PHYSICIAN PRACTICE MANAGEMENT (PPM) companies have arrived at pathology’s doorstep. For better or worse, a new era is pushing its way into the pathology profession.
In the first installment of this exclusive DARK REPORT series, we exposed the rotten secret behind the “growth by acquisition” strategy. “Acquisition only” strategies are no guarantee of ongoing financial stability.
PPMs are subject to the same market discipline as companies in other industries. A company which is growing by acquisition must also meet and exceed the expectations of their customers on a daily basis by delivering superior service. If not, then large size is not an automatic guarantee of profitability and success.
In this installment of our special series, we investigate the differences and similarities between pathology-based PPMs and other types of PPMs. The practice of pathology is fundamentally different from other hospital-based physician specialties. In the same manner, the practice of hospital-based medicine is different from that of office-based medicine.
The raging debate among many pathologists today is “should we sell our practice, or should we continue as we are?” Answering this question requires two fundamental assessments.
First, what is the reason to offer the pathology practice for sale at this time? What goals are served by the sale?
Second, if the decision is made to sell the practice, is there a certain type of buyer which is preferred? It is counterproductive to sell to the wrong buyer, since the selling pathologists must deal with the consequences of a bad decision for years to come.
In order for a pathology practice to properly assess both components, it is important that they understand the basic business characteristics of their profession. Pathology is a world apart from other physician specialties.
Don’t Interact With Patients
Within the hospital, pathologists are the only practice specialty which does not see patients on a face-to-face basis. Emergency room surgeons, radiologists, and anesthesiologists all interact personally with their patients.
But pathologists are the invisible provider. Clinicians appreciate pathologists’ role. But ask a patient to describe what a pathologist does, and most patients will think of Jack Klugman as the TV pathologist in Quincy.
Why is it relevant that pathologists don’t see patients? Because it means that many pathology services can be provided off-site from the hospital. That is not true of other hospital-based physicians.
Besides anatomic pathology (AP), pathologists are typically involved as medical directors and administrators of the hospital’s clinical laboratory (CP). Again, this function does not require face-to-face interaction with the patient.
Compared to other hospital-based physicians, the clinical procedures handled by pathologists can be organized in a variety of business settings. Many hospitals do not require a full-time pathologist on site every hour of the working day, unlike, say, radiology and emergency room physicians.
Consequently, hospital administrators have a number of options for contracting AP and CP services. For example, one pathology practice can contract to serve several hospitals, scheduling a pathologist to be on site for a minimum number of hours per week. The majority of AP specimens can be processed and diagnosed from an off-site location.
The key point here is that, compared to other hospital-based physicians, anatomic and clinical pathology services can be provided through a variety of professional business models. These business models can be located away from the hospital itself.
Next, let’s look at differences between a hospital-based physician and an office-based physician. The most relevant difference is how the physician accesses patients, because money (reimbursement) follows patients.
Office-based physicians can build their patient base using all the tools available to independent businessmen. Office-based physicians are free to choose a small office setting, a group practice, or a multi-specialty clinic.
The office-based physician also has more flexibility to participate in various reimbursement options as payment for his services. Whether capitated, PPO or discounted fee-for-service, there is usu- ally some wiggle-room to adjust payment terms.
Contrast that with a hospital-based physician. The patient case load seen by a hospital-based physician is dependent on that hospital’s daily census. If hospital in-and outpatient admissions decline, then the hospital-based pathologist has limited access to other patients.
Further, reimbursement for these patients comes to the hospital-based physician differently. For Medicare patients, there is probably a contract between the hospital and its pathology practice. Private payers and patients are billed for non-Medicare services.
Frequently the hospital contract has a 90-day cancellation clause. In a true sense, the pathology practice serves the hospital at the hospital’s convenience. Whenever the hospital wants to make a change, it generally holds a stronger hand than the pathologists. (He who has the gold, makes the rules.)
Given these intrinsic differences in how a hospital-based pathology practice contracts for services, it becomes easier to see why a physician practice management company does not automatically bring a better solution to pathology practice management.
PPMs say they can bring superior business administration skills to the pathology practice. They can also bring volume purchasing discounts for supplies and other consumables.
A PPM can certainly do that for a group or large clinic. In those practice settings, many patients per day flow through the examining rooms. A large staff is needed to support the physicians. Large quantities of supplies and consumables are required.
But compare this with pathology. The vast majority of pathology practices number five pathologists or less. The hospital provides their equipment, their staff, and their office space. Obviously there is little opportunity for a PPM to “add value” in the business administration of the pathology practice.
Next, PPMs say they can help market the physician’s practice and build
patient volume and revenues. But how does a typical hospital-based pathology practice get more specimens? It relies on the hospital’s daily census for the lion’s share of its specimens.
To get more specimens, it must get additional hospital contracts. But that usually means taking the hospital’s contract away from the pathology practice which served that hospital for decades. That is an unlikely scenario.
Analyst Provides Warning Flag
“I would advise any investor or physician evaluating a PPM to look at that PPM’s balance sheet,” said an industry insider in an off-the-record interview with THE DARK REPORT.
“If I see that 70% to 80% of that PPMs assets are goodwill, then I recommend avoiding that company,” he continued. “Here’s why. Goodwill is the excess of purchase price over assets. If a company’s net worth is mostly goodwill and similar intangibles (like the value of hospital or managed care contracts}, then it is a sign that the PPM has probably paid too much for the cash flows it acquired.
“The recent huge losses at PPMs like MedPartners and PhyCor result from write-downs taken on goodwill,” said the analyst. “They used accounting rules to generously pay for physician practices. The ability to squeeze more revenues from these practices proved an impossible task. In my opinion, the PPM industry has more hard times ahead and physicians should exercise caution before selling their practice to a PPM.”
Or, the pathology practice can solicit specimens from the outreach market. But those AP specimens already go to another laboratory. It requires expense, time, and persistence to build a sales outreach program for AP. Can a PPM afford to do this for most pathology practices, which number only two or three pathologists? Probably not.
Finally, how stable is a pathology PPM when it acquires a hospital-based practice receiving much of its money from hospital contracts with a 90-day cancellation clause? There is certainly no underlying security to protect the pathology practice and its affiliated PPM if the hospital were to seek a new pathology provider.
PPMs dedicated to pathology are still a new phenomenon. But for the past eight years, other types of PPMs have actively transformed the world of the office- based physician.
For better or for worse, PPMs have irrevocably changed the practice of medicine. But will PPMs improve the profession of pathology? That question