Physician Practice & Hospital Integrations: Cardiologys Inescapable Future

 The current pace at which U.S. cardiology physician practices are merging with hospitals and integrated delivery networks (IDNs) has only quickened since the massive CMS cuts, which took effect at the beginning of 2010. According to a recent American College of Cardiology (ACC) survey, 54 percent of practices reported integration is being actively pursued or on the horizon. Executives and cardiologists from Minneapolis Heart Institute (MHI) and Piedmont Heart Institute (PHI)—two geographically different practices, with varied models of integration, governance, physician compensation and vendor contracts—came together to discuss these issues, along with an attorney, who has brokered many integrations on behalf of physicians.

Roundtable speakers included:

  • Kevin J. Graham, MD, President and Director, of Preventive Cardiology, MHI, Minneapolis
  • Christine Bent, Chief Operating Officer, MHI, Minneapolis
  • Michele Molden, President and Chief Executive Officer, PHI, Atlanta
  • George Vellanikaran, MD, Cardiologist and Director, PHI, Atlanta
  • William T. ‘Mike’ Carlson, Jr., Attorney, Maynard Cooper & Gale, Birmingham, Ala.

Could you briefly describe your integration process?

Graham: In 1995, MHI integrated its group of 21 cardiologists with Abbott Northwestern Hospital, part of the Allina Health System, in an attempt to form what is today called a cardiovascular accountable care organization. We sought a business and clinical unit that could avoid the trappings within the developing IDNs, while providing improved patient care. Over the last 15 years, this partnership has created a stable platform, allowing us to recruit, develop a care network, serve 33 sites in Minnesota and Western Wisconsin through outreach, and form a diagnostic system throughout the upper Midwest.

Molden: From November 2007 to July 2008, we merged three cardiovascular groups in Atlanta to form a 62-member group. Integration was the clearest way to benefit from our ambulatory and in-office practice environments, while advancing quality and technology without being in constant conflict and competition with the hospitals. Over the last year, we have grown to 77 employed cardiologists and 17 affiliated physicians, allowing us to add cardiovascular surgery, vascular surgery and thoracic surgery. We still are trying to figure out how to create a uniform approach across our 31 practice sites. While MHI has benefitted from stability, we still have some rolling chaos as we figure out how to manage this large footprint.

What do you see as the driving force behind practices’ decision to integrate with hospitals?

Vellanikaran: For us, it was apparent that the Atlanta groups were fragmented, growing at their own pace and wasting a lot of time and money competing with each other and the hospitals. Our group is located on the south side, away from Atlanta, so we felt we had geographic and cultural differences that prevented us from joining PHI during the initial integration. We were a smaller group with a suburban practice, and PHI seemed like a huge city-based group of 60-plus physicians. We have since overcome those initial cultural concerns. Another driving force is the recent Medicare cuts that have largely affected cardiology, and merging seemed like the best way to protect our future.

Carlson: In the early days of integration deals, hospitals wanted to employ cardiologists and practices were not driven by reimbursement cuts. Often, it was cardiology groups whose financial or organizational performance had caused the group to become unstable and the hospital was concerned they would lose specialists who were important to their financial health. Over the last several years, these parties have begun exploring the accomplishments that can be achieved collaboratively. Especially since the 2010 CMS cuts to imaging reimbursement, financial motivation has become the largest incentive. While reimbursement cuts may initially bring cardiologists to the table, the savvy entities also understand there is an opportunity to address patient care and quality of care issues.

Graham: Mike, what percentage of physician groups are integrating or in the process? What’s your best estimate in two years?

Carlson: At ACC.10, Jack Lewin [MD, the college’s CEO] said that by December 2011, roughly two-thirds of all cardiologists would be in some type of integrated relationship. That figure sounded high, but it is amazing to see the number of groups that are seeking these discussions. Within 10 years, there will be hardly any independent cardiologists. Providers are facing dire economics that will make this a reality sooner rather than later, and maybe five years is a more accurate timeframe. In fact, Jim Dove, [MD, ACC’s past president] believes there is a purposeful effort by CMS and the government to bring hospitals and physicians together in an integrated model.

What value propositions can private practices bring to the hospital setting?

Molden: Physicians have been forced to compete with hospitals not just on a service basis, but there also is a conflict of commitment or time, in that they are very busy keeping their practices afloat in a difficult environment. The value proposition for Piedmont has been that these physicians have brought their talent and intelligence into our organization. Since we are physician-governed and physician-managed, we also manage the clinical enterprise. We have clinical responsibilities for the cath labs, the cardiovascular operating rooms and the nursing units at Piedmont Hospital. To me, the magic of this alignment has been the improved quality, reduced costs and greater operations efficiency. 

Bent: We have developed a scorecard that seeks to align incentives throughout the system, affecting the practice, hospital and corporate entity around care, service, financial health, people and growth. Every year, there are new initiatives in each of those areas tied to our overall strategic plan. For instance, we are currently focused on creating an ideal patient experience. Patient satisfaction stats are now being published, and in the future, we may get paid based on those data. As a result, we have tied improvement in patient experience as measured by patient satisfaction scores into the physician incentive structure.

What are the various merger models?

Carlson: There are three primary models:

  1. Contracting model: Not a true integration, but used when a cardiology group doesn’t have a strong relationship with the hospital, but is looking at some type of co-management agreement, outreach agreements or call-pay agreements to bring the entities closer. In this model, the group and the hospital set goals within the contracts that the physicians will meet. It’s typically a starting point.   
  2. Leasing model: Cardiologists will lease the assets of the group and even lease themselves to the hospital. In this model, there is a comfort level for the cardiologists who can easily return to the private practice model. Also, the hospitals do not have a large upfront, capital payment to purchase the practice.  
  3. Employment model: Cardiologists are committing their practice and professional lives to a relationship with a hospital or IDN. From the hospital’s perspective, it has a real commitment from the physicians, not merely employer/employee, but a partnership. Hospital CEOs look forward to having physicians on their side of the table. This collaboration should be an improvement on both sides financially, operationally and for quality of care. I surveyed my deals between 2005 and 2009, and discovered that 92 percent were employment model deals. 

Graham: Our contract indicates that when we go off the campuses, we become the cardiovascular vehicle for the health system. We cannot stress enough the importance of building strategic relationships with hospital administration, which aroused some resistance at first. This dynamic doesn’t form overnight. You think you know about a hospital before a merger, and then the curtains come back. However, at that point, it has to be a working team. Some practices try to exist as a private practice in an integrated system: you lose the benefits of true integration when this happens. In the early years, it is important to leverage physicians at the proper point; you want physicians involved in important decisions but you don’t want them mopping the floors.

Molden: Piedmont has a variety of models with different service lines. In our early model, we formed a cath lab joint venture, which didn’t get us very far, but it built trust between the groups, and later between the groups and the hospital staff. When the curtains come back and everybody gets honest about the conflicts and works together to achieve accomplishments—however small—it can be a process to build the trust needed to achieve a fully integrated model.

Carlson: Michele, can you explain PHI’s relationship with your affiliated cardiologists?

Molden: There are several groups in Atlanta that wanted to be part of PHI that aren’t at our campus facility, so they are not part of the system. However, there were two groups—one large and one small—located in strategically valuable areas, so we developed an affiliation model where they can participate in our clinical quality guidelines and can apply to be members of our contracting organization. This gives both of us the chance to test the water. Once you start moving down this path, the process evolves rapidly, so the affiliation gives us the opportunity to make sure that these groups are consistent with our culture and that we can meet the business and quality goals for their practice.

Could you assess the various methods and importance of governance?

Vellanikaran: Governance was one of the issues that originally kept us from joining PHI. In the last three months as part of PHI, the practice is running pretty much the same way. The scheduling is fully under our control, including for patients, physicians and vacations. Obviously, the finances now are centrally governed under PHI. We prefer this model to the affiliated model, as affiliates have no exposure to the Piedmont system. 

Bent: The governance structure is the most important aspect of an integration deal. Our bylaws written 15 years ago are still in existence today because five of our cardiologists are at the decision-making table with four Allina executives. As our divisions have expanded to include CV surgery and vascular surgery, each of those subdivisions now has a seat at the table. This board is where we set the strategy for our divisions with both Allina and Abbott Northwestern executives. Beneath that board, we have operating committees for each one of the physician groups to make more of the day-to-day decisions.   

Carlson: Many physicians are surprised that governance will mean more to them concerning their personal and professional satisfaction than the economic package. Often, there are five or six cardiologists in a practice who don’t want to integrate, and they are typically concerned about giving up professional freedom. However, most hospital execs have no interest in cardiologists’ daily operational issues. Physicians typically remain responsible for their daily schedules, their staff and patient scheduling. Usually, during the negotiations, governance consumes the second meeting between the physicians and the hospital, after the first principles’ meeting where they discuss what’s critical to them in the transaction. We spend as much as two-thirds of negotiations talking about governance because it’s also a challenge for hospitals, particularly nonprofits, that are concerned about their reserve powers, the Internal Revenue Code and other Medicare-related laws. The contract has to clearly define a governance structure so everyone is comfortable. Yet, the first year is often the hardest, even if there is goodwill between the two entities.

How do physicians protect their personal compensation/value to the practice?

Carlson: Over the last couple of years, we have begun asking hospitals for longer term commitments. The typical contractual agreement is five years, but we have hospitals considering 10-year commitments because the group is foregoing their practice to become partners with a health system. The hospitals are often wary of making a 10-year financial commitment, due to the financial risk. While physicians usually improve their compensation in these deals, there is the possibility of continued reimbursement declines. In 2014-2015, even more dramatic cuts will likely occur, so agreements should be risk-sharing models. For instance, if reimbursement falls to a particular percentage, a market basket approach can be employed so there is a reasonable impact on physician compensation.

Molden: When we were starting the process, we profiled about 10 integrated groups that were far more mature. We found there was no standard method for compensation and these models were constantly evolving. We started with a rudimentary compensation model but immediately convened a compensation committee, on which our CFO sits. After a year, it developed a compensation model that blends personal productivity, group affiliation and citizenship, but also rewards physicians for unique roles, such as administrative responsibilities. When we implement that plan in July, we will shadow it for a year before it becomes permanent to ensure that we are thinking about the laws of unintended consequences. Compensation is one of the most powerful levers to make this relationship work. 

Graham: When we wrote our deal in 1995, we didn’t leave enough considerations for bringing on new members, which caused us to rework that aspect in 1999. We use a positive non-compete, so a cardiologist could leave and practice across the street, but there is a negative financial incentive to do so. There is a portion of the physician’s salary that is deferred, and if you don’t compete, then it is released at the end of the term. We have negotiated so that at the end of each subsequent contract, the non-compete is paid out or you can roll it into the next contract.

Carlson: Relative to non-compete clauses, in the past, if a cardiologist decided to leave the collaboration, his or her colleagues agreed that they could relocate to another practice within their market because they didn’t want to force a partner to leave a community or become a disruptive influence in the group. However, now, the idea that one or more partners could leave and become competitors causes many cardiology groups to embrace non-competition provisions in their contracts. The most difficult area in negotiations is what happens at the end of a contract term.

If a practice has a particular vendor contract, how do you avoid conflicts with the hospital’s/IDN’s current contracts?

Bent: Being part of the larger system, all of our contracts are negotiated at the system level with our physician representatives highly involved. Our supply cost management has required collaboration and compromise among the physicians as they work with us to optimize supply pricing and utilization with preferred suppliers. We have an incentive structure where savings are accumulated. Fifty percent of the savings come back to our capital accumulation fund and the cardiology division can invest in new technologies, particularly for the latest and greatest technologies to further the goals. For example, we just purchased a new Flash CT Scanner, allowing us to add CT perfusion to our repertoire of services. Working collaboratively with the system, we have been able to reduce our vendor contract pricing effectively.

Molden: One example for us is when our primary care unit contracted with a different vendor than the cardiology group wanted to use for their office supplies. We have a large distribution center and a supply chain manager who allowed us to negotiate with whichever vendors would not only provide the best pricing, but also provide the best service. That flexibility allowed us to get a standardized price because we required our vendor to meet the prices that we could get on a consolidated contract.

If a particular hospital merges with a number of practices in its geographic area—is there a potential of one provider having a monopoly on a particular market for CV services?

Graham: That is a consideration, but competition is healthy and it makes us better when there are competitors that are pushing us. Likewise, we may push them. Also, there are hopefully enough safeguards both in the marketplace and government to keep that from happening.

Carlson: We are wrestling with this issue right now in three different states. In one state, the Federal Trade Commission has actually sent investigators in to look at a particular deal. Under a new presidential administration, it becomes tougher to predict the thinking of the Department of Justice and Federal Trade Commission. In the Clinton and Bush Administrations, we had a sense as to what they were looking for and there wasn’t much difference between the two administrations. Antitrust lawyers in these three states feel that the Obama Administration is going to take a tougher stance concerning the consolidation of market power as it relates to healthcare.

Molden: Don’t you think that once integration occurs, it creates a perfect platform for competitive bidding nationally?

Carlson: Hospitals that are considering a strategic integration are better positioned to become accountable care organizations. We expect the government to turn the whole reimbursement system on its head; we expect fee-for-service to go away; we expect to move away from the DRG system; and we expect that some type of bundled payment arrangement will emerge. Hospitals that are thinking strategically about integration are getting prepared for that time. 

Graham: Hospital presidents nationwide have a long line of specialists outside their hospital doors inquiring about whether they can become employed. More than most other specialties, cardiology has always been about data and has interfaced with primary care, related to hypertension, diabetes and lipids on almost a daily basis. This makes cardiology an appealing specialty because of its volume and the central place it holds in the healthcare network—as a bridge between hospitals, specialists and primary care. This unique position may benefit cardiology as health system executives may soon have to consider which specialists they can afford to employ in times of economic uncertainty.