At a Glance President Trump has promised to “repeal and replace” Obamacare – but what does this mean for ophthalmology?

With more individuals likely to be driven to join commercial healthcare plans, more physicians are likely to seek to partner and network with other physicians and organizations

There are a number of alternative practice strategies physicians could embrace – but ultimately, it is too early to tell which will prove the most successful

Ophthalmology has endured changes before, and many practices continue to thrive – so it’s also entirely possible that the expected levels of disruption may never materialize

Ever since the results of the US election became international news on November 9, speculation on the changes Trump might make to the healthcare system have been rife. His promise was to repeal and replace Obamacare, but the big questions remain: what form will this take, and what will it mean for healthcare – including ophthalmology? It’s still too early to predict (with any degree of precision) how the US healthcare delivery systems will change under the Trump administration and a Republican-controlled Congress, but two changes appear more likely than others: dismantling the core of the Accountable Care Act related to state exchanges and eliminating mandatory health insurance.

Safety in numbers

Most of the Republican proposals will drive more individuals, including Medicare and Medicaid beneficiaries, into commercial health plans. As a result, the trends among commercial payers to i) pay for services-based value and quality-based purchasing, ii) narrow physician networks, and iii) increase reliance on risk sharing contracts will continue to encourage physicians to seek alternative practice arrangements that offer greater integration of care and more providers with whom to share risk. It is likely that physicians will be considering a number of options, such as joining Accountable Care Organizations or patient-centered medical homes, seeking to grow the number of physicians and physician extenders in their practices, or exploring the potential of leveraging the services of professional management services organizations (MSOs). Physicians may also consider partnering with new owners or investors. Ultimately, one thing is predictable: the US health care delivery system will be in flux and some turmoil for years to come.

The increasing administrative burden required to participate in federal healthcare programs is making the cost of operating small practices prohibitive.

Weathering uncertainty

Many ophthalmologists are concerned about the uncertainty as we transition from Obamacare to Trumpcare, and are wondering what this transition means for their practices. However, as a result of forces in the marketplace over the past several years, some ophthalmologists have already begun to address this new frontier – often by taking steps toward consolidation. In my opinion, this transition will continue regardless of the direction of healthcare policy from Washington.

There are several factors that appear to be driving this transition. First, for some time we have seen a gradual movement away from traditional fee-for-service Medicare and Medicaid in favor of managed care plans. These plans often restrict the number of physicians who can participate on their panels, and consolidation is seen as a defense mechanism, as participation with a larger enterprise should enhance the ability to participate with payers to assure access to patients. Second, the downward pressure on reimbursement makes it difficult for any but the most highly efficient practices to thrive. Consolidation allows physicians to operate more efficiently by sharing overhead – at least in theory. Similarly, the increasing administrative burden required to participate in federal healthcare programs is making the cost of operating small practices prohibitive.

Talking From Experience Lessons learned from completing a large private equity transaction By Candy Simerson Independent physician practices that decide to go down the path of mergers or acquisitions will find that these activities involve a substantial amount of due diligence, and more scrutiny than a privately held business has experienced in the past. Although it’s a great learning experience, it is also a time-consuming and arduous process. As physician owners consider exploring merger and acquisition options, taking the time to review and improve business operations in advance is a worthwhile investment. The due diligence process for any transaction involves meticulous examination of many elements, a few of which are discussed below. Financial performance, including growth, monitoring of key metrics and operational efficiency trends are of vital importance for any potential buyer. It is important to ensure the accuracy of calculating and reporting exact net revenue on financial statements, and the accrual accounting method is preferred over cash basis accounting. Key performance metrics will typically include strong management of accounts receivable, reports on patient volumes, specific services provided and related volumes, physician productivity, payer mix and growth trends. The ability to produce all material contracts, such as all shareholder agreements, employment agreements, property lease agreements, equipment lease, major vendor contracts and others is also important. A study of antitrust and regulatory matters should include a review of coding and reimbursement compliance, conflicts of interest and other related party transactions to evaluate any potential future risks or liability. A review of organizational structure and management of human resources, compensation and benefits, personnel policies and compliance with reporting requirements should also be carried out. After completing a due diligence process, it should be clear to all parties whether the relationship is a good fit – and if it makes sense to move forward. Candy Simerson is Director of Business Development for Precision Eye Services, Bloomington, Minnesota.

Practice strategy pros and cons

Regardless of the direction of healthcare policy in the future, physicians are likely to be driven to a number of new practice strategies. And although it’s currently too early to tell which approaches will succeed and which will fail, the risks and benefits of some of the more common options are discussed below.

It’s currently too early to tell which approaches will succeed and which will fail.

1. Engage with private equity

Those who have been in ophthalmology for many years will recall the frenzy in the development of the Physician Practice Management Companies (PPMC) in the 1990s, where ophthalmologists across the country engaged with venture capital in an attempt to monetize the value of their practices and consolidate for the future. And although the concept of consolidation to realize efficiencies of scale has merit, these ventures all failed. Now, 25 years later, we are seeing the re-emergence of this model through private equity funding.

Despite its previous failures, the model should offer some significant benefits. It provides a practice the opportunity to participate in a network with multiple practices, making it attractive to payers seeking to contract with a single entity to provide a broad range of specialty services to its subscribers. It also offers the benefit of sophisticated management to address complex business, regulatory, and competitive issues. The private equity model also provides access to capital, which is critical for growth and access to new technology. And it provides some ophthalmologists with the opportunity to cash out at an attractive multiple of earnings with the possibility of further financial benefit if the investment is eventually taken to the public market.

But as proven in the past, the model also has its limitations. First, there is no assurance that other practices will join a particular venture – and the model is unlikely to succeed with only one or two participants. Second, there is the question of whether management will really be effective. Some believe that the failure of the PPMCs in the 1990s was based, in part, on an inability to properly manage all of participating practices. Third, ophthalmologists must give up a great deal of autonomy and decision-making, which may seem simple in theory but is challenging in practice. The fundamental question that still needs to be addressed is: why will this model work today when a similar model failed 25 years ago?

2. Cooperative MSOs

In response to the need for more efficient practice management, some practices have established an MSO, designed to consolidate administrative overhead for multiple practices. The MSO contracts with each practice individually to provide management services, presumably at a cost below what each practice would incur independently. And unlike some of the other models, the MSO enables practices to maintain a greater degree of autonomy in overall decision-making.

But there are drawbacks. The MSO model requires a commitment of time and resources to implement – it is not a project where the administrator of a practice can develop it in his or her spare time. Once again, there is no guarantee of finding other practices that are willing to participate – and even if you do, there is always the potential for disputes concerning personnel, technology, or other decisions by management that will affect each of the contracted practices. Finally, the MSO model only addresses the cost aspect. It doesn’t address the key concern of ophthalmologists: how to protect their patient base and continue to participate on payer panels. Without significantly more integration, the MSO model seems unlikely to address that concern.

3. Merge with other practices

In a clear pursuit of “bigger is better,” ophthalmology practices are merging to cover all subspecialties and expand their geographic reach. Not only do these practices hope to achieve some cost efficiency, they also hope to be more attractive to payers; after all, such ‘mega-practices’ can meet all health plan subscribers’ vision care needs. A true merger also may offer some operational efficiencies as all overhead costs are shared.

But merging with other practices is not a panacea. Physicians must surrender a great deal of autonomy; a big challenge for the physician will be to find potential merger candidates with compatible values and culture. Further, there are some real operational problems with practice mergers: administrative issues, such as consolidating employee benefit plans, salary structures, and simply retaining staff, can all present significant legal hurdles. A merger requires total integration from both the financial and clinical perspective – failure to do so raises potential antitrust risks.

4. Develop an integrated network

The development of an integrated network may be viewed as the complement to the development of the MSO. An integrated network establishes a panel of providers to contract with health plans for the provision of vision care services for health plan subscribers. The network model allows practices to maintain their autonomy in structure and operation, while providing access to patients.

However, there are limitations here as well. The cost of developing a network in both time and resources is not insignificant, and depending on the payment methodology for the services provided (for example, fee for service or capitation), there may be a significant degree of financial and/or clinical integration required to avoid antitrust issues. Nevertheless, these networks have been evolving and some have met with significant success.

Déjà vu...

As noted above, there is great uncertainty as to the direction of healthcare delivery in the future. In many ways, however, one can say, “it’s like déjà vu – all over again...” It is entirely possible that those who decide not to make any moves at all will be able to continue to operate in the future with little or no disruption. We do seem to have been in this place before and, despite significant changes over time, ophthalmology practices have, for the most part, continued to thrive.

Alan Reider is a Health Care Attorney with almost 40 years of government and private practice experience, and a partner with Arnold & Porter Kaye Scholer in Washington, D.C. Allison Shuren is also a Health Care Attorney and partner with Arnold & Porter Kaye Scholer, with almost 20 years of private practice experience.