Physicians Must Lead Local Organizations if Practices Are to Work, Panel Says

Conference Executive Summary
February 2, 1999

ASHINGTON, D.C.– While there are no established formulas for building successful physician organizations, a panel of health care experts brought together by the Center for Studying Health System Change (HSC) agreed January 26 that doctor groups will best thrive in a managed care environment if they are modestly sized, locally governed, physician-run and physician-owned.

Panelists David Blumenthal, M.D., J.D. Kleinke, and Jacob Kuriyan said that the recent struggles of for-profit physician practice management corporations (PPMCs) and hospital-based integrated delivery systems suggest that new strategies are needed in structuring the business side of medicine. Dr. Blumenthal is director of the Institute for Health Policy at MGH/Partners Health Care System, Inc. in Boston. Kleinke is chairman of Health Strategies Network, Inc., a consultancy in Denver. And Kuriyan is CEO of Physmark, an Albuquerque, N.M.-based information systems company.

The roundtable,Independent No More: How Effective Have Physician Organizations Been in Responding to Managed Care?, spotlighted the variety, in structure and success, of physician organizations around the U.S. through case studies from three HSC study sites. Community Hospitals Indianapolis is representative of multi-hospital systems that have purchased physician practices as part of a strategy to build a continuum of care and shore up a referral base in the primary care community. Harvard Vanguard Medical Associates in Boston is a multi-specialty group of about 600 doctors that recently spun off from a staff-model HMO.

Thomas-Davis Medical Centers, formerly based in Tucson and Phoenix, was an 80-year-old group practice that was acquired by two for-profit companies in four years and then dissolved when its parent, a PPMC, went bankrupt.

Dr. Blumenthal said that the role physicians play in successful physician organizations is still evolving, because doctors have been accustomed to near total independence and autonomy in their clinical practice. Doctors jealously guard that independence because they are uniquely accountable for the results, good or bad, of their interactions with patients. The organizational/managerial side of medicine has become more important as groups have grown in response to managed care, but to be legitimate in the eyes of the physicians, organizations need to be governed, as Harvard Vanguard is, by the doctors themselves.

Kleinke said that hospitals have often been guilty of not acknowledging the importance of physician leadership. They have too often pursued a "technocratic" approach to organizing doctors, he said, based on the premise that physicians could be motivated and controlled through compensation systems and productivity incentives. A better way would be to educate physicians in the techniques and demands of managed care, in tandem with a trend toward group-based capitation and group-based accountability. Today’s iterations of capitated arrangements have struggled, he said, because they are akin to "Version 1.0" of a new software program; many bugs have yet to be removed.

Kuriyan challenged a central tenet of the PPMC boom of the late 1990s – that physician groups need large amounts of capital to thrive and grow in today’s managed care marketplace. While it is true that physicians who want to "forward integrate" by launching an HMO need millions of dollars, the administrative support and information systems for a modestly sized IPA are affordable, he said. One implication is that physician groups do not have to be enormous to succeed. Kuriyan observed that hospitals like Community Hospitals Indianapolis have the ability to stitch disparate kinds of physician groups into a cohesive, cooperative system through a physician-hospital organization, if they give doctors ample input into governance decisions.

Other observations from the panelists included the following:

• Hospitals have lost money on physician practices, because often the price of acquiring those practices was bid up by competition from other health systems and PPMCs in a race to capture doctors in a local market. Nevertheless, hospitals remain a promising organizing force for physicians, given their access to capital and their place in the community structure.
• If physician groups are going to accept global capitation from health plans or employers, information systems need to be sophisticated enough to track costs, so that particularly costly patients, or profligate physicians, can be identified.
• Another important prerequisite to global capitation will be innovation in risk adjustment, so that groups of physicians who see sicker patients will be compensated appropriately.
• PPMCs probably had unrealistic expectations about the profitability of physician practice as a business. They often drove profits through growth rather than added value.

A transcript of the January 27 roundtable and the three case studies used in the discussion are available at the HSC web site, www.hschange.com. The conference was moderated by HSC President Paul B. Ginsburg and supported by background remarks by HSC Health Researcher Joy Grossman.

Health System Change – an independent research organization funded exclusively by The Robert Wood Johnson Foundation – provides objective, timely analyses about changes in the nation’s health care system and their impact on consumers to private and public decision makers. Health System Change, based in Washington, D.C., is affiliated with Mathematica Policy Research.