Disintegration: How Employed Doctors Are Landing on Their Feet
As integrated organizations come apart, family physicians are finding a variety of ways to bail out.
Fam Pract Manag. 1999 Nov-Dec;6(10):36-40.
Throughout the 1990s, health systems and physician practice management companies (PPMCs) across the nation have vied with one another to buy physician practices and hire doctors as employees, convinced that a broad network of physicians was the key to gaining more managed care contracts. But many organizations have instead found themselves trying to cut their losses from what are turning out to be costly relationships for both physicians and their employers. The decade-long trend toward large-scale health care integration, which saw PPMCs grow into a multibillion dollar industry, has turned into a trend now referred to by many as “disintegration.”
For years, the conventional wisdom was that health care systems could strengthen market position by integrating, thereby consolidating hospitals, ancillary services, physician practices and other services, even health insurance, into large entities. Both PPMCs and health systems offered doctors lucrative buy-outs as well as the promise of generous salaries and freedom from the business hassles of running a practice.
“In some cases, the purchases were one of the cornerstones of a proactive strategy to build integrated delivery systems and prepare for future risk-based contracting,” according to a report from Tiber Group, a Chicago-based health care consulting firm. “But, in most cases, the purchases were defensive. ... A domino effect occurred in many markets when health systems witnessed competitors purchasing physician practices and followed suit to avoid losing competitive position.”1
For their part, physicians sold their practices to escape from the hassles of practice management, gain access to capital and sophisticated information systems, improve negotiating leverage with payers and cash in on high practice values. They expected the health systems and PPMCs to provide expert management — including risk-based contracting, practice expansion and increased physician compensation — and, through economies of scale, to reduce the cost of malpractice insurance, employee benefits, supplies and support services.
The bottom line for many family physicians is that after selling their practices to take part in what they thought would be long-term employment relationships, they find themselves instead facing an uncertain and much more complicated future. The variety of their responses reveals the complexity of the situation. But the common message seems to be that doctors, no matter how they're compensated, need to take an active role in the management side of practice.
Growing numbers of physicians who sold their practices to health systems or physician practice management companies (PPMCs) are now faced with buying back their practices or finding new employers.
Organizations that intend to stay integrated are looking for strategies to counter their unexpected losses.
Even employed physicians must be cognizant of their organizations' performance.
What went wrong and why
Running physician practices hasn't proven to be as easy or as profitable as first predicted. (See “What's underlying the trend.”) In fact, some PPMCs — most notably FPA Medical Management Inc. and MedPartners — have declared bankruptcy or chosen to get out of the business. As a result, many physicians, some of them in practices that have already been bought and sold more than once, now face the possibility of becoming owners again — either buying back their practices or starting up new ones — or being unemployed.
The basic economic assumptions that drove the PPMC trend have proven to be false, according to Nathan Kaufman, senior vice president of Superior Consultant Co. Inc. in San Diego. First, large physician groups don't guarantee economies of scale. “As groups get larger, the expenses get higher,” Kaufman says. “For example, the accounts-payable department of a two-physician group is two physicians writing checks. The accounts-payable department of a PPMC is an accounts-payable department.”
What's underlying the trend
The financial failures of so many integrated entities can be attributed to a number of factors. First, as the physician practice buy-out trend accelerated, some physician practice management companies (PPMCs) paid inflated prices for practices, which added large amortization expenses over the three- to five-year term of the typical employment contract. This often left the organizations with little capital to invest in achieving efficiencies, enhancing services and improving patient care. Yet, until efficiencies could raise practices' profits enough to cover the PPMCs' 15 percent to 20 percent management fees, those fees had to come out of money that would have gone into growing the practices or into physician compensation. At the same time, the often cutthroat pricing of managed care (part of the original pressure to join PPMCs) simply led to more cuts in what plans were willing to pay physicians.
Additionally, many once-profitable practices experienced reduced productivity and financial losses following integration, in part because the physicians' new compensation arrangements failed to include appropriate performance incentives.
More fundamentally, rapid growth may have masked the inherent instability of some integrated health care arrangements. Many PPMCs had more expertise in raising and investing money than in managing medical practices, so their focus tended to remain on deal-making instead of operations. And, while an aggressive PPMC may experience growth in the short term, that doesn't necessarily mean it has what it takes to help practices grow and succeed in the long term.
Other reasons for integration failures have included unrealistic revenue projections, growth projections that didn't account for the costs of growth, inexperienced managers and their failure to understand the staffing and support required in physician practices, inadequate physician involvement in governance and the difficulty of managing risk contracts.
Another problem is that large medical groups don't, in fact, have a lot of negotiating clout. “When a large group negotiates with a billion-dollar payer, the payer can afford to lose the medical group as a provider,” Kaufman says. “The payer may be hurt locally, but it can afford that loss as a national company —whereas the medical group can't afford to lose the payer” and its patients.
Kaufman also points out that many medical groups experience financial distress when they assume risk. “In addition to providing care to patients, the groups have to worry about pharmacy risk, patients using out-of-network providers, hospital utilization and other factors,” he says.
Given all these pitfalls, many entities that employ physicians are “evaluating their strategic options,” according to the Tiber Group report. “These organizations are now coming to realize that the large losses incurred in the start-up phase (the first two to three years) of this strategy are not abating.” The three primary strategic options are to divest, which involves large-scale sell-offs of physician practices; to evolve, which means selling the practices back to physicians and entering into affiliation agreements or joint ventures with them; or to retain the practices but work with physicians to find solutions to counter the economic losses.1
What effects are these “strategic options” having on the doctors who work for these entities? Here are some examples of family physicians who have had firsthand experience with disintegration and have found their own ways out.
Taking back your practice
In 1995, Karl Singer, MD, and his six partners in Exeter Family Medicine Associates in Exeter, N.H., became part of a 1,000-member group run by a clinic. Barely three years later, the clinic decided to sell Singer's group. When there were no buyers, he and his partners had two choices — either close the practice or reestablish it themselves.
“There were seven of us at that time, including one partner who had joined us about four weeks before,” Singer says. “We weren't ready to end our careers. My senior partner had been there 30 years. I'd been there 27. And my next senior partner had been there 23 years. We didn't want to walk out on the community with five weeks' notice. So we decided to start an independent practice again, but we knew we couldn't do it in five weeks. Instead, we negotiated for nine.”
Singer acknowledges that they were lucky to pull off this transition in nine weeks, and he advises others who find themselves in this situation to push for at least three months.
In many ways, Singer's group was fortunate. Three of the doctors had experience running an independent practice, as did the administrative and office staff. The owners were supportive during the transition; the practice got to keep its name, and it remained in the same building with the same equipment. The physicians worked with a lawyer and an accountant they had worked with before. And they were able to secure a line of credit in a reasonable amount of time from a local bank they had worked with previously.
Singer does note that, given more time, they might have made better choices about the practice's fringe-benefits program and its computer system. “I think it's inevitable if you have only three months — or in our case nine weeks — that some of your decisions are not going to turn out to be the right decisions,” he says. “So you have to be prepared over the first year to reassess all the decisions you make, and you may very well have to make some changes.”
In many ways, the biggest adjustments were psychological. When he and his partners joined the big group, Singer says, “We had signed on with groups that had been around for a long time. And within three years and three months, we were being shed. Even though they were generous and fair and reasonable, it wasn't what we had planned,” he says. “You have to be prepared to turn things around and look at them as creative challenges. You have to try to keep things in perspective and not get overwhelmed.”
In 1994, Barbara Kostick, MD, and her partner sold their family practice in Fremont, Calif., to Mullikin Medical Centers, which eventually became part of MedPartners. Over the course of her three-year contract, Kostick gradually became disillusioned with the way the system was managed. Eventually she resigned, and within 80 days had started a new primary care practice with a pediatrician. During the first year, they added another family physician and another pediatrician.
But since Kostick, unlike Singer, didn't have the support or cooperation of her former employer, she faced many obstacles. “It was a lot of work to start a new group from scratch with no charts, no forms, no telephone number, no address, no tax ID number,” she says.
Kostick used a variety of strategies to build her new practice. Being part of an IPA (and sitting on its board) gave her access to a number of insurance contracts. The practice advertised in the newspaper and the phone book, and it joined a local hospital's marketing campaign, which included Kostick appearing in a commercial. And she volunteered to speak to civic organizations.
Retaining her existing patients was another part of the practice's success. One strategy was to notify local pharmacists that she had moved. When her patients needed prescription refills, the pharmacists would fax the refill requests to her new office.
“I am so much happier being in charge,” says Kostick, who also is president-elect of the California Academy of Family Physicians. “I love being able to hire the people I want to hire, design the charts so that they're friendly for us and work with partners who have similar objectives.”
Buying back your practice
For some doctors, buying back their practices may be the best way out of failed integration. According to at least one physician who's been there, the most critical factor in making the strategy succeed is having good legal advice.
“Make sure you get an attorney who is seasoned in this area,” says Jeffrey Cruzan, MD, a family physician and a member of the board of directors of the Oklahoma City Clinic, a group that recently bought its practice back from MedPartners.
The Oklahoma City Clinic was fortunate in that its original sales contract, with Care-Mark, included a clause stating that the group was not “assignable.” That meant that, in the case of a subsequent sale, the group had the option of buying the practice back or participating in the sales negotiations. The group opted to participate in the negotiations when CareMark sold to Mullikin Medical Centers, which was later folded into MedPartners. “We hired an attorney to oversee the contract negotiations for us,” Cruzan says. “Having a firm experienced in this area made a big difference.”
Then, when MedPartners began to talk about selling its interest in the Oklahoma City Clinic, the physicians exercised their option to buy the practice back. And again, they consulted an attorney to protect their interests.
Physicians should remember that when they sell a practice or buy it back, they're usually dealing with a large organization with excellent legal counsel, says Vasilios J. Kalogredis, JD, president and founder of Kalogredis, Tsoules and Sweeney Ltd. in Wayne, Pa., and a contributing editor to Family Practice Management. “When you're buying your practice back from a big institution, there are a lot of tax issues to be dealt with, as well as fraud-and-abuse and Stark issues,” he says. “An attorney who understands these issues can save you a lot of money and aggravation.”
Surviving multiple sales
Some physician groups have ridden the integration wave successfully by maintaining an active role in practice management despite being owned or managed by a larger entity. That's been the experience of Kelsey-Seybold Clinic in Houston, a 300-physician multispecialty group that has had three owners in seven years.
In 1993, Kelsey-Seybold was purchased by CareMark, which was subsequently bought by MedPartners. Last year, when MedPartners announced it was getting out of the practice management business, Kelsey-Seybold had to get bids from organizations willing to buy its contracts with MedPartners. Within a short time, Kelsey-Seybold was purchased by two Houston hospitals, Methodist and St. Luke's, in a joint venture.
“I think the reason we've done well is that through this whole thing, no matter who held the management contract, we still managed our own business,” says Patrick M. Carter, MD, chairman of the Department of Family Practice at Kelsey-Seybold. “We still had people here who knew how to run the clinic and how to watch the bottom line to keep the clinic financially healthy. So when it came time to sell us, we had several interested bidders. Throughout all the changing ownership situations, we continued to be a viable organization capable of standing on its own.”
Entering into a joint venture
Integration can still be a viable strategy, but successful examples probably will look increasingly different from the buy-'em-and-run-'em model of the last decade. In many cases, the relationships will take on new forms that allow physicians to work as equal partners with other providers, hospitals and payers — not as subordinates.
For example, Physicians Alliance Limited (PAL), a group of family physicians and internists in Lancaster, Pa., has managed to reap the benefits of integration while avoiding the pitfalls. Instead of selling the practice, the group formed a joint venture with St. Joseph's Hospital in Lancaster in which the group and the hospital are partners but the physicians retain a controlling interest.
“The arrangement has been successful because physicians remain involved and invested in the strategic decisions of the group,” says Michael Warren, MD, a family physician and president of PAL. “It's our opinion that this will allow us to maintain greater autonomy and to be more successful than the employment model.”
The arrangement offers advantages for both partners, Warren says. Working with St. Joseph's and its parent organization, Catholic Health Initiatives, the physician group has access to resources — such as information services, contract negotiation, human resources and purchasing — available through a large network. The advantages for St. Joseph's include potential profits based on the success of the group, as well as an opportunity for the hospital to work with the physicians to initiate community-health programs.
As Peter Altimare, MD, a family physician and a partner in PAL, explains it, the joint venture also works well because physician compensation is based on appropriate incentives. “I think our incentives work because they're based on fiscal reality,” he says. “There are no salary guarantees. Right now, my incentives are as strong on the productivity side as they were when I was independent.”
Staying in for the long term
For many organizations, the fundamental reasons for employing physicians are still valid, and those organizations plan to stick with their approach for the long haul. But they're looking for strategies to counter the unexpected losses arising from the original investments, according to M. Shane Foreman, manager at Tiber Group.
From the physicians' standpoint, the advantages of working things out with an employer include maintaining current salary (or something close to it) instead of spending years getting back to that level in independent practice, as well as avoiding the disruptions to one's personal life that can occur while building a practice.
Each organization must develop appropriate financial benchmarks against which to measure its income and expenses and then create a realistic budget based on managing those expenses.
“Financial benchmarking can reveal the sources of operational losses and identify improvement opportunities,” Foreman says. “Losses are driven by a variety of factors, some controlled by the health system and some by physicians. And physicians need to collaborate with health-system employers to stem those losses.”
The Tiber Group report lists the following among the issues to be resolved before a large organization employing physicians can hope for generally smooth sailing toward profitability:
Physician compensation packages that lack incentive features and thus pose problems for the organization's bottom line;
An inadequate physician role in the governance and management of their practice settings;
Differing health-system and physician expectations about everything from patient volume to support-staff levels;
An undeveloped or underdeveloped group culture;
Physician dissatisfaction due to promises made during the sales negotiation process that aren't kept because of fiscal problems.
While there is no magic formula for success in practice today, one thing is clear: Both independent and employed physicians must pay attention to their organizations' efficiency and effectiveness and, ultimately, to the bottom line. Even for those who turn to salaried practice as a safe haven from management issues, there is no escaping the business side of medicine.
Martha Collins is a freelance writer and editor in Austin, Texas, specializing in health care and business.
1. A Practical Guide to Benchmarking Employed Medical Groups. White Paper No. 007. Chicago: Tiber Group; 1998.
Copyright © 1999 by the American Academy of Family Physicians.
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