The Art of Mismanagement: Inside A Debacle.

"When one doesn't know for what port one is making, no wind is the right wind."

Old sailing adage

JUST A FEW YEARS AGO, primary care practice acquisitions were a leading activity for hospitals and health systems. Some characterized the phenomenon as a frenzy in which competing hospitals, desperate to ensure continued referrals, bid up the price for established practices to unrealistic levels. Hospitals and health systems of all types and sizes participated in this strategy, while physicians who sold their practices thought they were riding a wave into a brighter future. Publicly held practice management companies also bought up practices and were, for a time, the darlings of Wall Street.

Unfortunately, the balloon burst and seemingly overnight the acquisition mania has been replaced by divestiture frenzy. The furious pace with which practices were snapped up has been replaced by an even more hectic tossing overboard of the very same entities. For-profit practice management companies have all but disappeared and this entire chapter has become viewed as an enormous disaster in contemporary health care management.

The postmortem analyses of these tragedies focused on overpaying for the practices, physician compensation structures that were not aligned with organizational goals, and failure to hold physicians accountable for the practice's success. But there is an untold story that goes beyond what has been published and probes deeper into the reasons some of these networks failed.

Unfortunately, I was on the inside of one such acquisition and divestiture and what follows is the true story of how a successful primary care practice can be effectively destroyed in just a few years. The names have been changed to protect the identity of the institutions and individuals involved.

Background

River City is a pleasant suburban community of about 100,000 with a substantial presence of relatively affluent retirees. With a very low penetration of managed care, practice in the area was comparatively lucrative. The local hospital was generally well run with an aggressive management team. When it became affiliated with a large tertiary hospital system, a major university medical center 70 miles away became alarmed and crafted a strategy of acquisitions to ensure a continued stream of referrals.

The practice was, by any measure, very successful. Pre-acquisition valuation placed it within the 98 to 99th percentile nationally for similar practices. The group enjoyed a 95 percent collection rate in a completely fee-for-service market. However, change was on the horizon and managed care was beginning to make inroads into the local market. The group was courted by the Ivory Tower Health System (ITHS) and agreed to sell the practice.

Part of the allure was a promise to provide for a state-of-the-art, computerized collection and billing system, electronic medical records, a call center, disease management programs, and sophisticated marketing support. Unfortunately, the glossy brochure describing the advantages of being part of the system received more attention than the actual plans for operational implementation. The system's leadership included two physicians and an attorney. None had any formal management training or experience.

The death spiral 

Almost immediately after acquisition, problems began to occur. Apparently lacking a billing and collection strategy, the first initiative was to halt taking any cash at the front desk. All fee tickets were to be batched and sent to the ITHS central billing office. The practice's billing person was let go. Nearly a year later; when no billing had been submitted, a new local operations director was appointed. Despite her efforts, the collection rate improved only slightly and topped out at 60 percent.

There was no local or regional medical director appointed and no physician performance management system employed. The practice was merged with another and the new entity had four names in two years. No sign was placed outside the location with the new name for over two years. Each physician had a different employment agreement with differing compensation and bonus arrangements. Some had bonuses based on gross charges, others, net collections. No specific physician expectations were disseminated.

Both of the merged practices were full and very busy at acquisition. Nonetheless, announcement ads were run for several weeks in local newspapers erroneously proclaiming that the practices had immediate openings and accepted all managed care plans. In fact, new patient appointments were filled three months in advance and there was only limited participation in managed care plans. This marketing strategy proved to be a disaster as there were literally no slots available for the flood of new patient calls.

Complicating this was the deleterious effect of one of our senior physicians taking an 18-month leave of absence for a serious medical condition. This left the practice short staffed and exacerbated the difficulties we had scheduling patients. Over a year would pass before another physician was added.

The physical appearance of the facility was neglected. As a high volume office with substantial traffic, the carpets and furniture became worn and the walls scuffed. As the practice's losses increased, the cleaning and carpet service was reduced to save money. Patient complaints about the office's deterioration went unheeded.

Sinking morale

Physician and staff morale began to sink and there was severe frustration because no one was empowered to correct any of these deficiencies. The sole medical director of the network, which now consisted of 100 practices with 300 physicians, was more than 70 miles away and made one site visit in three years. The medical director did not want to "micromanage" the practice, but maintained that a local medical director was not needed because he did not want to "create a lot of little fiefdoms."

Meanwhile, I was pursuing management training through the American College of Physician Executives in the hopes that I could provide some assistance because of what was obviously becoming a disaster. Eventually, I was given the opportunity to assume a limited medical directorship, but had no authority or organizational support to make any substantive changes or purchases. My suggestions to provide better ICD-9 coding education, institute a physician performance management system, and improve the billing and collection process were ignored.

Nonetheless, the practice nearly broke even by the end of the third year by a combination of aggressive cost cutting, staff reductions, and increased patient contact hours. Despite the improvement after a regional medical management model was developed, it was abandoned when a new, also untrained, senior medical director was appointed.

Shortly thereafter, I accepted a medical directorship elsewhere. None of the remaining seven physicians elected to remain with ITHS, although some did repurchase their charts. The former practices were closed. ITHS incurred substantial losses during these four years, although they did maintain a vigorous rate of referrals from the practice. However, without an effective tracking process, ITHS was never able to quantify those referrals.

ITHS defaulted on the final deferred practice acquisition and non-competition payments and became embroiled in litigation, which it eventually lost. The physicians, who were once staunch advocates of ITHS, are now disenchanted, disenfranchised, displaced, and starting over. ITHS had an opportunity to maintain a high profile primary care presence in an a key affluent suburban market, but through a series of management errors has probably irreparably damaged its' reputation in the community.

Several articles have appeared in management newsletters about ITHS and its difficulties. The reasons generally given are that it was a "failed strategy" and that overpayment for practices, unrealistic salaries, and poor physician productivity were to blame. Not one article has addressed the issues discussed herein.

The postmortem

Having been on the inside of the ITHS debacle, I can say that much of what has been written about it in the management literature is superficial and focuses on a limited number of mistakes. The catastrophe I've described is replete with mis-management and can serve as an instructive case for physicians who are already in or considering similar arrangements, as well as for the executives who manage them. The key reasons ITHS failed in this acquisition are as follows:

1. Untrained senior management

Although the physician leadership of ITHS' primary care network was well intentioned, none had formal management training or experience. Without awareness of the basic principles of management and the systems needed to operate such a network, the initial leadership team was ill-prepared and ill chosen.

2. Inadequate organizational infrastructure

Many organizations can function with simplified and flatter structures. But not a hastily created organization spread out over a large area. Someone should have been in charge from the beginning. Independent sites at significant distances from the "mother ship" need someone empowered to make necessary changes and accountable for the results. By the time this error was recognized, it was too late. The regional medical management model showed promise, but was nonetheless quickly abandoned.

3. Ineffective billing and collection process

It is imperative that a well thought out plan for billing and collection is in place prior to acquisition. One cannot simply assign responsibility for billing to a remote hospital unfamiliar with primary care without direct input or communication from the offices.

4. Lack of a physician performance management system

One cannot expect performance to conform to expectations if none are ever articulated and if no performance evaluations are conducted.

5. Inappropriate marketing strategy

It is said that a major marketing mistake is to advertise products or services that cannot be delivered. ITHS acquired a very busy and essentially full practice. At the same time that one of the physicians went out on medical leave, the practice was being advertised with erroneous information about appointment availability and managed care participation.

6. Inadequate support for the practice

ITHS never followed through with their promise to install a sophisticated computerized billing and collection system or electronic medical records.

7. Failure to develop local and regional medical directors

It is virtually impossible for one untrained medical director to adequately oversee operations at hundreds of facilities distributed over a wide area. Had an effective, empowered, and accountable regional medical management structure been established at the outset, the outcome might have been quite different.

8. Poorly designed physician compensation plans

High base salaries, variable contracts, inconsistent bonus structures, and unachievable incentive targets cannot be expected to incentivize productivity.

9. Failure to sustain the vision

Once the initial losses began to occur, organizational support for the network quickly evaporated. There was no identifiable effort to sustain the vision and maintain support for the strategy.

10. Divestiture disaster

After the physicians decided not to renew their contracts with ITHS, the divestiture was handled poorly, resulting in litigation and leaving a formerly supportive group of physicians angry and unlikely to refer patients to ITHS.

Conclusion

Hospital-owned primary care networks have not generally been successful and the reasons given for their failure have focused on physician compensation and overpayment for the practices. However, firsthand experience with one such failure reveals several other areas of mis-management. Careful consideration to the areas delineated in this article may benefit others in similar arrangements.

Michael A. Patmas, MS, MD, FACP, CPE, is Medical Director of Providence Health System's Ambulatory Care and Education Center in Portland, Oregon.

KEY CONCEPTS

* Hospital-owned Primary Care Networks

* Mismanagement of Change

* Avoiding Catastrophe

* Divesting Primary Care Networks

* Failed Relationships

* Signs of Trouble

Much has been written about the difficulty hospitals encounter when owning primary care networks. Analyses of these relationships have focused upon overpaying for practices and failing to structure physician compensation packages that foster accountability for performance. Divestitures of these networks dominate the headlines. However, deeper study into these failed relationships reveals additional factors that may be just as important in their collapse. Inadequate attention to organizational infrastructure, poor operational implementation of the business plan, and failure to sustain the strategic vision are also involved. This article details the inside story of one such failure. Suggestions are offered to help physicians and physician executives in these relationships avoid a similar outcome.

Why We Failed

* Untrained senior management

* Inadequate organizational infrastructure

* Ineffective billing and collection process

* Lack of a physician performance management system

* Inappropriate marketing strategy

* Inadequate support for the practice

* Failure to develop local and regional medical directors

* Poorly designed physician compensation plans

* Failure to sustain the vision

* Divestiture disaster

Michael A. Patmas