Hospitals Employing Physicians: Is It Different This Time?

Posted on January 24, 2012

Around 15 years ago, physician practices were purchased by hospitals at compellingly high prices. Unfortunately for these hospital systems, within a matter of just a few years, the physicians were re-injected back into the community, largely because the hospital systems had not realized a return on investment. Fast forward to 2012, we hear similar stories about physicians becoming incorporated into a hospital’s network.

‘

The reasons for hospital systems obtaining physician groups may be many. But, most conversations boil down to either a specialty or geographic play, whereby hospitals seek entrance or command of certain designated fields or locales. Also, with the establishment of healthcare reform, and impetus from both hospital and physicians for greater reimbursements, as well as a movement to adopt a more streamlined, technologically advanced care distribution model — we think this time may be different.

‘

Based on casual conversations, the motivations to join a hospital from a physician perspective is appearing much greater today than it was in the mid-90′s. A weakened economy, high employment or practice costs, entry barriers, a more savvy-consumer, and the potential for declining reimbursements, are among the top justifications that we hear from physician groups.

‘

There seems to be a greater number of differences in how the hospital systems are purchasing medical practices today, though, when compared to that of years past. Mainly, hospital systems are not offering to pay exorbitant prices, likely as a result of previous miscalculations. As for those that we speak with, many are not seeking to purchase practices outright (staff, equipment, management, real estate, in some cases). Instead, the hospital is offering employment compensation, with greater emphasis on incentives for productivity, to a select group of physicians for a number of years. Also, because reform will include greater regulatory oversight of physician purchases, this may be an incentive for hospitals to complete acquisitions prior to 2014, when the majority of reform’s initiatives take effect.

‘

The most common way that a physician practice group is absorbed by a hospital is through a method where physician owners and practice administrators keep an ongoing operation in place, essentially subjecting to less guidelines and oversight, but to assume some naming rights, some jurisdiction, as well as partnership for likely for potential future transaction.

As for the outright sale of a practice to a hospital, it may be achieved in several different ways. A hospital may purchase a practice’s tangible assets with physicians and staff as employees of the practice, whereby the unit is obtained as a separate entity. In another instance, the hospital may acquire the assets, physicians and staff to become employees of the hospital, in which the practice discontinues. As for unique circumstances, the staff becomes employees of the hospital, but the physicians remain separate.

A certain consideration should be made by physician groups as to the value of their practice to the hospital system. Because anti-kickback laws exist, the hospital cannot pay a physician group more than ‘fair value’ for their practice. Any payment that is beyond a certain amount could be considered a ‘kickback’ for services provided to the hospital. Also, keep in mind, the revenue generated by physicians for referrals outside of the practice itself are not considered in the valuation.

Another issue that comes from a practice purchase is that physicians are not relieved of their responsibilities. This is because the acquisition is commonly considered a separate operating division or profit center of the hospital. Consequently, the physicians compensation is still tied to the profitability of their previous medical practice. This provides troublesome if physicians are nearing retirement.

One last reminder, and a stark reminder of how this time may be different, is how the practice’s patients now can easily become part of hospital’s affiliated practice, especially with the advent of electronic medical records. In essence, the hospital now owns and operates all patient lists and records that have been accumulated by the practice group.

While I will leave you with the determination of whether it is better to sell, partner or lease with a hospital, MREA has established healthcare real estate professionals, accountants and attorneys to whom you have access. Contact us for our wide range of client responsibilities that incorporate business strategies with extensive real estate capabilities.

Comprehension of a Medical Lease Contract

Posted on October 13, 2011

Statement: After auditing countless medical leases through our firm, its CPA and attorney partners, we want to make fully aware the consequences of any real estate agreement that is executed (signed).

On behalf of the associates of this firm, the declaration above is about as harsh and opinionated that we, as advisors, can be without crossing the line whereby disassociating ourselves in our mission to coordinate the healthcare real estate markets; physician, hospital, investor, owners.

But, speaking from the perspective of a landlord (lessor), the largest impediment that a landlord sees is the lack of commitment and foresight from the lessee’s principal founders with regards to their own organization’s goals and objectives. The landlord has to take into account that the necessary financial due diligence has been performed and the organization is prepared for the legal ramifications if ANY PART of the contract is broken. Thus, it is essential when provided any document that requires signature that it is taken to someone else for further review. Take it to your spouse, your associates, your financial partners, your attorney, your accountant, your shareholders. If your firm is fortunate enough to have real estate representation that will not charge you an arm or leg, take it to your broker.

Typically, the mistakes that we see from physicians (especially independents) is that of discounting the lease instrument and the level of sophistication and comprehension necessary to interpret this contractually-binding obligation effectively. As an example, if there are 10 items that are conveniently written to control one party of a transaction, does the other party know all 10, or just 5, or 2? Remember, it is already popular culture that a physician is not a savvy businessperson, which does not speak of their collaborative efforts. All kidding aside, it is of paramount importance to fully comprehending any contract or, at the least, obtain verbal or written interpretation through fiduciary relationships.

Now, for the really bad news.

The field of experts that truly understand medical contracts and can convey its purpose, as well as its fine print requirements to your organization, are few. Because most healthcare real estate real estate experts understand this, they will typically work for a 5 to 10 percentage premium over the traditional brokerage firm’s marketed commission or consulting fee. You may be fortunate to locate a highly skilled healthcare unit, but beware the temptation to accept their services for both sides of any transaction for reasons that I do not need to explain further.

To summarize, our readers should be acutely aware of the needs of their organization first, prior to contracting with any commercial or medical real estate agreement. They should also make sure they have brokerage or counsel that can perform the necessary tasks associated with YOUR transaction, which should be compensated by their firm. Until then, we can keep combing over the mistakes, some of which will cost our clients bankruptcy, until lessens are learned.

This article was written by Robert S. “Bob” Lowery, Managing Partner with MREA | Medical Real Estate Advisors.

10 Real Estate Requests From Our Medical Clients

Posted on February 28, 2011

These are the most common requests fielded by our medical representation group:

Accessibility – Doctors are looking for greater access to major road arteries and highways so that their patients can locate them easily. If a doctor’s office is off the beaten path, the patient may become lost and have to cut through side streets or worse, make unnecessary phone calls to your office. From a patient’s perspective, after exiting the highway, a physician’s practice should be no greater than two turns. As a patient, they may not be in the best physical or mental health whereby adding additional stress may complicate the already difficult situation. While most doctors that we speak with have a strong regard for their patient population, more and more are heeding this wisdom.
Mixed-Use Development/Modern Architecture – More often, physicians are looking for mixed-use developments featuring more modern architecture. They are attracted to buildings that are appealing and inviting. Unless you are a small practice with a doctor or two, the old one story stucco flat roof office building is quickly becoming history. A few recent medical office building projects in the Woodlands, Sugar Land and Cinco Ranch are examples of prime upscale designs with the more modern office park environments to which many physicians gravitate.
Parking Ratio and Parking – Most professional office buildings have a parking ratio of three to four parking spaces per thousand square feet. With patients coming and going throughout the day, doctors need to have at least five to six parking spaces per thousand square feet to avoid overcrowding. Since parking can be tight in areas such as Downtown, Midtown and the Inner West Loop, doctors often shy away from the area for medical. Driving the suburban markets you will notice medical in every direction, but driving Travis Street, Main Street, or Westheimer the medical is very sparse, if not nil in some stretches. Physicians are requesting reserved parking, which is also a nice bonus for key employees and staff as well. Also, covered handicapped pick-up and drop-off areas are a real asset, especially if there are associated outpatient treatment facilities.
Shell Space vs. Used Space – Although shell space, not built-out, may cost more in the initial term, it will end up saving the practice or organization a tremendous amount of money in the long run. With new shell office space the practice can implement space planning/design to fit their needs as well as increasing patient flow. Used office space with existing layouts, but such space often cannot be adapted without expensive demolitions and remodeling. While this can be accomplished, there still remains the potential for poorly laid out space that doesn’t fit the requirement.
Proximity to Other Physicians – In a medical office building, doctors are often looking for proximity to other physicians who may refer business to one other. For example, a family medicine physician will frequently refer patients to other medical specialties such as cardiology or orthopedics. With the right synergy, all of the doctors are inter-referring and enhancing their practices.
Ancillary Services – Working with the physician community is no different than working for a Fortune 500 in that, especially in this environment, people are trying to maximize profits to stay ahead of the curve. The buzz word within the physician community over the past five year is “Ancillary Services.” Traditionally, hospitals were the main benefactor of such services. Ancillary services include MRI’s, sleep labs, physical therapists, outpatient surgery centers, and imaging centers. Doctors are more recently looking for extra medical office space where they can install ancillary services and other diagnostic treatment areas.
Geographic Location – Until the last decade, doctors needed to be close to the hospital to round on large numbers of inpatients and perform mostly inpatient surgeries. Now procedures have been more frequently performed on an outpatient basis, and physicians can relocate their offices farther away from the hospital at usually lower lease rates. Many practices now have incorporated outpatient surgery facilities located at or nearby their office location.
Exclusivity – Willingness of the landlord to restrict leasing to other physicians of similar specialty in the same building is common. While many physicians view this as an important concession, it probably is not that important in the long run. After all, there is really nothing a physician group can do if a competitor wants to relocate across the street. This idea is typically of greater importance in rural or less populated areas where a new hospital is being established.
Signage - Building monument or signage to distinguish a medical organization or practice is an important feature. Local restrictions often restrict the size and location of business signage in a given area, but often the developer can offer “top of building” signs for major anchor tenants.
Price – Everyone is looking for price in today’s market, especially physician groups that are in their office more than in the hospital. For a doctor to move off-campus, the offer must be aggressive. For an example, Memorial Hermann is offering a few of our clients below market rental rates with above market build-out allowances. In other locations, they are offering full-service gross rental rates, which is coming back into vogue as hospitals rely heavily on cost control their costs to improve their bottom-line.

Follow “Robert S. "Bob" Lowery”