1. The Challenges of Integrating Physician Group Operations Presented by Gary Ermers, Associate Director of Healthcare Consulting David Bundy, President and CEO of Dean Dorton Allen Ford

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3. Why we did the study: Dean Dorton Allen Ford created this report in response to a clear need. Nearly every health system and hospital our healthcare team has interacted with has recently acquired physician groups, is actively seeking to acquire them, or both. Yet, nearly every health system and hospital with integrated physician groups is realizing substantial operating losses from those groups. 3

4. Who were the participants? 4

5. Most of the participants were in Kentucky and Indiana 5

6. The Survey Every hospital in Kentucky was invited to participate in this study through an email request via e-newsletter The survey had 30 questions and was taken using Survey Monkey The survey was broken down into 4 sections Background Structure Operations Opinions 6

7. Length of time Hospital has employed physicians Types of physician specialties employed Employed physicians organized in a separate group Physician compensation Average annual loss per physician Some questions from the survey 7

8. Analyzing the data Once we received all the responses, we analyzed the answers from each as it related to the question… 8 “What is your average annual loss per physician?”

9. 41% of all respondents reported that their average annual loss for hospital-owned physician groups is greater than $100,000 87% of all respondents reported a loss 9

10. Some other stats from the study When it came to losses… The size of the hospital didn’t matter The more physicians employed, the more likely operating losses became 10 Hospitals reported that physician groups operating as separate legal entities had the highest losses Length of contracts did not impact results

11. Some other stats from the study Less than a quarter of respondents reported that their hospital had a unique board of directors that oversaw the operations of the physician group(s) 69% of the respondents reported utilizing productivity based compensation measured by RVUs o 67% of hospitals using RVU-based compensation also experienced the highest losses 11

12. Does every physician group acquisition need to have a positive bottom line to be beneficial to hospitals? 12

13. Not necessarily…. But hospitals need to manage these practices as effectively as they can. 13

14. Hospitals benefit from the tradeoff of additional revenue streams to the hospital for losses on employed physicians; as compensation criteria changes, that tradeoff becomes less sustainable 14

15. Why are hospitals losing money on physician groups? 15 87% reported losses 41% losses over $100K 70% losses over $50K

16. Employing specialty and sub specialty physicians to meet needed service gaps Employing whomever is available, not necessarily following a strategy Employing for clinical quality support of other providers and the hospital 16

17. Compensation model does not drive profitable results or includes unaligned incentives 17

18. Compensation models The model needs to incentivize volumes of patient delivery and the payor mix; physicians work harder and smarter with correct productivity goals Negotiated compensation is not realistic to actual market forces; minimum base is too high, productivity incentives are too rich, or additional non-productivity compensation builds up. 18

19. Compensation Models Pure productivity based compensation without regard to actual collections and cost often result in unfavorable financial results Discipline to communicate and adjust annual plan for lower results, including terminating underperformers, is sometimes lacking 19

20. Understanding operations Operations can become disjointed or hospital-centric. The business of physician practices differs from the hospital. Integration of computer systems for EHR, billing, and practice management 20

21. Understanding operations Meaningful Use and clinical data reporting Duplication of functions and staff occurs as practices get added rather than accomplishing economies of scale 21

22. Hospital Experience From Me Too to Mission Critical Overstated Downstream Impact Competitive Market and Defensive Reasons caused over value/pay Relying on Hospital Based Reimbursement is risky Availability impacted strategy Underperformance not addressed 22

23. Physicians Experience Administrative, management, and billing functions less efficient than promised Confusing compensation model with data integrity concerns Equity (Financial) issues and Quality issues among employed physicians IT solutions lacking Decision rights and integration in Health System confusing 23

24. Successfully employing physicians 24

25. Understand the goals of the physicians selling their practice.  Recruitment and or retirement issues  Capital, IT, Investment needs  Administrative and Regulatory burdens Understanding what the group values will lead to a more positive, transparent agreement 25

26. Strategic Recruitment Program Effective/Efficient practice management structure and support – Data rich; Frequent reporting and tracking of clinical quality, patient satisfaction, and financial results. Physician Leadership development and support, and governance structure in place Address different generational culture and goals among physician group. 26

27. Compensation plans Compliant. Stark, Anti- Kickback, OIG/CMS Design a compensation model that aligns Hospital and Physician goals with an objective methodology for calculating physician compensation Transparency, understandability and data integrity will engender trust with the physicians Plans must evolve to align with changing reimbursement systems 27

28. Compensation plans Plans should reward integration with the system – For example if leakage occurs in diagnostic testing consider leaving minor ancillaries with physician practice. – Determine equitable allocation of bundled payments among practices 28

29. Compensation plans Maximize revenue growth while preparing for transition toward quality, satisfaction, and population health based system – Incorporate Value Based criteria lightly, as supplemental, to begin knowledge build towards transition 29

30. Compensation plans Capture all additional revenue streams available from payors for care coordination, shared savings, P4P, VBP, and bundled payments. – Include Internal savings sharing as part of cost responsibility built into the plan. 30

31. As with Hospitals, recruit the best Physician practice management Experience and balanced approach are key Benchmarking and data driven decision making IT technology and resources Avoid overlay of excessive bureaucracy 31

32. Employing doctors doesn’t mean you have an integrated system It is just the beginning. Getting to a true integrated delivery network is the key to success under ACA. ACA is the key differentiator from the 1990s when many hospitals did a mere about face after incurring losses Keeping an independent mindset 32

33. Healthcare reform is trying to line doctors and hospitals up in one continuum… these entities need to learn to work cohesively and in a financially sustainable model 33

34. QUESTIONS? 34

35. Contact Information Gary Ermers, Associate Director of Healthcare Consulting 859.425.7683 germers@ddafhealthcare.com David Bundy, President and CEO 859.425.7650 dbundy@ddafcpa.com 35