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


Corporate medicine's huge losses produce doctor layoffs, chaos

From the December 1998 ACP-ASIM Observer, copyright 1998 by the American College of Physicians-American Society of Internal Medicine.

Related article: Allegheny's failure sends shock waves through academia

By Edward Martin

In the third year of her contract with Oxford Health Plans Inc., Manhattan internist Margaret Lewin, ACP-ASIM Member, was going broke. Her patient load was booming, but the health plan was drastically behind in its payments.

As Oxford fell $140 million behind in payments to its New York physicians, she was forced to obtain a line of credit from her bank to keep her practice open. "Eighty percent of my patients came from Oxford, but I was getting only 20% of my revenues from them," said Dr. Lewin, 56, a primary care physician board-certified in oncology and hematology. "I literally had zero taxable income last year."

As financial turmoil engulfs health systems and managed care organizations nationwide, Dr. Lewin's dilemma is becoming all too familiar. What happens to doctors when the hospitals and corporations that own their practices go under, or when struggling health plans stay afloat by delaying or refusing to pay physicians they contract with?

Around the country, physicians who sold their practice or simply contracted with a sinking health system are struggling. In Raleigh, the 20 doctors who comprised the North Carolina Medical Associates recently found themselves in dire straits. When their group, $1.3 million in debt, declared Chapter 11 bankruptcy in August, the physicians had already been practicing without pay since June to avoid stranding 60,000 patients.

North Carolina Medical had originally sold to Pacific Physician Service Inc. in 1994, which then sold the practice to MedPartners Inc. in early 1996. The Birmingham, Ala., physician practice management company (PPMC) lost $200 million last year. That left some of the physicians out of work and stuck with noncompete and nonpiracy contract clauses that prevent them from practicing near their four former clinics or seeing former patients if they establish new practices, said J. Marvin McBride, MD, medical director of North Carolina Medical.

More commonly, however, physicians find themselves in situations like that of a Sacramento internist whose practice sold to Foundation Health Corp. in 1992. In July of 1996, after heavy losses, Foundation sold her practice and 32 others in northern California to FPA Medical Management Inc. for $200 million. The doctor, who asked not to be identified, had taken no vacation in order to accrue six months off for the birth of her first child. When FPA declared Chapter 11 bankruptcy in July of 1998, not only did she lose months of back pay, but also the time off she'd built up.

Dr. Lewin's case had a fairly similar ending. She was eventually able to collect much of the money owed to her after Oxford agreed to a mass arbitration agreement, one of the first in the nation. But even today, she remains leery of managed care contracts and prefers to treat self-pay patients or those who have a more liberal point-of-service option in their health plan that allows them to see physicians outside of the network.

Recipe for disaster

Analysts trace many of the current financial problems in managed care organizations to the early and middle 1990s. Doctors, reeling under burgeoning paperwork and deep discounts forced by managed care, sought an out by selling their practices. Hospitals, health systems and PPMCs obliged, typically paying between $200,000 and $400,000 per physician for physical assets and a salary based on prior earnings.

Hospitals and health systems expected to incur some losses from buying physician practices, but the theory was that they would recoup those losses in the form of increased referrals from those physicians. The losses, however, have been much larger than expected. A study from the Medical Group Management Association (MGMA) of the most recent data, for example, shows that hospitals and health systems lose $53,917 a year per salaried doctor, while physician-owned groups break even.

"Eighty-seven percent of hospitals that own physician practices are losing money," said Mark Kropiewnicki, JD, a medical practice attorney in Plymouth Meeting, Pa. "The other 13% are lying about it." Mr. Kropiewnicki's remark, made only partly in jest, reflects the financial upheaval in health care. For example, nearly 60% of HMOs lost money in 1997 for a total loss of $768 million, according to Weiss Ratings Inc. of Florida, which monitors the industry.

Mr. Kropiewnicki's clients include doctors who lost practices, or at best, will lose thousands of dollars in unpaid salaries and fees in the billion-plus-dollar bankruptcy of the giant Allegheny Health, Education and Research Foundation in Pennsylvania and New Jersey. The collapse of Allegheny, which in a decade had built an empire consisting of nine hospitals in the Philadelphia area and four in Pittsburgh, a medical school and practices employing 600 doctors, is the nation's largest failure of a nonprofit health care system.

Part of the problem has to do with physician productivity. "When you go from a two-, three- or even 20-physician practice to being just a spoke in a big wheel, it saps the entrepreneurial spirit and takes out some of the work ethic," said Bruce Johnson, a Denver-based practice consultant who works for the MGMA.

Harvey Spector, DO, a Philadelphia family practitioner with Allegheny, has seen how buyouts can affect physician productivity. Dr. Spector, 60, who has practiced at the same site for 34 years, will have to relocate because of Allegheny's collapse. "Our productivity actually improved after we joined Allegheny in 1991," said Dr. Spector, whose son, internist Larry Spector, ACP-ASIM Associate, works part time in the practice. "But I saw a lot of my peers sitting back and saying, 'Well, I'm on salary now. I don't have to work as hard.'"

But not all of Allegheny's problems were related to physician productivity. Ted Tapper, MD, had grown the pediatric practice he founded to three sites and a staff of 20 before selling to Allegheny in 1995. Dr. Tapper, 58, said that Allegheny officials offered him a six-figure salary with a five-year guarantee and promised that there would be no significant changes in how the practice was run or staffed. Only 18 months after selling to Allegheny in late 1995, however, he knew he was in trouble.

Allegheny required its practices to forward all bills to the system for payment. "In late 1997, we began getting cutoff notices saying our water, electricity, telephone and gas hadn't been paid," Dr. Tapper said. "We had become used to little amenities like that." Although he continued to receive his base pay, his bonuses grew smaller after the first year and then ceased altogether in the spring of 1998.

Allegheny had also agreed to pay Dr. Tapper $4,000 a month in rent for two of the practice's three buildings that he personally owned. By late summer, those checks were arriving two months late. When the last check arrived in September, Dr. Tapper deposited it the very next day. "I had it in the bank before noon," he said. "Just in case."

Many physicians say that even Allegheny's billing system was stacked against them. Critics claim that the health system tried to use software designed for hospitals to bill and collect for patient visits at group practices. "Allegheny would tell doctors, 'You only did X amount of visits,' but when we double checked, we'd find that they hadn't billed for half of the physicians' work," explained Mr. Kropiewnicki.

Problems with PPMCs

Health systems weren't the only ones caught up in the buyout frenzy. Practice management and ownership groups such as MedPartners, PhyCor Inc. and FPA raised billions on Wall Street by claiming they could wring huge amounts of waste from practices.

Bill Sandberg, executive director of the Sacramento-El Dorado Medical Society in California, traces the fall of San Diego-based FPA, once the nation's third largest PPMC, to questionable spending of investor capital. Particularly suspect was the $200 million purchase of Sacramento-area clinics from Foundation Health in 1996. "They went on a buying spree, which is exactly what PPMCs have been doing all over the nation," he said. FPA has since shut down more than 50 practices in California, Arizona, Texas, Nevada, North Carolina and Georgia.

Paul Handel, MD, a urologist and president of the Harris County Medical Society in Houston, said that FPA primarily operated as a contractual intermediary between health plans and doctors in Texas. Eight of the 13 University Medical Group clinics that it did own, however, are now closed. Physicians at those sites were let go.

Fearing the worst, doctors at other clinics managed by FPA quickly fled to Princeton Integrated Physician's Association of Houston. In August, however, a month after FPA declared bankruptcy, Princeton Health announced that it too was shutting down. More than 1,000 Texas doctors are still owed money by FPA; two physicians in Dr. Handel's three-member urology group are owed about $15,000 each.

The small print

In April 1996, four months before the troubled Foundation Health sold its physician practices to FPA, it abruptly laid off 20 doctors. That drove home a growing reality for the nation's employed physicians, who make up roughly 40% of U.S. doctors.

The problem for many doctors was that they had sold their practices to Foundation under "evergreen" contracts that seemed to guarantee employment. The small print, however, said that they could be terminated without cause—and with only three months of severance pay.

"We knew we were vulnerable," said Winni Loesch, MD, a Sacramento internist and former medical director of FPA Medical Group of Northern California. "Once it started going downhill, though, none of us could believe how quickly it went."

While the contracts contained blunt language about Foundation's rights to dismiss physicians, the clauses were easy to ignore in flush times. PPMCs seemed invincible and managed care companies like Oxford, fighting for market share, offered enticing deals.

Brian Van Linda, MD, a gastroenterologist in Hartford, Conn., said that many of his colleagues signed contracts with daunting clauses. "They can require you to deliver services, even if the HMO goes belly up," he said. "You're restricted from billing the patient directly, but you're also obligated to continue providing the service. The doctor becomes at risk for the financial viability of the managed care organization."

FPA owes $60 million to doctors in California alone, according to Jack Lewin, director of the California Medical Association. That figure includes money owed many physicians who traded practices for stock in FPA when it was $40 a share in October of 1997. By August of this year, it was worth 25 cents. Later that month, the stock was delisted by the New York Stock Exchange and it is now worthless.

Physicians will find that getting that money back is going to be difficult at best. "Contractually, the bankruptcy court here is forcing doctors to get in line with everyone else," said Rich Johnson, director of medical economics of the Texas Medical Society.

And in Philadelphia, Mr. Kropiewnicki said, "Doctors can put in their claim for the $20,000 or whatever they are owed, then get in line with 80,000-plus other people to get pennies on the dollar."

Some physicians, however, have benefited from such situations. Among them are many of the 270 employed physicians of American Health Network, the physician practice management arm of Anthem Health System, the Blue Cross and Blue Shield plan in Indiana and southern Ohio. After heavy losses, Anthem is fleeing the practice management business, and many of its doctors are negotiating buybacks.

In May, 212 of those doctors agreed to buy the network back from Anthem and retain its headquarters in Indianapolis, with a regional office in Columbus, Ohio. Separately, the southern Indiana division, which consists of 40 doctors, was acquired by Physicians Health Alliance. Financial and other details were not disclosed, but a spokeswoman for the network said that most doctors will remain in their old offices and retain their patients.

For many physicians, however, buybacks may not be an option. Most breakups are far messier, due to contracts almost invariably written to protect owners and health plans, even in bankruptcy.

Mike Heaton, a principal in Heaton & Eadie, an Indianapolis accounting and consulting firm that works with physicians undergoing buyouts and buybacks, said that some contracts offer doctors some protection, including "default parameters" that terminate the contract if, for example, the doctor loses his license or the owner becomes insolvent. "But you can't automatically assume that the physician has the right to get the practice back," he said.

As the Allegheny Health bankruptcy ground through federal court in Pittsburgh, some physicians learned their future quickly while others were left wondering. Dr. Spector's practice, always in the black, was quickly assigned to a so-called "A list" of practices scheduled to be bought, although with a renegotiated contract, by Tenet Healthcare Corp., which purchased the remains of Allegheny in November.

Those further down the list, however, face tougher prospects. "Bankruptcy allows the system to say, 'OK, we'll get rid of the bad contracts,' " said Mr. Kropiewnicki. New owners will reject contracts from doctors on "C" and "D" lists.

And while some may be free to set up shop again and keep the money they received when they sold, they may face restrictions. "They become free agents, unless they are locked out by noncompete clauses," said Mr. Kropiewnicki. "They won't necessarily get the assets back that they sold to the hospital. They're going to have to replace their practice, get their own staff and get their practices up and running again."

Charles Aswad, MD, executive vice president of the Medical Society of the State of New York, said that doctors in these situations face another inherent problem. "After selling and being absorbed into managed care, your practice—in reality, your patients—are no longer worth anything," he said. "They aren't yours anymore. They belong to a health plan."

The gloves come off

Norwalk, Conn.-based Oxford Health Plans Inc. did not employ doctors, but its contractual hold on many was nearly as tight as an employment arrangement. Like Dr. Lewin, many Oxford physicians spent much of their time treating Oxford patients for little to no money.

Jonas Goldstone, MD, one of 40 physicians at Mid-Manhattan Medical Associates, watched Oxford fall $400,000 behind in payments to his group. "They used all sorts of delaying tactics," said Dr. Goldstone, an internist who practices hematology and oncology. "But when it came down to it, they simply wouldn't pay."

As the complaints mounted in New York and Connecticut, medical societies in both states took up their members' cause. At first, they coaxed pledges from Oxford to pay its bills, but the health plan still did not pay.

According to Dr. Aswad, Oxford could stonewall doctors and state authorities because of a clause found in many managed care contracts: Doctors must arbitrate disputes with health plans rather than sue. "That's tedious and costly, and they know they can grind doctors down," said Dr. Aswad.

In February, the New York County Medical Society and others representing 25,000 doctors, filed mass arbitration proceedings against Oxford, claiming it owed New York doctors $140 million. "Doctors who reach the point where they're getting zero recompense face the terrible ethical dilemma of serving patients at a personal loss," said Dr. Aswad. "This isn't charity, it's theft. The health plan is taking premiums and stealing those services."

Three weeks after the mass arbitration was filed in New York, Oxford settled most of its back claims with Dr. Lewin. By then, however, she already had made a pivotal decision. Today, she tries to avoid managed care plans when possible. "Oxford made the decision easy," she said. "If you're losing five cents a widget, you're not going to get ahead by selling 10 times as many widgets."

Mid-Manhattan Medical doctors found their relationship with Oxford souring as well. They had invested $200,000 in a mammography clinic, under contract to the health plan. "Then they re-organized and just pulled the plug," said Dr. Goldstone.

The practice hired management consultants and took its case directly to Oxford, demanding about $400,000 in payments that were behind as much as a year. Oxford paid. "They leaned on them pretty hard for us, and that's an advantage of a large, physician-owned group," he said. "An individual practitioner wouldn't have had a prayer."

Nicole Reilly, a New York-based spokeswoman for Oxford, denied Oxford was forced into settlements with Mid-Manhattan, Dr. Lewin or other doctors. "The lawsuit had absolutely no impact on our willingness and ability to pay claims," she said. "We've improved our claims payments, and allegations like that are simply false."

In an interview and a prepared statement, Ms. Reilly and Oxford accused the coalition, consisting of the New York County Medical Society and 13 other societies, of exaggerating claims against Oxford. The doctors charged the company owes $140 million in back fees. Oxford said it owes less than $20 million in claims more than 60 days old.

In several other states, medical societies have gone to bat for their doctors, too. The Connecticut State Medical Society convinced lawmakers to pass a measure requiring managed care companies to pay doctors within 45 days or pay 15% in interest and penalties. The provision is scheduled to begin in January.

'Everything is dangling'

Physicians who are not part of a large group or don't have the force of a state medical society backing them up face a tougher time. "Will somebody else own my practice?" asked Dr. Tapper, the pediatrician whose practice was bought by Allegheny. "The second possibility is that no one will own it, and it'll be given back to me. Or third, I'll have to buy it back. Everything is dangling, nothing is on the ground."

By November, Tenet offered hope for physicians like Dr. Tapper, by agreeing to buy the crumbling system for $345 million. Jeffrey Barbakow, Tenet president, said his company expected to make the system profitable again although it is in such disarray it will take months to work out the details. Tenet will buy about 300 physician practices.

While physicians in Dr. Tapper's situation have several options (see "How to fight back when health plans refuse to pay"), many alternatives aren't appealing, particularly to older physicians who banked on practice equity for retirement. In the past, older physicians brought in a younger doctor for a few years and then sold the practice for retirement income. In that regard, hospital and PPMC ownership, with promised pensions that are now jeopardized by bankruptcies and revolving-door ownership, are changing the very heart of the physician practice life cycle.

"Many younger doctors have little sense of the legacy of medicine," said Houston's Dr. Handel, 55. "They are looking for employment situations, rather than the expense of hanging out a shingle and developing a practice in the traditional sense."

Mr. Sandberg from the Sacramento-El Dorado Medical Society said he has witnessed the same forces at work, noting that at least 80% of internists coming out of residency today aren't looking to be self-employed. "They know they'll never get out of their practices what they put into them."

Ed Martin is a freelance writer in Charlotte, N.C.

How to fight back when health plans refuse to pay

What can you do if your practice is at the mercy of a health plan that won't pay or is failing financially? Experts in practice law and finance say there are several options:

  • Hang on. "Doctors can weather the storm and look at where the system is going, in hopes it will turn around down the road," said Mr. Heaton. San Diego internist and entrepreneur Stephen Dresnick, MD, chief executive of FPA, has said that he expects a reorganized version of his company to emerge from bankruptcy in 1999.
  • Negotiate. PPMCs and hospital-owned practice groups getting out of the ownership business may ease noncompete or other exit restrictions and sell practices back to original owners for current market value. "A hospital that still wants you on its medical staff and wants your admissions tends to ease restrictive covenants," said Mr. Heaton.
  • Go to court. "Straight litigation is always a possibility," said Mike Heaton, a principal in Heaton & Eadie, an Indianapolis CPA and consulting firm. He pointed out that such a tactic is rare, even in egregious breaches of contract, because typical civil lawsuits can drag on for two to four years before they even reach court.
  • Throw in the towel. "Physicians can get out and go on with their life, which I'm seeing more often," said Bruce Johnson, a Denver-based practice consultant. The drawback is that doctors who return to solo practice are left vulnerable to the negotiating power of large health plans, which is why they sold in the first place. In Philadelphia, for instance, 80% of the managed care market is controlled by Independence Blue Cross and Aetna/US Healthcare.

Besides, even in disarray, physicians have a negotiable asset in patient loyalty, or what business analysts call "good will." In pricing practice assets, good will can amount to close to half of a practice's value.

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