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Models for medical practice integration.

The practice of medicine is becoming increasingly business-like and the business of medicine is becoming increasingly complex. Third-party and government organizations are imposing more regulations. Insurance companies and managed care firms are requiring more stringent utilization and quality controls, resulting in a blizzard of paperwork. The costs of practice inputs continue to rise, while physician revenues are stagnating. The availability of experienced support staff is limited, and turnover is frequent.

The need to investigate organizational alternatives to the traditional practice of medicine is becoming even more urgent with the expectation that the next few years will see a revolution in the way health care is organized and paid for. "Managed competition, "guaranteed access, "community capitated health plans, and "global price controls" are but a few of the new concepts that are being discussed at the national level and that may dramatically affect the delivery of physician services. Physicians, and the hospitals they relate to, must position themselves to respond quickly to these changes.

Objectives of Practice Integration

In order to compare the advantages and disadvantages of alternative models, it is important to identify key operational, financial, and legal objectives of medical practice integration. Does the model enable physicians to: * Enhance (or preserve) take home pay by:

* Raising practice revenue through improved collections and higher productivity.

* Benefiting from profits from group-owned ancillary services. * Reduce practice costs (lower prices for supplies and services, greater practice efficiencies). * Share profits from high-income specialties to low-income specialists. * Increase their influence in dealing with managed care and other payers. * Improve practice "life-style" by reducing hours spent in nonpatient care, permitting the physician to focus on the practice of medicine and leaving administrative, financial, and management issues to others. * Avoid, or deal more effectively with, burdensome government regulations. * Retain a large measure of autonomy and control over practice management and operations. * Participate in the strategic and operational decision making of the organization. * Avoid potential political problems with nonparticipating medical staff colleagues. * Expend a minimal amount in personal funds and time. * Avoid the risk of antitrust and/or fraud and abuse prosecution. * Involve the hospital in assisting financially in development and operations.

The table below provides a "score card" of how well the various models achieve these objectives.

Group Practice without Walls (GPWW)

A GPWW can be formed jointly by a hospital and physicians, referred to in this article as an affiliated medical practice corporation (AMPC), or it can be formed independently by community physicians, an independent group practice without walls (IGWW). The two models have much in common but are different in some very important ways.

Features in Common:

A GPWW is formed by physicians in established practices coming together to develop and control a professional corporation. (If this is an AMPC, the hospital is also involved and may take the lead, but the established physicians must have a major input). Physicians become employees of the group practice, merging their existing practices. Support staff members become employees of the group practice or of a separate management company that contracts with the professional corporation for management services. This management company may be owned 100 percent by the physicians, jointly by the physicians and the hospital, or by a third-party management firm.

Regardless of the arrangement, the physicians maintain their separate office locations and operational control over their support staffs, equipment, medical records, and clinical relationships with patients--the without walls aspect of the model. Practice income and expenses are tracked through the group practice's central financial books to each physicians' "profit center" so that the individual's productivity and cost-effective management are rewarded.

Other than common elements of a single fee schedule, flow of at least 75 percent of business through the group, a standard fringe benefits plan, central payables and payroll system, and risk sharing on managed care, physicians in a GPWW may operate their practices quite autonomously.

The employer/employee relationship of the GPWW provides very powerful advantages of this model over the other models in figure 1. As a single legal entity, the group practice can act on behalf of its physician/employees without fear of violating antitrust, safe harbors and other regulations that limit solo physicians from planning and working together. This enables the participants to enjoy the following benefits that can be achieved from the operation of a GPWW: * Collective operational and financial leverage in negotiations and program development with hospitals, HMOs, and third parties. (See sidebar, page 21, for a discussion of why group practices are attractive to HMOs. * Opportunity to share overhead costs and even revenue among physicians. In some GPWWs, specialty physicians "tax" their earnings in order to increase the income and ensure the survival of primary care physicians who are their referral base. * Opportunities to refer to and enjoy profits from group-owned ancillaries and other medically related businesses. Group practice ownership of ancillaries is one of the few remaining "safe harbors." * Efficiencies and professionalism of centralized billing, accounts receivable management, accounting, and financial reporting generate higher revenue. * Collegiality and support, financial and moral, of others who share common values, objectives, and strength in confronting common problems and external threats. * Enhanced ability to recruit new physicians to the area to assume the practice of a retiring physician or to expand services. * Economies of scale in buying supplies, services, equipment, and fringe benefits. * Centralized human resource functions providing wage and salary management, personnel policies, recruiting, orientation, training, and performance appraisals and advancement opportunities for support staff. * Ability, through cooperative marketing, to better withstand erosion of patient base to established groups that are expanding aggressively. * Delegation of administrative burdens to a central administrator, returning the physician's time to the delivery of medical services.

Participation in a GPWW provides the above benefits while allowing physicians to retain most of the important attributes of an independent practice: * Physicians are free to continue to treat patients in a convenient and caring manner in a familiar setting, their own offices, with minimal interference in their style of practice. * Because they operate in separate "profit centers," their compensation can be directly related to personal efforts and hard work. All billings and collections are tracked to the attending physician. * They can select their support staff and reward them within broad group-established guidelines. * They can set their own office hours and hospital schedules. * They have complete freedom in locating their offices close to the community and in equipping and furnishing them as they wish.

There are, of course, some trade-offs. Some of the independence of personnel, purchasing, and financial management will be reduced. The operations and finances of each member of the group will be monitored by the administrator and by the finance committee of the board of directors, if there is one. Time will be spent on governance and policy setting.

Major Differences between the Affiliated Medical Practice Corporation and the Independent Group Without Walls: * Ownership: The AMPC is owned by the hospital or the hospital holding company and, by extension of the not-for-profit concept, by the community. The IGWW is owned by the physicians who set it up. * Corporate Form: Assuming that the hospital is not-for-profit, the AMPC may be a not-for-profit, tax-exempt corporation (foundation). The IGWW is a for-profit, taxable professional corporation. * Governance: The AMPC board must have at least an 80 percent majority of nonphysician employees. In particular, the compensation committee must be totally composed of nonphysician employees, and physician compensation must not be out of line with that of other physicians in common specialties. The board of directors and committees of the IGWW can be structured in any way the founding physicians wish, and there is no limit on compensation. * Control over Admissions: AMPC-employed physicians will likely be very strongly encouraged to refer and admit their patients to the affiliated hospital-assuming that the necessary service is available and quality is acceptable. Physician employees of IGWW may admit to and work with any and all hospitals in the community and may play one hospital off against another in managed care subcontracting. * Financing: The cost of development of the AMPC and any ongoing operational deficits can be financed by the hospital or its holding company, because the AMPC is a controlled corporation. The IGWW must be financed by the physicians who are forming it. Hospital assistance can be made available in the form of a market rate line of credit to the IGWW, not to the individual physicians. * Purchasing Power: The AMPC can "piggyback" on the hospital's ability to negotiate discounts from vendors of supplies, equipment, and services. This is particularly beneficial in the purchasing of fringe benefits and big-ticket items. The IGWW may be able to get some concessions from the hospital's suppliers but fringe benefits vendors require a "controlled corporation" relationship in order to include the GPWW in the hospitals low-cost benefits contracts. * Negotiating with Managed Care Organizations: The AMPC and the hospital can negotiate as one entity with managed care organizations, because they are commonly controlled corporations. The IGWW can work with a hospital through a formal PHO or bilaterally when negotiating with managed care firms. However, an arm's-length contract between the three entities must result. * Joint Ventures: The AMPC and the hospital can work as one on development of ancillary services, medical office buildings, etc. An IGWW can joint venture with a hospital in an arm's-length contractual relationship and share in the risks and profits of the ventures, pro rata to the investment.

Issues in Developing and Operating a Group Practice Without Walls:

Merging independent physicians (or existing small groups) into a GPWW, independent of or in affiliation with a hospital, is not a simple process. Many hours must be spent in reaching consensus on important financial and operational issues. The acceptance of leadership roles by some must be encouraged. Practice consultants and legal, accounting, fringe benefit, and pension plan advisors must be recruited and utilized. Office support staff must be involved and their cooperation encouraged. The following are a few of the issues that must be worked through: * Common Vision and Values: Participants must have agreement on the respective strengths and weaknesses of solo and group practice and on the mission and goals for the GPWW. * Corporate Form: Membership corporation, stock corporation, or not-for-profit corporation? * Governance: 100 percent participation by stockholders on all decisions or representative decision process through elected board; hospital participation in governance (If this is an AMPC, physician participation in governance); community representation? * Participation: Who is in and who is out--open to all medical staff; primary care only; economic mix of primary care/specialty care; only physicians who have the "respect" of the physician founders (within the nondiscrimination laws, an IGWW can be totally selective on whom it employs and to whom it sells shares)--process for controlling participation? * Ease of Leaving the Group: Establish a strong noncompete clause or make it relatively easy and straightforward for physicians to leave and regain complete control of their practices; conversely, make the process straightforward for the group to force a physician out? * Provision for Establishing Price of Stock for Buy in and Selling out: Arbitrary price for stock set at average value of assets physicians bring to the professional corporation; how to handle accounts receivable, real estate, and good will? * Compensation Plan: 100 percent profit center-based versus various formulas for cross-subsidization across specialties; formula for sharing corporate overhead; implications on compensation of ancillary income, seniority, group management responsibilities, community service? * Pension Plan: Freeze existing pension plans outside of the GPWW or fold them into the GPWW; flexibility of pension plan(s) within the group to serve the needs of physician with divergent ages, incomes, and family needs? * Centralization of Business Functions (see figure 2, page 23): Implement only the minimal required functions to ensure that the group will pass the test of corporate status; start with minimal functions but have a timetable in the business plan to move ahead to implement other functions over a rational period. * Support Staff Issues: Uncertainty and change are threatening, so support staff must be well informed and involved in the process for the quality of their input and to encourage their "ownership" in the outcome of the process; merger of multiple benefit plans into a common plan; standardization of pay ranges for similar positions.

Group Practice without Walls Development Process

The development process will be complex and, depending on the number of physicians involved, protracted. Under the best of circumstances, three to six months should be allowed, with a year to 18 months anticipated for the larger groups. Below is a bare-bones list of the tasks and steps anticipated. (This list assumes an Independent GPWW, but an AMPC's list of tasks will differ only marginally.

Step One: Information and Commitment Process

* Meetings among the potential members of the GPWW to discuss in detail the pros and cons of this type of organization and outline responsibilities, opportunities, and risks until the potential members are satisfied that they are making an informed decision to go forward with GPWW development. * Potential members will be asked to sign a letter of intent in which they agree to participate fully in the process and make available to a consultant complete practice information, which will be confidential. If in an IGWW, they will also be asked to commit to share with other members in the costs of development. Finally, they will be asked to immediately pay a contribution $500-$1,000) to demonstrate that they are committed to the GPWW's development. These funds will go to pay for Step Two.

Step Two: Financial Analysis and Projections and Business Plan Development

* A combination of questionnaires and on-site survey of all practices will be employed in order to review their operations and to gather information on patient and financial volume and on trends and costs of supplies and services. * Analysis of data obtained will enable the consultants to develop an estimate of potential improvements in revenue and decreases in expenses for the combined group and estimates of new overhead costs. * Financial projections and cash needs will be developed: month-by-month projections of revenue and costs by practice and group as a whole for one year and quarterly projections for two additional years; projections of working capital needs for first few months until revenue begins to come in. * A business plan will be drafted, outlining the new group's objectives, strategy, and plans for growth for the first few years. If the hospital has a recent strategic planning document or medical staff development plan, it would be helpful to review it.

Step Three: Professional Corporation Development Process

* Facilitate, in a series of meetings with representatives of potential members, closure on (legal counsel should be available during this task): corporate form, by-laws provisions, membership/shareholder agreement, compensation plan and cost-sharing agreement. * Activation of the group practice: incorporation papers filed, physicians sign membership/shareholder agreements, obtain alternate financing, collect capitalization payments from members if more is required. * Informational meeting with office support staff to bring it up to date and educate it on what is happening and why. * Develop specifications for and coordinate selection of systems for various operational needs: centralized billing; accounting for funds received, payment of group expenses, and compensation to physicians; management reporting to physicians and board of directors. * Develop initial fringe benefit package in consultation with insurance vendors and negotiate discount. * Negotiate discounts on office and medical supplies for the group. * Contract with independent accounting firm to perform asset valuations, calculate average price per share, and execute promissory notes to physicians with excess assets and from physicians with fewer assets. * Hire administrator and other central office staff or negotiate contract with management firm. * Merge practices and necessary assets.

Step Four: Begin Operations as Group Practice without Walls

The cost of consultants, lawyers, accountants, and other facilitators for completing the tasks above will be directly related to the amount of time it takes to come to agreement on outstanding issues. For a group of 5 to 10 primary care physicians who have been used to working together in a coverage group, the process may take 3 to 6 months and cost $20,000 to $50,000. For a large number of otherwise unaffiliated physicians practicing in multiple specialties, the time might be 18 months and the cost upward of $200,000.

If the GPWW is hospital-affiliated, the hospital can pay the costs, assuming it has the financial capability to do so. If it is to be an Independent GPWW the physicians need to fund it themselves from personal or practice funds and/or through a market rate line of credit, possibly from the hospital. Alternative sources of funds may be HMOs or insurance companies that view group practices as a more cost effective delivery model and that wish to encourage their development. Finally, there may be a private management services firm that would front-end the start up of an IGWW in return for sharing in future revenue enhancements.


Practice integration, whatever its form, is not for every independent physician. Not all should join and not all should stay once joined. However, all independent physicians should make themselves aware of these forms of practice, weigh them against the stresses of continuing to confront alone a rapidly changing and increasingly hostile environment, and evaluate them as options. Similarly, AMPCs are not for all hospitals, but hospital CEOs should include them in their arsenal of physician relations programs.

The Harvard Community Health Plan Experience

Nearly a quarter of a century has elapsed since Harvard Community Health Plan opened as a single-location, staff-model HMO in Boston. A series of mergers, acquisitions, and building programs has since caused it to evolve into a mixed-model entity with 19 wholly owned staff-model sites and 30 affiliated but independent medical groups throughout Massachusetts, Rhose Island, and southern New Hampshire. Counting the groups' various satellite offices, HCHP now offers its members more than 80 group practice locations.

Despite this extensive network, HCHP's site distribution plaes in comparison with some IPA competitors, which offer from 5,000 to 8,000 mostly solo-practice physicians. And, although employers certainly consider cost and quality issues when they evaluate health care plans, site distribution can be the determining factor. As employers turn to preferred, selective, or exclusive contracting strategies in an effort to contain costs, HCHP realizes it must increase it distribution network if it is to prevail in the bidding for selective contracts.

For the group practice model to succeed, an HMO must create a win-win environment in its relationship with independent, for-profit group practices. HCHP is proud of the partnerships it has nurtured with its affiliated groups, and what these have meant to the groups: sustained patient growth, enhanced (and more timely) reimbursement via capitation, constructive feedback on practic variation, greater leverage in securing ancillary and specialty referral services, and positive incentives for delivering appropriate levels of care to patients (such as achieving high mammography rates for over-50 women and high pediatric immunization rates).

In return, HCHP has enjoyed greater market distribution and has acquired group practice partners who are inclined to interact cooperatively with utilization-management staff and protocols; show an open-mindedness toward implementing quality management initiatives; act as reliable primary care gatekeepers in determining appropriate levels of care; and, most important, influence their colleagues' behavior.

In sum, the arrangement has given HCHP cooperative managed care partners, very satisfied members, and an enviable price position. Our affiliated group practices retain real autonomy but know they have a business partner that is committed to helping them achieve dominant positions in their markets.

With such a successful track record, HCHP would obviously prefer to expand this group practice model. Rapid expansion may be precluded by the limited number of additional primary care physicians now practicing in group settings

within our enrollment area. But the landscape shows signs of change.

These days, local medical society meetings tend to attract crowds when their agendas include discussions of physician-hospital linkages or of formation of group practices without walls. Moreover, as the Clinton Administration sends out loud signals about endorsing managed care networks, many physicians in solo practice may view the group practice model as an increasingly appropriate setting for practice.

Competition, hospital acquisition of solo practices, and physician payment reform (RBRVS) are other factors encouraging such a shift in attitude. HCHP's expansion plans may also persuade some solo physicians to reconsider their practice environment. Our group practice model's robust health suggests that such relationships will continue to grow throughout New England.--Jack R O'Connor, Director of Network Development, Harvard Community Health Plan, Boston, Mass.

Legal Opportunities, Legal Restraints

In general, when structuring a business arrangement, the business objective should first be determined and then counsel can identify the legal arrangements that will be most helpful in achieving it. However, in the health care business, regulation is so pervasive and complex that it is usually advisable to determine business objectives with reference to regulatory constraints.

Group Negotiations with Prayers

If the objective is to form a physician group to negotiate with payers, a group practice or bond fide joint venture will be the most desirable alternative from an economic point of view. Any looser (i.e., not economically integrated) affiliation (e.g., a membership IPA or PHO) cannot negotiate price terms on behalf og its physician members without substantial risk of prosecution under the antitrust laws, In fact, even an economically integrated group could be at risk of antitrust prosecution if it dominates or threatens to dominate the relevant market for its services.

Financial Dealing with Hospitals

In general, because of antikickback statutes (for hospitals and physicians) and tax-exempt status constraints (for tax-exempt hospitals), dealings between physicians and hospitals must be on an arm's-length, fair-market-value basis. However, for tax-exempt status purposes, there is a narrow exception to this general rule for financial incentives offered by hospitals to physicians new to practice or new to the hospital's service area. A similar exception under the federal antikickback statute soon may be issued as one of the safe harbor regulations. As a general matter, the law allows more flexibility in financial dealings between hospitals and affiliated tax-exempt group practices.

Provision of Ancillary Services

Because of declining practice revenues, some physicians have sought to benefit financially from their referrals of patients for ancillary services. However, antikickback statutes prohibit direct benefits, and state and federal self-referral prohibitions limit the ability of physicians to invest in providers of ancillary services to which they refer patients. The federal self-referral prohibition, the so-called Stark Law, at present only applies to clinical laboratories but Representative Stark has filed legislation that would greatly expand the services subject to the prohibition. In addition, the American Medical Association has issued ethical guidelines discouraging such self-referrals in most circumstances. However, most of these regulatory efforts stop at the physicians's office door; they do not consider intrapractice referrals to be referrals. This means that a larger group practice not only has greater financial resources but also more regulatory leeway to recapture ancillary revenues by integrating ancillary services into the practice.--Chris Jedrey, Partner, Choate, Hall, and Stewart, Boston, Mass.

Further Reading

The following citations from the literature on group practices without walls have been gathered through a computerized search of electronic databases. For further information on the research process or the citations, please contact Gwen Zins, Director of Information Services, at College headquarters. Burns, L., and Thorpe, D. "Trends and Models in Physician-Hospital Organization." Health Care Management Review 18(4):7-20, Fall 1993. de Lafuente, D. "Provider Groups Entice Independent Practices through |Clinic without Walls.'" Modern Healthcare 23(22):31, May 31, 1993. Eason, B. "Anatomy of an Affiliation." Medical Group Management Journal 41(1):68, 70-2, 74, Jan.-Feb. 1994. Forster, R. "Putting Together a |Group Practice without Walls.'" Internist 29(9):12-5, Oct. 1988. Jones, K. "The Faces of Group Practice. Interest in |Group without Walls' Continues to Grow." Medical Group Management Journal 39(4):36-8, July-Aug. 1992. McCarthy, G. "Strength in Numbers. Hospitals that Encourage Group Practice Development May Have a Strategic Advantage in the 1990s." Health Progress 72(10):50-3, Dec. 1991. Schryver, D., and others. "Establishing a Group Practice |without Walls.'" Health Care Strategic Management 11(1):18-21, Jan 1993.

Richard M. Harris, MPA, MBA, is President of Compass Medical Networks, Inc., Cambridge, Mass., a consulting firm specializing in assisting physicians and hospitals in understanding the environmental and operational challenges for physicians and evaluating and implementing programs to assist them.
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Author:Harris, Richard M.
Publication:Physician Executive
Date:Aug 1, 1994
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