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


In the country's best bull market, many in medicine feel left behind

From the April 2000 ACP-ASIM Observer, copyright 2000 by the American College of Physicians-American Society of Internal Medicine.

By Edward Martin

The first few months of the new century have not been good ones for the business of health care.

First came the news in January that New England's Harvard Pilgrim Health Care is near bankruptcy, with losses of nearly $200 million for 1999 and questionable cash to take it through this year. More recently, the business pages have been filled with dour news about an even bigger health plan, Aetna U.S. Healthcare, which saw its stock plummet from $100 to under $40 a share.

While few physicians are misty-eyed that large health plans are in deep financial straits, the news has not been much better for many doctors. Over the last decade, physician pay has barely kept pace with inflation, and the practice environment has been ravaged by the interests of big business.

The news is particularly disturbing because it is so familiar. During the country's longest period of prosperity and economic expansion, large health systems have been brought to their knees, some academic medical centers are on the verge of financial ruin and the number of uninsured Americans continues to rise.

The stock market is booming and corporate America is raking in record profits, but much of health care feels left behind. And as the latest trouble at Harvard Pilgrim demonstrates, nonprofits and for-profits alike are being squeezed.

A number of factors are at work. Some health plans like Harvard Pilgrim have been criticized for cutting their prices too deeply to lock up market share, which has led to shortfalls. Other large systems and HMOs have suffered after making questionable business decisions and overextending their resources.

As the bull market is midway through its 10th year, physicians, health care executives and financial analysts are in unusual accord: Medicine has received less than its share of the munificence and far more than its share of turmoil. And perhaps more than anyone else, physicians feel they are at the bottom of that pile.

The market and for-profit medicine

The decade of the bull market has been one of dramatic ups and downs for medicine, according to J. Leonard Lichtenfeld, FACP, a Baltimore internist and executive vice president of, a San Diego-based Internet company that advises physicians on financial and management matters.

Dr. Lichtenfeld said medicine's immersion in corporate America began in the late 1980s. A year after a 1986 tax change discouraged previously rampant real estate speculation, 15 initial public offerings (IPOs), sales of shares to investors for the first time, raised $231 million for health services companies. "Suddenly, there was tremendous interest in the huge money spent on health care," he said, "and investors wanted a piece of that action.

Then, with the rise of the young bull market in 1991 and 1992, medicine's presence on Wall Street exploded, with 76 IPOs raising $3 billion for health care companies. Investors were particularly captivated by the emerging genre of physician practice management companies. New firms like PhyCor Inc., based in Tennessee, and MedPartners Inc., based in Alabama, promised stockholders that they could manage medical practices more efficiently than doctors and expand revenues by streamlining services like lab testing and radiology.

This growing interest in medicine did more than raise money for health care concerns. It also started to transform what had long been a cottage industry into big business. Most HMOs were originally formed as nonprofits to improve access, minimize patient cost and expand preventive care. But in 1991 alone, nine of them launched IPOs that raised $328 million.

Today, seven of 10 managed care members belong to investor-owned HMOs, and four of 10 doctors work for someone other than themselves. More than 100 nonprofit Blue Cross and similar plans with assets of more than $13 billion, once considered "insurers of last resort," have converted to for-profit status.

The stock market had grand plans to save medicine from itself by driving down costs and increasing efficiency. For a while, the strategy appeared to have some success. Market pressures were credited with slowing medical inflation to single digits for the first time in years.

To be fair, the bull market has helped medicine in a number of ways. Plenty of physicians have watched their retirement investments blossom, allowing some to retire early. Investments of many nonprofit health care organizations have prospered as well. The $2 billion endowment of Massachusetts General and Brigham & Women's Hospital in Boston, for example, has grown as much as 30% a year. Such endowments, noted an American Hospital Association spokesperson, have enabled hundreds of hospitals to survive Balanced Budget Act cutbacks.

Market pressures have also been credited with slowing medical inflation, and the $20 billion that American pharmaceutical manufacturers spent on research in 1999 was one of the highest percentages of the drug dollar ever.

The 'food chain'

But those gains have not made up for losses, particularly when it comes to physicians. Larry Levitt, director of the nonprofit Changing Health Care Marketplace Project, a group funded by the Kaiser Family Foundation to examine the impact of Wall Street on medicine, offered an explanation of why physicians feel so hard hit.

It begins not with medicine, but with the employers who pay for two-thirds of the nation's health insurance. In the mid-1990s, Mr. Levitt explained, employers began to face fierce competition for investor dollars from Internet startups and technology companies. To improve earnings to attract stockholders, employers pressured health plans for lower costs. Health plans in turn passed the pressure along to hospitals, practice management companies and physicians.

"Unfortunately," said Mr. Levitt, "the primary care physician is at the bottom of the food chain."

Over the last 10 years, the Dow Jones Industrial Average has climbed from 2,365 on Oct. 11, 1990, to more than 10,000. While the overall stock market has risen 350% and high-flying companies like Microsoft have seen their stock rise 7,600%, average internal medicine compensation has risen 3.4% a year, from $100,850 to $141,147.

By comparison, economists estimate that inflation rose 22.3% over the last decade. At the beginning of the decade, physician pay was outpacing inflation, but AMA statistics show that by the middle of the decade, doctor income began an inflation-adjusted decline.

And if the pay situation isn't bad enough, health care's relationship with Wall Street has meant additional problems for physicians. Medicine's move to for-profit status has strained relationships between doctors and patients, and physician dissatisfaction by most measures is at an all-time high.

Nancy Cho, MD, considers herself an example of how the bull market is passing physicians by. The cardiologist in Vero Beach, Fla., treats a patient population that consists primarily of retired executives who have grown wealthy on investments. The practice where she works recently spent $1 million on renovations that reflect its patients' tastes: vaulted ceilings, wood floors, beveled glass windows.

While much of the country seems to be getting rich, Dr. Cho said she feels constant financial pressure. Reimbursement from Medicare and health plans have plummeted. She's even had bad luck on the market, and poor investments in biotechnology stocks have helped set back her plans to retire early to teach and practice in a public clinic with her husband.

Just to keep her business solid, Dr. Cho's practice has undergone some subtle changes. For example, she cements bonds with largely self-paying patients, including retired executives of some of the nation's largest corporations, by walking them to the door, calling them personally with results of tests and returning phone calls the same day.

The bull market has illuminated some disparities in her practice. A recent pro bono patient in heavy makeup sitting next to a well-dressed man in her waiting room reminded her of an inescapable disparity in Wall Street's period of plenty: while the rich have been getting richer, the ranks of the uninsured have grown by a million a year since 1990.

"She was a prostitute," Dr. Cho explained. "He was a former president of the New York Stock Exchange. The worlds collide in our office."

Worst yet to come?

Medicine's bumpy ride on Wall Street may not be over. In the latter part of the 1990s, consumers began to rebel against managed care restraints. At about the same time, medical costs began rising again. As a result, investors who had turned from real estate to medicine a decade earlier jilted medicine for Internet and technology stocks, creating havoc.

PhyCor and MedPartners, along with insurers like Oxford Health Plans Inc., suffered massive losses and diminished investor confidence. Investors realized that these companies had wrung out the easy, early cost savings from medicine.

High-profile scandals also damaged health care in the eyes of investors. The Allegheny Health Education and Research Foundation in Pennsylvania plunged into bankruptcy. And when the government charged Columbia/HCA Corp., the country's largest for-profit hospital owner, with fraud for inflated Medicare billings, its president resigned—with a $10 million severance package and $269 million in stock. The booming business of hospital consolidation was effectively halted.

Then, in 1999, Wall Street's love affair with medicine faded even further, when attorneys who had successfully sued the tobacco industry began similar class-action lawsuits against HMOs, contending they systematically injured patients by denying care. Lawmakers have also entered the fray, threatening patient rights legislation. Investors tend to shy away from this kind of uncertainty.

All the turmoil has some health plans rethinking their basic strategies of how to control costs. While physicians may rejoice at the notion that health plans are finally getting a taste of their own medicine, all of health care is suffering in the eyes of investors.

Besides limited exceptions such as outpatient dialysis and cancer clinics and pharmaceutical services, medical stocks that began the decade as darlings of Wall Street are virtual outcasts, said William Bonello, senior analyst with the Health Care Group of USBancorp Piper Jaffray Inc. in Minneapolis. A survey last fall of 94 of the nation's largest lenders ranked health care the least attractive of all business sectors, noting declining reimbursements, doctor discontent and managed care turmoil.

"Health care services have underperformed the market pretty dismally the last couple of years," added Mr. Bonello. "It has been one of the most out-of-favor sectors of the market." (Florida's Agency for Health Care Administration has a Web site that tracks health care stocks at

And there are signs that the situation may get worse. While market forces helped control medical inflation, a recent study by the employee benefits consulting firm William M. Mercer Inc. found that medical inflation began rising sharply again two years ago and finished at 7.3% in 1999.

Some experts worry about what might happen to health care when the bull market ends. Mr. Levitt fears excesses of for-profit health care will produce a backlash resulting in greater government intervention and more actions like pending class-action lawsuits against HMOs. In a presidential election year, talk is mounting of a Medicare drug benefit that could exert pressure on drug makers to restrain prices, chilling pharmaceutical stocks.

'A new, intense marketplace'

Even without the worst-case scenarios, financial turmoil in the health care industry will continue to mean trouble for physicians—and their patients.

When Alena Williams, MD, arrived at her office one morning last fall at Palmetto Physician Practice Services in Columbia, S.C., she was stunned to find her waiting room empty. One month after a nearly perfect evaluation and bonus, Dr. Williams was dismissed. The reason? She didn't build her practice rapidly enough, according to the recommendation of a financial consulting firm hired by her employer.

"An administrative assistant had fired my nurse and called my patients the night before and cancelled appointments," the 34-year-old family practitioner said.

A month later, the practice sent her patients a letter that misidentified her gender. "Dr. Williams is no longer with us," the letter said. "We wish him well in his future endeavors." Dr. Williams is now in private practice.

For physicians, today's world of medicine presents harsh new realities. "Doctors have always had to make a living, and it's not like money was ever absent from their relationship with patients," Mr. Levitt said. "But health care organizations have been thrust into a new, intense marketplace."

While issues like pay and job security are important, physicians are also concerned about the more subtle impact a profit-driven culture is having on medicine. Drs. Cho and Lichtenfeld both noted that declining reimbursements have forced increasing numbers of physicians to sell vitamins and perform procedures like cosmetic dermatology and hair removal to maintain incomes.

Near Dr. Cho in Vero Beach, a physician's hospital privileges were recently suspended after a patient went into ventricular tachycardia and the hospital staff couldn't locate him. He was allegedly busy running a restaurant he owns in the area.

Many doctors and economists believe such conflicts are increasingly inevitable in a health care economy in which investor-owned medicine is accountable to stockholders, not patients. When the news broke about Harvard Pilgrim, many people attributed at least some of the problems to the difficulty that nonprofit health plans have keeping up with for-profit counterparts.

At Harvard University, which is not affiliated with the health plan, internists Steffie J. Woolhandler, FACP, and David U. Himmelstein, FACP, have conducted research showing that nonprofit HMOs spend substantially more on patient care than for-profit plans—such as eye care for diabetics—putting nonprofits at a competitive disadvantage, particularly in an environment in which basic medical costs are again rising. The for-profits diverted gains to stockholders and administrators. "They're taking resources from patients and moving them to profits," said Dr. Woolhandler.

Managed care representatives and Wall Street analysts dispute charges that the corporatization of medicine hurts patient care. But Dr. Himmelstein has found that facilities owned by investors had significantly higher death rates and referred patients for transplants less often.

A decade after the bull market began, its impact on health care, believes Dr. Himmseltein, can be summed up in one word: awful. "Medicine," he said, "has been transformed from a human service to a business where the motto is, 'Buyer beware.' "

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

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