When Urology Associates bought land on Charlotte Avenue to build a new facility in 1999, the two dozen members of the physician group signed for the loan with personal guarantees.

“We wrote our names down and said we’d guarantee this $8 or $10 million loan, so we had a lot of sweating for a number of years that it wouldn’t come back to haunt us,” recalls Dr. Charles Eckstein, president of the practice. “But it turned out to be a wise move on our part.”

Urology Associates is the premier urology specialty group in Middle Tennessee, thanks to a number of wise moves. Its main Nashville office sits in the middle of the burgeoning Charlotte medical district, near major hospitals and numerous health care support businesses. It has multiple streams of revenue from clinical, laboratory and diagnostic services, as well as same-day surgery and a practice management company called Cimplify that contracts billing, technology and other business functions for it and other medical practices.

And it has grown to 33 physicians, most of whom are partners and are personally invested in the group’s real estate and other business ventures.

ACA is a ‘tidal wave’

With its long track record, finding financing for growth is no longer a problem for Urology Associates.

But it’s a different situation for smaller independent physician practices, which face unprecedented financial burdens stemming from the Affordable Care Act. While it may make health care more accessible to consumers, the ACA has made doing business more expensive for physician practice owners with its tangle of new regulations and stiff penalties for non-compliance.

“The tidal wave that is the Affordable Care Act is swamping most medical practices,” says Russ Miller, CEO of the Tennessee Medical Association, which represents more than 8,000 physicians statewide.

“From all the costs unrelated to actual direct patient care services – anything that takes your concentration off patient care is adding to your resource demand and taking away from your core business. So that’s a whole new area that requires financial considerations.”

Dr. Charles Eckstein, president of Urology Associates, and fellow doctors put their financial futures at risk to build the now-thriving practice.

-- Michelle Morrow | Nashville Ledger

Doctors are generally a sought-after niche in private banking and wealth management divisions. Their high income and stable employment prospects due to a doctor shortage in many parts of the country make them prime customers for deposit accounts and investments. And large banks such as Wells Fargo, SunTrust and Bank of America offer practice finance loans and lines of credit for doctors, dentists and veterinarians.

Local banks move in

But some local lenders believe doctors’ practice lending needs are underserved.

INSBANK, a privately-held bank that reached $200 million in assets last year, created a new medical banking division in July specifically to fund physician practice needs, which could range from lines of credit for business needs such as equipment and supplies to financing for expansions and acquisitions.

INSBANK will offer lending products exclusively to the 8,000 physician members of the Tennessee Medical Association through a division branded as TMA Medical Banking.

Also in July, Avenue Bank brought on several bankers to develop a new medical and professional services division within its private client banking business that will lend to health care-related businesses, including physician practices. The head of the division, Steve Jaynes, was formerly with SunTrust Medical Banking. Avenue is roughly three times INSBANK’s size in assets.

INSBANK drew on a prior association with TMA in forming its new division. But serving commercial niches is baked into its mission; it started in 2000 as a bank for Insurors of Tennessee, a trade association of independent insurance agents.

In 2012, INSBANK grew loan balances by 24 percent over 2011 and ended the year with $1.65 million in net income after taxes. Lending got a capital infusion through its participation in the Small Business Lending Fund, a federal program providing money for community banks to lend to small businesses at a low dividend.

Avenue, another bank in the program, has also been able to grow its small business lending with SBLF capital. (Two other local banks are participating in the SBLF: Franklin Synergy Bank and Sumner Bank & Trust. Seventeen banks total in Tennessee are in the program.)

This year’s growth will be a little slower due to a number of new entrants in the market extending aggressive loan rates and INSBANK’s more conservative approach, says Jim Rieniets, president and CEO of INSBANK.

Russ Miller

“There’s more competition now that the problems are over with some banks,” he adds. “This year we won’t have as big a year but for no other reason than we’re going to stay within the boundaries we set both in credit risk and in interest rate risk.”

But he believes that large, well-managed physician practices are a good risk that could be a strong profit center for the bank.

Risky business

Risk is a term physicians are hearing more often these days.

Under health care reform, physicians will be risking more of their income by participating in accountable care organizations (ACOs), systems through which hospitals and physicians band together to try to achieve better medical outcomes by coordinating patient care more effectively through the use of electronic medical records and staff to follow up with patients to make sure they are adhering to their care regimen.

Any savings that result will be distributed by the payer – an insurance company like Blue Cross Blue Shield or a government source like Medicare or TennCare – and shared with the providers.

Other new payment models include bundled payments – one set amount of money paid out for all the treatment related to a heart attack, for example – and capitated payments, set fees paid each month per patient. But in many cases providers share risk as well as savings, and will be required to pay or absorb any cost overruns.

It’s a far more complicated way to pay physicians than the convention fee-for-service model that health care providers have been working under.

“Whether they’ll have enough money in the deal to make it worth everybody’s while, who knows?” says Jeff Milburn, a physician compensation consultant with the Medical Group Management Association.

“Ultimately the providers will be taking on more and more risk. With the ACOs and population management, you have to be very careful with how you define what you’re going to be responsible for.

“They’re going to push as much risk down on the doctor as the doctor can tolerate. And in many cases, the physician can’t really evaluate the risk until they’re a year or two down the road.”

‘Just pay me for my work’

Between 2001 and 2011, Small Business Administration Loans to physicians increased more than tenfold, from less than $60 million to $675 million and the number of loans more than doubled.

While that could be a sign of relaxed lending or increased faith in medical practices, some take it as a bad sign that medical groups are borrowing to meet basic operating expenses such as payroll (in Illinois, the debt backlog is so big that the state is making Medicaid payments to doctors on an eight-month delay) or growing larger than they’re comfortable with in order to survive.

The dominant health care industry trend is consolidation. Large health systems are combining and physician groups are merging or being bought by hospitals who want to cement their relationships with doctors so they can get their referrals for lucrative inpatient services.

Many independent doctor groups with long histories are simply selling their practice and becoming hospital employees.

Between 2000 and 2011, the number of doctors employed by hospitals increased 75 percent, a survey by the Medical Group Management Association reveals. And by the end of 2013, only 36 percent of physicians will own their practice, down from 57 percent in 2000, according to Accenture’s 2012 Physician Alignment Survey.

The majority of physicians giving up their practice cited business cost as the reason for seeking employment. Meanwhile, hospital employment is on the rise, and more than half the nation’s hospitals are planning to acquire physician practices this year.

“Instead of dealing with the business side of negotiating contracts with payers, implementing electronic medical records, dealing with compliance issues, administration and absorbing the capital expenditures, many doctors are saying, “Just pay me for my work,” explains Milburn.

“That’s very attractive to new young physicians just getting into practice, and more senior physicians looking to retire see that as a good exit strategy.”

‘Are you ready for ICD-10?’

Those practices that do survive will likely be the ones that have already achieved size and scale, says Jim Browne, CEO of Heritage Medical Associates, a 100-physician, independently owned multispecialty group that began in 1991.

“It would be much more challenging right now to build a practice up to the size of Heritage from a small independent group,” he says.

“Much more challenging is to build out the infrastructure, the human resources, the information technology, the quality support, all the services you need to support the physicians in giving the patients what they want.

“It’s hard for an independent physician to keep up with the rate and the pace of change any longer. There’s so much change occurring. How do you keep up with it, let alone try to get ahead of it?”

Miller says that in picking a partner for the association’s new branded banking service, the TMA wanted a lender that understood the particulars of the medical field as well as physicians. These days, that’s a tall order for both.

“There’s a new coding system for filing to get reimbursements – if a doctor’s not ready for that in 2014 they won’t get paid,” he said. “Anyone lending money, they need to be asking, ‘Are you ready for ICD-10? If not, your business is at total risk. Cash flow stops on October 1, 2014.’”

“I think there was a point in time when, because being a physician was a pretty low risk and had a high upside, you used to see financial institutions extend extremely large lines of credit for doctors just on their signature.

“With the change in the marketplace, you’re going to have to prove the [worth of the] business that you’re in and the stability of what you have.”

Understanding those complexities and building relationships with doctors is something INSBANK’s Rieniets believes his smaller bank can do well.

“This industry is going to see some change,” Rieniets adds.

“That should create needs and opportunities for physicians. And it represents a significant opportunity for us over the next couple of years just within the space of the TMA’s physician constituency. We don’t need a huge share of that pie for our program to be a success.”