Feb 1999 Table of Contents

An Expensive Dinner: Surviving a Failed Business Venture



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There's no such thing as a free dinner when you're dealing with “wanna-be medical entrepreneurs.”

Fam Pract Manag. 1999 Feb;6(2):45-48.

The table setting sparkled, the menu enticed us and the conversation was delightful. Five of my physician colleagues and I were being courted, and happily so, by a management service organization (MSO) being formed by a local hospital system. As we sat around the restaurant table with our prospective new partners, talking self-importantly over thick steaks and fine wine, my colleagues and I couldn't help but gloat. It seemed we would soon be making a lot of money, for ourselves and for the MSO.

In the preceding months, the HMO that contracted exclusively with our 200-physician group had been taking steps to absorb us under a staff model (this after years of strained relations). Our group had tried to resist but was finally being dissolved. We could sign with the HMO or were free to go.

Naturally, my colleagues and I liked the idea of quitting the managed care organization that had treated us so shabbily. It seemed we were at last going to land on our feet.

KEY POINTS:

  • No matter how attractive an offer sounds, carefully evaluate the business risk it entails.

  • Be sure to examine contract offers closely, even if you think you've already come to a verbal agreement.

  • Beware of potential business partners who can't provide answers to important questions.

The offer

After coffee and dessert, we finally got down to the details, what we could do for them and what they could do for us. They agreed to match our current salaries, and we offered them our many years of clinical experience in primary care in a managed care setting. The MSO would take the risk for this new business venture, and my colleagues and I would be set up in new practices placed in areas near the hospital that were ripe for growth and development. The MSO's representatives said they had carefully marked out the demographics and knew where they needed and wanted to be.

I had previously been involved with pharmaceutical management and information systems, so I was happy to hear the MSO promise me Internet access, computerized billing and, eventually, computerized patient records. A colleague who had been key to utilization management in the hospital was promised full support in managing the HMO risk contracts that the MSO would be negotiating for us. He could continue his success in managing cost savings for the hospital in terms of lengths of stay and overall utilization. Another colleague, formerly a center medical director, was promised full control in setting up and managing his new office, including choosing his practice site.

We would also have access to a network of primary care physicians, which we could help organize into a more efficient system. This would help us attract better managed care contracts, thereby generating much better incomes. We would even have the freedom to see any patient under any insurance that wished to contract with us. In our former practice setting, we continually lost patients who switched health plans. By partnering with the MSO, we were hoping to see and keep our patients indefinitely, just as it must have been in the good old days. We were also hoping that this new organization, lean and mean, would not face the problems of huge organizations that run on committees and hierarchies and suffer constant attacks of analysis paralysis and acute bottom-line myopia.

In many ways, the shift to the MSO sounded easy. We already worked in the hospital. Everyone knew us and we knew them. We even knew something of the politics and the players, those we would work with and those we would have to work around. The person leading the MSO, someone experienced in managed care, seemed to understand our vision and perspective and shared our enthusiasm for the new business venture. So we took the MSO at its word and went home that night feeling good about what was going to happen and feeling glad that we were about to reject our HMO's offer to take us under its wing in a staff model.

My wife was not as enthusiastic, however, and asked whether I was sure I wanted to do this. We lived well, and although there were many stresses associated with working for the HMO, I had the comfort of knowing there was always a paycheck every two weeks as long as I provided good medical care and did what the system required. The MSO venture would be risky — especially with a hospital that was having problems, like all hospitals in the region — but it would also be an adventure, an entrepreneurial exercise. The risk seemed acceptable; the alternative of staying in the HMO was personally unacceptable.

A checklist for evaluating business risk

Hindsight is indeed 20/20. After enduring a failed business venture involving a hospital and a management service organization (MSO), my colleagues and I learned these important lessons, which may be useful to other physicians who are considering aligning with larger organizations. hospital's annual medical staff meeting in December, hoping to hear its plans for the MSO further defined for everyone. Instead, the medical director announced before the entire staff that the hospital had plans to set up practices that would compete with other doctors in the community. We hoped this was just lip service.

✓ Check the organization's finances: How long has it been in business? Who is supplying the capital and how much? If the organization is just starting up, when do its leaders expect a profit? How long do they expect to sustain losses?

✓ Check the business plan: You need to determine whether the organization shares your goals and has a plan that makes sense to you. If they cannot make the business plan public, be sure to ask about these issues.

✓ Check references: Contact people who work or have worked with the organization and ask for their impressions. If they no longer work with the organization, ask why.

✓ Check the contract: The contract should outline not only rules and stipulations but also the rights and privileges you expect to have in the relationship. If it doesn't, ask for them. A lawyer can point out pitfalls in the contract but may not always be needed in negotiations. In fact, if you're confident of your own skills, you may do better negotiating directly with the principals. And remember what we didn't: If you don't have a contract, you don't have a deal.

✓ Check up on the managers: If you feel uncomfortable with those who are managing the organization, or if you feel that they are uncomfortable with one another, trust your instincts and think carefully about whether you want them managing you or your practice.

✓ Check out the operation: If possible, spend some time inside the organization, observe how things run and work with its employees. It pays to walk in the shoes before you buy them.

✓ Check out your options: Don't be pressured into accepting a contract before you're ready. Take your time in the decision. If it's not working out, don't force it. Explore as many options as possible, even if they don't seem as attractive initially.

✓ Check with your spouse: Discuss the plans with your spouse, significant other or someone you trust, and see if the plan sells as well to that person as to you.

✓ Check, please: Watch out for free dinners. Eventually, you will pay for them.

The wait

That dinner meeting was in early November 1997, just after we heard the devastating reports that our group was dissolving. Many of our colleagues signed with the HMO; others signed with the full expectation of finding new jobs quickly and then getting out. Their contracts included restrictive covenants and requirements of three months' notice before they could leave, and they were restricted from soliciting other staff to leave with them. Six of us decided not to sign the contract at all, which meant unemployment — but freedom.

Within a week, the MSO had presented us with a contract of its own. Unfortunately, the benefits were not what we had hoped and the salary had to be renegotiated to match what was being offered to those who signed with the HMO. We sent the contract back several times, and each time to our surprise and delight the contract got better. It was never quite as good as the one we were rejecting from the HMO, but it was adequate. A few small details seemed to be lost, however — including where we would work. We hounded the MSO's staff for more information and were reassured that they were making progress.

Two weeks passed, and still nothing. We didn't know where we would be working, and the final contract wasn't ready. After another week of waiting, we were called to meet with the medical director of the hospital, rather than the MSO's CEO, and we explained our objectives and common goals all over again. We left with no more information than we already had; he said he would notify us shortly about further developments. Soon after, we received a contract that looked like the first offer we had rejected so many weeks before. Several phone calls later, nothing had changed.

We met again just before Thanksgiving, and the medical director promised we would have contracts and places to work very soon. He asked us to apply for all the insurances that were needed to take care of our patients, which we did. We were ready — more than ready. We were anxious to get moving. We waited another week and received yet another contract that resembled all the other inadequate contracts. One member of our group finally suggested that we hire a lawyer to iron out the details. Since the arrangement was not progressing as quickly as we thought it should, and since it was getting close to the end of our employment with the HMO, we agreed it was time to move things along by using a professional.

Big mistake. From the time we engaged the lawyer, things seemed to go from bad to worse. One member of the group decided he could not wait any longer. He signed a contract with another hospital. Another member of the group decided to join an old partner. We were down to four from six. Other doctors who had signed with the HMO were watching our negotiations, hoping we would land on our feet so they could join us. We attended the hospital's annual medical staff meeting in December, hoping to hear its plans for the MSO further defined for everyone. Instead, the medical director announced before the entire staff that the hospital had plans to set up practices that would compete with other doctors in the community. We hoped this was just lip service.

We had expected another meeting with the MSO before the end of the year but were told that we would meet early in the new year to finalize matters and discuss any sticking points in the contract. We were mollified by the implication that the MSO would begin paying us on Jan. 1, 1998, even if the contract was not finalized. The first week in January we did meet with the medical director, who again could not give us clear answers about our practice sites or work hours and, worse, said some of the sites we had been thinking about were now unacceptable. He didn't want to start World War III with the physicians practicing in the immediate vicinity of the hospital. We understood but wondered why the MSO had waited so long to consider this. It was already a week after our employment had been set to begin. I had never been unemployed before, and I didn't like the prospect.

Three weeks into January, my colleagues and I were convinced that the negotiations and the plan had failed. Our calls to the medical director were not being returned, and the person assigned to select sites was getting no information from the MSO's leadership. We all began to speak in earnest with other organizations. I contracted to work part-time for a hospital system that was considering hiring more physicians. I was grateful for the work. I had toyed with the idea of setting up my own practice and even discussed a subsidy from another hospital system that was setting up an MSO, but they were interested in buying practices rather than gambling on new ones. I felt that, with all the expenses I had, setting up a practice was not an option; employment was an immediate necessity.

Nearly a week after I had begun working part-time for the hospital system, my three remaining colleagues and I met with the chief of the Department of Family Practice and were offered positions, with new offices opening soon in acceptable communities. We signed en masse, no negotiations, no lawyers. We settled for less in benefits and income but were choosing a real plan with real practices. I returned to the MSO's office to retrieve my insurance applications and other paperwork, and I discovered that my documents were nowhere to be found. I also learned that the human relations officer had just been fired. The office staff said they would call me when they found my papers. Knowing better, I returned on my own to the office a few days later and asked for the forms again. They had appeared, and one of the MSO's officers spoke to me, wishing me luck, seeming unaware that the plans and negotiations had been so muddled. I left, thanking him for his help, knowing he and his organization would need more luck than I did.

The lesson

That expensive dinner took place nearly two years ago. I did pick up the pieces and go on to work for the hospital system I had signed with, but I've since changed jobs again. The hospital setting was filled with new opportunities, but when the hospital began to hemorrhage millions each month (after its cardiology staff resigned), I was laid off.

After two months, I joined a flourishing practice that is physician- controlled by doctors I have known for years. It is expanding with the help of a local hospital that has invested capital but does not have controlling shares. The best part is that I am in my hometown, I am seeing many patients I have known for years, and I have the potential of earning well above my base salary as I grow my practice. I again see a future in medicine.

What my colleagues and I learned the hard way was that we may wish to hear what we would like to hear and see what we would like to see, but reality testing is necessary at all times, even for doctors, especially in business ventures with hospitals and other wanna-be medical entrepreneurs.

Dr. Burger is a family physician in group practice in Medford, N.J.

 

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