It is time to rethink hospital-physician relationships

According to the AMA, employed physicians now outnumber private practice physicians for the first time. Does this mean private practice physicians will eventually be the rare exception rather than the rule? Is there still a significant role for physician-owned private practices? Relatedly, as hospitals consolidate to fight off the accelerating trend towards outpatient care, which is increasingly being controlled by health insurers (e.g., Optum, which directly or indirectly employs tens-of-thousands of physicians), might hospital-physician relationships be the life vest that the two most critical parties to the healthcare system need?

Several trends have disrupted the traditional model of physician-owned practices: increasing complexity in payment systems including the proliferation of value-based models that require size, money and sophistication; increasing cost and complexity of healthcare IT systems requiring capital and a more robust infrastructure; the proliferation of large (sometimes huge) medical practices affiliated with hospitals, private equity investors and health insurers that compete for physicians, network access and patients; and the rise of a generation of physicians who tend to place lifestyle and a steady income over entrepreneurialism and maximizing income. So, is this akin to the wholesale replacement of horse-drawn carriages by automobiles, or more analogous to the partial (but not nearly complete) replacement of the sedan by SUVs?

As a healthcare law firm with a national client-base, we are seeing a recent proliferation of large, single and multi-specialty group medical practices owned and managed exclusively by physicians. These practices are being formed for a variety of reasons, but their founders generally share the view that a larger, more sophisticated, better funded practices will provide a better platform for managed care contracting, ancillary services, hospital relationships, managing costs, and funding physician retirement.

While managed care contracting may be a primary impetus for the formation of these “super groups,” other benefits often emerge as a practice develops and matures. One common benefit is the potential to enter into joint ventures with acute care hospitals. Hospitals increasingly recognize the need to evolve from the inpatient delivery of care to an outpatient model. This evolution requires strong relationships with physicians. Healthcare is, in many ways, still local. In most regions, patient choice and physician recommendations dictate where patients end up (though this trend has been challenged through narrow or limited networks, higher co-pays and deductibles for out of network providers, and the like.) The traditional hospital “service area” is becoming too limited to supply hospitals with sufficient patient volume. Where in the recent past, hospitals frequently demanded complete control over the provision of care, the trend towards ambulatory care provides physicians with an opportunity to work with hospitals to develop jointly-owned practices, professional services agreements, jointly-owned management services organizations and jointly-owned ancillary services. Frier Levitt is seeing a significant increase in hospital-physician joint ventures that demonstrate a much more collaborative approach than traditional hospital-centric models.

Part of this pivot in strategy by hospitals is the result of competition (for both physicians and patients) by health insurers and private equity investors. These new players in the marketplace have several advantages over hospitals, including greater access to capital, a built-in network of patients (in the case of insurers,) and fewer regulatory hurdles. The regulatory issues are often under-emphasized: hospitals are limited by not-for-profit laws against private inurement and Stark Law constraints concerning physician referrals to hospitals that may not apply to the other players.

It is ironic that hospitals and physicians, which had become, in many ways, adversaries in recent years, may become one another’s saviors. Large physician groups may be in an advantageous position to work with local hospitals towards a more symbiotic relationship. Hospitals may provide physicians with access to better fee schedules, a more sophisticated infrastructure, access to referral sources, etc. Super groups may provide hospitals with a referral stream, and a network of participating physicians in a hospital-based ACO or CIN. Both may provide one another with a more expansive geographic reach.

Change being the one constant in the business and delivery of healthcare, it is time to question old assumptions and paradigms, and dispense with traditional notions concerning the relationships between hospitals and physicians.

Daniel B. Frier, Esq., is founding partner of Frier Levitt.