Tightly integrated health care organizations were once thought to be the solution to the many problems facing our health care system. They had capital, negotiating clout and seamless systems of care. But all across the country, those organizations are falling apart, from the Allegheny Health System bankruptcy in Pennsylvania to the MedPartners failure in California to much smaller system breakdowns in between.

For family physicians who have sold their practices and have become employees of these now troubled integrated systems, the next step can be uncertain. In some situations, the best option is to stick with the organization and help it rebuild its strength. In other cases, where the organization simply cannot be repaired, physicians will need to take back control of their private practices, join forces with other established groups or find different organizations with which to integrate. [See the authors' previous article, “Is Disintegration the Answer?” FPM, February 2000, as well as “Disintegration: How Employed Doctors Are Landing on Their Feet,” FPM, November/December 1999.]

Whatever option you choose, it won't be easy. You can't just jump at the first attractive possibility that comes along and expect to leave trouble behind. Before you make a move, learn all you can about the new endeavor, then use that information to create a strong plan of action.

Due diligence

No matter what route you choose to get out of the chaos of a disintegrating organization, even if you are “simply” buying back a practice you once owned, your first step is to conduct due diligence and make sure the venture is a wise move. An effective due-diligence process should take the following issues into consideration:

• Patient and payer mix. Payer mix and collection programs generally change in integrated organizations. For example, not-for-profit hospitals often integrate practices into the hospitals' community-service programs for the underserved, take on managed care contracts that are favorable to the hospital at the expense of physician practices and move successful outpatient programs into the hospital. If your group was integrated for two years or more, the changes in your patient and payer mix can be significant. The patient mix of the newly independent group is apt to be better insured but also a more narrow subset of the community. These are the most sought-after patients in your market, so be prepared to compete for them with other physicians. Every time a practice undergoes a change in ownership, facility or providers, it should expect some erosion in the patient base, sometimes up to 40 percent.

• Billing and collections. If your hospital partner has been handling billing and collections, that situation won't continue after disintegration, except perhaps on a short-term basis. In the long term, this may be in your best interest, considering that hospital collection rates are generally 10 percent to 20 percent lower than what the physician groups collected before integration. In a nutshell, if you've been using hospital billers, you won't want to keep them, and you couldn't afford to even if you wanted to. But restoring collections to their previous levels will pose a serious challenge. Your group will be faced with either locating a quality third-party billing company or finding people with the appropriate skills and developing the necessary computer system. Your group most likely will experience a reduction in patient volume, which makes the need to maximize collections all the greater.

• Contracts with insurers. You'll need to assess all your managed care contracts — not just the new ones you're considering as you start up your group. It's common for integrated systems to negotiate contracts on the basis of their benefit to the entire system or to the hospital. Sometimes this occurs at the expense of the medical practices. Carefully consider your existing contracts, particularly their reimbursement levels for physician services, to determine whether you should continue them in their present form. Consider also whether your new situation might allow you to contract with your insurers for additional services.

• New revenue sources. It's also important to consider alternative sources of revenue. Most markets are long past the stage where raising rates will accomplish anything since most services are capitated or on fixed fee schedules. Integration typically means that fewer ancillary services are delivered through the medical office. But, with independence, the group may have opportunities to capture (or recapture) reasonable ancillary volume, including laboratory and X-ray services.

• Group membership. You'll have to consider which physicians will be part of the medical group. In many cases, physicians will have joined the group after integration, and their expectations and interests may not meet the new group's needs. You'll need to determine the interests of each physician, and the group will have to determine which should become members.

• Physician compensation. The physicians who join the new group must be prepared to take an ownership approach to compensation: It must be tied, at least to some degree, to productivity. That won't be to the liking of some physicians, particularly those who came to the group expecting the predictability of a salaried position. A related problem is that the benefits package both physicians and staff had been receiving from the integrated organization is likely to have been more generous than the new group will be able to provide. The change may be difficult to sell.

• Staffing. Your staffing levels most likely will change as the practice makes the transition to greater autonomy or independence. You probably won't be able to maintain the staffing levels put in place by hospital management if you want to maintain a reasonable bottom line. You also may need to consider changing your staffing philosophy. For example, the hospital may have chosen to staff with more physician extenders and registered nurses. This can be problematic if the new practice sees a decline in patient volume.

• Services and the work that supports them. Finally, your due diligence should examine the services that the practice is delivering. Some services that made sense to deliver in an integrated environment are poor choices for an independent group. These are likely to be services that draw on other specialists outside the group for support. Examples include complex diagnostic services, public-health education programs and well-baby clinics. As you examine your services, carefully assess your work-related processes with an eye toward re-engineering. In a competitive environment, acting assertively to reduce operating costs is unavoidable. So begin to do it as part of due diligence.

Next steps

Armed with what you learn from due diligence, you'll be ready to begin getting the reformulated practice up and running. Here are several steps your group will need to take:

• Strategic planning. There's no better time than a practice's beginning to do critical analysis and strategic planning. A strategic plan lets you know where you're going and gives you criteria for measuring your progress toward those goals. Your plan should be based on very specific assumptions about patient volume, revenue, staffing, operating costs, and parameters of operation and service. It must also include a budget that projects the financial impact of the group's start-up, as well as volume, operating costs and net income for the first year. Be careful to include the cost of carrying debt, which is almost certain to be a factor in buy-back situations.

• Hiring an administrator. Having an experienced administrator on board early can be critical to effective planning and implementation. Experienced, savvy managers are not in abundance, so be prepared to pay for the right person. The amount depends on your market, the size of your group and your range of services. A very small group should be ready to pay a salary of $40,000 to $50,000; for a large multispecialty group, the price tag jumps to $150,000 or more.

• Staffing. This is an area of focus for the administrator and another argument for hiring a good administrator as soon as possible because someone must be on top of staffing from the very beginning. The administrator will need to build a budget, identify candidates, hire staff members and schedule their availability. Some staff from the integrated group may want to join the new group, but each person needs careful evaluation. Although getting a jump on building the staff is critical, bringing staff members in too early is a costly security blanket. You should make a careful and detailed estimate of volume and staff for that volume when the doors open.

• Managed care contracting and credentialing. Once you have reviewed your insurance contracts as part of due diligence, you'll need to work with the plans so that the new practice assumes the contracts with a smooth transition and no credentialing issues. Credentialing can easily take more than 90 days — and up to six months in some tight markets — so don't delay getting this process under way.

• Formalizing the group. This step also should be taken early in the process. It involves creating an appropriate legal entity, getting tax help and obtaining billing numbers for clinical staff. Meeting these needs sooner rather than later can make an enormous difference in cash flow. In addition, the planning that goes into formalizing a group — doing financial pro formas, projecting net income and estimating new costs, such as the amortization of the buy-back — allows you to make projections about the likely tax impact, which is critical to projecting your bottom line.

• Selecting the facility. It takes a good deal of time to find new clinical facilities, negotiate leases and relocate a practice. In most markets, for a 10- to 20-doctor group, it takes one to two months to locate a facility, another month to negotiate a lease, another 45 days to make minimum changes to the facility and arrange phone service, and another month for planning and making the move — and all this assumes good luck and intensive effort. Keep in mind, too, that if the facility needs major modifications, the lead time is much longer. If your practice must relocate, the buy-back discussions should involve arrangements for a temporary facility, which the seller often welcomes.

• Selecting a computer system. You'll need to assess the new group's computer needs. Be sure that the person responsible for billing and collections is involved in the evaluation. This can make an enormous difference in cash flow and, therefore, whether the physicians will be paid in the transition months. If the computer system used by the integrated group will meet the new group's short- and long-term needs, computerization should pose less of a problem than many other issues. But if you need to acquire and install a new system, be prepared for a great deal of work.

• Marketing. A marketing program can make a big difference in the new group's success, particularly in stabilizing cash flow early in the life of the practice. Effective marketing can also make a significant difference in controlling the erosion of existing patients. The group's marketing plan should be based on its strategic plan, and it should be funded appropriately. It pays to spend some money for expert advice. Remember that a good marketing plan should get your message out not only to potential patients but to the local medical community as well, through doctor-to-doctor contacts.

• Obtaining liability insurance. Of course, the group will need to secure professional liability insurance before beginning operations. If the group was part of an integrated organization for a relatively short period, you probably won't encounter major problems in obtaining coverage. If no carrier has a track record with your providers, this process can be very time-consuming.

• Complying with fraud-and-abuse laws. This is the age of aggressive enforcement of health care fraud-and-abuse restrictions. For a newly independent group, this means paying particular attention to your leadership structure, your billing practices and your physician compensation plan in order to stay within the law.

Probably the biggest risk is related to physician compensation because many groups structure it in a way that encourages doctors to overutilize services such as ancillaries (because ordering services is sometimes seen as an indicator of high productivity). In addition, many hospitals try to maintain some influence over newly independent groups by offering them financial incentives to continue utilizing that hospital and its services. Unfortunately, the Office of Inspector General may interpret this as buying referrals, and the IRS may interpret it as inurement. So, in addition to structuring itself carefully, the group must establish guidelines in these areas and train doctors and staff members to follow them.

• Obtaining legal review. Given the complexities of establishing the new practice's original valuation, its structure and its fraud-and-abuse compliance plan — not to mention the potential exposure of the parties involved — it's critical that a knowledgeable health care attorney be involved in evaluating potential courses of action and in structuring the essential legal documents. Retirement issues also require the involvement of specialized counsel.

Do it right

Dismantling an integrated organization is no small chore. It's also expensive. The most common error in this process is simply being cheap and failing to understand the need for expertise to help the parties involved get the job done right. Having assisted with such projects, we can assure you that disintegration is the least desirable option.

But if you must endure it, at least go into the process with your eyes open. Squarely face the facts underlying the breakup; assume nothing about the new group's likely profitability, patient volume, operations or long-term potential; and don't kid yourself that you can relive the good old days.

It's critical that you pursue a strong, focused due-diligence process directed at uncovering every aspect of the group's operations — including why the integrated relationship failed. Based on these facts and insights, the leadership can cultivate physician buy-in, which must be based on clearly identified objectives and assumptions, as well as a clear indication of what the future is likely to hold. If the group's members share a set of expectations about their partnership, they have a better chance of avoiding another disintegration down the line