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Arkansas Hospitals Keep Buying Physician Clinics

5 min read

When hospitals buy physician clinics, the results are mixed: higher costs for patients and their insurers, more revenue but lower profits for hospitals, fewer hassles but less autonomy for doctors.

But the trend, which is as evident in Arkansas as it is nationally, shows no signs of going away.

This week, Arkansas Business debuts a new list: Hospital-Owned Physician Clinics. It’s a tricky list, ranking the hospitals that own clinics by the total number of physicians they employ directly. Because doctors may practice at more than one clinic, we have asked hospitals to list all of the clinics they operate, but we did not ask for the number of doctors working in each clinic.

The doctor-employing champion by miles is the University of Arkansas for Medical Sciences Medical Center, the state’s teaching hospital in Little Rock. It employs 941 physicians and 223 “physician extenders” — nursing practitioners and physician’s assistants — and lists 20 different clinics.

No. 2 on the list, CHI St. Vincent in Little Rock, employs 258 doctors and 89 extenders. But it has the longest list of separate clinics, 60 of them, including home health providers.

The trend is not new, but it has picked up steam during the Obama administration. Why depends on whom you ask.

Insurance researchers at Conning & Co. Inc., in a year-end 2015 report, predicted that “merger and acquisition activity is expected to increase as smaller hospitals struggle financially when reimbursement becomes more focused on value than traditional fee-for-service models.”

But Paul Cunningham, executive vice president of the Arkansas Hospital Association, said his members are not having to court doctors.

“From what we have heard, it’s not so much the hospitals going out and talking with physicians,” Cunningham said. “It’s the docs saying ‘Can we be a part of you?’”

Reducing financial risk and administrative headaches are among reasons doctors decide to sell to hospitals. The allure of a steady paycheck as an employee, with someone else covering the cost of reporting paperwork, malpractice insurance and other office overhead, can be overpowering.

“The biggest, overriding one is getting away from the hassle and frustration that has been pushed on physicians, mostly by federal requirements and private insurance requirements,” said David Wroten, EVP of the Arkansas Medical Society.

“You don’t have to be in the business of medicine. You get to focus on the practice of medicine.

“The amount of regulations and pressures, both administrative and financial, that has been placed on independent physicians has become for many overwhelming. As a result, their satisfaction level for their profession has been reduced, and they’re looking for ways to get past that.”

Corey Little, president of Arkansas Mutual Insurance Co., which insures physicians for medical malpractice, said doctors sometimes discover that the relief from administrative headaches comes with a downside.

“At first, ‘This is great, I don’t have any more paperwork,’” Little said. “But if you want to make more money next year, you have to see more patients. ‘Well, I’m already seeing the maximum number.’”

Little also thinks hospitals have an incentive to acquire clinics.

“The motivations by the hospitals are to control where the patients go,” he said. “If you are doing a profitable procedure — a heart procedure, let’s say — the hospital wants you to do it at their hospital as opposed to their competitor across town.”

The current consolidation marks the third wave of medical practice acquisitions since the 1990s, according to Dr. Scott Gottlieb, resident fellow at the American Enterprise Institute.

The first occurred when physician practice management companies arrived on the scene but were unable to achieve the efficiencies and financial savings envisioned.

That was followed by hospitals buying doctor practices with an eye toward protecting market share by gaining more control over patient referrals. But like the PPMs, hospitals often experienced operational losses instead of the anticipated financial rewards.

“This time it’s not business factors alone that are driving these mergers,” Gottlieb said when he testified in September before the U.S. House of Representatives Subcommittee on Regulatory Reform.

“This time, the consolidation is a consequence of deliberate policies designed to instigate these marketplace changes.”

Among the biggest factors driving hospital acquisition of medical practices is an unequal Medicare reimbursement schedule. The payout tilts heavily toward hospital-owned outpatient clinics over independents, with cardiology and oncology among the most lucrative.

Gottlieb cited several examples of the disparate reimbursement for the same procedures: heart scan, $749 versus $503; colonoscopy, $876 versus $402; and a 15-minute doctor visit, $124 versus $70.

The rationale behind the higher reimbursement rates is that hospitals have a bigger, more expensive infrastructure to maintain although the same logic doesn’t correlate to hospital-owned clinics.

Private insurers, too, allow higher reimbursements for hospital systems, and the result is increased out-of-pocket costs for patients. In 2014, the Journal of the American Medical Association published research by the University of California at Berkeley that found hospital ownership of physician groups led to patient care costs that were 10 to 20 percent higher overall.

The additional money is not necessarily going to the hospital system’s bottom line. In December, Moody’s Investor Services reported that nonprofit and public hospitals that directly employ the most doctors saw strong revenue growth but lower profitability than hospitals that employed fewer doctors.

“It’s pretty simple,” Daniel Steingart, a senior analyst for Moody’s, told HealthLeaders Media, an online trade journal. “Physicians are very expensive to employ.”

In his testimony, the AEI’s Gottlieb said it may be too late to correct the payment imbalances that have encouraged hospitals to buy doctor practices.

The Bipartisan Act of 2015 Budget made a token gesture in that direction. Off-campus hospital outpatient departments established after the law took effect Nov. 2 will receive Medicare reimbursements in line with physician payment or ambulatory surgical center payment as of Jan. 1, 2017. Those established before Nov. 2 receive grandfathered reimbursement treatment.

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