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

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Why bigger really is better

Smart strategies for internists in tough markets

From the May 1995 ACP Observer, copyright © 1995 by the American College of Physicians.

By Edward Doyle

For years internists have been hearing that when it comes to integration bigger is better. But speakers at this year's Annual Session went one step further and described how alliances and mergers are being formed--and how physicians are being affected.

Baltimore-based practice consultant Richard Tomkins, FACP, explained that for group practices trying to prosper in markets where capitation is thriving, alliances with other physicians and medical organizations such as hospitals are critical. These alliances can not only provide the capital that groups need to buy computer systems and open satellite clinics, he said, but they allow physicians to take a bigger chunk of the health care premiums paid by patients and employers.

Dr. Tomkins explained that if a payer collects $43 million in health care premiums ($144 a month from 30,000 people), it will give roughly $36 million to a group that provides all physician and auxillary services. The group that provides only specialty and primary care, on the other hand, will receive roughly $22.3 million, while the group that provides only primary care services will be left with just $6.5 million, about one-fifth the income of the practice that provides a full range of patient services.

The best way to get more of those premium dollars, Dr. Tomkins said, is to form groups that have a strong primary care focus and include a combination of internists, pediatricians, family physicians and obstetrician-gynecologists. "You can't provide the services for an entire population unless you have this mix," he said.

And while he was quick to point out that getting more of those patient premium dollars does not automatically translate into additional profits, Dr. Tomkins emphasized that larger practices have the chance to profit on items that other organizations now profit from, such as prescriptions and ancillary services. "You want to be near the top of the feeding chain to get more of that premium," he explained.

Managing risk

But forming the group to win capitated contracts is only the first step. In order to profit from capitation, Dr. Tomkins said, physicians in these large groups must understand the incentives of capitation and adjust to a fiscally conservative style of practice.

The Sharp Rees-Stealy Medical Group, a 285-physician group in San Diego that gets about 85% of its revenues from capitated contracts, has adopted two strategies to make its managed care business profitable. First, the group pays its physicians using capitated formulas, not salaries, and it carefully tracks physicians' use of resources and measures patient satisfaction rates.

Donald Balfour III, FACP, Sharp's president and medical director, explained that the group stopped paying its physicians salaries and switched to capitation about two years ago. To create its pay scale, Sharp took physicians' earnings for two years and arrived at an average income level for each physician. Administrators then put the salaries of specialists into separate pools and the salaries of generalists in another pool. Physicians in each department were allowed to split the money among themselves as they wished.

Specialists tend to split money from their pools evenly, Dr. Balfour said, while primary care physicians are typically paid according to the number and types of patients they see. Patients are adjusted for risk based on age and sex (physicians get a higher capitation rate to see a 60-year-old woman than a 29-year-old man); the group also pays a significantly higher capitation rate to physicians who care for AIDS patients.

The move to capitation, Dr. Balfour explained, has made the group's physicians more fiscally responsible. Each department can hire additional physicians to lighten its work load, for example, but the money to pay additional salaries must come from the department's pool. (The group will pay for additional staffing if the department is seeing enough new patients.) Conversely, if a physician leaves and the department's physicians choose to not replace that person and instead work harder, they pocket the savings.

In addition to revising its pay scheme, Sharp also began using a sophisticated computer system to track the satisfaction of patients and the services its physicians use. The group conducts its own patient surveys by phone and tracks complaint rates. It also tracks the number of patients physicians see each month, the number of consults and referrals they order and the dollar amount of hospital resources that physicians spend on patients.

When the going gets tough ...

In some of the toughest managed care markets, even the largest groups are finding that no amount of internal belt-tightening can compensate for another factor: competition from other organizations.

Virginia Mason Medical Center, a 315-physician group in Seattle, for example, recently controlled about 10% of the area's market, but competition was stiff and the group was not attracting enough new patients. So Roger C. Lindeman, MD, Virginia Mason's president and CEO, said the group had two options: "We could either grow ourselves or pick a partner."

The group chose the latter, allying itself with the local HMO Group Health Cooperative of Puget Sound. Dr. Lindeman said that the match is a good one because the two organizations complement each other: Group Health is known for quality primary care, while Virginia Mason is well-regarded for its tertiary care services.

The alliance's most obvious benefit is the boost that Virginia Mason has received in tertiary service referrals from Group Health. In addition, both organizations share use of one of two Group Health hospitals, which has been renamed to include both organizations' logos. Two new joint subspecialty clinics are also in the works, and joint deals with two insurance companies have given the organizations 9,000 new patients.

While there has been no noticeable backlash from patients or the medical community, Dr. Lindeman said that the strategy is not problem-free. Group Health, for example, supplies the University of Washington with more than half of the academic center's cardiac surgery patients; Virginia Mason officials worry that taking those patients away from the university will cause strife among physicians. Dr. Lindeman also noted that Group Health is concerned that it may lose patients to Virginia Mason. In addition, antitrust laws mean that the two organizations have to be careful not to discuss pricing issues in any detail.

Academic solutions

Finally, these cutting-edge alliances are not only limited to profitable institutions; academic medical centers also are finding that they too must ally to survive.

In Boston, Massachusetts General Hospital realized it faced some hard choices. Because Boston has almost twice as many hospital beds per capita as nearby major markets and only three major payers, hospitals will need to either close or consolidate, said Samuel Thier, MACP, hospital president.

The result: Massachusetts General formed a partnership with the Brigham and Women's Hospital to consolidate resources and save money. Administrative areas such as engineering, finance and human resources were consolidated, producing $100 to $150 million in annual savings. But to save $250 million a year, the amount necessary to keep the two institutions afloat financially, the institutions will next look at consolidating areas of clinical practice.

Already, there is only one residency program for specialties such as ob-gyn, emergency medicine and medical pediatrics, Dr. Thier said. And soon, many of the two institutions' fellowship programs will be merged as well. In addition, new guidelines regulate the creation of any new service areas, and when service chiefs resign, their positions are scrutinized before being filled.

To encourage savings in the area of research, the institutions offered five $60,000 research grants. The catch: Only those projects that had co-principal investigators from each facility could apply. Nearly 200 researchers have applied, Dr. Thier said, creating new relationships between the two hospitals that he hopes will last regardless of whether they get the grants.

Another way that the two institutions hope to remain alive is by creating a primary care network that would attract more patients and provide the system with referrals. The Boston area has been divided up into nine regions and primary care physicians are being recruited to join the network. Almost 200 physicians from outside of the city have already joined the network; another 70 from the city have joined. The long-term goal is to bring in 900 physicians as part of the network.

But Dr. Thier noted that while such partnerships may make good fiscal sense, he worries about their effects on medical education and treatment of the indigent. In Boston, academic medical centers typically charge 25% to 30% more than other hospitals, in large part to cover the expenses of teaching. And Dr. Thier said that academic medical centers care not only for the sickest patients, but also the poorest; nationally, 10% to 12% of hospitals care for half of the nation's indigent.

The Massachusetts General-Brigham alliance has also come up with a creative way to address how to fund medical education. In order to join the primary care network, Dr. Thier said, physicians have to agree to give up between 3% and 4% of their capitation rates. The amount will go to fund the institutions' teaching and research missions.

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