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


In bid to regain control (and income), physicians forming their own HMOs

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

By Deborah Gesensway

Every time Shawnee, Okla., internist Eldon V. Gibson, FACP, hears his Medicare patients talk about their fear that an HMO will make them change doctors, he is reminded why he has risked several thousand hard-earned dollars investing in a start-up HMO.

After all, the fledgling company he has invested in--with no expectation of a financial return on that investment, he adds--is no typical HMO. Instead, it is owned and managed solely by doctors. He is betting he and his fellow doctor-owners can manage care in a more patient- and physician-friendly manner. After raising more than $3 million by selling stock to members of the state's medical and osteopathic associations, PROklahoma Care was given its HMO license this fall and on Oct. 2 began marketing its health plan to employers in the state's most populous counties.

In Memphis, Tenn., general internist William C. Stewart Jr., ACP Member, has come to the same conclusion about the potential of physician-owned HMOs. He too has opened his wallet to back up his words, investing in 100% doctor-controlled MidSouth Health Plan, which was given its state certificate of authority on Oct. 30 and is now marketing its HMO product to employers and patients throughout Shelby County, Tenn.

"I didn't see how insurance companies do anything that I can't do myself, and instead of sending 20-25% of the premium back to Hartford or wherever, it can stay here in the community," Dr. Stewart said. "We have no hospital money in our plan. We have no insurance company money. Too much conflict of interest. Too many different goals."

What these internists have in common is that they are betting on a hunch that the American public, like many in medicine, is seeking an alternative to the Cignas, Humanas and HMO Blues of the world. From Maine to Louisiana, Florida to Washington state, physicians are joining a national trend that has been predicted by few: physicians not just merging into larger groups capable of negotiating better deals with health plans, but actually taking over the insurance functions themselves and contracting directly with employers, Medicaid and other payers.

A year ago, Towers Perrin, one of the nation's largest management consulting firms, surveyed state medical societies and found that more than half either were in the process of or were actively considering developing a physician-sponsored managed care network. And today, consultants say, as Congress considers allowing "physician-sponsored networks" to contract directly for Medicare's HMO patients, interest continues to rise, with the initiatives no longer issuing only from state medical societies. According to the Washington, D.C.-based Group Health Association of America, which represents HMOs nationwide, about 15% of existing HMOs are "provider sponsored," which means they are owned either by doctors or doctors and hospitals together.

"Almost every interested party in health care--including the doctors--is now trying to get in the direct line of the medical dollar," said Anthony M. Kotin, ACP Member, national practice leader for clinical effectiveness at Towers Perrin in Chicago. "To the extent that they can get the premium directly, it obviously puts them in the best position to profit the most or at least control their own destiny."

Says Gary Brown, MD, a Philadelphia ophthalmologist spearheading the drive to raise $16.5 million from physicians to finance Pennsylvania Physician Healthcare Plan, "You have to fight fire with fire. ... We can form our physician organizations (POs), but unless physicians are on an equal playing field, unless we can create multibillion dollar organizations trying to control medicine, we will lose. We think POs can help, but long term, we think we should have POs contracting with our own insurance companies."

This movement, say adherents like Dr. Brown, has taken on almost a religious fervor. Its believers are emotionally charged, filled with a spirit of righteousness that drives them to fight the force of for-profit health corporations, which are doomed, they pray, by their seven-digit CEO salaries and 30% administrative costs. The believers' credo: He who pays the piper calls the tune.

"It's the golden rule. He who has the gold rules," says Thomas J. Garvey, president of the Garvey Group in Merrick, N.Y., a consulting firm that has specialized in helping physicians set up statewide, doctor-owned and controlled HMOs. "I'm approached by physicians all the time who want to do networks, large groups. I say to them that the Garvey Group does not organize doctors to hand over large amounts of their cash flow to managed care organizations. Just because you have a network and you contract with someone doesn't mean that you are in control of your cash flow."

As Mr. Garvey preaches, this strategy is the only alternative to physicians becoming employees--actually or de facto when 30% of their income derives from one HMO. "I believe this is the only way to preserve the private practice of medicine," he says.

Risky business

The intensity of participants' belief aside, these investments are not a sure thing. A decade or so ago, another rash of doctor-owned HMOs started up; few succeeded or survived, the victims primarily of undercapitalization and unprofessional management. "It's risky business," said Dr. Kotin. "That's our biggest word of advice to people trying to do this: You've got to have your eyes wide open when you go into it, not just think you can do it cheaper. The reality is you still have to learn a different way of practicing and a different way of managing."

The doctor-owned plans started simply to preserve the status quo of private, fee-for-service practice--the ones that might call themselves HMOs but that really have not embraced the idea of managing care--are not likely to survive, said Robert C. Bohlmann, senior management consultant for the Medical Group Management Association's consulting service. "The differential will be those organizations that get themselves structured so that they can make a difference," meaning controlling use of services, access to specialists and fat in the system.

If these new organizations can do that, Mr. Bohlmann said he thinks they may be onto something. "The employers are getting less than enamored with what the commercial health plans are. I think developing direct contract arrangements is going to be the wave of the future."

"If Plan A and Plan B cost [employers and other payers] the same thing and offer the same benefits, they would much rather have a physician-controlled company than a corporation outside the realm of medicine controlling the quality of medical care," said PROklahoma Care's Dr. Gibson.

In Midland Park, N.J., Henry Rosin, MD, a head and neck surgeon, opened his checkbook last year to buy shares in Physician Healthcare Plan of New Jersey, which got its state HMO license to operate in five North Jersey counties in September and will start providing health care to patients on Jan. 1. That plan, which raised $17.5 million and now has a network of 3,550 participating doctors and 60 hospitals, Dr. Rosin says, will be a different kind of animal than the typical HMO operating today.

"We are not protecting the status quo. We are doing exactly the opposite. We are doing managed care. But we are doing a different kind of managed care," Dr. Rosin said. Now the chairman of the health plan's board, Dr. Rosin expands on that point: "The kind of managed care that we see around the country primarily is profit-driven managed care. We're interested in medical-driven managed care."

What does that mean? By guaranteeing that administrative costs will be kept to between 11% and 15%-not the 20-30% of many commercial HMOs today-Dr. Rosin says the plan will be able to first reduce premiums and then improve physician reimbursement.

Also, he says, there will be no toll-free numbers to call for preauthorizations, except if the doctors themselves decide that particular procedures require that scrutiny. There will be no termination of physicians' contracts "without cause"; the doctors will know exactly why they are dropped from the network, he said, and that will come only after attempts are made to educate the doctor to practice according to the decisions of the health plan's member-doctors.

To be part of the network, he continues, physicians will have to pass a strict credentialing process, but board certification will not be mandatory. Patients who live across the street from a hospital will not have to travel cross-county to another hospital just because the plan negotiated a better deal there. Utilization review and quality assurance will be designed and run by physicians and will focus on the 8% of physicians who tend to be outliers. The plan will not pay physicians by capitation because, he said, he thinks it "puts the patients and the doctors in competition for the health care dollar."

Moreover, Dr. Rosin said, the HMO--once it runs a profit--is planning to fund special educational endeavors in primary care, encouraging its physicians to do research in primary care, educate providers, write guidelines and recommend priorities.

"Nobody we know of is doing anything like this to the degree we intend to," Dr. Rosin said. Without HMOs like Physician Healthcare Plan in the market, he said, there is no impetus for doing anything but making money. But to compete now, he added, other HMOs will have to do what they should have been doing from the start.

In Washington state, that effect has already begun, said James A. Peterson, president and CEO of Unified Physicians of Washington Inc., which received its license as a health care service contractor on Sept. 15 and will start operating its HMO in 13 Washington state counties on Jan. 1. Although many physician groups in his area have discovered they like taking full capitation from insurance companies, the HMOs have started backpedaling from giving doctors such complete control over care and profits. He explains that when United Physicians said it would give the full cap to all physician groups who wanted it, other HMOs in the state countered by saying they would match anything United Physicians did.

"We're not seeing ourselves as having to take over the marketplace to be influential," Mr. Peterson said. "All we have to do is be in the marketplace and be creative." To start up, United Physicians, which is sponsored by the Washington State Medical Association, raised $6.8 million from physicians in the state. The average investment was $3,000. Internists made up the fourth largest group of investors, ranked by specialty (after family physicians, orthopedic surgeons and anesthesiologists). As a group, they invested less than many smaller specialty groups, including orthopedic surgeons, family physicians, ob/gyns and radiologists.

Can they compete?

Many of these new health plans have been, by and large, the product of medical specialists and not primary care physicians, which leads some skeptics to question their ability to compete. In response, many of the new HMOs say their doctors are not naive about what it takes to succeed in the marketplace and consequently have limited the number of subspecialist providers in their networks. For example, on New York state's Long Island, MDLI Healthcare--a physician-owned and directed health plan that won its state HMO license Nov. 8 after raising $10 million from about 2,000 doctors in Nassau, Suffolk and Queens counties--only those physicians who bought stock in the first 60 days of its offering were guaranteed a place in the network. After that, specialists in areas where the business plan showed there were too many of those kinds of doctors were excluded from the panel. Any primary care doctors who meet credentialing requirements can join. The doctors also chose to set their fee schedule lower than many competitors, banking on the hope that they can raise it later once the plan proves to be successful.

At the same time, however, MDLI senior vice president Jay Kossman said the health plan has been designed to allow patients to self-refer to 12 different popular specialists. "They can't go to a neurosurgeon without a referral, but when someone wakes up in the morning with blurred vision, he can go directly to an ophthalmologist," he said.

The point, he said, is that physicians designed this plan, that it is a case of doctors regaining control of the practice of medicine. "Our position is that when an employer pays a premium, they are paying it for health care. They are not paying a premium for no care. And that's what many of them are getting today: no care," Mr. Kossman said. "The dollars that are being taken out of health care are being diverted to corporate profits and corporate perks and seven-figure executive salaries. I don't think this is what health care was intended to be. A few people are making a lot of money to the detriment of patients and doctors and hospitals."

MDLI already has signed an agreement to provide the managed care benefits for Long Island's largest employer, the Diocese of Rockville Center. Access to these patients was gained in part by allowing the diocese-owned Catholic Health Care Network of Long Island to buy one-third ownership in MDLI. Mr. Kossman said he thinks MDLI will succeed in part because the Long Island HMO market does not yet have much managed care penetration.

Many business analysts agree that start-up HMOs will probably not succeed in the most competitive U.S. markets. While consulting in Florida recently with some physicians who were thinking of starting their own plan, Mr. Garvey said, he was told by several HMO executives that if doctors attempt to compete with them, they should expect retaliation. He interpreted this as not only meaning underbidding the start-up plan to sew up market share but also perhaps kicking doctors who support such an agenda out of their network panels.

In fact, some areas of the country have become so competitive that even the granddaddies of the movement are struggling to survive.

For example, the doctor-controlled HMO, Connecticut's M.D. Health Plan--by all accounts a success in its market since starting up eight years ago--was bought this summer by California-based Health Systems International. Market analysts have been quoted as saying the plan did not have enough capital reserves to compete with the new HMOs entering the market.

Meanwhile, in the Chicago suburb of Aurora, Ill., the physicians at Dreyer Medical Clinic, a privately-owned, 104-physician multispecialty group practice that started its own HMO in 1984, are struggling with whether they should sell all or part of their HMO to an insurance or physician practice management company.

"We became a victim of our own success," explained John Potter, Dreyer's president. "We're not sure a niche player really can remain effective in a large metropolitan area like this because some of these insurance companies have amassed unbelievable amounts of money." HMOs in markets like his, he said, are going to employers and saying they will cut their premiums significantly and guarantee those low rates for several years. "They are subsidizing this strategy, assuming a small HMO has no ability to outlast them. We don't have the deep pockets to survive that." Mr. Potter wonders if any of the new startups--particularly those in competitive managed care markets--can have experiences different than his.

Partnering with or selling out to a bigger system would allow the clinic to survive, but at what cost to its character? Without doubt, Mr. Potter said, Dreyer has been more patient-friendly than other HMOs, particularly because all claims processing and utilization review was done locally by clinic staff and doctor-led committees.

"There's a big concern that we will lose that character," he said. "But there are the financial realities."

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