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The PPMC debate. (Part 2 the Future of Health Care).

THERE ARE APPROXIMATELY 40 PUBLICLY OWNED and 138 privately owned physician practice management companies (PPMCs) in the United States today. (1) With the frenetic pace of mergers, acquisitions, bankruptcies, new incorporations, and initial public offerings, these numbers can change weekly, if not daily. But the industry's best days may still be ahead because only about 5 percent of American physicians are currently affiliated with PPMCs.

Some of these physicians sold their practices to PPMCs outright and signed employment contracts. Some groups entered into long-term equity acquisition arrangements in which PPMCs bought their practices for cash or PPMC stock. Some were physicians in independent practice associations (IPAs) who retained PPMCs to provide management services and access to managed care contracts. And some physicians collaborated with PPMCs in still other innovative ways.

For affiliated physicians, a PPMC can become a vehicle for sharing data on clinical best practices, maximizing their economic clout at the bargaining table, and gaining economies of scale. PPMCs may also provide their affiliates with access to capital, information technology, managed care contracts, and expertise in practice operations and strategic planning. In the equity acquisition model, the concept works only if this infusion of resources Increases practice revenue and reduces expenses enough to cover the PPMC's percentage of practice profits.

Proponents maintain that PPMCs offer the best prospect yet for returning control of clinical decision-making to physicians and creating positive change in American health care. But not everyone is convinced that PPMCs can, in fact, do right by their affiliated physicians and their patients and satisfy Wall Street investors.

Investors are very much a part of the PPMC phenomenon because only Wall Street can raise the kind of money it takes to capitalize a PPMC. Taking PPMCs public, merging with and acquiring competitors, is sometimes a way for investors, including some PPMC executives and affiliated physicians, to get rich quick. Like other investments, PPMC stock can also lose value. Total capitalization for publicly-traded physician practice management companies was $13 billion in August of 1997. (2) Not bad for an industry that didn't even exist 10 years ago. But by the end of 1997, the value of these PPMCs had dropped to $11 billion. (3)

In Part 2 of the second annual panel discussion in The Physician Executive, Jeff Goldsmith, Barbara LeTourneau, Uwe Reinhardt, and physician executives from three PPMCs examine this burgeoning new industry. They grapple with questions (and occasionally with each other) such as:

* Are PPMCs delivering what they promise?

* What will separate successful PPMCs from the rest?

* When PPMCs win, who loses?

* What value do PPMCs add to health care?

* What lies ahead for this industry?

* Could Wall Street pressure cause PPMCs to put profit ahead of physicians and patients?

* What roles will physician executives play in PPMCs?

The Physician Executive: What is a physician practice management company [PPMC]?

Edelson: A PPMC is a company which aggregates and manages physician practices.

The Physician Executive: And within that larger definition, can we say that some PPMCs specialize in hospital-based care, others in multi-specialty groups, others in primary care groups, and...

Everson: ...specialty care. There are a number of PPMCs that focus on different specialties, including cardiology, pediatrics, orthopedics, and oncology, to name a few. Some are publicly traded and some are still private. Our model at American Oncology Resources [AOR] probably has some similarities to the PhyCor model, which is defined by a 40-year management agreement in which AOR functions as the management company but does not employ the physicians. The physicians are employed by their PC [professional corporation], which, in turn, has the long-term management agreement with AOR.

Edelson: But I would say that there are two different varieties of practice management companies, those that own the practices and those that manage them. I think there's a very important distinction between the two. Most of the publicly traded practice management companies have focused on buying physician practices, but theres at least one, which is Advanced Health, that is managing but not purchasing practices, and I think there are a whole host of other private companies that are taking this approach as well.

Goldsmith: PhyCor does not own their practices, do they, Ron?

Loeppke: We work with two models. There are the equity multi-specialty group practices where we do come into a financial transaction with the group, but the physicians do not become employees of PhyCor. They're still in practice for themselves, but not by themselves. We're a strategic partner with them. And then we have IPAs, physicians within independent practice associations that we manage for the managed care portion of the practice.

Edelson: Maybe you can define a spectrum of PPMCs from those that truly employ the physicians, to those like PhyCor which has an equity-based model, to those in which the physicians are completely independent.

The Physician Executive: The PPMC industry is barely 10 years old, and after 10 years, the statistic I keep seeing is that approximately 5 percent of American physicians are affiliated with PPMCs. About how many covered lives is that at this point?

Reinhardt: Well, not all of them live off managed care contracts, do they?

Everson: I think that's right. In our book of business, only about 1 percent is capitated managed care, 32 percent is Medicare/Medicaid managed care, 47 percent is discounted fee-for-service managed care, and the rest is indemnity or other.

The Physician Executive: What impact have physician practice management companies exerted in the health care sector so far?

Goldsmith: I think PPMCs have had a major impact on compelling hospitals to purchase their physicians' practices. I wouldn't be surprised if there are more physicians employed by hospitals than there are physicians managed by PPMCs. That is a very important strategic impact, forcing hospitals to do something that they might not otherwise have done.

Reinhardt: Why did they feel they had to do that, Jeff?

Goldsmith: To avoid losing ancillary services and to avoid having their referral patterns rearranged in ways that were inconvenient to the hospital. I think hospitals also felt that they would lose influence and leverage in their managed care contracting if the physicians were represented by another enterprise.

Everson: I wonder, Jeff, how successful that endeavor has been as far as hospitals are concerned.

Goldsmith: It's been a terrible disaster. When I hear my hospital colleagues bragging about getting their per physician losses down to $50,000 per year, you get a sense of how much of a problem it's been.

Edelson: In fact, I am now being approached, as are others in the industry, by hospitals who are looking for practice management partners to help them deal with this very problem.

Everson: I would agree with Jeff on that and one of the key reasons behind this is that the clinical and financial incentives haven't been aligned between the parties. You add to that the inherent distrust of physicians for hospitals and hospital administration that's been around for years and it makes for a very difficult relationship.

Goldsmith: Well, it's a relatively rare hospital organization that's created the infrastructure to bring physicians together Into a business. It was an opportunistic, defensive strategy. I think one of the things that distinguishes hospital strategies from the PPMCs is that PPMCs really have tried to make their acquired groups business units and have shifted risk to them In significant ways.

Reinhardt: For the most part, hospitals bought doctors, or rented them, really, to move referrals their way. Isn't that so?

Goldsmith: Well, It wasn't renting.

Reinhardt: I mean buying.

The Physician Executive: Is there a relationship between the proliferation of global risk contracting and the growth of PPMCs?

Goldsmith: That's a really complicated question. Certainly the rationale of West Coast-based PPMCs was to manage risk, and indeed the companies that got eventually rolled up into MedPartners had as their core rationale growing capitated lives as their basic business. I'm not sure that is the modus operandi of the whole field. In communities in the West, where large, aggressively managed physician groups had a major influence, there was tremendous pressure to grow capitation. In some cases, the demand for capitated risk exceeded the supply, enabling managed care plans to push the rates to a point where physicians couldn't really make any money.

The Physician Executive: One of the things that a lot of PPMCs have set a great deal of store by is building information systems infrastructures to link their affiliated practices.

Everson: The way we kind of view this whole area is one of phases. Certainly if we look at our history, it's built on a foundation of trying to align physician incentives, both financially and clinically, so that indeed the physician can basically get back in control of some of the clinical decision-making that they have tended to see erode. Quite frankly, I think as this whole sector matures, you've seen a lot of activity and acquisition-based building of critical mass, and if you see that critical mass finally developing in a particular company, then and only then can you begin to think about all the other value-added pieces like, for instance, clinical research, information systems with electronic medical records, and disease management partner programs. If you don't have the critical mass of physicians with some alignment of clinical and financial incentives, it's hard to do.

The Physician Executive: What do you mean by critical mass?

Everson: You need a market presence wherever your practice is located. I think it'd be difficult to have any kind of market force in Los Angeles, for example. But with less than 5 percent of all the oncologists in this country affiliated with PPMCs, public or private, we still see tremendous opportunities for oncology PPMCs. We believe this model will continue to evolve and become an increasingly attractive alternative for physicians. We're certainly not seeing any lessening of interest by physicians in joining a PPMC.

Loeppke: One of the reasons critical mass is important is to have a compelling influence in the local marketplace as a coordinated delivery system. Whether it's in a managed care contracting arrangement or whether it's patients voting with their feet in a fee-for-service environment, the quality, the size, and the geographic coverage of the physician organization establishes strategic leverage in that local market. A critical mass of physicians can then harness the capital needed to invest in information systems and the infrastructure necessary to sit at the table as an equal to hospitals and payers in local markets.

Information systems are really the neurologic monitoring and communication systems to coordinate the care, manage the cost, and allow differentiation based on quality. Health care information systems in the past have largely been based on documenting the financial transactions, whereas now they are moving more towards focusing on the clinical transactions. From that vantage point, these physician-driven coordinated delivery systems can build a virtual organization, as Jeff Goldsmith refers to them, through strategic relationships based on clinical and financial performance, rather than as a vertical organization through the merger of balance sheets.

Goldsmith: But somebody asked earlier about the state of information systems development in the field, and my impression, based on my unscientific sample, is that it's fairly primitive. How many legacy systems do you have in PhyCor? Do you have a single vendor or is it...

Loeppke: No, we don't have a single vendor, and as you can imagine, we have a whole host of legacy systems. Of course, we're identifying some preferred vendors. We can then convert to those systems as we go forward. But you're right, Jeff. I think part of the vulnerability and limitation in a lot of the physician organizations to date has been the lack of adequate information systems.

Everson: I would agree with that. If you look to the future, I think there's no question that that's going to be critical for survival, for differentiation, for value-added pieces. But quite frankly, I think the whole profession of medicine is about 40 years behind. Even in our smaller network, compared to PhyCor, we have at least five legacy systems that we continually look at. But that's one of the major advantages of a PPMC, is the ability to raise capital for this very expensive undertaking.

The Physician Executive: When you say behind, you mean behind other sectors of the economy?

Everson: Right. I was sitting on a panel a couple weeks ago in New York, and we were tossing this around, an some people on the panel represented multinational companies who had been at this for 40, 50 years, and I said, 'You know, my impression is, based on no real scientific poll, that we're about 40 years behind.' There was a lot of chuckling and one of the CEOs raised his hand and said, 'You know, you're absolutely right. When I see my doctor, whom I've seen for 20 years, he still opens up the paper chart and asks me the same questions, what medicines are you on, what's your family history, over and over and over again, every time.' I doubt very much that we will ever really impact cost issues or clinical issues unless we have a good handle on the information.

Edelson: I can echo that. In fact, the financial services industry will spend up to 10 percent investing in information infrastructure, and in health care, particularly in the physician practices, we're at a fraction of that 10 percent. That is somewhat ironic, given that medicine is perhaps the most information-intensive business there is in the United States. So clearly if health care, and practice management companies in particular, are going to come up to speed, they're going to have to begin investing in information technology. And that comes in two waves.

The first wave is one of a financial system that handles the billing and collecting and the patient scheduling, and these are the so-called legacy systems that have been talked about. And even there, many practice management companies haven't invested sufficiently in even those elementary systems. And then building upon the financial system, you put into place a clinical system, and that's something we've actually been working on very intensively because we didn't find a product that we liked. We developed a beginning system for clinicians that's focused around the ordering, prescriptions, laboratories, referrals, etc., with a migration path to getting physicians onto a full electronic medical record system. The PPMC industry is really at square one here on information management. It has to be a priority, but it's not yet the priority of the industry.

Reinhardt: You know, this has been my criticism of the industry in general. There are really two problems. One is that they underinvest in information systems. Oxford is the most glaring symbol of it, but it's not just Oxford. Because the industry is so unstable, with everyone buying everyone else, you almost always have information system legacy problems. The industry itself is too unstable, in my view, to support a good information platform. Still, a lot of these problems could be mitigated if the industry spent a little more.

The Physician Executive: Uwe, when you say industry, you're talking about health care in general?

Reinhardt: The whole health care industry, not Just HMOs and PPMCs. Hospitals, too. I think many of our hospitals are still way behind. Whenever I go to a doctor's office or a hospital, I am amazed at the paper these people shuffle. HMOs are in a class by themselves, though. For example, is there any excuse at all for Oxford? Can anyone say a kind word about what happened at Oxford? Can you think of any bank writing to a customer, 'Gee, we saw you in the bank and we know you are a depositor, but, you know, we have this new system and we lost your account. But don't worry, on the other hand, we also don't know to whom we owe money.' I mean, this happens only in the health industry, and at some point somebody really has to say it bluntly.

Ask yourself this, if you look at the salaries of the CEO, CFO, and CIO, I will put it to you that a well run company should pay the CIO more than the CFO. Anyone can do CFO stuff. The CIO's work is really the art. In fact, I'll bet you 10 to one it's always the other way around, that CFOs make more than CIOs. The health industry simply does not have enough respect for information systems and the people who make them go.

Goldsmith: Well, you know, Uwe, part of the problem Is where's the power in a health system? It's the clinicians. The CIO really doesn't have the leverage to impose the framework of data management on the doctors. Even in PhyCor it's a political thing, Ron, isn't it?

Laeppke: That's true. I will tell you again, however, information systems are critical to the development of all of the cost and quality management initiatives that we're talking about as an industry, and I can tell you that on the West Coast, the employer coalitions as health care purchasers are beginning to set forth expectations within the horizon of a few years as to when an electronic medical record and other information system components need to be in place as a prerequisite for managed care contracting.

All that being said though, Jeff, your point's well taken. Computers don't manage care, physicians do. And physicians need an organized system and an operational infrastructure that allows them to use those information systems to improve clinical performance. It's kind of like when John Kennedy in the early '60s said that we're going to put an American on the moon by the end of the decade. He didn't say, 'We need to build a rocket,' but they had to build a rocket for an astronaut to get to the moon. In the same vein, we have to have information systems as the learning engines to help physicians achieve the clinical performance improvement and the utilization efficiency this system needs.

The Physician Executive: So what's standing in the way, other than money?

Goldsmith: My vendor friends, the people in the IT business, tell me that the ROI [return on investment] for developing version 6.6 of the lab computer system that people have was so much higher than the ROI for developing a comprehensive clinical information system based on electronic medical records that you simply didn't have people investing the money until very recently. You have a field where just for investment reasons, tailoring information systems around particular clinical disciplines or particular functions, billing, accounts receivable, etc., was where the money was.

Everson: I think you will see in the future, though, that whether it's a hospital or a PPMC or whatever entity it is, the ones that will survive will make those long-term strategic investments in information handling.

Edelson: I think it's really not the technology. It's the usability of the system that's the physician incentive. Someone said earlier that physician incentives have to be aligned. Physicians have to see that these information tools are going to allow them to achieve what they want to achieve, whether that be higher quality care or more revenue per physician. They have to see that these tools will actually get them that value and I think what physicians haven't seen to date is that value proposition. People haven't been able to show them that if you do these 10 keystrokes, you're going to get this out of It, and until we demonstrate effectively to physicians that using a computer in clinical practice provides value to them, it's not going to happen.

The Physician Executive: We often hear and read that there are PPMCs who are big on acquisitions and then there are those who are more focused on same-store growth, the implication being that these two types are mutually exclusive. Is that a fair characterization of what's going on in the industry these days?

Everson: I don't think so. I think that we're seeing growth phases. In the beginning stages, you see a lot of practice acquisition, and if a PPMC is completely devoted to an acquisition game, then eventually the value and the basic business will suffer. But you have to develop some sort of critical mass from which you can begin to do something about same-market growth and begin to put forth the expenditures to look at information systems, as an example. As these organizations mature, I think you will find that they will be differentiated now and in the future as to whether or not they have developed long-term strategies that they're really investing in.

Edelson: I think we're actually witnessing the beginning of a transition from the first generation PPMCs, which have been physician aggregators, to a second generation of companies which will be value creators. The second generation will not only aggregate physicians, but create value in practices as measured by increased revenue per physician or improvements in patient care and satisfaction and other parameters of success, Some of the companies that started the industry will make the leap to that second generation, and others, I think, will come in as a new value creation story. Getting to the earlier point about acquisition versus same-store growth, I think they're not mutually exclusive. I think they probably come together in terms of having to both grow the practices as well as create value in them.

The Physician Executive: But to what extent is that really happening?

Loeppke: I would submit that we have been involved in the business of creating value and being an operations-oriented company at PhyCor since our inception. Clearly, along with growth through acquisitions, we have had a long-term focus on producing same-market growth for those physician organizations that are already affiliated with us. In fact, since 1994, we have experienced an annual same-market growth rate of better than 11 percent, with our stated objective being 10 to 12 percent. We continue to receive feedback from our affiliated physicians that we are improving operational efficiencies and generally adding value to the physician organizations. It's a reflection of many of the areas that you talked about earlier as to what goes on with physician practice management companies. Is it the capital? Well, that's part of it. Is it economies of scale? Well, that's part of it. But it's also the practice reengineering and the clinical performance improvements that begin to be built in the practice once it is affiliated.

Everson: I think you do see a number of publicly traded companies transitioning to what Jon called the second phase of development. At AOR, we've paid a lot of attention to organizational and infrastructure growth and I think that's reflected in our same-market growth. Over the last couple of years, we have performed in the 30 to 40 percent range in same-market growth.

The Physician Executive: Do you see an industry shake-out in the foreseeable future?

Goldsmith: What do you mean by shakeout? This sector has been hammered in terms of stock market valuation in the last eight to 10 months. You've seen the two major PPMCs taken down significantly in their equity value and incur write-offs and experience operational difficulties.

The Physician Executive: Let's say that it takes somewhere on the order of two to three years to generate same-store growth in affiliated practices...

Edelson: Actually, I don't agree that it takes two or three years to see this type of improvement. At least in our case, we've been able to see it within one year of the change in management. I think these things are readily apparent as to whether you're going to be successful or not. Like I said before, I think there is going to be a transition in the industry, as Ron had said, of companies that are creating value as demonstrated in operations, in revenue per physician, and in improved patient care, versus those that are not. That's going to be the natural evolution of the industry, and I don't know if it's going to be an evolution or a shake-out.

Everson: I'm not sure it takes two to three years to develop and implement a same-market growth strategy. It does take a certain amount of critical mass or practice strength in a given market to begin to recruit new physicians and add new services, but I would put that timeframe at one to two years.

In terms of measuring health outcomes, our experience has been that the practices we add all have different cultures and I don't think you're going to be able to measure outcomes until you begin to consolidate the database for whatever clinical outcome you're looking to have an impact on. In the interim, I think you can begin to impact quality and cost effective care with guideline development and task force measures, which we are actively pursuing as the foundation pieces on which to build our protocol manager and information systems. I believe success in these areas will depend on organizational and financial commitment, as well as physician buy-in. To that end, I think it is critically important that any successful PPMC pay a lot of attention to its physician and clinical organization.

Reinhardt: How do you actually know that you're improving patient care? How is that measured?

Loeppke: There are several elements of outcomes measurement and outcomes management that we are engaged with in our affiliate groups and IPAs. We could go into some detail if there was interest.

The Physician Executive: Could you hit the high points, please?

Loeppke: Well, first of all, it's really a focus on managing care rather than merely managing costs. Secondly, it is accomplished by internalizing the processes of care management into the operational infrastructure of the physician organization, including both the medical management and the health management of the population. The medical management component includes administrative risk management, as well as clinical risk management. Health management includes demand management, as well as prevention.

Those pillars of medical management and health management are built on a platform of outcomes management. Some of the outcomes are system-derived and some are patient-derived. Those that are system-derived can typically be found in databases if the clinic or IPA has adequate information systems. Those databases help you to look at, through the rear view mirror, what you did in the last month or quarter with your utilization parameters, length of stay, bed days per thousand, admissions per thousand, readmission rates, and some of the HEDIS rates and measures.

The patient-derived outcomes, however, look through the windshield at the time of care by proactively collecting the functional status, the SF36, health status, and patient satisfaction measures at or around the time of care. Then those patient-derived outcomes can be made available for the physician during the episode of care.

We've been able to demonstrate significant improvement across condition-specific lines, like in asthma care or diabetes management or the management of low back pain. In fact, Uwe, specific examples related to asthma include the improvement in the use of steroid inhalers for the asthmatics enrolled in our asthma outcomes management initiative across PhyCor clinics. We have also documented significant improvement in their ability to self-manage severe flare-ups so they don't have to go to the emergency room. In addition, we have seen a dramatic reduction in time lost from work, ER visits, and hospital visits for these asthmatics over time. We are now developing a physician performance report that compares clinical outcomes in conjunction with RVUs [Relative Value Units] and patient satisfaction with other physicians of that specialty in PhyCor.

Reinhardt: Is that actually done or is that the blueprint? Very often in the health industry, people move from the real world to dreams and back without even knowing any more in which world they live. I'm a little tired of blueprints. We'd like to see some action.

Loeppke: We have actual physician-specific data demonstrating this type of multi-phasic performance profile in a prototype. So in some ways it is the blueprint. However, we have actually been collecting the functional status, health status, and patient satisfaction measures over the past three years. Also, we have rolled up that data into a centralized database for analysis and report generation. We're right now on the verge of populating that data warehouse with RVU analysis by physician, as well as ICD-9 and CPT data from the practice management systems.

LeTourneau: One of the things that I've heard others around the country talk about is that the things that you've just talked about can be done very well by an integrated system or a group model or staff model HMO, without having physician management companies actually going in and creating another layer of infrastructure that is probably already in existence. When we talk about an industry shake-out, I think part of what needs to be discussed is. are we going to find out that a lot of the PPMC activity is actually duplicative, especially in this area of measuring outcomes and care management and so forth? Doesn't the PPMC come in and make money for the physicians by taking it away from other parts of the delivery system? I don't know much about PPMCs, but I think the issue needs to be raised.

Goldsmith: That's an important policy issue. Where should that responsibility be lodged? Health plans are being raked over for taking an accepted amount of the premium dollar as overhead, and those functions are overhead functions. As a patient, I'd certainly rather have the physicians actually driving that process than have it be driven out of some massive data center in Tucson.

LeTourneau: Wouldn't you say that in many, many marketplaces there already is this huge health plan infrastructure, and for a PPMC to come in and build its own infrastructure is really duplicative? Maybe patients would prefer to have the doctors do it, and I certainly would also, but it already exists, and so you can spend millions of dollars duplicating a system that might be able to work just fine.

Edelson: Yes, Barbara, but does it really exist? That's the question. I think in a few marketplaces it does exist, but in many marketplaces it's a complete vacuum that needs to be filled, and whether it's the HMO, the integrated delivery system, or the PPMC that fills it, we'll see what plays out, I question the assumption that it exists in many marketplaces. There are HMOs in all marketplaces, but whether the HMOs are doing what you're describing is another matter.

LeTourneau: Many are not, but many are doing it, and they're not doing it perfectly, but then many PPMCs aren't either. So doesn't it create competition that actually increases the cost of care rather than decreasing it? Let me give you an example that I've heard of. A PPMC buys an oncology practice and does all the case management, standardizing all the protocols, and then brings chemotherapy into the clinic from someplace else, perhaps from a hospital or an outpatient center. That hospital or outpatient center, at least in our marketplace, would already have some way to measure outcomes, so what you've done is you've taken a profit center, or at least a revenue center, out of the hospital, leaving it with fewer revenues, and you've also duplicated a system because the PPMC probably won't be able to demonstrate better outcomes for the first few years. How is this good for the industry and for patients?

Reinhardt: When people talk about value creation, I always tell my students there's a difference between value creation for the country as a whole and value shifting where you just siphon off someone else's value. I do have the feeling that an awful lot of what has gone on in health care in the last few years has actually been value shifting. Not much has happened from the patient's point of view. Maybe Jeff has wonderful experiences, but from my own experience it's the same damn thing as it always was, It wasn't bad, but it's not better. I don't see the great value added in my daily life, nor do the people that I talk with at cocktail parties. Ian Morrison defines managed care as an organized system that shifts money from providers to consultants and shareholders, and he's only half kidding. For every dollar in value the industry has created for America, one or two dollars have been merely shifted from one bank account to another.

Everson: Just listening to this is interesting. I would only suggest that, when you look at cancer care as an example, the majority of that care is multi-disciplinary and is taking place in office practices, not in hospital settings, and there are a number of reasons for that. Better patient support, including antibiotics and CSF [cerebrospinal fluid] to support the bone marrow, as well as tremendous cost savings and more convenience for the patients. It's certainly a much more pleasant and self-empowering experience for the patient and family to be treated in an outpatient setting than to be hospitalized for months on end. Certainly the patients wouldn't go to the physician if they didn't want that type of care.

LeTourneau: I think the patients go to the physician that their primary care physician refers them to, or to the one that they think is really good in their network.

Everson: For cancer care?

LeTourneau: Yeah. I can't imagine a patient saying, Well, gee, I think I would rather have my chemotherapy or radiation therapy or whatever there rather than here, so I think I'll pick a physician that's over there.' Typically, they go to the doc that they believe is best, and that doc says. 'I want you to get your chemo here,' or 'This is where I send my patients for radiation therapy.'

Everson: The referral lines are pretty well established, I agree with you, Barbara. But I would only point out that those physicians in a private practice or a hospital location are there because they feel it's more efficient, or better income or whatever, more convenient for the patient.

Loeppke: To your point about physicians' influence, physician decisions tend to drive the cost and quality of health care in this country. They affect about 80 percent of the premium dollar if we assume that about 20 percent goes to HMO or insurance company administration. Because of that, the more we can either shift or ideally create value at the physician-patient interface, then the better off the system is, and part of what physician practice management companies are involved with is trying to empower physicians and add value to the physician-patient relationship. The physician-patient relationship is the fulcrum to leverage value in our health care system because it is a combination of the physicians as providers on the supply side and patients as consumers on the demand side that directly impact the cost and quality equation. Physician empowerment can translate into patient empowerment by engaging the patients as active participants rather than passive recipients in their health care.

The Physician Executive: What percentage of physicians do you see affiliated with PPMCs in five and 10 years, either in IPA management services or equity relationships?

Loeppke: More. I don't know if we can give you a specific percentage, but I think that it's clear that there will be a significantly greater number just because there is value being added and the system is changing and needing professional business management, along with professional clinical management.

Everson: That's pretty hard to project. I think you can probably go back and look at the graph of the number of physicians joining PPMCs, both private and public, over the years, and project it out. But whether or not that slope will continue is anybody's guess.

The Physician Executive: Do you see any significant government regulation that's going to impinge on the PPMC industry?

Goldsmith: Boy, I sure don't.

LeTourneau: Not at this point, but I think if we start to see a trend for the PPMCs to come into a marketplace and skim the cream off of the other delivery systems and threaten the collapse of those delivery systems because they can't generate the revenues, I think we might see regulation, but I don't know that that's widespread right now.

Edelson: I think we're seeing less regulation as the government Is, in fact, encouraging physicians to aggregate to foster greater competition in the health care market.

Goldsmith: I think between the hospitals and the managed care companies, I think the regulators are going to be pretty busy.

The Physician Executive: PPMCs, whether they're in the IPA or equity business, are for-profit businesses. Does that have any implications for physicians or for patients?

Edelson: Let me point out that independent physician practices are for-profit.

Reinhardt: Exactly. That's a point I was going to make.

Edelson: So when they affiliate with a PPMC, it's not a transition from not-for-profit to for-profit.

The Physician Executive: I'm glad you pointed that out, but the distinction I was making is being publicly traded on Wail Street and I think it's fair to say that most independent physician practices are not. That's really what I'm getting at here.

Reinhardt: I would say if physicians want to regain control over health care, I think the equity model and publicly traded mode1 will disillusion the individual physician real fast. Not the CEOs who will become deal junkies, but the patient-oriented docs in the trenches. They'll wake up in the morning and will have no Idea whom they'll work for that day.

The Physician Executive: Why?

Reinhardt: Because under the equity model, the doctor in the trenches basically becomes a piece of human capital that yields an expected cash flow that can be bought and sold in the market. I may be dead wrong, but when MedPartners and PhyCor tried to merge, was that an idea that trickled up from the grass roots, from the docs in the trenches, or was that a deal hashed out among executives and then sold to the docs in the trenches, or even crammed down? I've been at meetings where some board decided to buy 50 of some 80 doctors who were being sold by a PPMC that had a little cash flow problem, and little is putting it mildly. People were haggling over the price of a doc. Should it be $200,000 or $250,000? Personally, I think physicians would feel happier in a more collegial model such as an Ivy League university or the Mayo Clinic. It is possible that physicians could find professional fulfillment in a very stable equity model. But when the front office is run by deal junkies who want to get rich quick themse lves, it will be quite another story. We shall see.

Goldsmith: But Uwe, what an extraordinary thing you just said. An Ivy League university has a couple hundred million dollars in endowments. The Mayo Clinic has two billion. What is Joe Smith practicing in Keokuk, Iowa, going to do to aggregate together with his colleagues to create that type of thing? It doesn't just happen out of thin air. Santa Claus doesn't...

Reinhardt: No, you'll have both models, Jeff.

Goldsmith: But where does the capital come from? Where does the management come from?

Reinhardt: Well, you had it in Rochester [Minnesota] basically in the potato field. But the capital also will come from hospitals.

Goldsmith: And what did medicine cost when they put the Mayo Clinic together? I mean, this is a different world, and if you want Mayo Clinic-style enterprises, some-ones going to have to pay for it. There's definitely an infrastructure cost, and that's part of the reason why capital markets have played a role, why the non-profit hospital systems have gotten involved, because they believe they can provide the capital to try and make this happen.

Everson: Uwe, I would strongly disagree with you. You can't build a health care system today or get into value-added services without a lot of capital expenditure. You're not going to do that in a single practice. In our network, we see the physician leadership, even down to the younger men and women in our practices, have been absolutely engaged in clinical guideline development, physician leadership, and strategic issues. There is very much a unanimity of purpose to really try and so-called take back control and really get involved in clinical decision-making. And to make that happen means going to capital sources such as Wall Street and raising capital.

Edelson: We also have to have a vehicle for change, and I'm not sure that the traditional vehicles that we've seen in health care have delivered the sort of change we're all looking for. Everyone is dissatisfied with the health care delivery system today, and I think the PPMC model, at least, holds Out the promise of creating an organization and delivery vehicle that can implement some of the change at a fundamental care-giving level.

The Physician Executive: What are the roles of physician executives in the PPMC industry and how will these roles evolve in five to 10 years?

Loeppke: I think physician leadership is one of the greatest needs right now in the American health care system, and the need for this leadership is really one of the greatest opportunities that physicians have faced in this decade. There's an opportunity to get back into the driver's seat and take up the mantle of leadership on behalf of the patients and the communities that we serve. But to do that we have to have the systems, the tools, the technologies, the organizational infrastructure to be able to effect change. That's one of the reasons organizations like PPMCs, which are empowering physicians, are generating the kind of interest that Lloyd was talking about. I appreciated Uwe's comment, but I don't share in that perspective about physician practices. We are in long-term 40-year agreements with these practices. These are long-term relationships based on trust and the ability to add value to all the stakeholders, but especially the patients that we're really serving.

Reinhardt: Well, that's exactly where I have some doubts. You know your neighborhood physician, and you know he's for-profit, but in a sense you have a feeling he's not, right? He makes a decent living and they live where you live and there's kind of an accommodation. I'm just waiting for the day when on "60 Minutes" you see some relative of a cancer patient or someone who didn't get certain services, and here is a physician-run organization, and the executive lives in a castle. Do you really believe just because people have MDs behind their name that people will have this trust necessarily? I think taking full risk by Wall Street-traded organizations is going to be difficult whether it is people with MD degrees or MBA degrees who run these organizations, and I think physicians are dreaming if they think that as long as these organizations are run by MDs, that the patient will instinctively trust them. I think you're dreaming.

Loeppke: In fact, PPMCs do not equate with HMOs. PPMCs are physician advocate, physician-empowering organizations that also have to deal with the HMOs on behalf of their physician affiliates. And I agree with you that trust is earned every day with every patient that goes into the care system. Any time the amount of care is in question you have to have the quality of care verified, and that's why, at least in my experience at PhyCor, we invest so heavily in trying to focus on clinical practice improvement, quality enhancement, and value added at the local level, because of the very point that you bring up.

Goldsmith: And you know, Uwe, it isn't going to happen by the intercession of lay management. If it's going to happen, it is physicians saying to their colleagues, 'This is the right thing to do, and it's also the right thing to do in an environment where resources are limited, and we need to make intelligent trade-offs within fixed resources about how to maximize the value of our own decision-making for patients.'

Reinhardt: What is the thing that isn't going to happen?

Goldsmith: The idea that people are going to try to maximize the value of the medical encounter. It isn't going to happen without physician leadership.

You also have to distinguish between the merits of capitation which Uwe raises and which, I think, are obviously an important issue, versus a PPMC. Someone said not to equate PPMCs with HMOs and capitation. PPMCs are simply a way of making physician practices more organized and providing the infrastructure to manage in a fee-for-service or a risk-bearing environment. I don't see a downside. I see a lot of benefit to that type of organization. Whether the PPMC takes up capitation or not depends upon what happens in the market, but doesn't speak directly to the merits of PPMCs.

The real issue isn't whether PPMCs are capitated or not, but what the payment rate is. Part of the problem that happened in the West is that you had a lot of people wanting to be capitated and a relatively small number of plans that were willing to do it and you had global medical caps pushed down into the high 60s PMPM. Capitation is in theory perhaps a better way of paying for medical care than a la carte. But the payment level is at least, in part, what determines how attractive it is.

Edelson: Our organization is operating on the East Coast where there's very little capitation and we're seeing the tremendous benefit that we can bring to physician practices in a largely fee-for-service environment.

The Physician Executive: How will PPMCs influence the delivery, cost, and quality of health care in the next five to 10 years?

Everson: Seeing what's happened in our network over the last few years, an evolution of physician engagement and clinical guideline development, information systems, electronic medical records, and disease management processes, I'm very optimistic that, indeed, we as the medical profession can continue as the key patient advocate, but we can't do it without the management tools, access to capital and information systems that are going to be critical to manage the clinical and business side of a practice.

LeTourneau: I think the best opportunity for PPMCs to really make a difference is by providing the professional management and influence to bring physician groups back to the table as a group to be reckoned with, rather than to be run roughshod over by big systems, HMOs, etc. To have an affiliation with something bigger than yourself and being able to actually manage appropriately is a very good tool for physicians to actually be able to start negotiating with entities that are larger than they would be alone.

Loeppke: Barbara, I would totally concur with what you just said. PPMCs help align with and empower physicians on the business management side of the practice as well as allow a greater focus by physicians on the clinical side of the practice.

LeTourneau: And I think that's probably the role of the physician executive in the PPMC, to bridge the clinical and the business sides of medicine so that the physician's thinking and culture can start to Influence the business of medicine in more effective ways.

Loeppke: Exactly, because then you get the best of business marrying the best of medicine, and the best of both worlds then are delivered for the patients in the communities.

LeTourneau: But the fear I have and the caveat is that the temptation is great to go in and make money for the physicians who have equity in the PPMC by, as Uwe said, shifting value rather than creating value, just taking the easy money, the low-hanging fruit as we sometimes call it, and shifting it to the physicians. I'm not saying it's bad for physicians to make money, but I think that's where people will start to become angry at PPMCs, and that's where the trouble will come. If we try to stick with bringing the physicians to the table, that's probably the most effective thing to do.

Goldsmith: People already are angry. I mean, the PPMC is enormously threatening to the hospitals.

LeTourneau: Yes, and to HMOs.

Goldsmith: Because PPMCs provide an alternative nucleus or organizing focus for medical practice. Given the huge amount of duplicative capital investment that we have in hospitals, the idea that you have physicians that are not beholden to hospitals and are not biased in the way they organize their care towards supporting all that capital, I think will help take cost Out.

LeTourneau: That may be, but if you're willing to accept the premise, Jeff, that we do need to have hospitals.

Goldsmith: We just don't need five thousand of them.

LeTourneau: ...and that they do need to make money.

Goldsmith: We need a hospital system that's running at 59 percent occupancy?

LeTourneau: No.

Goldsmith: Each with its own cadre of employed physicians?

LeTourneau: No.

Goldsmith: That's certainly not going to get us to a more cost effective, health-improving delivery system.

LeTourneau: But I'm not sure that the way to reduce hospital capacity and make them run more efficiently is to take away the revenue centers, the easy pickings, and sort of randomly have the hospital system collapse. I don't disagree with you.

Goldsmith: How would you do it?

LeTourneau: I don't know how I would do it. That's not what we're talking about. I think that we all, or I would hope that we all would agree that the system needs revamping, but I'm not sure that's the way to do it.

Goldsmith: Well, we tried health planning and that was a raving success. You know, get them all to have one CAT scanner instead of three.

LeTourneau: As you describe it, you may take away the revenue centers of the most efficient, highest quality, best value hospital in town, and that may be the one that collapses because that's the one that the PPMC group.

Goldsmith: But this is bizarre logic. I mean, who said that the hospital owned the clinical laboratory franchise?

LeTourneau: I never said that.

Goldsmith: Or the pharmacy franchise?

LeTourneau: I never said that.

Goldsmith: Well, that's the implication. I mean, why is it the hospital's franchise? I don't understand what makes the circle that we drew around a particular set of activities somehow sacred, and that's what you're implying it is.

LeTourneau: I don't think so. I'm sorry if that's your interpretation. What I'm saying is that hospitals, in order to finance those businesses in which they're now losing money...

Reinhardt: Well, then they shouldn't be in it.

LeTourneau: They shouldn't be in it because they're losing money?

Reinhardt: Yeah, that's right. They shouldn't be.

LeTourneau: So we should stop doing critical care in hospitals?

Reinhardt: No. Critical care in hospitals should be paid for.

Goldsmith: Right.

LeTourneau: Yeah, but it's not. The reality of the system is that it is not.

Reinhardt: Well, that's because you had all these sugar pots that you could sort of cost shift within the hospital, and no activity ever had to justify itself.

LeTourneau: Absolutely, Uwe. That's exactly how it happened. However it happened, it is what it is now.

Reinhardt: But you see that is exactly why American hospitals can run with 60 percent occupancy, and HCA ran with 40 percent, because they had all these franchises that could keep in place totally useless capital. So here I agree with Jeff, that if you have somebody who sort of repackages where health care takes place and finds the most efficient locus, that's just too bad for the hospital. It really is. Now you could say, what about indigent care? Well, we shouldn't be paying for it that way either by giving the hospitals artificial franchises.

The Physician Executive: Any other thoughts on the role of physician executives in the PPMC industry?

Edeison: The critical thing to point out is that physician executives provide a compass for non-clinical business executives to navigate what are obviously very complex currents of health care delivery. Physicians have been deeply imprinted with a sense of the patient care process which has to inform critical business decisions you make. Without such a clinical sense, there's potential for bad business and bad medicine. So I think the role of physician executives is critical to the whole process.

Loeppke: Physician executive roles really occur even at the local level. These are physician leaders that may be elected presidents or medical directors or others engaged at a group practice or IPA level. Those are physician executives at the local level.

LeTourneau: I agree.

Loeppke: And they're the ones that are really going to influence the physician leadership and what we've been talking about. When you asked what are some of the ways this segment of the industry can be influential, I think one of the most compelling ways is when you are able to aggregate multiple group practices from around the country and other physicians and IPAs and harness the economies of intellect for the practice of medicine.

The Physician Executive: And that brings us back to information systems, doesn't it?

Loeppke: Part of it does, but part of this can be collected right now with just pencil and paper to find ways that best practices are occurring. But certainly they would be facilitated with better information systems.

Reinhardt: Jon or Ron, the information on patient satisfaction and clinical outcomes that you assemble in your database, do you share that with patients or prospective patients?

Loeppke: You mean individual patients?

Reinhardt: Yeah. Suppose I call up and I want on all of these physicians you either own or have equity relationships with, I'd like to get a printout of their patient satisfaction scores. For example, at Princeton, you could get for every professor for every course he or she taught the students' ratings. Could I get that from you guys for every doctor affiliated with you...

Loeppke: You would be able to get an aggregated...

Reinhardt: No, no, by the doc!

Loeppke: By the doc? That would depend on the group. The group itself would make that decision, and there probably are some group practices that are very willing to share some of that data. But that's going to be up to them at a local level. One thing you have to remember as a physician practice management company, at least in our model, we don't own these physicians. We are in essentially an empowering or affiliated relationship with them, and so we don't mandate that level of...

Reinhardt: I think that has been a bit of a problem with this discussion because earlier, Barbara, before you came on, we saw that there actually is quite a spectrum of things called PPMCs.

LeTourneau: Yes, that's true.

Reinhardt: For instance, FPA on the West Coast, is that a PPMC?

Loeppke: Yes.

Reinhardt: Now they own that clinic in Tucson, that Thomas-Davis Medical Center in Tucson that was so much in the news, right? Now here you have a situation that is not nearly as sweet and angelic as you gentlemen described it. This was not a felicitous situation. These docs, in the end I think they quit, they wanted to unionize, they did not feel a sense of collegiality and so on, So when you talk about PPMCs, I think there's a whole plethora of these outfits out there. Even we developed quite a matrix to describe them, and I think the experience is going to range all over the map. This one made The New York Times, made JAMA.

Goldsmith: That's a valid point. This is a heterogeneous and differentiating field and I think it is very difficult to generalize. There are differences in management competence, in philosophy and values. To talk about the sector as some type of unified entity is misleading.

Reinhardt: And that gets back to this issue of the physician leader. Part of what a leader does is sort of infuse a culture or an ethic, an ethos, to the organization. That leader could be a very medically oriented, clinically patient-focused, or that leader could be very Wail Street-focused.

LeTourneau: Yes. And a physician could be either one.

Reinhardt: It could be either one. So the leaders that we want, that Jeff and I and Barbara and others dream about, would be physician leaders who certainly have a good business sense, but who really care about the clinical side. When I listen to the MDs on tonight, you seem to be of that ilk, and the real trick is, will this industry be dominated by people like you, or will it be the kind of people that lead to eruptions and articles in The New York Times? The answer to that question isn't totally clear to me yet.

Loeppke: In response, Uwe, to your comment, I think there will be differentiation over time. And in response to the earlier question about a shake-out in this industry, physician practice management is a very difficult business. It's not for the faint of heart. There are some that maybe came in for an acquisition strategy and maybe don't have quite the operational focus or the clinical focus and the added value focus, and that I think will get differentiated over time. I will tell you though, having a chance to go around the country and meet with physician colleagues, both affiliated physicians in PhyCor and external ones, I am getting a sense that we're entering a new era, that there's a new sense of urgency and a new hope about essentially regaining the dignity of our profession. When I'm out there, I try to get a finger on the pulse, and I can tell you it's palpable, there's an excitement, and physicians are looking straight ahead at the good new days of medicine, rather than over our shoulder at the good old days of medicine.

The Physician Executive: What's giving them this optimism?

Loeppke: Because there is now organizational infrastructure, the industry is consolidating into systems of care in the group practices, into organizations that can effect crisp strategies. There are tools, technologies, systems, approaches. and, in fact, there is a way to harness some of the capital, even in a public marketplace, to be able to effect system improvement on clinical performance and more cost-effectiveness at the same time, so that you can get the balance of quality management and cost management, so that you can actually put patients first and see that you can still have financial stability as an industry.

The Physician Executive: In other words, you're suggesting that the PPMC industry in its best sense is giving a lot of physicians hope for the future?

Loeppke: I think that's true. That's what I said earlier about it's the best of business marrying the best of medicine, so that the best of both worlds are then delivered to the patients and the local communities.

Reinhardt: But that raises the question, and somebody else also raised it earlier, which is why are 95 percent of the docs not with it?

Everson: I think that you're seeing, Uwe, that this is in the beginning.

Goldsmith: It's 10 years old.

Everson: ...phase of the whole sector. I think PhyCor was the earliest PPMC, if I'm not mistaken, Ron.

Loeppke: Yes, that's true.

Eversan: AOR, my organization, has only been around since '93.

Goldsmith: The PPMC industry has gone from zero equity value to $13 billion in 10 years. I assume that that's fairly impressive growth, and as somebody said earlier. I think the jury is out. If these firms are able to create value, they'll grow because physicians will want to be part of them. And if they can't create value, and I'm not talking about shareholder value here, Uwe, I'm talking about value for the practitioner and the patient, if they can't create the value, they're not going anywhere.

Everson: In another sense, the movement of patients and physicians out of the hospital setting would not have taken place if they would have filled that void.

Edelson: Some physicians join a PPMC out of fear for the future and a desire to cash out now. Other physicians join with optimism and a desire to change that future. I think that the PPMC industry is now beginning to create a track record of demonstrating value, so instead of feeling they have to join a PPMC, doctors want to join. If, in fact, PPMCs do deliver on this value proposition, I think you'll have a very significant uptick in the number of doctors joining these companies.

The Physician Executive: Jon, how do you define the value that PPMCs can add?

Edelson: There is economic value and there's quality of care value. I think of economic value in terms of revenue per physicians, the operational efficiency of the practice, and other financial parameters. And I think there are quality of care parameters in terms of the outcomes of care, treatment, and patient satisfaction which ultimately will determine the economic parameters.


The following participated in Part 2 of this discussion, conducted on February 23, 1998, via telephone conference call:

Jonathan Edelson, MD, is Chairman and Chief Executive Officer of Advanced Health Corporation, a national physician network and practice management company in Tarrytown, New York

Lloyd Everson, MD, is President of American Oncology Resources, a national physician practice management company in Houston, Texas.

Jeff Goldsmith, PhD, is President of Health Futures, Inc., in Charlottesville, Virginia.

Barbara LeTourneau, MD, MBA, FACPE, is Vice President, Medical Affairs, North Region, of Allina Health System in Minneapolis, Minnesota, and Immediate Past President of the American College of Physician Executives.

Ronald Loeppke, MD, is Vice President and Chief Medical Officer of PhyCor, Inc., a national physician practice management company in Nashville, Tennessee.

Uwe Reinhardt, PhD, is James Madison Professor of Political Economy and Professor of Economics at Princeton University


(1., 2., 3.) Conversation on May 20, 1998, with Douglas B. Sherlock, CFA, Senior Health Care Analyst at Sherlock Company in Gwynedd, Pennsylvania. Sherlock Company publishes PPMC, a monthly newsletter that provides financial analysis of publicly traded physician practice management companies.

Note to the reader: The acronym for physician practice management company, PPMC, is sometimes shortened to PPM. To a void any potential for confusion, I changed PPM to PPMC throughout this transcription. Also please note that Barbara LeTourneau joined this discussion in progress.

Robert P. Carlson conceived and moderates these annual panel discussions. His articles appear in health care Journals throughout the United States. He also provides marketing communications counsel to physician groups and other health care entities. He lives in Indianapolis and can be reached at 317/769-4609.
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Title Annotation:physician practice management companies
Author:Carlson, Robert P.
Publication:Physician Executive
Geographic Code:1USA
Date:Jul 1, 1998
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