Four Reasons Private Medical Practice is Becoming Extinct

We have reached consensus if not unanimity: Consolidation in medicine is inevitable; the solo practice is well on its way to extinction; and the days of the small, independent medical office are numbered. The conventional wisdom is clear: Physicians must affiliate to survive.

The trouble with conventional wisdom is that it reduces complex circumstances and concepts to simple statements. Following conventional wisdom without an awareness of the underlying assumptions is dangerous. So, what is driving consolidation for medical offices?

1. Reimbursement levels. The larger the group, the larger the numbers of patients, the more leverage in negotiating reimbursements with private payers. Additionally, reimbursements to hospital-employed physicians providing care and performing procedures in an outpatient setting have been significantly higher than those for private practitioners.

2. Need for specialized expertise in non-medical disciplines. The business of medicine has become significantly more complex. Negotiating reimbursement contracts with payers requires both time and expertise, neither of which a physician is likely to have.

The increase of regulatory burdens also requires specialized knowledge and systematic attention to avoid increasingly heavy penalties for non-compliance. HIPAA is a case in point. The HIPAA Privacy Rule, with which most of us are very familiar, presents guidelines and guiding principles, and non-compliance has rarely resulted in fines. The HIPAA Security Rule, which is relatively new, specifies particular required activities and is regularly the basis for heavy fines.

The move to EHRs, eRx, CPOE, and health information exchanges requires reliable technical infrastructure and sophisticated systems, as well as regular upgrades, tests, and troubleshooting. Even large practices have difficulty providing the necessary resources to keep their technical houses in order and up to date.

Medical offices are notorious for the challenges they face in managing their financial affairs. These include the accurate recording of charges for services and supplies, the accurate capture of insurance information, timely and error-free filing of claims for reimbursement, and management of client balances. Shrinking margins make it necessary to get these accounting processes under good control. They also introduce a need for financial management, which includes managing cash flow and the cost of operating funds.

3. Closed systems. A benefit of affiliation is that one’s colleagues are more likely, and generally expected, to refer within the affiliation. The whole enterprise is set up to benefit from each physician’s relationship with her patients.

Diminishing referrals are a real threat to independents, and a significant motivation for affiliation.

4. Economies of scale. The downward pressure on reimbursements makes it more important than ever to control costs. Consolidating purchases of equipment and supplies is a reliable way to drive down unit costs. The same should also be true for services, such as billing, training, HR, maintenance, legal, etc.

Still, a large number of studies have confirmed that 70 percent to 90 percent of all mergers and acquisitions, including those of medical practices, fail to deliver on the objectives that motivated them. High hopes are dashed and most parties are disgruntled. The results are consistent enough that it is relatively easy to identify the main causes. Next week’s blog will describe those.