Major Hospital brings physician practices into the fold: Smaller doctor groups find health systems attractive

July 11, 2005

Major Hospital went on a buying spree toward the end of last year, and it had nothing to do with the holiday season.

The Shelbyville hospital purchased three physician practices as part of an effort to help doctors and to make Major a "physician-friendly hospital," Major Hospital CEO Tony Lennen said.

"I've always felt if our physicians do well, we'll do well," he said. "Our goal down here is, 'Is there some symbiotic way we can coexist?' "We've always been trying to look for ways to do that."

Lennen's hospital is not alone. Health care analysts say hospital systems across the country have returned to a habit they developed in the 1990s of buying local physician practices. It's a habit the hypercompetitive Indianapolis market never really dropped.

Doctors have as many reasons to sell as hospitals have to buy these days. Hospitals can offer doctors a certain amount of security, noted William E. Corley, president and CEO of Community Health Network. They can provide a regular salary and help spread call responsibilities, giving doctors a chance to spend more time at home, he said.

Physicians face an increasingly complex world of coding and billing requirements when they try to run their own practice, said Jeff Williams, a health care consultant for the Indianapolis office of Pricewaterhouse-Coopers LLP.

More payers want more details, and Medicare is placing greater restrictions on how much doctors can charge and collect.

"We're seeing a lot of early retirements as a result of increased regulation and restrictions on profitability, which is projected to lead to shortages of physicians in the future," he said.

Dr. Bernie Emkes grew tired of the administrative burden of running a practice, things like making sure labs are certified and offices pass inspection.

"What we found was that an awful lot of our time was spent on administrative detail that had nothing to do with taking care of patients," he said.

Emkes was among a group of five physicians who sold their private practice to St. Vincent Health in 1993. Other members of that group have since returned to private practice, but Emkes stayed and currently holds the title of St. Vincent Health's medical director, managed care services.

It has become more difficult for small, non-specialist physician groups to make it financially, Lennen said.

"For the primary care groups, it's been tough. In an effort to try to help our doctors prosper and thrive, it made more sense for us to own those practices or help manage those practices; that's something we've been willing to do," he said.

Major owns six practices in Shelby County. It started a general surgery group and a pediatric practice. The hospital also bought practices in obstetrics and family and internal medicine.

The hospital's actions are not completely altruistic. Doctors who are doing well are less inclined to open a specialty hospital that would compete against Major, Lennen noted. In one case, buying a practice also will help Major start a program for hospitalists-physicians who specialize in the care of inpatients.

Hospitals also feel that if they control primary care doctors, they can control specialist referrals and which hospitals patients wind up visiting, noted David Charles, a partner at Katz Sapper & Miller LLP in Indianapolis. That helps blunt the blow from surgery centers that pull businesses away from hospitals.

The trend of hospitals buying doctor practices surfaced in the 1990s. In Indiana, hospitals did it in response to managed care, said Bob Morr, vice president of the Indiana Hospital and Health Association.

In managed care, primary care doctors act as gatekeepers to bring patients into a network, so hospitals bought practices "to assure that the primary care physicians were staying in your marketplace and were aligned with common economic interests," Morr said.

However, managed care didn't become as entrenched here as expected, and some hospitals started selling the practices.

They ran into trouble because they guaranteed salaries to the doctors, then found the doctors weren't generating enough revenue to cover the salaries.

Poor management hurt the hospital-practice relationship in many cases. Hospitals had a hard time adjusting to outpatient practice billing, Emkes said. He noted that while many were used to billing $3,000 for major procedures such as hip replacements, the average bill for his office hovered around $55 when he and his partners sold it.

Some hospitals tried running private practices like hospitals, and that just didn't work, Corley said. For instance, hospitals tried to run an office where everyone has a specific role. One person does billing. Another handles receptionist duties. That doesn't work in smaller offices, where duties often overlap, he noted.

Community started a separate company to run its physician practices.

"I basically said to the guy who was going to run that company, 'We can do this as long as you never hire a hospital administrator to run a physician practice,'" Corley said.

Hospitals started buying practices again a few years ago. This time around, experts say, they became a bit more selective concerning location and patient volume.

Corley said Indianapolis skipped this roller coaster ride. The four main hospital networks in town-Community, St. Vincent, Clarian Health Partners and St. Francis Hospital & Health Centers-bought practices and held onto them, as did several hospitals in surrounding counties.

Central Indiana hospitals suffered some of the same lumps as other networks when they bought doctor practices, Corley said. But they realized they had to keep them or the competition would snap them up.

The result of that environment is a market in which probably 90 percent of all primary care physicians (family practice, internal medicine and pediatrics) are employed by one of the hospital networks, Corley said.

"This is one of the things that makes Indianapolis different from other cities," he said.

Dr. Christian Ballast, standing, joined Major Hospital after his physician practice was purchased.
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