Chronic Conditions

In the early to mid-1990s, managed care was the theme of the
day and the employment of physicians by hospitals was in vogue. But hospitals
and health systems rapidly discovered that managing a medical group was
significantly different from managing an acute care facility.

Most notable in the Northwest was the formation of Medalia
HealthCare, merging 45 physician clinics from the Providence and Franciscan
systems. But after losing $36 million in 1998, the venture was dissolved.
During this time, a commonly cited statistic was that hospitals managing
physician practices could count on losing $100,000 per physician annually. This
situation led to many facilities either divesting themselves of these practices
or freezing these initiatives.

Welcome to round two, where a variety of factors during the
past several years has again led health care facilities to employ physicians
and acquire medical practices. According to the Medical Group Management
Associations annual Physician Compensation and Production Survey, the number
of doctors in hospital-owned practices has increased to 50 percent of the total
in 2008 from 26 percent in 2005.

There are many factors contributing to this trend:

Regulations, human resource issues and many similar factors
continue to increase the complexity of managing a medical practice. Most
physicians choose the profession to practice medicine but are seeing patient
care hours being squeezed by the administrative burden.

Many younger physicians do not possess the same
entrepreneurial spirit that, historically, has been common to the profession.
They are more interested in work-life balance and quality patient care than
substantial salaries.

Rising health care costs continue to force a shift in
payment responsibility away from traditional third-party insurance provided by
employers to private-pay or government payers that often remit less than cost.

Medicare reform is bringing the inevitability of bundled
payments and outcomes measures, which will force the coordination of care
between physicians and hospitals to maximize reimbursement.

Neither legislative nor reimbursement trends favor physician-owned
surgery centers and hospitals.

Future reimbursement will depend on implementing electronic
medical record systems that require capital investments that many physician
groups are either uninterested in or incapable of making.

But the consolidation phenomenon affects more than just
single or small physician practices. Larger single and multispecialty clinics
are also looking at these factors and considering their own future viability.
In Spokane, the 80-year-old Rockwood Clinic, a multispecialty practice
consisting of approximately 220 physicians, was recently purchased by Community
Health Systems, the Tennessee-based chain with more than 122 hospitals in 29
states. The reasons cited for the merger were a desire to develop a regional
integrated care network and the continuing need for capital.

From hospitals perspectives, acquiring medical groups and
employing physicians still brings the specter of losses, or at least
significant investment that may not be recouped in the short term. But the
prospect of ancillary revenues, securing the increasingly scarce physician
resource, and proactively preserving market share are more than worth the cost
and effort. Indeed, this may be the difference between survival and the
alternative.

Todays health care environment clearly presents a multitude
of challenges. And, in order to survive, providers and hospitals alike will be
forced to find creative ways to remain viable and relevant. There is no doubt
that adapting appropriately will result in a landscape much different from that
of the past.

Chris Rivard is a partner in Moss Adams health care
practice. Founded in 1913 and headquartered in Seattle, Moss Adams is the 11th
largest accounting and consulting firm in the United States.