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

Tuesday, October 6, 2015

Mergers and management--health care has been here before

We've been here before. Well, sort of. The gradual consolidation of physician practices into large multispecialty groups and integrated delivery systems is not a new concept. The U.S. health care industry underwent a similar transformation 20 years ago. The difference is that last time we were probably ill-equipped to handle things.

Let's start with a little history. Health insurance as we know it was blueprinted after J.F. Kimball's hospital insurance plan for teachers at Baylor University in 1929, a model that birthed the Blue Cross plans. And while health insurance grew in scope and complexity over the next 50+ years (notably with the national wage freeze during World War II and Medicaid and Medicare being signed into law in 1965), it was the 1980s and 1990s that saw legislation and changes that molded the health insurance industry into its current state.

Prior to the 1980s and 1990s fee-for-service medicine—the more one does in terms of volume, time, and complexity, the more one gets paid—essentially was unchecked. The result was a health care industry that emphasized volume with little regard or incentives for quality, efficiency, or service. This in essence led to overutilization of the system on the part of physicians, organizations, and consumers alike.

In an effort to rein in costs, the health insurance industry saw increased Medicare and Medicaid regulation and the maturity of managed care. Soon Health Maintenance Organizations (HMOs) and concepts such as diagnosis related group (DRG) payments and capitated payment models—where a fixed amount of money per patient per time unit is paid prospectively to physicians to cover patient care—started to replace the traditional fabric of fee-for-service medicine. As further complexity and uncertainty of payment reform loomed, physicians and hospitals alike found themselves looking to equip themselves with appropriate administrative expertise and economies of scale. Out of the need for physician practices and hospitals to manage the business of increased regulation, varying complex payer contracting, and the growing concept of population health management, physician practice management (PPM) companies were born.

Prevalent in the 1990s, PPM companies were management corporations that provided administrative support and financial management of physician practices in exchange for percentages of income or revenue. More specifically, practices and medical groups acquired by PPM companies received instantly increased economies of scale, which aided in improved contact negotiations and consolidated purchasing discounts; administrative manpower and expertise to manage the growing complexities of health care; streamlined operations; improved telecommunications; and access to capital for practice expansion. PPM companies also usually purchased the assets of physicians groups, from practice equipment to accounts receivable, and non-physician employees became employees of PPM companies. Physicians retained practice and clinical autonomy, continuing to have control over medical policies and physician personnel matters. In exchange, PPM companies collected somewhere around 20% of practice net incomes, and service contracts were set for 30 to 40 years.

PPM companies primarily grew through physician practice and medical group acquisitions. Other substantial sources of revenue included capitated contract earnings, improved practice margins, and same-clinic growth. By 1997, there were over 30 publicly traded PPM firms. The 2 undoubted leaders in this space were Birmingham-based MedPartners and Nashville-based Phycor. MedPartners was a multispecialty PPM company, had over 10,000 affiliated physicians, and yielded $2.5 billion in revenue and $134 million in net income in 1996. Also a multispecialty company, Phycor had over 12,000 affiliated physicians and earned revenues of $766 million with a net income of $36 million in 1996. This success was relatively short-lived however, and PPM companies were essentially non-existent by the early 2000s.

So … what happened???

One could argue that the lack of sustainability of PPM companies was the result of a concept that was too far ahead of its time. Rephrased, PPM companies lacked the technological capabilities and infrastructure to successfully function long-term. These firms by and large did not have the expertise of managing conglomerates of medical practices. In addition to being tasked with attempting to transform physicians (a long-time autonomous profession) from entrepreneurs to employees, PPM companies had difficulty getting physicians to maintain their levels of productivity once employed. The relationships between physicians and their PPM companies thus often times became strained.

The larger, multispecialty PPM companies also discovered that there were frequently incongruent strategic goals and priorities amongst different medical specialties. Furthermore, with increasing complexity and growth also grew higher corporate overhead costs. Many PPM companies subsequently found themselves in situations where it was difficult to make meaningful profit margins. Strapped for capital, PPM companies began to dissolve contracts and divest physician practices. Not surprisingly, Wall Street caught wind and began to abandon these companies that they had poured money into just several years prior. By the late 1990s, many PPM companies found themselves in financial peril. MedPartners announced it was leaving the PPM company industry in 1998, and Phycor filed for restructuring through chapter 11 bankruptcy in 2002.

Fast forward to 2015.

U.S. health care is again an environment with a myriad of reforms, guidelines, and regulations. While health care is still predominantly provided in a fee-for-service manner, both commercial and government insurance programs are placing an increasing emphasis on value over volume. That said, physician practices are finding themselves in a place where assessing patient characteristics and health outcomes has become paramount for revenue.

Possessing a comprehensive, well-functioning electronic medical record has grown from being an asset to a necessity and is now one of the largest operational costs a medical practice can have. Additionally, having administrative support that can not only manage technology, but that can also efficiently manage billing, coding, and contracting, has become a must. Physician practices, especially in primary care, have thus found themselves in a place where larger economies of scale are necessary to function appropriately and to yield a profit of any kind. The American Medical Association reports that only 17.1% of physicians are in solo practices, down from approximately 23% in 2007/2008. Also, in 2014 50.8% of physicians were practice owners, and 25.6% were in practices with at least some hospital ownership. In 2007/2008, these numbers were over 61% and only 16.3%, respectively.

Physician practices and hospitals alike continue to merge and form alliances as we trudge through this period of uncertainty in U.S. health care. Even for practices that remain solely physician-owned small businesses, it is not uncommon for purchasing and insurance contracting to be done in conjunction with other physician practices in the form of independent physician associations (IPAs). Individual hospitals are becoming parts of hospital systems, and it is becoming rare for non-concierge primary care practices to not have some sort of affiliation with a health care system. Large health care integrated delivery systems are now frequently amongst the largest (if not the largest) employers in major metropolitan areas throughout the country.

This trend does not seem to be slowing down any time soon as healthcare reimbursement reform steams ahead. In comparison to 20 years ago hospital systems and large multispecialty medical groups now have the expertise, technology, and leverage to acquire, manage, and grow medical practices. However, we should remain cautious and careful in this period of mass acquisitions and mergers, as one should not ignore that we have essentially been here before.

Kenneth G. Poole Jr., MD, MBA, FACP, practices medicine in Scottsdale, Ariz.

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Members of the American College of Physicians contribute posts from their own sites to ACP Internistand ACP Hospitalist. Contributors include:

Albert Fuchs, MD
Albert Fuchs, MD, FACP, graduated from the University of California, Los Angeles School of Medicine, where he also did his internal medicine training. Certified by the American Board of Internal Medicine, Dr. Fuchs spent three years as a full-time faculty member at UCLA School of Medicine before opening his private practice in Beverly Hills in 2000.

And Thus, It Begins
Amanda Xi, ACP Medical Student Member, is a first-year medical student at the OUWB School of Medicine, charter class of 2015, in Rochester, Mich., from which she which chronicles her journey through medical training from day 1 of medical school.

Ira S. Nash, MD, FACP, is the senior vice president and executive director of the North Shore-LIJ Medical Group, and a professor of Cardiology and Population Health at Hofstra North Shore-LIJ School of Medicine. He is Board Certified in Internal Medicine and Cardiovascular Diseases and was in the private practice of cardiology before joining the full-time faculty of Massachusetts General Hospital.

Zackary Berger
Zackary Berger, MD, ACP Member, is a primary care doctor and general internist in the Division of General Internal Medicine at Johns Hopkins. His research interests include doctor-patient communication, bioethics, and systematic reviews.

Controversies in Hospital Infection Prevention
Run by three ACP Fellows, this blog ponders vexing issues in infection prevention and control, inside and outside the hospital. Daniel J Diekema, MD, FACP, practices infectious diseases, clinical microbiology, and hospital epidemiology in Iowa City, Iowa, splitting time between seeing patients with infectious diseases, diagnosing infections in the microbiology laboratory, and trying to prevent infections in the hospital. Michael B. Edmond, MD, FACP, is a hospital epidemiologist in Iowa City, IA, with a focus on understanding why infections occur in the hospital and ways to prevent these infections, and sees patients in the inpatient and outpatient settings. Eli N. Perencevich, MD, ACP Member, is an infectious disease physician and epidemiologist in Iowa City, Iowa, who studies methods to halt the spread of resistant bacteria in our hospitals (including novel ways to get everyone to wash their hands).

db's Medical Rants
Robert M. Centor, MD, FACP, contributes short essays contemplating medicine and the health care system.

Suneel Dhand, MD, ACP Member
Suneel Dhand, MD, ACP Member, is a practicing physician in Massachusetts. He has published numerous articles in clinical medicine, covering a wide range of specialty areas including; pulmonology, cardiology, endocrinology, hematology, and infectious disease. He has also authored chapters in the prestigious "5-Minute Clinical Consult" medical textbook. His other clinical interests include quality improvement, hospital safety, hospital utilization, and the use of technology in health care.

Juliet K. Mavromatis, MD, FACP, provides a conversation about health topics for patients and health professionals.

Dr. Mintz' Blog
Matthew Mintz, MD, FACP, has practiced internal medicine for more than a decade and is an Associate Professor of Medicine at an academic medical center on the East Coast. His time is split between teaching medical students and residents, and caring for patients.

Everything Health
Toni Brayer, MD, FACP, blogs about the rapid changes in science, medicine, health and healing in the 21st century.

Vineet Arora, MD, FACP, is Associate Program Director for the Internal Medicine Residency and Assistant Dean of Scholarship & Discovery at the Pritzker School of Medicine for the University of Chicago. Her education and research focus is on resident duty hours, patient handoffs, medical professionalism, and quality of hospital care. She is also an academic hospitalist.

Glass Hospital
John H. Schumann, MD, FACP, provides transparency on the workings of medical practice and the complexities of hospital care, illuminates the emotional and cognitive aspects of caregiving and decision-making from the perspective of an active primary care physician, and offers behind-the-scenes portraits of hospital sanctums and the people who inhabit them.

Gut Check
Ryan Madanick, MD, ACP Member, is a gastroenterologist at the University of North Carolina School of Medicine, and the Program Director for the GI & Hepatology Fellowship Program. He specializes in diseases of the esophagus, with a strong interest in the diagnosis and treatment of patients who have difficult-to-manage esophageal problems such as refractory GERD, heartburn, and chest pain.

I'm dok
Mike Aref, MD, PhD, FACP, is an academic hospitalist with an interest in basic and clinical science and education, with interests in noninvasive monitoring and diagnostic testing using novel bedside imaging modalities, diagnostic reasoning, medical informatics, new medical education modalities, pre-code/code management, palliative care, patient-physician communication, quality improvement, and quantitative biomedical imaging.

Informatics Professor
William Hersh, MD, FACP, Professor and Chair, Department of Medical Informatics & Clinical Epidemiology, Oregon Health & Science University, posts his thoughts on various topics related to biomedical and health informatics.

David Katz, MD
David L. Katz, MD, MPH, FACP, is an internationally renowned authority on nutrition, weight management, and the prevention of chronic disease, and an internationally recognized leader in integrative medicine and patient-centered care.

Just Oncology
Richard Just, MD, ACP Member, has 36 years in clinical practice of hematology and medical oncology. His blog is a joint publication with Gregg Masters, MPH.

Kevin Pho, MD, ACP Member, offers one of the Web's definitive sites for influential health commentary.

MD Whistleblower
Michael Kirsch, MD, FACP, addresses the joys and challenges of medical practice, including controversies in the doctor-patient relationship, medical ethics and measuring medical quality. When he's not writing, he's performing colonoscopies.

Medical Lessons
Elaine Schattner, MD, FACP, shares her ideas on education, ethics in medicine, health care news and culture. Her views on medicine are informed by her past experiences in caring for patients, as a researcher in cancer immunology, and as a patient who's had breast cancer.

Mired in MedEd
Alexander M. Djuricich, MD, FACP, is the Associate Dean for Continuing Medical Education (CME), and a Program Director in Medicine-Pediatrics at the Indiana University School of Medicine in Indianapolis, where he blogs about medical education.

More Musings
Rob Lamberts, MD, ACP Member, a med-peds and general practice internist, returns with "volume 2" of his personal musings about medicine, life, armadillos and Sasquatch at More Musings (of a Distractible Kind).

David M. Sack, MD, FACP, practices general gastroenterology at a small community hospital in Connecticut. His blog is a series of musings on medicine, medical care, the health care system and medical ethics, in no particular order.

Reflections of a Grady Doctor
Kimberly Manning, MD, FACP, reflects on the personal side of being a doctor in a community hospital in Atlanta.

The Blog of Paul Sufka
Paul Sufka, MD, ACP Member, is a board certified rheumatologist in St. Paul, Minn. He was a chief resident in internal medicine with the University of Minnesota and then completed his fellowship training in rheumatology in June 2011 at the University of Minnesota Department of Rheumatology. His interests include the use of technology in medicine.

Technology in (Medical) Education
Neil Mehta, MBBS, MS, FACP, is interested in use of technology in education, social media and networking, practice management and evidence-based medicine tools, personal information and knowledge management.

Peter A. Lipson, MD
Peter A. Lipson, MD, ACP Member, is a practicing internist and teaching physician in Southeast Michigan. The blog, which has been around in various forms since 2007, offers musings on the intersection of science, medicine, and culture.

Why is American Health Care So Expensive?
Janice Boughton, MD, FACP, practiced internal medicine for 20 years before adopting a career in hospital and primary care medicine as a locum tenens physician. She lives in Idaho when not traveling.

World's Best Site
Daniel Ginsberg, MD, FACP, is an internal medicine physician who has avidly applied computers to medicine since 1986, when he first wrote medically oriented computer programs. He is in practice in Tacoma, Washington.

Other blogs of note:

American Journal of Medicine
Also known as the Green Journal, the American Journal of Medicine publishes original clinical articles of interest to physicians in internal medicine and its subspecialities, both in academia and community-based practice.

Clinical Correlations
A collaborative medical blog started by Neil Shapiro, MD, ACP Member, associate program director at New York University Medical Center's internal medicine residency program. Faculty, residents and students contribute case studies, mystery quizzes, news, commentary and more.

Interact MD
Michael Benjamin, MD, ACP member, doesn't accept industry money so he can create an independent, clinician-reviewed space on the Internet for physicians to report and comment on the medical news of the day.

PLoS Blog
The Public Library of Science's open access materials include a blog.

White Coat Rants
One of the most popular anonymous blogs written by an emergency room physician.

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