Challenges to physician practice acquisition and integration


The relationship between physicians and hospitals has not always been an easy one. As the two groups once again look to align their interests and organizations, Johnnye Dennis and Kevin Junod of Lockton look at the challenges and opportunities ahead.

Few physicians entering the practice of medicine today are starting their careers by way of setting up an independent medical practice. Instead, they are opting for employment. Meanwhile, physicians with established practices are experiencing greater difficulties in managing them. Both are turning to hospitals, healthcare systems, insurance companies, private equity groups and others to find relationships that will allow them to practice medicine without many of the distractions from patient care that are associated with the management of a practice.

Hospitals have been responding to this dynamic with eagerness, believing that an alignment with physicians will improve the quality of care and patient safety as well as the bottom line.

This relationship has been tried before—in the 1990s and early 2000s—but failed due to frustrations on both sides. Physicians became exasperated with how hospitals managed the practices, and hospitals became dissatisfied with the physicians’ lack of motivation and declining productivity. Hospitals and physician practice management companies lost money and, eventually, physicians returned to independent practices.

Yet here we are in 2012, with hospitals and physicians seeking relationships again. Why? Will it work? And moreover, what are the risks?


When we look at the recent rise of commercial payer pay for performance (P4P) programs and the movement of the Centers for Medicare & Medicaid Services (CMS) towards bundled payments under the accountable care organization (ACO) service model, we see that an integration strategy is needed, both to improve quality and enter into broad-based financial risk-sharing arrangements.

According to the latest survey statistics from the American Hospital Association (AHA), hospitals employed 211,500 physicians in 2010, a 34 percent increase since 2000 which now encompasses almost 25 percent of all active physicians. With 60 percent of hospitals currently using hospitalists, 37.9 percent of hospitalists on the medical staff are employees.

Employing physicians has the potential to improve quality and efficiency through better clinical integration in all care settings, but hospitals also utilize physician employment strategies to gain market share by increasing services across their business lines. Hospitals can also negotiate better health plan contracts on behalf of employed physicians, gaining higher rates which are likely to lead to higher compensation.

For hospitals in markets where physicians are less inclined toward employment (or where it is not allowed, such as in California and Texas), contractual arrangements are still pursued to strengthen relationships in the move towards Medicare payment reforms.


Physicians have experienced stagnant reimbursements rates and rising costs of private practice. Navigation through the complex changes in the insurance and delivery systems under healthcare reform may be done with less effort while in hospital employment, bringing relief from the administrative burdens associated in participating with the private and government-sponsored insurance programs.

Further, in private practice there is often not enough capital available to invest in new technologies such as electronic medical records. ACOs may be too costly for the individual practices to implement as nearly 75 percent of office-based physicians work in groups of five or fewer clinicians. This is true for nearly 95 percent of all medical practices in the US.

Many practices do not offer, nor can they afford, to provide services required by the Patient Protection and Affordable Care Act (PPACA). Outside of hospital employment, financial risk for the physician will depend on the type of contractual arrangements made for shared risk, but it’s fairly evident that unless a physician decides no longer to accept Medicare or Medicaid patients, some financial arrangement will be necessary with the community healthcare providers. 

Quality of life and financial security improve with employment although the traditional salary compensation has changed since the physician employment contracts of old. While volume related to physician productivity is likely to continue, quality metrics are gaining ground.

In the Medical Group Management Association’s 2010 Physician Compensation and Production Survey, 62 percent of physicians had incentive-based compensation tied to quality metrics in 2009, a 300 percent increase in just one year. Some quality metrics include detailed physician focus on chronic conditions such as asthma, congestive heart failure and diabetes. If quality benchmarks are achieved, compensation may be anywhere from 1 to 10 percent.


A complete assessment of all risks associated with integrating a physician or a physician practice with a hospital is beyond the scope of this limited discussion. So, let’s suppose that those involved with valuation of a physician practice and physician compensation will negotiate an agreement that will not be in violation of federal or state laws applicable to such an agreement.

Depending upon the dominance of the healthcare system after physician practice acquisition, let’s also assume that any non-compete language will not invite the Federal Trade Commission’s interest, as was seen with Renown Health of Reno, Nevada upon its acquisition of two cardiology practices in Reno. It just may be that the health system has managed to avoid a directors & officers (D&O) claim, but the risks clearly do not stop here.

‘Due diligence’ should include assessment of liabilities, claims and compliance history of the potential acquisition providers and the corporate organization, not only for purposes of whether to acquire a practice but for the insurability of the physicians. As many health systems retain a substantial amount of medical malpractice risk, underwriting considerations are a major concern and loss runs should be obtained for review as physicians may not recall their total loss history, especially if they’ve been in practice for a long time.

An assessment should include the length of practice, practice specialty (some specialties have a long lag time from incident to discovery of injury), whether the state location of the practice is subject to malpractice caps or the opposite, known as ‘judicial hellholes’. 

Typically, post-acquisition malpractice premiums are paid by the hospital for its employed physicians but tail coverage negotiations are paramount. The physician will invariably request the hospital purchase tail coverage for run-off coverage of a claims-made policy; this request will most likely come at the end of an otherwise successful negotiation.

The physician’s continuing liability for prior activity can be a significant risk for the acquiring hospital and may well affect the insurance risks or risk-financing programs from acquisition date forward. Even in an asset purchase, successor liability can impose financial responsibility to the acquiring health system for pre-acquisition activities.

If the current physician policy is written on an occurrence basis, will the prior limits be sufficient to cover a suit that is brought years later and, just as important, will the carrier still be in business? Additional research and insurance alternatives from a well-qualified broker may assist in determining the most cost-effective risk-financing solution, information not usually available to law firms. 

Additional risk assessment may also be needed for the physician’s corporate entity as to its corporate practices and compliance with federal and state laws. What is the history as to billing coding practices? Recognize that post acquisition, the hospital may well be responsible for payment of any Medicare violations of the prior practice. Unknown to many in the process, such medical billing errors & omissions (E&O) risks can be insured and provide substantial peace of mind to all parties involved.

Is the organization compliant with the Health Insurance and Patient Affordability Accountability Act (HIPAA) and the Health Information and Technology Act (HITECH)? How are cyber and privacy liabilities going to be addressed? How will the e-risk profile of the organization change after substantial merger and acquisition activity and expanded use of the electronic medical record?

Many physician practices are without a risk manager or human resource personnel, so are there exposures with respect to employment liability? Was the physician practice self-insured and, therefore, accustomed to handling and settling claims independently? 

In additional to the financial risks of new P4P and bundled payment contracts, hospitals have a lot of money at stake with these new hires, which often incur high upfront costs. The physicians are expected to be significant future sources of revenue for the health system and, as such, should be viewed as ‘key person’ insurable assets of the organization. A new approach toward life, disability and retirement products will be needed for health systems to attract, retain and protect highly valued physician employees in the new model.


Healthcare organizations should not be naïve about the challenges and risks associated with employing physicians. The investment is substantial and hospitals often lose money during the early years of a physician employment contract. Done incorrectly, the acquisition could lose a lot of money. Perhaps more importantly, clinical and business reputations are at stake.

There can be significant culture shock in this process. Under hospital employment physicians give up the autonomy associated with owning a practice, but hospitals need to remember that most physicians have never been taught to think as team members in large organizations. Employment alone will not necessarily bring engagement in the manner that is required to achieve the outcomes needed under this alignment.

We need only to look at history to recognize this fact. Physicians are unlike any other employee in healthcare. They are accustomed to being the business leaders, clinical decision-makers, and daily problem-solvers—and they often move at a faster pace than hospital administrators. Physicians new to employment will need mentoring by more experienced employed physicians.

If healthcare systems and physicians use shared ideals and goals when affiliating under an employment alignment, history should not repeat itself. Success in a shared risk environment will come with a shared ethical foundation and an embraced ‘we’ attitude.


Integration, Physician, Hospital Healthcare Systems, Management, Challenge, Risk, Medical Practise