Ratna Palakodeti, MD, had a decision to make and it had to be made quickly. In 1991, he had joined a small family practice in Beavercreek, Ohio, just outside Dayton. Four years later, all four of his partners left the practice, leaving him a solo practitioner—an increasingly untenable position in the health-care climate of the ‘90s.

“I had to find four partners fast,” he says. But before he could start recruiting, the local hospital came courting. Let us buy your practice, the hospital recruiters told him. We’ll take care of all the administrative work. All you’ll need to do is take care of patients. Palakodeti sold his practice.

He wasn’t the only one.

During the 1990s, hospitals were in a frenzy to buy physician practices. Blame it on a couple of things. First, there was managed care and along with it, capitated contracts which paid providers by the patient, not by the service. That placed hospitals at a disadvantage. “Like it or not, physicians controlled 80 percent of hospital utilization in the 1990s” says Charles Peck, MD, the medical director of LifeMasters SelfCare, a national managed-care company based in San Francisco. Hospitals still had to deal with spiraling costs but had no way to control their market share except by buying physician practices and routing patients to their facilities. Wayne Bracken, the chief operating officer of the Baptist Health System in South Florida, says, “It was a defensive position on our part. It was a way to secure referrals.”

As if managed care didn’t make physician practices attractive enough, along came competition for those practices in the form of national practice management companies. The goal of these companies was to improve the cost efficiencies of the practices they bought and managed and pocket the savings. When these companies began to come into markets and snap up physician practices, hospitals jumped into the buying frenzy, says William Spratt, Jr, a partner in the global law firm K&L Gates, and the past chair of the American Health Lawyers Association. “A bidding war developed between the hospitals and the practice management companies,” Spratt says. “Neither of them paid the right price. They both overpaid.”

To make matters worse, hospitals not only paid hefty purchase prices, they enticed physicians to come work for them by offering huge salaries.

“Who wouldn’t want a deal like that?” asks Terri-Lynn Smiles, a health-care attorney with the law firm Collis, Smiles & Collis in Columbus, Ohio. “Of course they sold their practices.” And physicians went to work as hospital employees, a scenario that didn’t work well.

The integration fiasco

The problem with the integration plan of the 1990s was its structure, says Michael Maynard, the chief executive officer of the Springfield Clinic, a 200-member multi-specialty group practice in Springfield, Illinois. “These arrangements were top-down management structures, not true partnerships.” As a result of this top-down style, tensions grew, and soon neither side trusted the other. Hospitals also learned the hard way that once physicians are paid substantial salaries, they’re less motivated to see large numbers of patients. The hospitals had bought practices based on previous revenues. Now, those revenues were going down.

Spratt says, “Originally, these arrangements were an attempt to create glue between the physician and hospital, but neither could manage the efficiencies or economies of scale required.”

Bracken agrees. “It was a model that was not built to last,” he says. “The money gained from the practices could not be sustained.”

Hospitals began to lose money, and as the next decade approached, they began to sell off the practices they had bought.

Meanwhile, another physician-hospital arrangement popped up. These were co-ownership deals or joint ventures between physicians and hospitals. According to Peck, “Hospitals learned the direct employment model was doomed to failure, so their next thought was splitting ownership 50-50.”

Ambulatory surgery centers, specialty hospitals, labs, and other facilities co-owned by physicians and hospitals began to spring up across the country, but they also caught the attention of the Office of the Inspector General. Soon, certain types of suspect arrangements were highlighted by the OIG and the number of these facilities dwindled substantially.

Hospitals never stopped looking for solutions, however. They merged, expanded, collaborated, integrated, and every time they did so, they became stronger.

What’s different now

As a result, today’s hospital system is stronger than ever, but now it’s the physician who faces some very troublesome issues.

“Malpractice insurance costs are up, administrative costs have risen, and the new technology that’s required to practice today is expensive,” says the Springfield Clinic’s Maynard. Most physician practices, for example, find they eventually have to switch from paper to electronic records—a huge cost that prevents some practices from moving ahead and competing for contracts. Add to that problem declining reimbursements and general dissatisfaction with the practice of medicine and you have a scenario that’s reversed from the 1990s.

Palakodeti agrees. “Hospitals are now in a dominant position,” he says. “They have become like big corporations.” Hospitals hire their own physicians, build and staff their own specialty hospitals, and have simply become less dependent on the kind of independent physicians they once hired. Now, those physicians who once were happy to sell their practices for a profit and a paycheck are turning to hospitals again—this time for survival.

There is another twist as well.

Many of the physicians who leave medical school today are more than happy to be employed rather than own a practice like the majority of the previous generation of physicians.

T. Cliff Deveny, MD, the vice president of physician alignment for Summa Health Systems in Akron, Ohio, says it’s a cultural thing. “Physicians who are coming into practice today need a good income because of the debt they’ve incurred,” he says. Hospital employment not only provides them with regular cash flow but also with the lifestyle they want, which usually translates as regular hours, more coverage, and less call. “Also, more women have entered medicine,” says Deveny. “Typically, women want regular schedules so they can spend more time with family.”

Sarah Sams, MD, is an example. Last September, she closed her Columbus, Ohio-based family practice and went to work for a local hospital, teaching and practicing as part of its family medicine residency program. There wasn’t a single, definitive factor that prompted her move, she says. Rather it was an accumulation of things over six years in private practice—lower reimbursements, higher administrative costs, lack of time to spend with her family, and professional liability costs that doubled in her first year and continued to rise, forcing her to give up the obstetrical work she loved. Now, she teaches, sees patients three or four half-days a week, and has returned to obstetrics. She’s happy, she says, because she doesn’t have to worry about the hassles of running a practice. She’s able to spend more time with her family, and thanks to built-in coverage, she recently took a week-long vacation without worrying about the loss of income.

The days of direct employment—as seen in the 1990s—are waning, however. That’s not to say that the direct employment model isn’t out there and thriving. Palakodeti and Sams are both practicing as direct employees of their hospitals, and Bracken says there will be more and more direct employment in the future. But this model, as well as other employment models, has taken a different form.

The “new” employment paradigms

“The new employment models are better designed than the ones in the ‘90s,” says Maynard. “They give physicians more voice and more independence.”

But these “new” employment models are not really new at all. They have always been available, says Smiles, the health-care attorney, and generally, they fall into three types: the direct employment model, the captive group model, and the service agreement model.

The direct employment model is what most of the 1990s partnerships were, says Smiles. In those arrangements, physicians gave up most of their control and independence and became hospital employees. Gradually, though, physicians were given a greater voice through various committees, and today they operate with more power than they had during the 1990s. At the same time, hospitals staunched the loss of revenues by building productivity measures into compensation. According to Bracken, “That was an element missing in the 1990s.”

Palakodeti and Sams both say they’re happy working under today’s direct-employment model. “It has allowed me to focus on patient care instead of administration,” says Palakodeti. For many physicians, however, direct employment can take some adjustment.

David Barbe, MD, of Springfield, Missouri, wasn’t happy with direct employment when he sold his practice to St. John’s Health System in 1997. Fortunately, the hospital reorganized in early 2000 and formed its own physician group—making Barbe part of what’s known as a captive group model.

Under this particular employment paradigm, the hospital forms a physician group that operates as a separate entity. Physicians retain some control by serving on a board of directors or committee, and while, ultimately, the hospital has the final word on decisions, the physicians have a greater voice and more independence than in the direct employment model.

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