A Sudden Change of Course

Teri U. Guidi, MBA, FAAMA
President & CEO, Oncology Management Consulting Group, Pipersville, PA

Reflecting the increasing complexity of hospital/private prac­tice relationships, this case study is based on true events, modified to protect the innocent. Does your practice find itself in a similar situation as our main characters?

The Characters

  • “Memorial”—A 500-bed community hospital with limited outpatient infusion and a large hospital-owned radiation center.
  • “the Practice”—A 12-physician hematology/oncology practice with a large outpatient infusion business.
  • “OMC Group”—The Oncology Man­agement Consulting Group.

Once Upon a Time…

Memorial and the Practice were in a rapidly consolidating market. Nearly 100% of all primary care practices had become employed by one or another of the multiple hospitals and health systems in the region. Over 75% of the specialty practices had also become employed or entered into exclusive relationships as well. Memorial had its own primary care physician group and employed a handful of other specialists, but the Practice remained independent.

Memorial, like many of its competitors, was opening a variety of satellite locations throughout the market in an effort to capture more primary care patients. But the employed primary care physicians often sent their referrals to oncologists who were affiliated with competing hospitals. When queried, most responded that this was for patient convenience because Memorial’s independent oncologists were located farther away than the competitors. Memorial invited the Practice to a meeting to discuss the situation.

At the meeting, Memorial presented its case and asked the Practice to open their own satellite at one of the most promising hospital satellites. The Practice replied that the volumes would be too low to sustain an additional office. They listed the increasing pressures, which included:

  • Decreasing reimbursement for chemotherapy drugs, coupled with rising costs of newer drugs
  • A decline in prompt-pay discounts and rebates
  • Rising time lag from billing to collection
  • Decreasing market share due to market consolidations that were effectively steering referrals to their competitors.

These pressures had already led the Practice to take several steps to survive. They had put a hiring freeze in place several months earlier and had recently announced a reduction in staff benefits and a freeze on pay raises. The physicians all took a pay cut and their bonuses were eliminated. Memorial was sympathetic to the Practice’s plight and asked for suggestions on how they could help so that the Practice would be able to open a satellite office.

The Practice held their own strategy session and brainstormed ideas to generate new revenue streams. They considered approaching other still-independent physician practices to form a larger multispecialty practice, achieving economies of scale and tightening up some of their referrals. And they discussed approaching Memorial or other hospitals to enter into joint ventures for equipment. When they had laid out all of the options they could think of, they went back to Memorial and presented the concepts. They assured the hospital that their preference for joint venture partners was Memorial and that they would give Memorial the first right of refusal.

Now it was Memorial’s turn to strategize and evaluate the joint ventures suggested by the Practice. In the end, each option was dismissed. The major reasons for eliminating the joint ventures were (1) Memorial was very conservative and was uncomfortable with the possibility of violating the complicated laws and regulations associated with financial relationships between physicians and hospitals, including concerns about the antikickback statutes; and (2) Memorial was simply not willing in some of the scenarios to share the revenue. Instead, Memorial returned to the Practice and proposed employment. The Practice declined that option and countered with a proposal to explore other alignment options. Both sides agreed to the exploration and engaged OMC Group to facilitate.

The first step in the exploration was to interview each of the stakeholders confidentially to understand their goals, expectations, and any deal breakers. At the same time, OMC Group ran the financials using Memorial’s collection rates and the Practice’s payer mix, collection rates, and billed service volumes. OMC Group determined that, financially, it would be more advantageous to operate the infusion business as a hospital outpatient department. One of the Practice’s deal breakers was a hard insistence that they retain their corporate identity and that they retain substantive control of operations. Remember, Memorial’s deal breaker was a firm decision that joint ventures would not be accepted.

Thus, all parties agreed that a professional services agreement (PSA) and a comanagement agreement (CMA) was the best combination for the next phase of work (add the options for compensation to the financials, and, through a series of facilitated working sessions, work out the deal points for both of the agreements) the performance expectations on both sides, the delineation of the scope and decision-making structure for the CMA, physician compensation for professional services and for comanagement, transitioning of the infusion business (valuation by a certified public accountant, moving staff to Memorial’s employment, etc), mutual exclusivity, noncompetes, and other details largely associated with ensuring a clear understanding of control. A complete pro forma was developed.

The Plot Twist

Just as both parties were handing the deal sheet to their respective attorneys, the senior partners in the Practice called an emergency meeting with Memorial. They were convinced that with all of the federal scrutiny of financial arrangements between hospitals and physicians, PSAs and, most definitely, CMAs would—probably sooner than later—become disallowed. “By the time we get it all ironed out and implemented, we will probably just have to unwind the thing,” said the managing partner physician. “We wish to have Memorial acquire our entire practice and employ us. Does the offer still stand?” Memorial accepted.

Epilogue

With additional facilitation, em­­ployment contracts were negotiated and the transition plan was mapped out. Under the new structure, the New Practice recruited a new oncologist to staff Memorial’s satellite and, while his practice was ramping up, to spend time meeting the primary care physicians who would be most likely to refer.

After some months in operations, several payers began to push back on their contracts, noting the increase in costs with the infusion moved to a hospital outpatient structure. This negatively impacted on the pro forma projections, but not enough to make it untenable for any party. Today, the New Practice is as busy as ever. The satellite is nearing capacity. The potholes in the road over information system integration and staff assimilation have subsided. And emerging efforts around accountable care organizations and bundled payments are now far simpler.

And they lived happily ever after (until Medicare and the Office of Inspector General issues…?)

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