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The Demise of the Nalle Clinic.

THREE ASSOCIATES joined Brodie Nalle, MD, in 1921 to form the Nalle Clinic, which prospered and slowly grew. By 1961, there were 14 physicians occupying a new building. In 1975, the first primary care satellite was established. The clinic functioned largely as a condominium model and was recognized as a strong organization with an emphasis on specialty medicine and surgical care. By the early 80s, with many other medical and surgical specialists entering the market, Nalle developed a primary care network and opened new satellites.

The governance through the mid-80s was a true democracy, with a large board deferring important decisions to the staff. Monthly staff meetings were usually acrimonious and lasted late into the night. It became clear that we were not able to make decisions quickly enough to respond to the changing environment. In the late 80s, under the leadership of medical director Ray Fernandez, MD, Nalle moved to a smaller, stronger board, which was empowered to make most management decisions. [*]

By 1989 we were making better, faster decisions--but we continued to struggle with the environment, collections, business functions, and profitability. In 1990, we signed a contract with a new, little known practice management company named PhyCor, headquartered in Nashville, Tennessee. Both PhyCor and Nalle had the naive intention that the physicians would practice medicine, PhyCor would run the business, and the Joint Policy Board, with members of both organizations, would deal with mutual issues such as strategy, fees, and satellite locations.

Little did we realize that there were almost no issues that were either purely practice or business. Rather, every medical decision impacted the business, and every business decision affected the practice of medicine. Our agreement called for PhyCor to manage accounts receivable, human resources, and other general business functions, as well as provide access to capital. In exchange for these services, PhyCor received a percentage of the profits. In the early 90s, the arrangement seemed to be mutually beneficial. Physician compensation was up, collections increased, relations with our hospital partner improved, we grew rapidly to 140 physicians, and, in 1995, moved into a beautiful, new building.

How could this happen?

By 1998 the skies had darkened, and those of us on the inside knew trouble lay ahead. On April 30, 2000, after 79 years of operation, the Nalle Clinic closed its doors. The 140-physician multi-specialty clinic had seemed to be the embodiment of success and was one of the major players in the Charlotte, North Carolina health care arena.

The initial reaction was a combination of surprise, sadness, and anger. And then, Why? How could this happen? What happened? What went wrong? Could other health care organizations suffer the same fate? As President of Nalle for the past six years, I was in the midst of what was successful, as well as unsuccessful. On the other hand, it is difficult to be totally objective in describing circumstances in which one is a part. This article, therefore, has the strengths and weaknesses of an insider's view of the trials and tribulations of the clinic's last days.

Across the U.S., health care organizations are struggling in this turbulent environment characterized by increased expenses, decreased reimbursement, and more regulatory pressure. Decreasing reimbursement for services by health plans and Medicare is familiar to all of us. One of our physicians recently showed me copies of his 1988 and 2000 Medicare fee schedules--for many surgical codes, fees were half of what they had been in 1988.

Health plans, pressure from employers, Medicare, and the effects of the BBA'97 are putting downward pressure on reimbursement. The vigorous national economy, growing communities, and low unemployment are putting upward pressure on personnel and real estate expenses. The increasing complexity and diversity of health plans requires more sophisticated billing and computer systems for all health care providers.

But there were characteristics specific to Nalle that made it particularly difficult for us to manage in this environment. With decreased reimbursement and increased cost, our fate was somewhat predictable--we experienced a steady decline in profitability in recent years, resulting in lower compensation, physician defections, and, eventually, our demise.

Nalle's strengths

Consumerism

In spite of our failure, we had a number of important strengths. Rising consumerism helped Nalle. Customer service feedback showed high patient satisfaction in the clinical arena. We developed customer and peer satisfaction surveys and provided physicians with the results at least annually. Results were very positive. Physicians were counseled over unfavorable responses, and we observed measurable changes in behavior. We had complaints, but overwhelmingly they were over the billing process.

Local competition

The local competitive environment between the two health systems also helped. We were able to get competitive managed care contracts. Health plans liked our good patient satisfaction marks. Our managed care performance was competitive for our region, with rates of 160 to 180 bed days per 1,000. The health plans were playing the three largest providers in the market against one another--the two hospital systems and the clinic. They did not want the hospitals to become too powerful. We enjoyed another advantage in that we admitted to both systems and patients were able to see us regardless of whether their plan moved from one hospital to the other.

High quality medicine

We had excellent physicians who practiced high quality medicine.

Nalle's weaknesses

We provided not only high technical quality but also compassionate personal care. We developed systems to provide high quality care with good resource conservation for our HMO patients. The collegial environment, the clinic setting, and the unified medical record allowed us to coordinate care across different specialties. We had an effective contracting strategy that allowed us to leverage our size and independent status into better-than-average contracts. We had delivery sites throughout Mecklenburg County and were well positioned with satellites in all the right places.

A disconnect between actions and consequences

Our weaknesses were subtle but more pervasive. Like many large medical clinics, we suffered from a disconnect between a physician's actions and the consequences of those actions. Compensation was based on total clinical production multiplied by a specialty specific factor to account for overhead, differences between profitability of different specialties, and the "primary care supplement." The dynamics of the income distribution plan were such that the impact of a physician's performance--whether he or she worked particularly hard or had a more leisurely pace--tended to be spread throughout the entire group.

If physicians felt they were underpaid, for example, they focused on the formula, or what was the "clinic" doing about it, rather looking at the processes, expenses, or productivity of their practice. In contrast, in a solo practice, the impact, whether good or bad, directly affects the individual. Similarly, physicians did not benefit from sacrificing for expense reductions or suffer from excessive expenses.

Mismanaging physician performance

Managing physician performance and process improvement were other casualties. Historically, we had relied upon individual work ethic to incentivize physician productivity and performance. Unfortunately, we lacked valid feedback mechanisms to help individuals know where they stood compared to their peers and the clinic's needs. No one felt they needed to improve their performance, which blunted the incentive to move to a more uncomfortable, but possibly better "new way." This is "the way we have always done it" was the overwhelming attitude.

Jack Silversin, MD, has described this phenomenon in multi-specialty groups as the "old compact," in which the individual expects entitlement, protection, and autonomy, whereas in the "new compact," the individual needs to feel a sense of ownership, interdependence, customer focus, and delegated decision-making. [1]

Complicated billing process

Increasing numbers of physicians, specialties, and health plans have caused more complexity in preparing bills, filing claims, and collecting money. Each specialty has coding nuances. For example, someone accustomed to coding for a gastroenterologist would not necessarily have the knowledge to properly code for an orthopedic surgeon. Similarly, each health plan has differences in their pre-certification and claims filing process--and sometimes they don't pay legitimate claims promptly.

Without sophisticated billing systems and dedicated staff to navigate this labyrinth, revenue was lost and patients became frustrated. A driving force in entering into the relationship with PhyCor was the expectation that they could efficiently manage accounts receivable. But we never were able to make the business office perform up to industry standards.

In some ways, the artificial separation of responsibilities into "medical" and " business" made change more difficult. Physicians felt that problems in the business office were purely an administrative function and resisted process change that would improve collections but complicate the flow of patients through the clinic.

Shoot the messenger syndrome

Administration was reluctant to involve physicians in change initiatives because of the "shoot the messenger syndrome." When a problem was pointed out, the response was, "Why hasn't this been fixed before now?" rather than, "How can we solve this?" Business office problems undoubtedly hurt profitability, took a toll on customer satisfaction, and created a vicious cycle. We needed to invest in a computer system for accounts receivable, but we did not feel that we could afford it. Stress and pressure in the business office created a harsh work environment, which led to staff defections, which led to more stress and pressure.

Overhead structure

Our overhead was high when compared to industry benchmarks, particularly the MGMA annual reports on cost. We were unwilling to make the changes necessary to drive down costs and tacitly accepted a somewhat higher cost structure. Support staff salary expense was higher than benchmark comparisons. Capital expenses, such as leases and rent, were also high. We moved into the Randolph Road building in 1995 and fell in love with it. It was spacious, attractive--and expensive. In the mid-90s we opened two satellites in growing areas of town--they quickly became busy but added to the increasing cost structure.

The PhyCor fee was always a burden. But it also had a more insidious effect. As profit margins became tighter and compensation declined, the physicians focused on this fee as the root of all our financial problems, rather than looking at other, more basic, parts of the overall structure.

Attempts to change course

We needed a culture shift to help improve productivity, decrease expenses, and facilitate process improvement. Initially, we set productivity and expense control targets and rewards accordingly. Then we started changing the compensation structure to reflect the economics of each site, on the theory that the physicians were in the best position to manage their production and expenses.

We were evaluating a new computer system to help manage accounts receivable. Many of our collections problems started with registration at the individual sites. We were developing a "front end" process in which all demographic and health plan data was verified before the patient was seen. Historically, the service was rendered, the claim submitted, and the bill fixed on the "back end" if payment was denied.

Our profitability was lagging and most of our primary care competitors had a relationship with one of the hospital systems. We focused on getting help from an outside entity, first PhyCor and then one of the hospitals. In 1998 and 1999, many realized that declining profitability was a big problem and that increased productivity was part of the solution. But gaining significant changes in behavior would be time consuming and would require one-on-one coaching with the staff. Pursuing a "hospital deal" seemed like a better way to use limited physician management resources.

But despite our efforts, we were running out of time.

Signs of trouble

The sequence of key events began with an unusually weak first quarter in 1998, which had traditionally been our strongest period. By the end of the year, we saw a trend toward lower profitability. We developed an action plan to close two satellites, eliminate unprofitable services, and reduce personnel. In early 1998, PhyCor had infused additional cash, and we opened discussions with one of the hospitals to develop a mutually beneficial relationship that would also help our profitability. As this discussion continued, we delayed implementing our cost savings plan and concentrated on concluding the hospital deal.

Throughout 1999, we felt that a hospital deal was just a "couple of weeks away." The weeks and months of waiting eventually took their toll and we began to see the defections of a few physicians. As they left, we couldn't decrease expenses proportionate to the lost revenue and profitability deteriorated further. In early 2000, we were negotiating with PhyCor to repurchase our assets, which ultimately failed. We had a poor month in the business office in January and a spectacularly poor month in February. The almost nonexistent paychecks at the end of March was the straw that broke the camel's back and we experienced massive resignations, sealing the fate of the Nalle Clinic.

Jeremiah H. Holleman, Jr., MD, was President of the Nalle Clinic from 1994 until April 30, 2000. He is now practicing peripheral vascular surgery at the Sanger Clinic in Charlotte, North Carolina.

Reference

(1.) Phycor Institute for Healthcare Management. Nashville, Tennessee. Fall, 1999.

Note

(*.) The Nalle clinic's evolution in governance is chronicled in My Pulse Is Not What it Used To Be, a monograph by Irving Ruben, MD, and Ray Fernandez, MD, published by ACPE in 1991. It is available for $34.00 by calling The Temenos Foundation at 808/528-2433.

KEY CONCEPTS

* Signs of Fallout

* Why Organizations Fail

* Symptoms of Trouble

* Practice Management Companies

* Fatal Errors

The prestigious Nalle Clinic closed its doors and ceased operations lost year, after 79 years as o major player in the Charlotte, North Carolina health care market. The initial reaction to the clinic's demise was a combination of surprise, sadness, and anger. And then, Why? How could this happen? What happened? What went wrong? Could other health care organizations suffer the same fate? The 140-physician multi-specialty clinic had seemed to be the embodiment of success and was highly regarded by the medical community and by patients. This article is a postmortem examination of how the Nalle Clinic ended up shuttering its business, to provide insight that might help others avoid this outcome. Some of the symptoms that signaled trouble ahead included: A challenging health care market, high overhead, decreasing reimbursement, increasing costs, lagging profitability, difficulty managing accounts receivable, difficulty managing physician performance, and a disconnect between physicians and the consequences of thei r actions.

Lessons Learned

What are the lessons to be learned from the Nalle Clinic experience?

1. Develop a structure and culture in which the physicians feel like owners and are accountable. Whether the connection is through the income distribution plan, timely reporting of feedback, or another mechanism, each physician must realize that his or her fate is intimately connected to his or her actions.

2. Be decisive and speak with a unified voice, especially in turbulent times. Leadership should not be reluctant to suggest solutions because physicians may find them unattractive. Ambivalence or uncertainty of leaders leads to fatal inaction.

3. Look for internal solutions to internal problems. If you wait for people outside your organization to save you, you are placing your fate totally in their hands.

4. Medicine is a business, has always been a business, and like any other business must make a profit in order to survive. The formula for profit is revenues minus expenses equals profit. If profit is below expectations, the physician owners must adjust revenues, expenses, or both.

5. Develop reserves, if possible. With the impact of BBA'97, hospitals are having a hard time. However, with adequate reserves, they will make it through this squeeze and survive until they can develop more efficient processes or the environment is more favorable.

6. Monitor your expense structure carefully, particularly fixed expenses. If revenue declines, it can be difficult to shed excessive expense. Prior to committing to a project that will increase fixed expenses, thoroughly evaluate its impact on profitability.

7. Pay attention to managing accounts receivable. No one else should be as interested in collecting your money as you are.

8. It really is about the patient. Possibly the only bright part of this tragedy has been to see how the Nalle Clinic physicians continued to serve their patients even during the final months, in spite of having been paid practically nothing.

Jeremiah H. Holleman, Jr., MD

The Nails in Nalle's Coffin

* Challenging health care market

* High overhead

* Decreasing reimbursement

* Increasing costs

* Lagging profitability

* Complicated billing process

* Difficulty managing accounts receivable

* Difficulty managing physician performance

* Disconnect between physicians and the consequences of their actions

* Unsuccessful relationship

* Reluctance to change

* Failed negotiations

* Massive resignations

Fatal Errors

Several errors sealed the fate of the Nalle Clinic, including:

1. Lack of leadership. Physician leadership agreed on the problems but never came to grips with the best approach to solve them. Top physician management was giving mixed signals. No one knew who was ultimately responsible for making and implementing decisions. The reporting structure was not as clear in daily operations as it appeared to be on the organizational chart. As a consequence of this ambiguity in physician leadership, there was no disciplined approach to problem solving.

2. Looking for solutions externally. We went outside of our organization for help rather than looking internally for solutions. We knew we needed to improve productivity, decrease expenses (particularly fixed expenses), and improve collections. These changes would be difficult and would require that physicians do things differently. It seemed easier to enlist the aid of one of the hospitals and arrange for a "bailout" than to go through the pain of creating the change internally.

3. Difficulty managing accounts receivable. We didn't adequately manage accounts receivable and didn't have the expertise to effect the kind of change needed in the business office until it was too late. Several factors were involved. Inherent complexity and the payers' adversarial nature created a challenging environment. We were unwilling to spend the money on a new computer system. The "shoot the messenger syndrome" interfered with candid communications between the administration, which was technically responsible for managing accounts receivable, and the physicians, who needed to be a part of any solution.

Jeremiah H. Holleman, Jr., MD
COPYRIGHT 2001 American College of Physician Executives
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Title Annotation:PhyCor
Author:Holleman Jr., Jeremiah H.
Publication:Physician Executive
Article Type:Company Profile
Geographic Code:1USA
Date:Jan 1, 2001
Words:3004
Previous Article:Get Connected, Get Results, and Get Smarter.
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