American College of Physicians: Internal Medicine — Doctors for Adults ®

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In tough markets, three primary care groups are learning how to make their size count

From the October ACP-ASIM Observer, copyright © 2002 by the American College of Physicians-American Society of Internal Medicine.

By Phyllis Maguire

Down payments as signing bonuses?

You don't have to look far to find problems in primary care. As Medicare payments plummet and interest wanes among medical students, primary care physicians are looking for ways to improve their prospects.

In the 1990s, the "bigger-is-better" mentality drove many physicians, both generalists and specialists, to embrace integration strategies, from selling their practices to working with physician practice management companies. As the decade waned, however, many of those strategies failed.

Now, as primary care reimbursement reaches new lows and workweeks get longer, physicians are looking for help.

"Everyone is trying to figure out the model that will let them control runaway overhead, deal with complex financials, track expenses and income, and have some time and energy left to practice medicine," said former College President Clifton R. Cleaveland, MACP, a general internist in Chattanooga, Tenn., whose practice has been through different rounds of integration.

ACP-ASIM Observer talked to three primary care practices that have developed strategies to increase their clout and cut through red tape. While some of their business models echo the integration strategies of the 1990s, these practices have learned valuable lessons from past missteps and are drawing new roadmaps for success in primary care.

Not surprisingly, one common theme has emerged from conversations with these group's physicians and administrators: While size definitely matters in negotiating strength, physicians need to develop other strategies to make integration work.

Here is a look at the strategies that have worked for three practices.

A new form of integration

In the mid-1990s, primary care physicians in Chattanooga knew they had to mobilize. HMOs had arrived in force, hospitals were buying up physician practices and independent internists were being ignored at the bargaining table.

To fight back, Dr. Cleaveland and 40 other primary care physicians founded Beacon Health Alliance in 1994. The group, which consisted of 10 practices with internists, family physicians, pediatricians and ob/gyns, did all the right things. It merged assets, invested in computer technology, started its own management services organization (MSO) and planned to build market share and bargaining power.

Within three years, however, the group was floundering. Like many practices that embraced integration, Beacon grew too fast. There wasn't enough money to pay for the computers and other equipment the MSO needed. And the group's computer system couldn't keep track of claims, particularly payment delays.

In 1999, Beacon moved to a new form of integration when it affiliated with a primary care group that had close ties to a local hospital. The resulting group, Memorial Health Partners (MHP), has more than 100 physicians in 32 practice locations and has captured 20% of the local primary care market.

Beacon officials say they have benefited from the affiliation in several ways. First, the group now negotiates as part of a much larger organization, which has distinct benefits.

While the group used to have several contracts that paid rates below Medicare, they now have none, according to Collin G. Cherry, ACP-ASIM Member, founding member of Beacon. MHP can negotiate better terms for timely payments and premiums from plans that don't have electronic billing, and it has a standing meeting every month with local health plans to iron out processing and payment glitches.

The affiliation has also led to better clinical quality and practice efficiency. All of MHP's physicians have adopted the same guidelines to manage hypertension, asthma and diabetes, for example, as well as guidelines on coding compliance and practice management. On the business side, they share contracting, fee schedules, information systems, and centralized billing and scheduling.

Beacon also has benefited from being able to use the hospital's MSO. While the group once had 10% of its accounts receivable stretching out six months, the MSO helped it whittle that down to 2%. And it has cut the nine months it used to take to credential new physicians (and have health plans pay for their services) in half.

While the alliance has helped Beacon's bottom line and practice management, the two MHP groups have retained some degree of independence. As an independent group, "We can make our own decisions on physician salaries and profit distributions," said ob/gyn Michael I. Bonder, MD, Beacon's president and chief executive officer.


While his group's business strategy has strengthened the bottom line, Dr. Cherry in Chattanooga, Tenn., says the biggest benefit is "the ability to practice medicine unencumbered."


Having rushed into integration once before, the group's physicians have learned "that integration is a process," Dr. Cherry said. While the two MHP groups are moving toward a full merger, the physicians are taking their time to explore whether an affiliation with the hospital or independence is a better model for the future.

For now, Dr. Cherry said, the biggest payoff of Beacon's new business model is the ability to practice unencumbered.

"I can see 15 patients in the morning from 15 different health plans, yet not change any of the tests I order or my referral patterns," he said. "I don't have to shape my practice to any health plan, and that makes my life a lot simpler."

Diversifying revenue

Arizona Community Physicians in Tucson also has found out that bigger is better, but with a twist.

Since starting with two practices and six physicians in 1994, the group now has grown to include 80-plus doctors among more than 30 practice sites in the Tucson metropolitan area. The group consists of 35 internists, 35 family physicians, a dozen pediatricians and one ob/gyn. Like Chattanooga's Memorial Health Partners, its size gives it control over a significant chunk-about 25%-of the local primary care market.

While those numbers could give the group a real negotiating advantage, particularly because of a shortage of primary care physicians, Arizona Community physicians say they have been loathe to use their size to bully their way to higher rates. In large part, they don't want to be seen as an 800-pound gorilla, creating resentment among health plans and competing physicians.

According to Michael I. Fuchs, ACP- ASIM Member, a former president of the group and a founding member, "Our ability to create revenue lines is where the value of being a large group has really come to fruition."

One example is ancillary services. Dr. Fuchs said the group's size has helped convince local insurers to let Arizona Community physicians use their own ancillary services. The group has invested heavily in ancillary services, in part by finding medical equipment manufacturers willing to offer attractive leases to a large group. Arizona Community now has lab and X-ray services, as well as several imaging sites with CT, MRI, mammography, Dexascan and ultrasound equipment. (By contrast, Beacon in Chattanooga owns only a lab—a thriving one—and X-ray facilities.)

The group's size is important not just for leasing equipment, Dr. Fuchs said, but for ancillary revenue. He said that 50 is "the magic number" of physicians you need to make ancillary services profitable, particularly for what he called "the big ticket ancillaries" like CT and MRI. Ancillary revenue now accounts for 15% to 20% of physicians' income in the group.

But Arizona Community pursues diversification even further. It leases out its 18-member management services division to other physician groups, offering them a menu of practice management services—from contract review to billing and collecting—for a fee. And many of the group's physicians pursue practice-based clinical research—another advantage that comes with size.

"To attract good contracts with companies that coordinate clinical trials, we found we needed between 35 and 50 physicians, or a patient base of around 100,000," Dr. Fuchs said. The group's patient base now, he continued, is approaching 300,000.

He also pointed to two other key strategies behind the group's success. First, its physicians do not merge their practice assets. Instead, Arizona Community owns only the group's ancillary services, software management program and management services division. Each of the more than 80 physician-owners buys one share of stock for what Dr. Fuchs called "a negligible amount." (His own buy-in figure eight years ago was $3,000.)

"If it costs nothing to join the group, then there's no impediment to growth," he said. "That's what we were after." Each physician in Arizona Community pays an equal portion of shared costs, such as for legal services or accounting, while maintaining his or her own overhead.

Another key concept: The group does not employ physicians for management roles or even pay physician leaders for time spent administering the group.

"Once you employ physicians who are not producing revenue in a management position, the hierarchy becomes difficult," he said. Instead, the group rotates board members through a four-member executive committee, electing a new president every two years. During his own tenure as president, Dr. Fuchs said that he spent at least 10 hours a week away from patient care on group business, but was never reimbursed for that time.

Because of the group's success, Dr. Fuchs said, he is often asked to explain Arizona Community's model to physician groups around the country. While one group in southern Oregon has adopted the model, Dr. Fuchs said that the lack of merged assets and paid physician leaders are often obstacles to more groups adopting the model.

Most physicians, he said, don't want to spend years developing a company without getting paid for their efforts. And as for not merging assets, "Some physicians can't walk away from the concept that if they bring a certain level of practice or a building to the deal, they want a bigger share."

Finding internists' value

Alliance Medical Group in Pinole, Calif., in the greater San Francisco Bay area, also started jockeying for size in the mid-1990s. The group, which had been a seven-member internal medicine group since the 1970s, decided in 1994 to grow and to expand its primary care focus by adding family practice, pediatrics and ob/gyn.

One goal was to get big enough to successfully negotiate, like the physicians in Chattanooga and Tucson. (Alliance's current mix is five internists, eight family practitioners, 10 pediatricians, two ob/gyns and two nurse practitioners, spread out among seven different practice sites.)

But Alliance also needed size for another reason: In one of the country's toughest markets, the value of internal medicine was under fire.

"Capitation treats primary care as a commodity, with no regard to complexity," said medical director James L. Naughton, ACP-ASIM Member. Under risk-bearing contracts, internists found they couldn't compete economically with family practitioners' large panels of healthy patients.

"But we could bring value to the management of complex patients, especially in the hospital," Dr. Naughton continued. "We needed to expand the group to get a large enough patient population to utilize those internal medicine skills."

In 2001, Alliance took its inpatient strategy one step further. The group had already experimented with different models—having internists see their own hospitalized patients was one, while handing off patients to intensivists was another. Group physicians quickly realized, however, that they got dramatically better hospital utilization rates—and greater profits under global capitation—when their own internists provided care.

That's when Alliance's five internists decided to rotate hospitalist duties. Each physician began working as a hospitalist at the hospital every fifth week, while spending the other four weeks seeing patients in his or her office. Together they assumed that hospitalist role not only for their own 40,000 patients, but for patients covered by the independent physician association (IPA) they belong to as well. That move put another 15,000 patients under their care.

"It's been very successful," Martin L. Serota, ACP-ASIM Member, Alliance's president, said about the hospitalist strategy. "It's given us an edge in contracting, allowing us to take some contracts that wouldn't be profitable if we didn't use hospitalists efficiently. And it lets us tap into one of our best available revenue streams."

In full-risk contracts, using hospitalists saves Alliance one-third of the global capitation fee it receives. The group receives fewer savings for providing hospitalist services for patients covered by shared-risk contracts, but even there, the group's hospitalist strategy has helped boost revenue by 5%.

In part, the savings come from using hospitalists who also have an outpatient practice, Dr. Serota pointed out: Alliance's hospitalist-internists are very familiar with outpatient treatments such as therapies for deep vein thrombosis and pneumonia. In addition, their colleagues in the group can follow up with patients in the outpatient setting. The result is fewer bed days, better care—and more revenue.

In northern California, according to Dr. Serota, the premier revenue stream comes from Medicare HMOs. A Kaiser Family Foundation report last month found that Medicare+Choice plans in California—where 35% of Medicare beneficiaries in 2001 were in Medicare HMOs, compared to 14% in the nation overall—have been more stable than in the rest of the country.

According to Dr. Serota, Alliance continues to take commercial HMO contracts "that don't pay the freight" in order to access the companies' Medicare+Choice plans. "The Medicare HMO product recognizes the value of internists in treating complex disease and lets you be creative," he said.

Under Medicare capitation, for instance, internists can provide preventive services, unlike in fee-for-service Medicare. Physicians also have more regulatory leeway with Medicare+Choice plans, including the ability to order home IV antibiotics and direct admissions to nursing homes.

Alliance has also aggressively pursued PPO contracts that now make up about one-third of its business. Unlike risk contracts, which are negotiated by its IPA, Alliance negotiates its own fee-for-service contracts. The group has boosted the value of its PPO contracts between 15% and 20% over the past three years by terminating all contracts and negotiating better rates.

"We did that with two or three contracts every year and put about 5% of our patient population at risk," said Dr. Serota, who negotiates the contracts himself. "We lost a few contracts along the way, but a couple came back at much better rates." As a result of better contracts and adding providers to the group, Dr. Serota said, Alliance's revenue has been growing about 20% a year.

The California market, however, continues to be turbulent. Just last month, Alliance learned that two of its biggest Medicare HMOs—one from PacifiCare Health Systems and another from Aetna Inc.—are pulling out of the market, closing their commercial HMO products as well.

In addition, CalPERS—the state's biggest employer—will next year start moving enrollees to Blue Shield. Together, these developments could affect about 25% of Alliance's patient population. While Dr. Serota doesn't think the group will lose patients, he expects a three-month disruption in capitated payments until health plans notify the group about which patients are covered.

To tide the group over, Alliance intends to rely on credit lines—another advantage that bigger groups have over smaller practices. As HMOs in California continue to melt down, Alliance's near-term strategy is "to wean ourselves off the HMO market," Dr. Serota said. An offshoot of that evolution may be the end of the IPA model that once flourished in the state.

"The IPA may be running its course in terms of being a useful instrument," Dr. Serota said. "There may not be a role for IPAs in a couple of years unless they can reinvent themselves."

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Down payments as signing bonuses?

The three groups profiled—Beacon Health Alliance, which is part of Memorial Health Partners in Chattanooga, Tenn.; Arizona Community Physicians in Tucson; and Alliance Medical Group in Pinole, Calif.—have all enjoyed contracting advantages and practice efficiencies from getting bigger. But they have had very different experiences when it comes to recruiting new physicians.

Both Beacon and Arizona Community are sensitive to antitrust issues, so they are trying to grow slowly. Beacon's recruitment "is by invitation only," said Collin G. Cherry, ACP-ASIM Member, and one of Beacon's founders. Across the country in Tuscon, Arizona Community's Michael I. Fuchs, ACP-ASIM Member, said that the group has a waiting list of area physicians who want to join.

Alliance Medical Group in northern California, however, faces a radically different situation. The group's president, Martin L. Serota, ACP-ASIM Member, said the group is now "down" two internal medicine positions—thanks in large part to the region's exorbitant real estate.

One of the group's biggest competitors recently upped the ante by offering potential recruits $100,000 interest-free loans for a down payment on a home. Unfortunately, Alliance may have to follow suit in order to compete, Dr. Serota said. "If a new doctor doesn't honor the agreement, I don't want to be in the loan collection business," he said.

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