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


'The Philadelphia Story'

When the might of managed care clashes with 250 years of history

From the March 1997 ACP Observer, copyright 1997 by the American College of Physicians.

By Deborah Gesensway

Some institutions in Philadelphia continue to reflect the historic city's Quaker heritage, which esteems equality, condemns vanity and values success over fame.

Health care is one such domain. Some even credit this basic conservatism as key to the area's 246-year-old tradition of fine medical care. "Philadelphia medicine is very good medicine, but it really isn't bandwagon kind of medicine," said local internist Bernard J. Kravitz, ACP Member. "We are not the trendsetters. Strange things that have come and gone [in other parts of the country] have never come here."

But now managed care is shaking to its core the inherently cautious culture of the Delaware Valley's health care industry, the region's largest and most prosperous economic sector. New vertically integrated health systems are coalescing around the city's dominating academic health centers. Hospitals, which for a century or two had been willing to share patients with other neighborhood hospitals, are gobbling up doctors they hope will, in turn, refer exclusively to them. And, hospitals are joining with other hospitals to avoid being consumed themselves. Everyone wants to be strong enough to be the last one standing after all the consolidation, cost-cutting and competition runs its course.

In the world of managed care and integration, Philadelphia got a late start. Analysts date the modern Philadelphia health care story, particularly as it relates to physicians, to Jan. 1, 1994, the day internists Paul Rogers, MD, Joel Eisner, FACP, and their colleagues in private practice in the western suburb of Phoenixville metamorphosed into employees and became the first group of physicians to sell to the University of Pennsylvania Health System.

At 25 doctors, the Phoenixville group was already one of the largest practices in the region, and Dr. Rogers said the group figured it could have grown to 50 on its own. "But we would have to have gone into debt," said Dr. Rogers, who is now senior medical director for Clinical Care Associates (CCA), Penn's community-based, primary care physician network. "Rather than go into debt, we said now is the time—if we can get the right partner."

In the three years since the Phoenixville group sold to Penn, an additional 185 primary care physicians joined CCA. Nearly every other hospital system in the area has also followed suit. "It's been just non-stop, a merry-go-round between Penn buying practices, Allegheny buying practices, every other hospital trying to buy practices," said Joan Roediger, JD, LLM, of The Health Care Group in Plymouth Meeting, Pa. "Everybody is trying to do something to strengthen their position in terms of staying afloat."

Buying, not merging

For the most part, what everybody is doing is selling. Unlike other managed care markets, Philadelphia has relatively few doctors merging and re-emerging as bigger physician-owned groups or building independent practice associations.

Why is there such a frenzy to buy and not merge? Leon S. Malmud, MD, president and CEO of Temple University Health System, attributes it to raw competition. "If there is excess capacity, it means someone is not going to survive," he said. Figures estimate that there are one-third too many hospital beds. Philadelphia has the sixth highest physician-to-population ratio in the nation. And the number of specialists is particularly high. The Dartmouth Atlas of Health Care estimates that for every 100,000 Philadelphians, there are 168.5 specialists. Nationally, that figure is 121.7 specialists for every 100,000 individuals.

Perhaps more than any other institution, academic hospitals have recognized the implications of such oversupply. Dr. Malmud said that Temple's decision to purchase primary care practices and several community hospitals, for instance, was made so that competitors can't run the North Philadelphia hospital and medical school out of business. "We painfully and recently learned how unreliable it is to have even a long-term relationship with a provider who may be bought up by a competitor and taken away from us," Dr. Malmud said, referring specifically to rival Allegheny's acquisition of St. Christopher's Hospital for Children. "It was our affiliate since 1947, and within eight months of acquisition [by Allegheny], a letter was sent to us terminating our relationship."

The insurance industry—and the unquestionable power of large HMOs—is also driving this heightened state of competition and the resulting integration. Two locally-headquartered companies— Keystone, which is owned by Independence Blue Cross and Pennsylvania Blue Shield, and U.S. Healthcare, now Aetna/U.S. Healthcare—cover about 85% of all privately insured Philadelphia-area residents. While neither owns any health facilities or employs physicians, both contract with nearly all area hospitals and doctors.

The two insurance giants have worked hard to lock up their hometown and have managed to keep other insurance companies, including those that have been successful in other markets, largely out of the area. They have also not been shy about threatening to ruin providers who suggest competing for their managed care business.

It's a lesson that Philadelphia's physicians learned first hand last year when Blue Cross threatened to stop sending patients to any facility owned by the Graduate Health System. Doctors perceived that threat as punishment for Graduate's decision to work with a California-based HMO that was looking for a foothold in the area. Late last year, after severe financial problems, Graduate turned over control of its hospitals and physician network to Allegheny.

"For the doctors, integrated delivery systems have meant a great fear of the future. Think about those doctors at Graduate who were suddenly faced with losing their Blue Cross contracts," said Donald Kaye, MACP, president and CEO of Allegheny University Hospitals. "I think doctors are afraid because they realize that the contracts are going to systems."

Unique factors

Another factor that's moving physicians to sell and not merge with each other is the local business community. David B. Nash, FACP, director of health policy and clinical outcomes at Thomas Jefferson University Hospital, explained that Philadelphia lacks a strong, united business community that could actually encourage the type of integration in which physicians are viewed as equals, not just commodities to be bought and sold. He said that in the Midwest, for instance, well-organized business cooperatives are looking to contract directly with physician groups, which tends to prompt doctors to merge into large multispecialty group practices rather than to sell to hospitals.

That's not the case in Philadelphia, Dr. Nash said, because "health care is the biggest business here." One out of every eight private-sector jobs in the region is in health services, accounting for 14% of the total private sector payroll, according to the Pennsylvania Economy League. During the early 1990s, when the Delaware Valley's total employment base was shrinking by nearly 2% a year, health services grew 4%. The region is home to nearly 100 hospitals, including 24 teaching hospitals and five medical schools. The University of Pennsylvania, including its health system, is the region's single largest private employer.

In addition, Philadelphia faces a unique situation in which the real movers and shakers in the health care sector also lead the large academic health centers. In fact, many agree that it took the arrival of a few visionary out-of-towners to shake up the way that business is done in the area. The two names that are most often mentioned: William N. Kelley, MACP, head of the University of Pennsylvania Health System, who began the physician-buying frenzy, and Sherif S. Abdelhak, head of Allegheny University of the Health Sciences, who spearheaded the process of acquiring and consolidating hospitals and medical schools.

Demographics have also played an important role in the city's sluggish embrace of integration. Pennsylvania has the fourth largest senior population in the country, according to Jerry Katz, president of Katz Consulting Group, a local health care consulting firm. As long as seniors remained in traditional fee-for-service Medicare, he explained, providers could always count on a somewhat more generous source of reimbursement to offset the deepening discounts they were giving the managed care plans. As a result, few felt financially squeezed enough to consider the kinds of integration that began appearing five to 10 years ago in other parts of the country.

Nearly overnight, however, all that has changed. Medicare risk plan enrollment in the Philadelphia area now tops 26%, up from 13% at the end of 1995. East of the Mississippi, the only state with greater Medicare HMO penetration is Florida, according to a Physician Payment Review Commission report issued last year.

And while all doctors and hospitals are finally beginning to cope with the cost-cutting aspects of managed care, academic health centers are the most prepared to do so. In part, it's be-cause of academic medicine's tremendous clout in Philadelphia. No other city of 1.5 million people boasts such a proportion of academic medical centers, particularly centers that have dominated the market in both profit and prestige. Over the years, Philadelphia's big guns of academic medicine have been able to demand—and receive—higher payment rates from insurers precisely because of their power and prestige.

One result, according to John R. Ball, MACP, president of Pennsylvania Hospital and former ACP Executive Vice President, is that the city's academic hospitals are in a strong position to guide integration. "They've got bigger war chests," he said.

In addition, the sheer presence of so many large academic medical centers in one area gives the Philadelphia health care market a feel that is not found in other areas. "It's pretty clear we're becoming a region of four or five competing systems, built around the academic health centers," said Glen Shively, a Philadelphia-based partner in the national consulting firm of Coopers & Lybrand.

Many systems, one strategy

While each of these systems has a unique character that depends in part on the personality of its leaders, each also seems to be pursuing essentially the same strategy.

Philadelphia's health systems have watched and learned as others around the country have slashed their fees to retain HMO patients. Instead, they are trying to make themselves indispensable to the HMOs a different way—by cornering a significant share of the market. They are buying primary care physicians, creating management services organizations and networks to align still more doctors who can feed their facilities, and they are purchasing small community hospitals.

"We knew that unless we developed an integrated system, the only way we could keep a flow of patients was to drop the prices lower than everybody else," explained Penn's Dr. Kelley. "But in that case we would go out of business because the prices were so low."

These systems are shifting more of the focus of their teaching programs to primary care, using their new community networks for office-based teaching and asking their academic doctors to increase productivity. A goal for all is to secure a solid enough base of clinical care in the community to support their educational and research missions.

Allegheny is an interesting case in point. The birth of the health system giant followed a gestation across the state that began in Pittsburgh. The leaders of Allegheny General Hospital, a large tertiary care hospital in Pittsburgh, felt that their longtime academic partner, the University of Pittsburgh, was keeping them from starting training programs they felt they needed to remain competitive.

"You could have a hospital system that has nothing to do with education or research, but in our opinion, in the long run, that is not going to be successful," said Dr. Kaye. "In order to be successful, we feel you have to be on the cutting edge, and to be on the cutting edge, you have to be involved in research and education."

So Allegheny turned its sights across the state to a small medical school with a small hospital—the Medical College of Pennsylvania (MCP), where Dr. Kaye had been chairman of internal medicine—that had come to believe that joining with a partner would be key to a successful future. Buying MCP, which was originally founded by Quakers in 1850, led eventually to a buyout of Hahnemann medical school and hospital and the eventual merger of the two medical schools. Now you can hardly drive through a Philadelphia neighborhood without noticing the red, white and blue Allegheny banners and billboards.

"Life has changed, and now you have to be of a certain size and certain geographic spread and have enough physicians in the community who are identified with you in order to be recognized as successful," Dr. Kaye said. By achieving a certain size, he said, the system can cope with shrinking revenue sources and still make major investments in the medical school and primary care network. "We are able to be all things to all people," he said.

At the moment, however, each of the developing systems is immersed in the tricky problems of putting their organizations together. None is yet at the point of attempting serious reengineering of how their doctors practice, but experts say it's in the offing—and that doctors' lives are bound to be changed even more when this begins.

At Penn's network, for instance, Dr. Rogers explained that the first step is recruiting new physicians and adding more capacity to see new patients in their already busy practices. "That takes a year or two to digest," he said. "Then we are going to be improving a lot of the practices by enlarging them or by moving them to a neighboring area with growing room." And for a few of its practices, Penn is already experimenting with changing internists' schedules by having one person assigned to make hospital rounds for an entire group for a week at a time.

"We're finding that the most challenging thing is to change the hospital coverage system because it's not efficient for every doctor to see his patient in the hospital everyday, and hospital performance is not as good either," Dr. Rogers said.

Also for the first time here, consultants say they are hearing of non-board certified physicians being excluded from managed care panels. Dr. Kravitz, whose practice was sold to a local hospital last summer, said he's learning that just the idea of reporting to a boss takes some adjusting to. He is reminded of that every week when he fills out a time card.

Consequently, observers of the Philadelphia health care scene are predicting that even greater upheaval and more turmoil lie ahead. In some ways, the revolution has just begun. As Jefferson's Dr. Nash said, Philadelphia "hasn't reached the pain threshold yet, meaning bed closures and physician underemployment. That's coming."

Phialdelphia health care: a look at the top players' strategies

Allegheny University

Physician strategy: Allegheny has purchased about 450 physician practices, creating the Allegheny Integrated Health Group (AIHG), to feed its growing stable of hospitals, to win risk contracts and to have a training outlet for students and residents. This is in addition to the health system's 1,000-member faculty. When it assumed control of Graduate Health System last year, Allegheny also acquired Graduate's 110-member community doctors' network, Founders Health Care Inc. To increase its prestige, the system recently began hiring top-name researchers and scientists from other universities and has started the region's first public health program.

Hospital strategy: Allegheny has gone from owning one hospital in Pittsburgh to acquiring several city and suburban community hospitals, including a major children's hospital in the city. When Allegheny last year took over management of Graduate Health System, it took on four more hospitals. The system now has its eye on several community hospitals across the river in New Jersey.

In their own words: "What we're talking about doing is establishing a national, as well as a local, image in research, education and clinical care. We've invested enormously in educational and research programs, recruiting world-class researchers. This takes a lot of money, which is another important reason why we have to be large. If you are a small medical school with one hospital, you can't go out and spend millions and millions recruiting researchers," said Donald Kaye, MACP, president and CEO of Allegheny's hospitals and of AIHG.

Jefferson Health System

Physician strategy: Although Jefferson has purchased some primary care physician groups, its strategy is to convince physicians to commit themselves through more loosely structured agreements including management services and physician-hospital organizations. Jefferson has created the Jefferson Health Network, made up of 250 primary care physicians from Jefferson's PHO and another 120 primary care physicians from a suburban health system. The network brings together both community and employed physicians into one contracting organization owned and governed jointly by the doctors and hospital.

Hospital strategy: The system was formed in 1995 when Thomas Jefferson University combined operations with a hospital system in the affluent western suburbs. Since then, the system has announced mergers and affiliations with a number or other hospitals throughout the region. Although Jeff has been criticized for not having a unified business plan, the system remains profitable and successful.

In their own words: "We have always been an organization where there has always been a very strong volunteer physician group and an organization where there never has been a single individual in control of the whole organization. Our approach is that democracies are the ones that stick around," said Stanton N. Smullens, MD, CEO of Jefferson Health Network and Jefferson's PHO.

Temple University Health System

Physician strategy: Temple Physicians Inc. now manages about 100 practices—most of them primary care—that the system has purchased. Temple, which employs more than 300 full-time faculty, is also starting several other physician management and equity organizations that will allow physicians to participate with an equity position in profitable practices without selling. A management services organization is also now getting off the ground.

Hospital strategy: Temple has pursued a strategy of acquiring hospital partners that may otherwise have gone to a competitor. While Temple University Hospital is closing some beds in its adult wards, the system is building a new children's hospital next door to its main hospital in North Philadelphia.

In their own words: "Temple University Hospital is the single largest provider of unreimbursed and under-reimbursed care in the commonwealth of Pennsylvania. This has taken us to the point of bankruptcy on more than one occasion, the last time being about 10 years ago. We decided at that point that the best thing we could do to continue to provide for all our patients and to support our dual mission was to continue to provide that care to the community but also to build up our revenue base by providing tertiary care services to patients who could afford it to help us cost-shift," explained Leon S. Malmud, MD, the system's CEO.

University of Pennsylvania Health System

Physician strategy: Penn's central strategy has been to purchase primary care physicians throughout the region, saying that anything less than ownership won't allow for a truly integrated system. These doctors, now part of Clinical Care Associates, number about 200 in more than 70 offices. Some of the 650 faculty academic physicians, meanwhile, are being assigned to staff new suburban satellite clinics as well as work on campus. The health system has also set up a management services organization for non-affiliated community physicians.

Hospital strategy: In addition to its traditional training affiliates and formal arrangements with five community hospitals, Penn has recently begun buying hospitals in both the city and the suburbs. Most recently, plans were announced to develop a "tight corporate affiliation" between the nation's first medical school, Penn, and the country's first hospital, Pennsylvania Hospital.

In their own words: "Our strategy is to joint venture, if you will, with every HMO in the region, and to take on full-risk contracts. But to have a full-risk contract, one has to have a large primary care population of physicians, which we didn't have. ... We have to have patients flowing through our organization because patients are critical to our educational programs and they are critical to our research programs. You can't teach primary care in an empty exam room and you can't teach neurosurgery in an empty operating room," said William N. Kelley, MACP, the system's president and CEO.

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