangement allowed him to return his focus to what he enjoys most: taking care of patients. "What it's allowed me to do is the best I can do," he says. "But there's no pot of gold at the end of the rainbow anymore; there really isn't."

Type A's need not apply
Both Dr. Monto and Dr. Deese say letting a hospital take over is not for everyone. There are some surgeons whose personalities make it difficult for them to yield control to a hospital, and if they work in a larger urban environment where income is steadier, they may never have to. However, Dr. Deese says he is fielding an increasing number of calls from other physicians interested in exploring the option. "The uncertainty of [reimbursement] year in and year out is more than most of them want to deal with at this point," he says, referring to changing reimbursement rates, which are less of a threat to a physician's income under a hospital employment model.

Dr. Monto's advice to other surgeons contemplating turning their practice over to a hospital includes the following:

• Be honest in understanding where you stand in your market. This will help you know how much leverage you have in striking a deal with a hospital.
• Know what the hospital wants to get out of the deal.
• Be clear and upfront about what you want to get out of the deal.
• Try to envision a way to bring the hospital's interests in line with yours.
• Negotiate with civility and respect because your reputation within the community is at stake.

Physician-hospital alignment a growing trend

Dr. Monto and Dr. Deese are not alone in opting to throw their lot in with a local hospital. Recent nationwide studies back up the idea that the relationships between physicians and hospitals are changing. In a study published in the September/October 2008 issue of Health Affairs, authors Lawrence Casalino, Elizabeth November, Robert Berenson and Hoangmai Pham found that from 2005-2007, hospitals' employment of specialists accelerated in seven of 12 metropolitan markets studied, and 68 percent of 46 hospitals included in the study employed sizeable numbers of specialists. Of those hospitals, 84 percent increased specialist employment from 2005-2007.

Roughly two-thirds of the orthopedic surgeons in South Carolina are now employed by hospitals, says Steven Poletti, MD, the president of the South Carolina Orthopaedic Association. He, however, is not one of them. At least not anymore.

In 1996, Poletti was part of a practice that was bought by Tenet Healthcare Corp., but the relationship was dissolved after the employment contract was up. "It wasn't a bad relationship," he says. "But I think the ultimate problem with the sale of medical practices was that, oftentimes, your productivity was tied to collections, which is a mistake for a doctor." Now he is one of nine physicians at the Southeastern Spine Institute in Mt. Pleasant, S.C., and he prefers to remain independent. His reasoning is fundamentally one of control over patient care.

Working for a hospital limits a physician's options, Dr. Poletti says. Under employed arrangements, hospitals dictate where the physicians operate, where they refer patients and where they order tests. The primary reason hospitals employ specialists is to gain control of their ancillary services, he suggests. "By giving up that control, we lose part of our voice in doing what we think is best for our patients," he says.

"Right now I wouldn't want to become employed by a hospital because I don't have to be," Dr. Poletti says. "I think the doctors that are becoming employed by a hospital are doing it because they have to be."

Declines in reimbursement, the drying up of credit to physicians and a less receptive Wall Street all are driving this trend, suggests Michael Farris, chairman and CEO of Navvis & Co., a St. Louis-based management consulting firm that provides consulting services primarily to health systems but also to physicians.

Employed physicians bring value to hospitals

Hospitals are beginning to see employing physicians as a "value proposition" that offers the physician a mix of income-related, lifestyle and professional satisfaction but also benefits the hospital by incorporating the physician into the success of the entire health system, through pay-for-performance structures and other opportunities for accountability. Under certain arrangements, specialists and hospital administrators can sit side by side on multidisciplinary councils that are tasked with managing a system's performance, cost and quality, and the physicians might be rewarded financially when the council meets predetermined goals and objectives, Mr. Farris says.

That said, it is important for physicians negotiating deals with hospitals to weigh the pros and cons to them personally, and to structure a deal that works for them, says David J. Schiller, a tax attorney in Norristown, Pa. who handled Dr. Monto's negotiations to turn over his practice to the Nantucket hospital.

Clinching the deal

One thing to consider, Mr. Schiller says, is the physician's physical space. Is the office leased or owned? If so, what will happen if the physician becomes employed by the hospital? The hospital may want the physician on-site, or may not want to buy an office. For these reasons, physicians wanting to join a hospital might want to wait until they are near the end of a lease to begin negotiations to avoid getting stuck with the remainder of a lease.

If the hospital is actually purchasing a physician's practice, there might be complications arising from the potential for double taxation. This will depend on the way the practice is legally structured and whether it is incorporated. There may also be restrictive covenants involved in a purchase if a hospital is interested in hiring one physician in a practice but not another.

Medical equipment can also be a source of headaches. If a hospital purchases a physician's medical equipment for $50,000 as part of an employment deal, but then a year or two later decides not to extend the physician's employment, that physician might have to go out and buy all new equipment at a significantly higher price unless a contract is negotiated that allows for the physician to purchase it back from the hospital at the price at which it was sold to the hospital or a further depreciated price.

Hospitals will typically compensate physicians based on productivity, with a base salary and a bonus linked to productivity measures, according to Mr. Schiller. Physicians may go into negotiations expecting to be paid based on what they were making on their own, which he says is legally irrelevant but may determine whether there is a deal.

"If I was working 75 hours a week and was making $1 million a year, who says I'm going to work 75 hours a week for them?" he says. "The real question that I would ask is what is fair-market value, not what have you been earning." Mr. Schiller suggests coming to terms with what a fair salary would be, understanding the terms of a potential contract, and knowing how long the hospital is willing to guarantee income. "You have to figure out what's reasonable," he says.

Generally, Mr. Schiller says, a physician might able to earn more being self-employed, but the trade-off comes in the form of steadiness of employment, reduction in administrative hassles and more reasonable work hours. "I think physicians are just sick of getting paid less and less, having staff issues, and they'd rather just be employed," he says.

For physicians who are interested in selling their practice to a hospital, Dr. Monto suggests beginning negotiations while still in a strong position financially. Deals can take many months to hammer out. Dr. Deese adds that it is important to hire an accountant experienced in physician practice valuation who can help get the most value for your practice and an experienced healthcare attorney to represent your concerns.

"You can't wait until you're in trouble," says Dr. Monto, "but you always have the nuclear option of walking away."

Contact Barbara Kirchheimer at barbara@beckersasc.com.

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