Impact of managed care on physician organizational behavior. (Beyond Managed Care).

"AT THIS POINT, WE ARE not looking to anybody to come in and be the white knight to protect us and save us. We are simply going to have to do whatever we do on our own." (1)

--Earl R. Washburn III, MD, Pediatrician, Placerville, California

"I never imagined that the government would implode and leave the field to the insurance industry and the corporations that got in on the first floor. What we have today is market medicine with the bark off The Wall Street Journal has now supplanted the Journal of the American Medical Association as the professional magazine." (2)

--Lawrence Matheis, Executive Director, Nevada State Medical Association, Las Vegas

The mood, movement, and momentum of the various types of physician organizations are closely tied to physicians' psychological beliefs in the leadership and legitimacy of the organizations.

* For example, when physicians don't trust "command and control" hospital executives as their employers in integrated delivery systems (IDSs), then physicians' moods shift away from IDSs, their productivity drops, relationships with hospital leaders unravel with movement toward more physician-centric organizations. This physician alienation may cause IDSs to lose market share and to become dysfunctional in gaining managed care contracts. Many IDSs are unprofitable, losing $50,000 to $125,000 per physician per year, and one of the largest, Allegheny Health System in Pennsylvania, recently declared bankruptcy. (3,4)

* To take another example. when physicians lose faith in the performance and motives of business executives in physician practice management companies (PPMCs), then these organizations' stock may crash on Wall Street. This past year the largest three PPMCs--PhyCor, MedPartners, and FPA Medical Management--have lost 71 percent of their stock value. And, as we all know, FPA Medical Management Inc. has landed in bankruptcy court.

According to a July 31, 1998, Wall Street Journal article, PPMCs have landed in "sick bay" because "physician-practice management companies tend to demoralize the doctors they recruit into their networks." (5) The terminal state of the PPMC industry became official on November 11, 1998, when MedPartners announced it was exiting the practice management business, and abandoning its 238 physician clinics and more than 10,000 affiliated physicians. (6,7)

* As a final example, physicians remain in a negative mood towards HMOs, which is understandable. After all, in physicians' eyes, HMOs are responsible for remorselessly cutting fees and restricting autonomy. What's to love? In any event. partly because of the negative mindset and subsequent physician undermining, most large national HMOs--Prudential. Aetna, and Cigna--have little success owning and operating physician groups or contracting with physician networks at a profit. Objective evidence of physician HMO distaste surfaced in a September/October 1997 Health Affairs article. "The New Medical Marketplace: Physicians' Views." in which physicians in higher HMO penetration states were reported to be much more likely to express serious satisfaction and practice problems. (8)

It surfaced again in December 1997. in a Minneapolis Star Thibune/Harvard University survey of 988 Minnesota doctors, in which 49 percent of the physicians said the system had grown worse in the previous year. The title of the article announcing the Minnesota physiclans' dissatisfaction was "The Closer You Get, The Worse It Looks." (9) Even an exemplar staff model HMO, Group Health Cooperative in Seattle. Is losing money, a $10.4 million loss on revenues of $1 billion in 1997.10 And on the Medicare HMO front, the redoubtable Minneapolis-based United Healthcare, supposedly the best HMO in the managed care industry, took a $900 million charge in the second quarter of 1998 and confessed it was unable to manage Medicare HMOs at a profit.

A disconsolate mood among physicians

Physicians are in a disconsolate mood about managed care and many, if not most, are milling around, wanting to stay independent without giving up ownership, but still shopping for a model that makes sense and that works. Practicing physicians want to have their cake and eat it too: they want to stay independent vet have access to managerial services and capital without giving away the store. Physicians are also realists. They know they're an indispensable cog in managed care machinery, but that the reengineered managed care system is not especially physician friendly. In a recent New York Times article. James Robinson. PhD. professor of health care economics at the University of California in Berkeley. explained the physician's new role:

"We are reengineering the health care system, and we are doing it the American way, which means incredible competition. We're going to have a consumer-oriented system, not a doctor-oriented system. We are seeing supply and demand equilibrate here in California at a new low price, and it is nasty."

Nasty it is, and unprofitable too, as Robert Cook, a writer for Modern Physician. reported in a June 1998 piece entitled "Indigestion."

"Staff model HMOs lost money operating physician practices. Hospitals are losing money operating physician practices. Now some of the biggest physician practice management companies are losing money operating physician practices.

Can't anybody here play this game?" (11)

An excellent question

It's an excellent question--one that has everyone scratching their heads.

After all, everyone knows doctors need business help and support. PPMCs have recognized this most clearly and are growing faster than other forms of physician organizations. Robinson, the previously-quoted Berkeley health care economics professor, summarized the physicians' economic problem well in the 1998 July/August issue of Health Affairs.

"Medical groups need financial resources, yet most retain no earnings and have no reserves. Physician practice management companies have recognized the need for in vestment and the scarcity of indigenous capital in the physician sector and are rushing to fill the void.

Resources are being contributed by venture capitalists, bond underwriters, private investors, pharmaceutical manufacturers, health plans, hospital systems, and public equity markets. The potential contribution of PPMCs is to nurture the intellectual capital of leading physician organizations and diffuse it throughout the health care system. The risk is that short-term financial imperatives will impede the necessary long-term investments." (12)

Physician ownership with outside capital

But the answer to Cook's question. "Can anybody play this game?" is becoming clearer. Only physicians themselves can play the game. physicians who believe in themselves, trust themselves, discipline themselves, hold themselves accountable for better outcomes, and who rely on a new breed of business-trained physician leaders. Here I'm talking about physician-led groups. I'm not talking about physician-owned HMOs. which have a spotty economic track record, or physician owned PSOs, for which I predict frequent failures, but about physicians operating within their own groups. concentrating on their own strengths. physicians and their organizations when you read articles like these:

* A February 1997 cover story in Physician Practice Options which reported on three Oregon Clinics--The HealthFirst Medical Group in Portland with 128 physicians, the Corowallis Clinic in Cornwallis with 85 physicians, and the Medford Clinic in Medford with 75 physicians--banding together to form a single company, Physicians Partners, Inc., with the ultimate plan of attracting outside capital. (13)

* A December 1997 Modern Physician article describing how the Connecticut State Medical Society had formed a statewide MSO In a 50/50 arrangement with MeD3000, a Pittsburgh-based private PPMC, supported In part by capital from Novartis, the pharmaceutical company. (14)

* A January 1998 lead story in The Physician Executive, "Hospital-Sponsored Networks: The Rush to Consulate and The Future of Medical Practice," in which Derek van Amerongen, MD, National Medical Director for Anthem Blue Cross and Blue shield, makes a powerful argument that ambulatory-centered physician-directed networks will soon be in the driver's seat In any future managed care health system. (15)

* An article In the April 27, 1998, American Medical News "Doctors Opt For New Management Tool--Themselves," says that the trend is toward physician-owned and contralled PPMCs and gives as an example Stratum Med, an Illinois-based physician-owned PPMC with 1,250 physicians in shareholder clinics. (16)

* An August 15, 1998, Physician Practice Options opinion piece, "Prescription for a Workable PPMC Model," by Bill Freeman, Vice President of Operations at MD Alliance, an Atlanta-based multi-speciality PPMC, describing how a physician-owned and controlled PPMC "cooperative" of many clinics will allow physicians to acquire public capital for expansion while controlling their own clinical and economic destinies. (17)

Physician organizations options: Outsource, get support, share information

Given the lack of retained earnings and cash reserves and the demand for capital to stay in the managed care game, where are physicians headed?

First, it's a given that physicians organizations will require financial and managerial expertise and affiliation with outside organizations possessing this expertise.

Second, physician organizations do not have the core where-with-all to handle both clinical and administrative functions.

Third, capital-starved "lean and mean" physician organizations will outsource" management of ancillary centers, practice management, and such administrative functions as claims administration, internet/intranet connections, eligibility verification, provider network integration, provider profiling, HEDIS reporting, credentialling, capitation management, and provider utilization patterns.

Considering these "givens," physician organizations have three basic options:

1. Affiliate closely with an integrated delivery system, to be owned by that system, and to be dependent on that system, usually driven by a hospital or an HMO or a combination thereof, for financial and managerial expertise.

2. Be acquired by a physician management company, or its MSO equivalent, and be dependent on that entity for financial and management resources.

3. Remain "independent" but become part of a larger "single signature integrated physician network, and become stronger and more competitive through the use of optional outside and out-sourced support services.

Conclusion

As I watch physician-owned organizations grow and as new information technology becomes more reliable, cheaper, and versatile, the third option is looking more and more viable, sustainable, and practical. It is possible for physician organizations, for example, to "outsource' almost the entire "back office," "administrative infrastructure," and "information systems" functions needed for managed care competitiveness. Physician organizations can become "virtual organizations," with all the tools needed to compete, but without the heavy up-front investment in systems and without the necessity of having those systems on site. The key physician attitudinal adjustment here is to share information and to give up some control.

Physicians don't necessarily have to become an "employee" of an outside entity, or be herded into an organization to which they don't want to belong. But they do have to become stronger financially, more collaborative, better organized, and more business-like. Intelligent use of outside management can prevent physicians than being sucked into the bureaucratic entrails of a large organization. As one executive of a successful Southern California practice management company remarked to me: "Our job is to make the cats fat, not to herd them under one roof into an organization, which makes them feel more like an employee than a doctor."

To become more business-like and to work smarter rather then harder, physicians need to recognize that geographic connectivity Is less important than information connectivity. This connectivity will make it possible for physician organizations to manage through information, rather than through being controlled or owned by some outside entity.

What physician organizations need are outside support services to remain strong financially and self-sufficient and to lease the infrastructure needed to deliver the right information to physicians. This information will set them free to make prudent medical and financially correct decisions. The mood, movement, and momentum of physicians, in short, is toward integrated physician organizations bound together by information that amplifies on their core competencies and capacities to deliver care.

TABLE 1

PHYSICIAN CONSOLIDATION

Type of Practice                           1983  1997

Self-employed, sale parctice                41%   26%
Self-employed, group practice               35%   31%
Employed of large                           24%   43%
Company

                                           1988  1997

Physicians with at least one managed care   61%   92%
contract
Percent of revenues from managed care       23%   44%

Henry J. Kaiser Family Foundation

References

(1.) Stolberg, Sheryl, Gay. As Doctors Trade Shingle for Marquee, Cries of Woe, The New York Times, August 3. 1998.

(2.) Hitshens, christopher. Bluer Medicine, Vanity Fair. August, 1998.

(3.) "MGMA cost Survey." Report based on 1996 data, MGMA. 1997.

(4.) Kilborn, Peter, T. Philadelphia Shaken by Collapse of Health Care Giants, The New York Times. August 22. 1998.

(5.) Rundle. Rhonda. How FPA Landed in Bankruptcy Court, The Wall Street Journal, July 31, 1998.

(6.) Sharpe, Anita. MedPartners is Abandoning Physician Management Business. The Wall Street Journal, November 11. 1998.

(7.) Freudenheim, M. MedPartners to Divest itself of the Business of Physician Practice Management. The New York Times, November 12, 1998.

(8.) Donlan, Karen et al. The New Medical Marketplace: Physicians' Views. Health Affairs, September/October 1997.

(9.) Hamburger, Tom et al. The Closer You Get, The Worse It Looks. Minneapolis Star Tribune. December 1997.

(10.) Anders, George. For a Shangri-La of HMOs, a Dose of Modern Reality, The Wall Street Journal. August 4, 1998.

(11.) Cook, Robert, Indigestion, Modern Physician, June 1998.

(12.) Robinson, James. C. Financial Capital and Inteliectual Capital in Physician Practice Management, Health Affairs, July/August 1998.

(13.) Strategies: Three Clinics Form A Physician Practice Management Company, Physician Practice Options. February 1997.

(14.) Sloane. Todd. A Better Mousetrap. Modern Physician. December 1997.

(15.) van Amerongen, Derek. Hospital-Sponsored Networks: The Rush to Consulate and The Future of Medical Practice. The Physician Executive, volume 24, issue 1, January/February 1998.

(16.) "Doctors Opt For New Management Tool--Themselves," American Medical News, April 27, 1998.

(17.) Freeman, Bill. Prescription for a Workable PPMC Model, Physician Practice Options, August 15, 1998.

(18.) Physician Practice Management and Integrated Delivery Systems, VHA, Inc., Research Series, 1997.

(19.) Baum, Neil. Take Charge of Your Medical Practice...Before Someone Else Does it For You: Practical Management for the Managed Care Market, Gaithersburg, MD: Aspen Publishers, Inc., 1996.

(20.) Zaslove, Marshall O. The Successful Physician, A Productivity Handbook for Practitioners, Gaithersburg, MD: Aspen Publishers, Inc., 1998.

RELATED ARTICLE: WHAT ARE PHYSICIANS ASKING?

Physician Practice Options, a widely circulated monthly physician newsletter, has a toll-free line for subscribers to call. It reveals a great deal about physicians' moods and choices among the various physician organizations. These are the questions that physicians are asking:

What is the value of my practice?

Physicians want a "ballpark figure" of the rough value of their practice. I point out that evaluating a practice is like reaching a diagnosis--you can't do it from a distance without interacting with the patient, taking a history doing certain tests, and performing a physical The value depends on economic performance, goodwill, market conditions, economic trends, practice reputation, physician supply and demand, and what buyers are willing to pay. Many practices have more than one bidder-the hospital, a PPMC, or another group. There is definitely an arbitrage underway, with a 20 to 40 percent drop in solo fee-for-service practice values. As markets transition to managed care, the number of covered lives and ability to assume risk begins to dictate the practice's value. Physicians most anxious to sell are older solo family doctors and solo specialists in highly penetrated markets.

The mood among physicians is to sell when the selling is good, the movement is toward selling to non-hospital buyers, and managed care momentum is forcing the sale of solo practices. For solo physicians, it's come down to a game of medical musical chairs, with the solo doctor out.

Should I sell my practice and to whom?

Most physicians are reluctant to sell to hospitals because the grapevine is telling them that physicians in hospital-acquired practices are unhappy or are seeking to buy back practices as their five-year contracts expire. This mood may change with the collapse of the PPMC industry. I receive few calls from doctors merging with other practices. Presumably these transactions are a collegial and private matter. Most physicians express anxiety over selling to PPMCs and their fast-talking advance men. Are these companies real or are they part of an elaborate Ponzi scheme? To many of these physicians, I fax a list of the existing publicly and privately traded PPMCs without making any judgments. I sometimes discourage doctors from being acquired by hospitals because of the inherent conflicts and control issues between hospitals and physicians and the generally poor track record of hospitals as employers of physicians and acquirers of their practices.

The mood toward selling practices still has a high level of uncertainty, the movement is away from sales to hospitals, and the momentum favors sales to physician-owned or controlled organizations. For the moment, ownership by other physicians is more popular than hospital ownership. Even in the face of physician resistance to selling to hospitals, hospitals expect to acquire 5,000 practices in a year. (18)

How do I educate myself to deal with managed care?

Physicians need to steep themselves in the managed care literature. I suggest that they join the American College of Physician Executives; plunge into on-the-job training opportunities with the medical staff, physician group, or local managed care organizations; take a formal MBA, MPH, or MMM degree; or attach themselves to a mentor. For callers who ask about MBA degrees, I give them information on a website listing all the 986 MBA courses in the United States (http://mba.us.com/guide/programs/alpha.html). recommend part-time or distance learning physician-centric MBA courses or academic centers with a proven track record in producing managed care leaders, such as the University of St. Thomas in the Twin Cities, the University of Wisconsin in Madison, or the University of Colorado in Boulder. I also suggest the Masters of Medical Management course offered by the American College of Physician Executives at Tulane and Carnegie-Mellon. MPH courses at major land-grant universities or large private universities are also in demand.

The mood is a reluctant resignation that a formal education in business is preferable to on-the-job training, the movement is toward part-time or distance learning opportunities, and the momentum favors formal management training.

What are my career options?

My answer often starts with counter questions: How old are you? What are your skills? Do you consider yourself an entrepreneur? What do you want to do with the rest of your life? Do you want to pursue a career inside or outside of medicine? If you choose to go outside of medicine, do you want to use your medical knowledge, for example, advising venture capitalists about which health care ventures to invest in, or do you want to work as a physician in a health care corporation or in a pharmaceutical company? I always warn callers: once you step outside of medicine into a non-medical career, you're nothing but a raw rookie at the starting line with other rookies.

The mood is to get out of clinical practice, the movement is gravitating toward medically-related administrative positions, and momentum belongs to those who are doing it while they're still young. Most callers are between 35 and 55 years old.

How do I evaluate my organizational options?

In other words, should I join or form an PA, PHO, group practice without walls, or merge my practice into a larger integrated medical group? Should I be acquired by the hospital or a PPMC? Or, if I'm specialist, should I take the lead and form a single specialty network? It's a tough call and depends on the market and the personality makeup and leadership record of the caller. I often refer callers to acknowledged experts and consultants. The question of organizational alternatives, however, comes up so often that Physician Practice Options has introduced a column by Thomas Gorey, JD. A consultant for the American Medical Association and six other state or specialty society sponsors, Gorey has written a series of six booklets containing analyses and case studies of PHOs, MSOs, POs (physician organizations, such as group practices without walls, integrated group practices, and IPAs), single specialty networks, and practice mergers.

The mood is "I need outside expertise," the movement is toward more tightly integrated groups, and the momentum favors group formation or mergers.

Catching the drift

You can begin to catch the drift of the mood, movement, and momentum of and outsourcing HMO functions. What HMOs do, administer complex systems, is beyond the competencies of most physician organizations.

Where should I go to get capital?

This is an extremely important query. Physician Practice Options has a regular section, "Capital Ideas," devoted to alternative sources of capital, current popular sources of capital, rate of capital activity, market performance of health care organizations, and strategic considerations, risks, and opportunities for acquiring capsulate. I refer questioners to respected sources of capital advice.

The mood, movement, and momentum of physicians toward capital acquisition are ambiguous and vacillating. Many clinics are in financial distress as they ramp up systems to assume risk. With the apparent decline of the PPMC industry and the indifferent performance of hospital systems, many physicians are exploring other capital options--senior bank debt, variable rate notes, strategic partner debt, and sale and leaseback with a real estate trust.

How can I make my practice profitable?

This question demands a multifaceted answer from practice management firms addressing such "levers of profitability" as coding, billing and collections, accounts receivable management, expense and operations management, physician productivity improvement, and enhancing patient volume and patient mix, I refer physicians to physician practice management firms, For physicians who want to increase their individual productivity I recommend two books on physician productivity: (1) Take Charge of Your Medical Practice...Before Someone Else Does it For You: Practical Management for the Managed Care Market by Neil Baum; (19) and (2) The Successful Physician, A Productivity Handbook for Practitioners, by Marshall O. Zaslove. (20) I also recommend the International Council for Quality Care, in Boca Raton, Florida (407/421-7331), an institute that features a two-day course for increasing physician productivity and patient satisfaction.

The mood, once again, is "I can't do this alone," the movement is toward outside paid advice, and the momentum favors thoughtful practice evaluations rather than quick fixes.

Richard L. Reece, MD

SEVEN STRATEGIES FOR PRACTICE SUCCESS

MedPartner's November 11, 1998, decision to abandon physician practice management to focus on its pharmacy benefits unit is one more nail in the coffin of the physician practice management company (PPMC) industry. But MedPartners' departure opens a window of unparalleled opportunity for hospital, health system. and physician executives who are willing to act quickly.

The PPMC downturn that began with the 1996 bankruptcy of Durham, North Carolina-based Coastal Physician Services gained momentum with the 1998 financial collapse of San Diego-based FPA. Now, the demise of a former Wall Street darling such as MedPartners makes it likely that doctors will increasingly shun the PPMC model and its associated fee structures.

Doctors seduced by PPMCs' extravagant acquisition offers didn't always realize they had to cover acquisition costs and capital out of future earnings. Unable to grow practices and cut costs, physicians saw their earnings decline.

PPMCs are suffering too, Capitalization has declined 64 percent--from 10.6 billion in 1997 to less than 3.6 billion in late 1998, according to the New York City-based Corporate Resources Group. And recent speculation over the intent of Nashville-based PhyCor to go private leads to forecasts of even more serious potential erosion of the PPMC industry.

But how should hospital, health system. and physician executives respond to MedPartners' departure from practice management? Following are steps they should take now:

1. Move into action immediately

Physicians are searching for capital and are likely to view hospitals and health systems as strong potential partners. Unlike PPM Cs, hospitals and health systems don't need to turn a profit on the practices themselves. Instead, they can concentrate on total revenues controlled by physicians, both within physicians' offices and within the hospital or health system.

2. Assess current and emerging threats

The key issue: If physicians were to align with a competing entity, how much could the relationship damage the hospital or health system? If physicians are already members of another hospital's staff, or if your hospital already holds the dominant market position, the threat is probably negligible. But if physicians are already on your medical staff and are a major source of admissions, the threat is serious and immediate. The scenario has already played itself out in Chicago. Before MedPartners' October 1998 announcement to divest itself of Skokie. Illinois-based North Suburban Clinic, the majority of clinic admissions went to Rush North Shore. Eventually, the clinic was acquired by Rush North Shore's competitor, Evanston Northwestern Healthcare. Rush North Shore lost out, because it failed to launch a decisive, imminent strike and forge strong relationships with existing physicians.

3. Evaluate the current and emerging opportunity

At stake is whether an affiliation with physicians would enhance or solidify the hospital or health system's market position. If the physicians are not on a hospital or health system staff or only admit a portion of their patients, acquiring the practice would probably boost and often solidify a hospital or health system's market position.

4. Identify physicians' needs

No two groups of physicians are alike. While some demand income security, others crave seamless practice management. Still others seek enhanced freedom, autonomy, and control, or look to build wealth through an affiliation with a larger network. The most effective approach is a low-key initial conversation with a groups formal and informal leaders, followed by more formal discussions with all physicians.

5. Diagnose partnership opportunities

Avoid pitfalls, such as high payments of up-front capital--historically more than 50 percent of annual revenues--for practice acquisitions. Also essential is offering physicians a dominant role in practice planning and operations, and crafting compensation arrangements based on productivity factors, such as number of patients seen and revenues generated. Overly generous physician compensation arrangements are one of the top reasons for PPMC failures.

6. Identify the best organizational model

Organizations have toyed with approaches ranging from association and practice management, to practice acquisitions and. physician employment. Highest marks go to a model where physicians reside within their own corporation and receive practice management services through a management services

SEVEN STRATEGIES FOR PRACTICE SUCCESS

organization (MSO) jointly owned by physicians and the hospital or health system. The most significant advantage is providing physicians with true ownership of a practice where management fees are earned on the basis of MSO performance.

7. Pinpoint benchmarks for negotiation success

No matter what type of model is chosen, it must meet physicians' personal goals, preserve quality of care, and generate revenues and add economic value for both physicians and the hospital or health system. The success of any model depends on making sure that physicians are satisfied with their professional lives and working environment. Physicians, hospitals, and health systems must be candid about what they want from a partnership and make sure they understand each other completely.

Jeff Peters is President of Harvey, illinois-based Health Directions, Inc., a physician management turnaround firm. He can be reached by calling 708/915-6352, via fax at 708/915-2706, or via email at [e-mail].

Richard L. Reece, MD, is Editor-in-Chief of Physician Practice Options and Chairman of the National Association of Integrated Health Organizations (NAIHO). He can be reached by calling 860/395-1512 or via email at [e-mail].