Private Practice Is Fighting for Survival

Doctors in private practice today are facing numerous questions about sustainability, including:

• Will my private practice be able to compete with hospitals offering employment to new physicians? Can our small group practice survive further declines in reimbursement?

• Will our young physician partners want to buy our practice assets before or when we retire?

• Do we want to bear the risk of investing in our own electronic medical record?

• Can we compete with the hospital for ancillary services?

• Will the hospital direct its employed primary care physicians to refer only to its employed specialists?

• Should I sell my practice, cash out my assets (which are declining in value every year), and join my peers who have become hospital employees?

• Are we willing to take on additional debt in order to update our imaging equipment?

• How long do I want to keep working at this pace?

• Has private medical practice become a dinosaur?

Regardless of what ultimately comes of healthcare reform, physician reimbursement will likely continue to decline. Hospital employment of primary care and specialty physicians is on the rise in most communities. New physicians are shunning entrepreneurship, preferring the security and improved quality of life they perceive as employees.

Capital for equipment and operating expenses is increasingly difficult to obtain through normal debt financing. The business complexity of medical practice is increasingly challenging and regulatory compliance is almost overwhelming. So, can physicians survive in private practice?

The simple answer is “Yes…maybe!” A number of factors affect the ability of physicians to remain independent and financially and operationally viable. Some of these factors are within the control of physician entrepreneurs, who can prepare for and/or respond to a changing environment by modifying their strategies and behaviors. For example, as reimbursement declines, some physician groups add screening and procedural offerings to supplement their cognitive services. Other factors may be outside the control of private physicians. For example, a local hospital may decide to create its own group of employed physicians in your specialty, increasing competition in the marketplace.

In our business consulting practice, we have developed the “Is it Time to Sell?” model to assist independent physicians to evaluate their ability to remain successful in private practice (www.halleyconsulting.com). That model evaluates internal factors that relate to the practice and the physicians who comprise that practice. The self-evaluation also

includes external factors such as local payer tactics, hospital strategies, and the activities of competing physician groups. Physician owners should carefully review these internal and external factors when trying to gauge the ability of their private practice to

remain financially viable.

Internal Factors

Internal factors fall into four categories: 1) owner demographics, 2) practice performance, 3) strategic capability, and 4) leadership.

Owner Demographics

Those involved in recruiting physicians for medical staff development learned long ago that as physicians reach age 55, they become more vulnerable to early retirement, debilitating illness, a desire to “slow down,” or even loss of interest in the work. The age profile of physicians in a private practice has a great deal to do with its survivability. If that age profile is a nice bell curve, with younger physicians and growing patient populations, the practice is likely to remain viable. The interest of physician owners in the business side of medicine, their business savvy, and their satisfaction with the return on their time and energy are significant factors in the success of the enterprise. If several physician owners have developed business skills and participate in practice decisions, the practice will likely remain viable. If the partners have depended on one very interested physician to “run the show” and he retires, good luck!

The strategic and financial objectives of the physician owners are another critical factor in the sustainability of their private practice. If the owners are interested in the perpetuity of the practice, if they have a clear and shared vision for its future, and if they are able to “cash out” when the time comes, the practice will be more likely to succeed in the long run. If, on the other hand, the owners have no clear strategic goals or direction and want

to liquidate their practice assets before the value declines further or before those assets need to be replaced, the practice will be less likely to remain viable long-term as a private practice.

Practice Performance

Entire books have been written on the factors affecting successful practice performance. For our purposes, sustainable private practices are those with high physician productivity (above the Medical Group Practice Management Association median for the specialty; (http://bit.ly/cGjJdQ); they include those practices that are able to pay their physicians competitive market compensation. They have low physician and support staff turnover. They are growing in terms of new patients each week and new referring physicians each month (referral-dependent specialties). Income from ancillary services is adding to their net patient revenue so they are not dependent on cognitive services alone. Sustainable primary care practices may have ancillary income exceeding 25% of their net patient revenue or collections. Sustainable practices manage their receivables, including patient due balances, very closely. Finally, and very importantly, all of the practice physicians have a positive reputation among their peers for clinical quality, and the practice has a great reputation for service quality among patients and referring physicians. Failure in one or more of these performance indicators places the practice at risk of demise.

Strategic Capability

The strategic capability of the practice relates to its position in the marketplace and its ability to implement sustainable competitive strategies. The first measure of sustainability is the practice’s access to new patients, either directly or through referring physicians. New patients are the lifeblood of any practice. Even mature primary care practices still need new patients to offset patient departures. If the practice has direct access to adequate numbers of new patients in growing neighborhoods, it will be more likely to survive than if population growth is stagnant. In addition, a sustainable private practice must have access to capital for new technology, maintaining existing infrastructure, and funding growth. Since most private practices use debt financing, the debt ratio becomes an indicator of strategic capability. The heavier the existing debt load, the lower the strategic capability, and vice versa. The ability to recruit new physicians to the practice is a critical indicator of strategic capability. If new physicians are lining up to join the practice, the independent group is much more capable of pursuing critical competitive strategies locally or through geographic outreach. If not, the practice will be vulnerable to those who can recruit (such as the local hospital). Importantly, if the practice and some or all of its physicians offer some unique skills, capabilities, or services to the community, it is much more sustainable and strategically capable than if multiple options exist in the community for the same specialty. The higher the strategic capability score, the more likely the practice can remain independent and successful.

Leadership

Some physicians express their desire to abandon the business side of medical practice. Such an attitude is the death knell for independent medical practice (it should also be a “red flag” for those seeking to employ those physicians). The ability of physicians to participate in decision making and oversee successful implementation is a critical indicator of medical practice potential regardless of ownership. If an independent practice is led by physicians with a demonstrated track record of jointly making sound decisions, the discipline to enforce policies and decisions among themselves, and the ability to hold their manager accountable for implementation, the practice will be more likely to remain successful in the long run. Unfortunately, some private practices are an amalgamation of little fiefs, with each physician (and his nurse) acting in his or her own way. Other private practices are dependent on one strong leader who is the glue holding together a loose confederation of goals and opinions. These weak configurations are not sustainable under the pressure of competitive market dynamics.

External Factors

Of particular interest among the external factors that affect the sustainability of an independent practice model are the characteristics and activities of payers, hospitals, and competitive physician groups operating in the local market. Larger numbers of competitors in any of these fields reduces the potential strength of any one player. The competitive approach employed by the player may reduce or enhance competition and sustainability.

Payers

Payer negotiating leverage has a significant impact on the sustainability of an independent practice. The greater the negotiating leverage enjoyed by a practice, individually or in concert with others, the more likely reimbursement will contribute to the sustainability of that practice. Payers have and continue to consolidate around the country, yielding fewer, larger competitors in most markets. Larger competitors generally have more negotiating leverage than do smaller competitors. A market with a larger number of payers is more likely to experience higher levels of competitive intensity than a market with fewer payers or one dominant payer. A payer who is a large portion of your business has more leverage than a payer that is dependent on you for a large portion of their business. Payers trying to “buy” market share using lower premiums as a competitive strategy will respond differently than competitors just trying to maintain their market share.

Hospitals

Local hospitals that own primary care practices potentially control a portion of their market share—3000 to 5000 patients per employed primary care physician (PCP; http://bit.ly/dr3ccT). Depending on geographic location, those hospital-owned practices may end up competing with independent primary care practices in the same neighborhoods and threaten their sustainability. Hospitals may place an owned primary care practice in direct competition with an independent practice affiliated with a competing hospital. If the hospital owns a large number of primary care practices, executives may choose to employ specialists to stabilize their service lines and to attract referrals directly from their employed PCPs. In some competitive markets, hospital executives may even mandate that employed PCPs refer only to employed or affiliated specialty physicians, upsetting established referral patterns and threatening the viability of specialty practices that are no longer included.

Physician Groups

Larger multi- or single-specialty medical groups or larger networks of affiliated practices can have a significant influence on the sustainability of other local independent practices. Multispecialty groups may recruit and elect to refer only to their own specialists who contribute to their overhead costs. Large, single-specialty groups may be more accessible than smaller groups, providing their services in multiple locations, offering same-day evaluation service commitments, providing more extensive screening procedures, etc. This size advantage may create a local dynamic that forces smaller, independent competitors into larger networks or into employment models in order for the physicians to survive. On the other hand, a community with a number of small group practices may support the continuation of that model if the practices can remain viable (see Internal Factors).

Can You Survive?

Responses to these internal and external Factors provide clear indicators of the ability of an independent practice to remain independent and financially viable. Those practices with high scores are more likely to be sustainable over time. However, given the current pace of change in the healthcare industry in general, and in most competitive markets in particular, independent physicians should assess the sustainability of their practice at least annually. As weakness begins to appear in the assessment score, independent physicians can decide whether they can adapt and remain independent or whether they need to change their approach altogether.

A variety of forces are threatening the sustainability of private practice in today’s medical environment. In the face of these and other trends, can physicians survive in private practice?