Independent No More:

How Effective Have Physician Organizations Been in Responding to Managed Care?

Conference Transcript
January 27, 1999

MR. GINSBURG: I am Paul Ginsburg, and I would like to welcome you to this conference on physician organization and how they function in a world of managed care. This is the first of three conferences the Center for Studying Health System Change will be putting on this year.

The background is that many, certainly I, believe that they key to improving quality and limiting cost is the practicing physician, and many, and I also subscribed to this, have the notion that physicians will do better in this environment if they are part of a physician organization that supports them and influences how they practice.

But last year there have been a rash of well-publicized problems about physician organizations. Probably most notable have been the troubles of the physician practice management companies, which have--many of them have actually left the scene. In site visits that the Center does, we often talk to hospitals who report the tremendous problems they are having in trying to integrate the physician practices they have purchased or the physicians that they employ into the delivery of effective medical care.

So we thought this is an opportune time to look at the various types of physician organizations. We want to look at their objectives. We want to look at the characteristics that are thought to predict success or failure, and then look at the prospects for these organizations in the near future.

Many of you have been here at Health System Change conferences before, so I won’t say a lot about what we do, but we do have a mission to inform public and private decision makers about changes in the health care system and the effects of those changes on consumers. The core of our approach is through gathering data, both through surveys and site visits, in a representative sample of communities and tracking these communities over time.

More and more we have chosen our conference topics to be topics where things that we have learned through either our surveys or our site visits can add something to the conference. You will see today’s conference is very much tied in, in particular, with our site visits, because these are issues that come up frequently and we are continually gathering information on them.

I would like to introduce the panelists and begin. All the way on the left is David Blumenthal, who is Director of the Institute for Health Policy at the Massachusetts General Hospital, which is a division of the Partners Health Care System in Boston. David is, in addition to directing this research institute, is a practicing physician at the Mass General Hospital. He is a general internist. In addition, he is a faculty member at the Harvard Medical School, and in the past he has been a hospital administrator and a staff member in the United States Senate.

Jacob Kuriyan is the CEO and President of Physmark. He is an expert in management information systems, and he and his company assist provider organizations in meeting the challenge of accepting risk and delivering quality care in a cost-effective manner. He has advanced training in physics, and he is formerly a fellow with the Institute for Advanced Study in Princeton.

Then me.

J.D. Kleinke is Chairman of the Health Strategies Network, Inc. He writes on many health care topics, and his book, "Bleeding Edge: The Business of Health Care in the New Century," was published earlier in 1998. He is known to many of us for his leadership of HCIA, which is a publicly traded provider of information products to health care organizations.

And closest to me is Joy Grossman, who is a researcher at Health System Change and has been with us since our inception in 1995. Her specialties are the structure of local health care markets and market variation in managed care. She is a member of the team that is doing the site visits in 12 communities, and she has played a key role in the design of the Community Tracking Study physician and employer surveys. She also co-moderates with me our regular roundtable discussions with Wall Street analysts.

I would like to review the agenda for the meeting. After I complete these remarks, Joy is going to give a brief presentation on a framework for understanding physician organizations. My sense of what she is going to do is, she is going to give us the basic framework to bring us all up to the level at which we can have a high-level discussion with the panelists with her, so that we can go at a higher level.

The next step is presentation of scenarios that were prepared about three physician organizations that were found in our 12 sites, and these scenarios will be presented by the panelists, who didn’t write them, but they will be bringing to you the highlights that they perceive from these. We chose these scenarios to represent a wide range of experience, and we deliberately have a failure as well as success in there, and a hospital-driven system as well as a physician group-based system.

Then we will go to the moderated portion of the discussion, where I will be asking questions to the panelists and they will be answering them, and adding, and arguing with each other for truth of information or whatever. The panelists have seen the questions in advance, so that they have had time to reflect on them, and hopefully the questions will be useful in stimulating discussion.

Then we will take a break in the middle, and at the end of the session before we break, I will try to summarize the main points that have come out of the discussion, and then I will be turning to the audience for questions to the panelists. That will be the official end of the meeting, after those questions, but the panelists will be able to stay until about 12:30 to answer informally your individual questions.

So let me proceed to introduce Joy Grossman.

MS. GROSSMAN: Thanks, Paul.

When I was asked to take 10 minutes or less to discuss physician organizations, I sat back and thought a little bit about the old adage that if you have seen one IPA, one MSO, you have seen exactly one IPA or one MSO. I decided that I would try to actually accomplish this presentation by not using any acronyms at all, which is probably a first in health care.

And so I wanted to point out to you that in the materials you got there is, behind the agenda, there is a copy of the slides that I will be presenting. Then behind that are the written-up scenarios that the panelists will be presenting, and then tucked away behind that is a glossary of terms. So if anyone isn’t familiar with what these organizations are, you can refer to them throughout the conversation.

I am going to be discussing a little bit about the forces that are driving changes in physician organizations and some of the key characteristics of these organizations, and then focus in on the objectives in forming them and some of the challenges that are being faced in trying to achieve them. As Paul mentioned, this is really a backdrop to the rest of the discussion today which will get into these topics in much more detail.

Purchaser pressures to control premiums and the related growth in managed care has resulted in a battle for the control of the premium dollar among health plans, hospitals and physicians.

Even with the growth in managed care, it is the case that physicians continue to play the key role in controlling the flow of patients through the delivery system, so that any entity that is interested in trying to control the premium dollar needs to be able to come up with appropriate incentives to try to influence physician behavior.

It is also important to note the pressures for broad networks and specialist access has complicated these efforts to try to influence physician behavior.

The interest in trying to influence physicians has resulted in efforts to "control" physicians through purchasing practices, consolidation and integration of those practices. This really requires a new model for how to organize physician practices.

In our Community Tracking Study survey, as of 1996 40 percent of physicians still reported being in solo or two-physician practices. But this aside, there has really been a tremendous change in the landscape in terms of physician organizations.

These organizations have tended to become larger and more formal, and they have either replaced existing structures or have been overlaid on top of them. They have expanded the scope of services they provide. The traditional practice really focused on patient care and related administrative tasks like billing. Newer organizations need to address managed care contracting, medical management, et cetera.

One of the important things to note is, in a traditional practice physicians took out any earnings at the end of the year as income. But with the goal to try to provide this broader range of services, this requires financial investment in the practice.

Well, as I said, I am going to try to avoid using any acronyms here, but we know that there is a large variation in the types of physician organizations that are out there. This is true both within and across markets.

It is also the case that multiple arrangements can be used by a single entity. And as you will see when the scenarios are presented, we have some good examples: for example, one single hospital entity that used four or five of these different structures to try to influence physician behavior.

So I wanted to try to focus in on some of the key characteristics of these types of organizations, and the first set relates to the structure of the arrangements. First of all, is it physicians only who are involved, or are there non-physician entities, be they plans, hospitals, investors, or other types of entities or organizations?

Second, how is this arrangement structured? Is it an ownership arrangement or a contractual one? Jamie Robinson and others have referred to this as "vertical versus virtual."

Thirdly, what exactly is it in this organization? Is it the physical assets of the practice that are in this organization? How are physicians related to this organization? Who holds the managed care contracts?

Next, who capitalizes this organization and how much money do they put into it?

And, lastly, what is the degree of exclusivity in these arrangements?

The next important set of characteristics relate to the role of physicians, and here I am going to reorder the slide a little and just focus on two key points: One, are physicians--do they have an equity interest? Are they owners, or are they employees? And how are any financial gains or losses shared with physicians?

And then, second, who controls decisionmaking at the management level, and then how are physicians included in the process of actually running the organization day-to-day? As an example of that, if you think about medical management, you can ask, are physicians involved in the management decision to impose certain medical management techniques? And, secondly, are they involved in the process of developing them and implementing them?

Other distinguishing features include size, and here we have the really basic question raised by what is going on in the market today: Is bigger better? How big is too big?

What services are covered in this organization? Is it a single specialty organization or multi-specialty? Are ancillary services included?

And, lastly, geographic spread: Is this a local organization, or is this--does this have a larger geographic spread?

While the structure of physician organizations is pretty complex, the objectives I think are much more straightforward, and they can be boiled down into three main objectives. The first is to leverage the patient base that physicians have in negotiations for a slice of the premium pie.

A second objective is to try to control cost through gaining efficiencies, and these can be efficiencies related to the operation of the practice. Here I kind of throw into that bucket, managed care contracting, administration purchasing, those kinds of activities. And then there are clinical efficiencies that relate to medical management.

I think the last key objective is access to capital to be able to fund growth in the organizations, to integrate them, provide data systems, et cetera.

While the objectives are pretty straightforward, trying to achieve them is less so, and I think that will be the bulk of our discussion today. There has been, as Paul mentioned, a lot of bad press about physician practice management companies, hospitals losing money, physicians being very unhappy with the changes they face.

I think the recent experience suggests, first of all, that operational and clinical efficiencies are very difficult to achieve, and there is a lot of complexity involved in this and a lot of experimentation going on. One of the key issues, I think, is that this added administrative layer may cost more than the benefits it yields, and I think that remains to be seen.

There is also the issue of pressure for short-run gains, and I think the focus of the attention here is on Wall Street and their demands for quarterly earnings, but I think the question is broader than that. In order to try achieve operational and clinical efficiencies, there is clearly a lot of investment that needs to take place up front, but it may be that the benefits take more time to come about.

The question is, what players in this market, what entities have the capital to invest and also the time to ride it out and to see the benefits? The question is, is that hospitals? Are there other physicians or other investors that have that kind of capital?

The next issue is that there have been a lot of reports that the buy-out of physician practices has reduced physician productivity, and this is in part not just because they have lost their equity interest but also because it has often not been replaced with new compensation methods that provide appropriate incentives for physicians. Again, from our Community Tracking Study physicians survey, only about 16 percent of physicians reported in 1996 that their compensation was dependent on profiling results. That is one example.

It is clearly the case that as our organizations get larger and more formal, that we need different governance structures to run them. And as I said, there have been a lot of reports that physicians are unhappy with sort of the MBA model of management.

At the same time, there aren’t a lot of physicians who are trained to manage. It is also the case that where there may have been a strong organizational culture, when organizations are taken over or restructured, often that management retires or otherwise find themselves in a difficult position and the original culture of this organization comes undone.

Given the challenges that these organizations face, I guess the major question for our panel is going to be,"What works best?" I just wanted to point out that the trade-offs and the challenges really vary significantly by the types of strategies that are implemented, and as an example I wanted to talk about the IPA.

Because this a network of existing physician practices, it is much easier to get it up and running. It requires less capital up front, and you can achieve a larger geographic spread much more easily than, for example, the typical large group practice. At the same time, however, these organizations lack the kind of potential for cohesiveness and culture that allow a more uniform administrative approach and to put things like medical management and financial incentives in place.

So there are really a lot of varying strengths and weaknesses of these different types of strategies, and they will play out very differently in different markets.

So to sum up, I just want to say that it is clear that the market is in transformation as people experiment with these different structures. Ultimately the goal is to try to balance these organizational objectives with physician satisfaction, both with respect to the professional satisfaction and income.

I think it is going to be the goal of the panel today to try to shed some light on the question of where is the capital and management expertise going to come from and how will these goals be achieved.

MR. GINSBURG: Thank you very much, Joy.

If I could turn now to Jacob Kuriyan, who will tell us about Community Hospital in Indianapolis.

MS. GROSSMAN: Can you hear me? Good morning. I am going to be talking, introducing you to one of the sites that HSC has been surveying. It is the Community Hospitals in Indianapolis, consisting of four hospitals serving a nine-county region, approximately 270 primary care physicians and I am sure at least three times as many specialists in that area.

What we are going to be talking about are different models of physician organizations that are participating in the delivery of care. Another way of looking at it is looking at the various phases, the economic phases that these organizations are facing.

I would say that the Community Hospitals in Indianapolis is what I would call either a living organization or maybe going to do some major reengineering. David will be talking about the Harvard group, which is more like I would say a reengineered organization or a resurrected organization. And J.D. will be talking about a group that is really a dead organization. So you will get a flavor of all the three things that are happening in the delivery of care.

What is interesting about the Community Hospitals is that they have actually followed some of the fads in the marketplace, which is acquiring physician practices without quite understanding why they are acquiring it--because of the fact that the neighbor may acquire them, you just go and buy them out--and then finding out that in the process, that these practices don’t generate the kind of returns that they expect in most investments.

But they have set up some very interesting ways in which the physicians can work within the organization, either as employees or as independent entities contracted with the organization. They brought a lot of uniformity into it by having a specialty--two different groups called MedPrime, which is the primary care doctor group, and SpecPrime, which is the specialty doctor group, and these contract with their major organize--the--an entity called Indianapolis ProHealth. I’m sorry, there are a lot of names in these things.

Essentially this is the main hospital group contracts with the HMOs, and the specialists and the primary care doctors contract separately with these two entities, and the hospital has its own relationship also. What is really nice about it is, they brought all the primary care, the specialists, and the hospitals together. They are not adversarial. They seem to be working together, which is an incredible achievement in itself.

And they are willing to try ways by which they can include choice. One of the biggest complaints in managed care is that our patients don’t get a choice to go and see the doctor that they want to see. What they have done here is really opened up the panel, so virtually all the doctors in the community can participate within this kind of a contracting network.

They call it contract capitation, and I can explain it at a later time during the discussion, if it ever comes up, what exactly that stands for. But the basic idea is to allow any person to go and see any specialist, without restricting the panel in any fashion.

So in that sense it is a very interesting, forward-thinking group. They are willing to work with all these physicians to allow them the independence, given that some of them are owned, and at the same time also allow the patients the option to go in and select the docs of their choice.

I think also there is a hint here that the hospitals have recognize that they are losing money with the doctors, and so they are trying to scale down the amount of payment that they are making to the primary care doctors by mutual agreement, and they are slowing scaling it down, and apparently there have not been a lot of defections from the group, either. I suppose the other competitors also know that owning doctors is not very profitable, and so there is no real rush for them to go anywhere, and so it is working as a community enterprise there.

MR. GINSBURG: I appreciate that.

David, could you tell us about Harvard Vanguard?

MS. GROSSMAN: Thank you, Paul. This is actually a pleasure for me. I think Paul chose people who he maybe thought didn’t know any of these organizations, but I’m a ringer. Truth in advertising, I should say that I have followed the fortunes of Harvard Community Health Plan since I was a medical student when it was formed, and we were all very much aware of it at that time.

Harvard Vanguard is a spin-off of Harvard Community Health Plan, one of the pioneering health maintenance organizations, nonprofit, Northeastern style or maybe I should say northern style health maintenance organizations. It is a group of 600 physicians who have about 300,000 affiliated covered lives, and it has a longstanding reputation as a pioneer.

In fact, it is the staff model portion of Harvard Community Health Plan. Harvard Community Health Plan merged with a network IPA-style HMO about five years ago, and I think there was a clash of cultures in that merger between the IPA style and the staff model style health maintenance organization.

There was also a recognition that the staff model side of the organization was not as profitable and not growing nearly as rapidly, and physicians, who were much more autonomous traditionally and much more organized within the staff model, sought more control over their lives. The result was ultimately this halfway independence, near independence but not complete independence.

Just to give you some perspective on this health maintenance organization and the role it has played, it played a very important role in bringing total quality management to the health care system. Don Burwick worked for Harvard Community Health Plan, working for the head of the Harvard Community Health Plan, when he was first introduced to total quality management, and it was on the paycheck of Harvard Community Health Plan that he went into that particular area of work.

The hope for this organization is that it will, as a physician group with employed physicians, be able to do better by its patients than it could when it was part of a larger, integrated, more complex health care organization. I think that the goal is to--the theory that will be tested is that physicians who govern themselves and have autonomy in their organization can do better at controlling costs and improving quality than they could in a more complicated organization in which they had less governance control.

They have, interestingly, implemented a compensation plan that is based on productivity and risk-sharing, which was explicitly rejected when the management of Harvard Community Health Plan was a nonphysician management. So that, in effect, either through recognizing that the market has changed or because of the greater trust they have in their own physician governance, they have been willing to put themselves at risk in ways that they weren’t when nonphysician managers were in control.

They are different, also, from many other organizations in that they have close ties to Harvard Medical School. They actually run, have resident and partly fund a department at Harvard Medical School, and have an active research agenda, and in that way are like Kaiser and Group Health Cooperative and some of the other larger, nonprofit, older HMOs.

The hope, I think, is that they will be more aggressive in building on long-standing disease management programs in the area of asthma and diabetes and HIV/AIDS, and they have done a lot of pioneering work in the past. I think it is obviously too early to gauge their success, but I think they have--they provide a good test of the proposition that a large physician organization, nonprofit, with a culture and some coherence and some traditions, and a commitment to quality and a reputation for quality, can be successful in a marketplace. Now Boston, of course, is a rather special market, and maybe their success or failure won’t be generalizable to other markets in that regard.

MR. GINSBURG: Thank you, David. J.D.?

MR. KLEINKE: Thank you, Paul.

I am here with the autopsy report on Thomas-Davis Medical Centers. Thomas-Davis Medical Centers is a real tragedy, an almost operatic tragedy embodying what really goes on when a deal is made on Wall Street. In the case of Thomas-Davis, two deals were made on Wall Street, and the logic--with the lack of logic, with the special logic or what I like to refer to as the attention deficit disorder that seems to affect the investment banking community on Wall Street.

Greed I think serves as a big villain for a lot of what went wrong with Thomas-Davis, but ultimately we can blame our bankers and our advisers for fee-base advice that really doesn’t work out. But ultimately it comes down to why did Thomas-Davis fall for this, why did Thomas-Davis go through this, and I think people need to understand that the desire for capital and the fear and the greed that drives the desire for Wall Street-based capital is very real and it has affected a lot of different practices around the country.

Background: Thomas-Davis was a 200-physician group practice spread over Tucson and Phoenix. It was one of the first to really forward-integrate into the managed care world and operate its own HMO, and so it created a kind of a Kaiser-like organization. By the early ’90s it covered 380,000 people in its HMO, on an exclusive basis delivered care to them, and like a lot of HMOs was starved for capital, needed to grow.

And Wall Street offered at the time, based on a lot of the promises and a lot of the theories about how health care was going, Wall Street offered a lot of very tempting kinds of opportunities for that capital. The first didn’t come directly from the physicial practice management or the PPM community; that came later.

The first stroke was really from Foundation Health Systems, or actually at the time it was Foundation Health Plan which purchased, after they went public at Thomas-Davis, Foundation purchased the entire group and the HMO for $720 million in 1994, and immediately went, moved from a productivity-based model to a salary-based model; basically went the opposite way that all logic and all Marxist theory about capital and labor has gone in this decade, whether you are talking about United’s employee owners or you are talking about the stock options that seem to drive most people.

The Foundation model and a lot of the other early models, like Coastal and some of the other PPMs, went and basically disenfranchised literally the physicians, the most important economic drivers of the organization. And as everybody knows, when you go from becoming an owner to becoming an employee, your behavior changes, your motives change, et cetera.

This was compounded by the fact that when Foundation bought the group, they also cashed out 133 of the founding physicians for $3.2 million apiece, and those physicians obviously are thought leaders, spiritual leaders, cultural leaders of the organization. So basically you have changed the fundamental way that the capital and labor was organized in the group, and you have changed significantly the leadership of that group.

What was interesting here is that two years later, Foundation turned around and kind of broke its promise, and sold off the doc group and kept the HMO. Now the cynic in the crowd can say, "Well, a two-year span, they paid $720 million for the group, for the entire business, and then sold off the docs for $220 million, so in effect they paid $500 million for a 380,000-member HMO."

If you do the math, that equals--and this is rough, I did it on the back of the envelope--about $1,400 per covered life. That was at the time that Aetna/U.S. Healthcare had just paid $3,200 per covered life in the Northeast, and so essentially Foundation’s motives can pretty much be summed up as an arbitrage play on those covered lives, and they got them at a bargain basement deal, and they kind of cut the docs to the wind.

In walks the savior, the PPM. Act II in the tragedy is FPA Medical Management, one of the larger PPMs, driven by a lot of the PPM logic, which is to raise capital and consolidate the purchasing of all the physician groups across the country, and to get managed care contracts across the country, despite the complete illogic of that based on how care is actually financed and delivered locally.

Despite all of that, FPA proceeded to do things like collect capitation payments, global capitation payments from payers, and then turn around and pay the docs salaries and/or fee-for-service payments. And as everybody knows, you usually run out of money by October for your annual contract in that situation, and that is what FPA did.

FPA, like most of the PPMs, has exploded, and I think that why they have exploded, we could talk about that all day long. But I will sum it up really with two kinds of ideas, and we can explore these at length today. I think that will be a good use of today, is explore both of these, one of which is strategic.

Trying to run physician practices from Nashville or from Birmingham, Alabama or from Southern California is just not feasible. It doesn’t work. It doesn’t make any sense. You can barely run hospitals, which are a lot more standardized and a lot more institutionalized, than running local service businesses, which ultimately is what a physician practice is.

So strategically it was never really a sound idea. Had they been able to deliver on the promises--now, the other issue with PPMs is they never really successfully delivered on any of the promises. They took 15 percent management fees in a lot of cases and never gave anything back for that, not discounted medical malpractice insurance, not a lot of the information systems that were meant to drive these deals.

And so ultimately what the PPMs became was another arbitrage play on Wall Street. A typical physician practice is work what is called an EBITA, or an earnings before interest, taxes, and a bunch of other accounting things. A physician practice typically trades at about, when it’s privately held, six or seven times that number.

Based on the multiples that PPMs had when they went public, they were trading at about 20 to 25 times EBITA, and so basically the entire function of a PPM, when you look at it in retrospect, was to create liquidity, and creating liquidity for physicians to exit, for cultures to change. And for models of incentives and economics to go backwards against the rest of society and against the rest of the wisdom of the business literature doesn’t make a whole lot of sense.

So at the end of the day the PPM doesn’t make a lot of sense either, and that is really what finished off, the inherent contradictions and all that are really what finished off what was a very viable physician organization in Arizona.

MR. GINSBURG: Well, thank you very much to all the panelists for bringing these scenarios. As we go through our discussion, the panelists may very well be referring to these scenarios as examples, but they certainly won’t be limiting themselves to these scenarios because, you know, all combined, they are familiar with many, many physician organizations in the country.

Well, the first part of the discussion is going to be about looking backwards, about physicians having moved away from solo or small group practices to form large groups or large networks and other arrangements, and as to how the role of the practicing physician has been changed.

So the first question is, what kinds of policy decisions, such as medical managements, recruiting other physicians, purchase of new technology, are practicing physicians helping to make in successful physician organizations? What is their role today, and how has that been changing?

Who would like to start off on that?

MS. GROSSMAN: Well, I guess this is an evolving area where we really don’t know exactly what works with relation to physicians. But as a physician perhaps I see with greater clarity, and perhaps too much emphasis, the role of the culture and the acculturation that occurs as physicians train and find mentors and are role-modeled.

And those models are extraordinarily independent, at least for most of us who are in middle age and practicing, and I think that remains true actually for many junior physicians. I don’t think medical education has changed very much at all. So the role model, the ideal of the physician, still is to be extraordinarily independent and in an almost religious sense to have responsibility for the major decisions that occur between--within the patient-physician relationship.

That in turn causes the physician to believe that there should be a kind of cocoon of inviolability around them and their patient, and about the only people they trust not to violate that are them and their immediate colleagues. I think it is on that sort of mental model that the striving for democracy in physician organizations is based.

Legitimate physician organizations for the most part are run by physicians, that is, organizations that are legitimate in the eyes of physicians. That is not to say it is not possible to transcend that, but I think if you look at those that are sort of stable and effective historically, that have grown up naturally and have a natural history, they have for the most part been started by, run by, managed by physicians over a period of time.

I am reminded in that regard of the Parke-Nicolette Health Center as one example. I know these are older examples and perhaps they are not pertinent to some modern and changing markets.

All this means that physicians in these organizations play central roles in many facets of the management of organizations, and delegate to nonphysicians the roles in which they don’t feel and are not expert in themselves, and those are usually fiscal roles or operational roles, accounting roles, purchasing roles.

But my sort of ongoing hypothesis is that the most successful large physician organizations, that is, organizations that are able to maintain the trust of physicians who don’t personally know well every one of their colleagues and certainly don’t personally know well the leaders, will be organizations that are in some sense representative democracies or maybe republics, with sort of legitimacy deriving from the fact that people are elected and accountable to the members of the organization.

MR. GINSBURG: So that, I recall J.D.’s point about the problems of developing a national organization for what is a local service business. I would think you would say that even if they were physicians in a distant location, that that would be problematic.


MR. GINSBURG: J.D.? Jacob?

MS. GROSSMAN: If you look at the example of the Community Hospitals in Indianapolis, it is a very good example of where the specialists and the primary care doctors and the hospitals are working together to make sure that it is not an adversarial type of a relationship.

For instance, the specialists agree on dividing the total dollars that are budgeted for all specialty care according to a formula that they work out themselves, and essentially assign total dollars for care based not on the service that is rendered but more on the basis of what the diagnosis is for the care. That is the model of a contract capitation, so it is a very interesting way in which they are working together, and it is sort of like community ownership essentially of the entity.

I have also seen the other side of it, where you see an entrepreneurial doctor who actually takes over an organization, and those things run well, almost like a good business does, because they have some business acumen and they realize how the direction should go, and they don’t give a lot of authority to everyone to muddle up the field, essentially. They make the decisions essentially in a very dictatorial fashion.

As long as it is a benign dictatorship, these things seem to work. But sometimes, you know, it is overrun with greed, and then what happens is that at a certain point they want to sell out to someone. There is an exit strategy. They sell it to a MedPartners or something and walk away with a bundle of cash. And that is when people start realizing, members or the other doctors feel they have been taken for a ride, essentially.

MR. GINSBURG: David or Joy, what is your reaction to a physician entrepreneur who is seen as a benevolent dictator? That seems at odds with what you were saying, David.

MS. GROSSMAN: There is a recent Orange County site, a local IPA in a growing area of the county. It was originally three hospital-based IPAs and they went independent, and they were merged together and run by physician leadership. And for a while I think that was viewed favorably by the member practices in the IPA.

At some point, however, it appears that the leadership has really taken hold of this organization. And it is a few people, and as the organization has grown and they have really gotten a stranglehold on a piece of the business in the market, I think there has been increasing disaffection by the members in this organization with these sort of entrepreneurs who are basically taking a cut of their money and deciding and controlling how things are going to work.

I think from the perspective of the organization, they realize the difficulties in trying to control smaller groups of physicians and trying to get them on board, and there are a lot of power struggles that play out in terms of turning over data, giving information, as these organizations evolve.

MR. KLEINKE: I want to step back from that, because this is a very interesting and relevant issue, because this is ultimately how it is going to unfold, going forward, is that these will be smaller, locally focused physician-driven organizations, and that is obviously the only thing that is going to work.

I think the question about benevolent dictatorship is less interesting than how that is even an acceptable lesser of two evils. It really is the lesser of two evils, because if we step back to David’s point, ultimately the culture of medical training, and if we look at the way residency programs work in this country, it is ultimately an apprenticeship model.

In an apprenticeship model there are the smart, outgoing people in the class, and they are the ones that are speaking up during the rounding, and they are the people that are driving a lot of opinion, and they are the natural leaders in a group. It is like any other sociologic experiment that you conduct. That apprenticeship model, combined with the accountability, the unique accountability, unique like in no other industry among "production workers," flies in the face of a lot of the externalized approaches.

A benevolent dictator, I think, that has credibility clinically and has credibility in the local marketplace and is truly a leader, is a far cry from the technocratic approaches of a PPM or an externalized force that comes in in a very condescending way and says, "You docs, you’re like calves, we can’t herd you." We have all heard that cliche.

I think that that technocratic approach to managing physicians is just doomed. It is cultural anathema to the culture of medical training and the practice of medicine and the special accountability associated with it.

MS. GROSSMAN: I think the model of the benevolent dictator works extremely well until you try to transition to another leader. And I think that that has been one of the problems with some of the newer entrepreneurial based organizations, that when the leader is not around long enough to create a culture or doesn’t groom succession, I think it just becomes like any other organization that isn’t institutionalized.

So I think the real question is, does the physician who builds the organization--and it may be an entrepreneur--have the wisdom and the insight to share and delegate and build and groom successors the way any founding CEO would?

The advantage of a more representative kind of system, which is how many of these organizations naturally evolved, though not all of them, is that it creates the opportunity for succession without disintegration, or it may be more likely. On the other hand, decisionmaking is slow and decentralized, and in many ways has all the demerits of democracy compared to dictatorship.

The only reason why things happen this way in medicine, as opposed to--and it may seem completely irrational, but the reason it happens is for two reasons that I think J.D. has nicely illustrated. One is training and the other is the unique accountability, enshrined in malpractice law, that physicians have for what they do. You know, you can’t sue HMOs but you can sue physicians, and that is where accountability resides.

That is why physicians are so jealous of their independence, because they do have that unique sense of responsibility. They don’t always live up to it in practice, but they are all very much aware of it because of the feeling of being out there on the front line alone, behind the closed door in the examining room, making decisions for patients in complex situations.

MR. GINSBURG: I would like to move our discussion to the situation where hospitals are forming the physician organizations. I guess the question is, given the fact that most of the time all the physicians that practice in the hospital are invited into these organizations, then there is the question of leadership in a sense of physicians in an organization with a bunch of people they didn’t choose, and how are they led? Anyone like to comment on that? Is this a major barrier to hospitals getting into the business of leading, you know, a physician organization?

MR. KLEINKE: Well, that is a great question, and one of the problems, and a number of them have failed and made spectacular headlines in modern health care because a number of these hospitals have gone out and frankly they have overpaid.

Part of the problem was that the PPMs and the others were out there bidding these practices up, and somebody with equity to sell is going to sell to the highest bidder. That is human nature, and nobody should be blamed for that. If somebody is offering you all cash up front and a salary on the back end and Fridays off, that is your market-based expectation of what your practice is worth and that is how you are going to sell.

So that was a big part of the problem. People get real distracted by, is this a strategic organizational issue about you can’t do vertical integration? You have got Stark laws which make it difficult and you have got all these other obstacles, and that is the reason that these hospitals have struggled with the physician practices.

I don’t agree with that view at all. I think that from a perspective of--and again maybe we are getting to a least of all evils here. But if physician practices need capital and they need information systems and they need the ability to assume global medical risk and they need to appeal directly to consumers to neutralize HMOs, et cetera, et cetera, all the things that are necessary to thrive in the brave new world, then the local organizing entity being the hospital, having the capital, having the information systems, a legacy infrastructure and all those other things, makes the most sense to organize and deliver that care locally and create a local brand and appeal directly to consumers. I think it is the soundest model from a strategic basis.

Unfortunately, like a lot of things in health care, it was--you know, we are in kind of a version 1.0. We have gone through a version 1.0 with that, and like most versions 1.0, the things that make the press are the bugs, not the things that work well.


MS. GROSSMAN: I have seen examples of hospitals acquiring physician practices. I have seen examples of hospitals working with independent groups of physicians. It is very difficult to say which is the better model. It really has a very demographic role, which is better. Because if the hospital dominates the community, more than likely physicians are happy to work with the hospital; and if there are many hospitals and a lot more beds than needed, then the physicians usually have the upper hand and they work a different type of relationship.

But what is really amusing in this whole marketplace is the fact that there is one sentence that is oft quoted and probably totally misunderstood, and that is this following sentence: Everyone says that 80 cents of every dollar that is spent in medical care is controlled by the doctor.

So this then they interpret to mean, therefore if you own the doctor, you will get 80 cents out of the dollar, and that of course is just nonsense, absolute nonsense. And they are finding this out slowly, that as they own these poor general practitioners who make probably $80,000 or $90,000, and they pay them $300,000 a year, there is no way you are going to get the returns out of it because the rest of the control of 80 cents really doesn’t fall in the hands of the doctor.

This, unfortunately the same argument has gone through the whole community, and you have hospitals buying doctors sometimes with the same idea that the Wall Street firm comes in and finances a PPM group. But hospitals have another reason for buying up doctors, because they often look at primary care doctors as a conduit for patients in a managed care market. So if you are really in a managed care market, it does make sense to have some kind of a loyalty, some kind of ties with these doctors.

I think it is a mistake to think that owning a person is the best way to have a good, decent tie with the person. There are better ways of building relationships without having to own them. And unfortunately because of this there are a lot of mistakes that are made, and you see as we go through this whole process alienation between physicians and hospitals, distrust, everything building up, and then eventually the whole thing breaks down.


MS. GROSSMAN: I was struck by something that was said earlier about the required returns on investment for publicly held, for-profit companies to last in an endeavor. The nice thing about capital in capital markets is it moves in fast, and the bad thing, as Brazil or Thailand can tell you, is it moves out fast.

There is one thing about local hospitals which is different. It is very hard to move them. They have a stake in the local health care system that is absolutely ineradicable, and they are also a potential source of capital and of expertise. They are usually not nearly as good as one might hope, as good a source of capital or as good a source of expertise, but they have to stick it out. They cannot leave their physicians and take their business elsewhere.

So in a way the final common pathway in local communities for organizations, especially those that aren’t slam dunks, is a hospital-based or an organization that is surrounding a hospital, assuming that physicians cannot generate the margins or the managerial capability from their own work--and we weren’t sure of that until we undertook this recent experiment--assuming they can’t generate the margins and the management capability from their own work.

Now I also have seen and been part of successful physician-hospital organizations. I work right now in an academic physician-hospital organization. The Partners Health System is dominated by its hospitals, but also has now 900 affiliated primary care physicians and probably 3,000 or 4,000 affiliated physicians altogether. And I am personally a member of a physician organization at the Massachusetts General Hospital which has about 1,100 physicians with an elected representative board, and is truly physician-governed.

The link between us and our hospital is absolutely essential, and neither the hospital nor the physicians could exist independent of one another, and I think that is the reality in most communities. The problem is, in many communities the hospitals are multiple and the physicians have shifting loyalties.

I think perhaps where physician-hospital organizations are likely to work over the long term is where there are well established, longstanding loyalties--usually non-economic, though economics is important, but in part non-economic--between the hospital and the physicians who participate in the care in that facility.


MS. GROSSMAN: Yes. David’s point, I just wanted to reinforce that a little, again using the Orange County, California example. Here we sort of have in that market every type of physician organization and permutation you could imagine, and there were originally very strong independent physician organizations.

At the beginning of our site visit work, we were hearing a lot about the decisions they faced in deciding where to go to get this capital and management expertise--not even the management expertise so much in Orange County, but really the capital. There were really divergent paths taken by different groups. The exit of FPA and MedPartners has really hit this market very strong, and you see that the organizations that seem to be in the best shape at the moment are those that did tie themselves to hospitals.

But the organizations are just beginning to play out, and you really face this issue that many of the physician groups that joined up in these hospital organizations didn’t even necessarily refer all of their patients to these organizations, and it is a slow process to try to figure out what makes most sense, you know. If physicians decide it is cost-effective or it makes the best clinical sense to send their patients to other hospitals, what is the organizing entity going to think about that?

So I think it is still really playing out about what the most appropriate model may be, and that it really varies significantly by market, you know. But these are, hospitals really right now are the ones sitting on the cash. They are the ones with the money, and they are not leaving.

MS. GROSSMAN: I think one of the big surprises in this, and it is wonderful to have hindsight, but one of the big surprises in this is that hospitals have not been drummed out of business by managed care.

Five years ago, if you were looking at one reasonable scenario, it would be that capitation would empower physicians, who would become prudent purchasers of hospital services. Hospitals would be, many of them, forced to close. They would all be working--they would all become cost centers, not revenue centers, and that physicians would be in control of the health care system and would generate the capital that they needed to be the dominant player in the health care system.

Now why that hasn’t happened is, I think, a complicated story. But it hasn’t happened even in those markets like San Diego and L.A. and San Francisco and Portland where you would most have expected it to occur. In those situations hospitals continue to be the source of capital, and that is why they continue to be important players in organizing physicians.

I think there are many CEOs of hospitals around this country who are wondering why they are doing so well, but they are, and that gives them enormous power to be a positive force in the organization of local health care systems.


MR. KLEINKE: It’s all those Medicare margins that we have been hearing about.

That is an interesting point, David, and I would, despite--you know, sometimes it is easy to get discouraged and to believe a lot of the consultants’ doomsaying scenarios about the future, but the reality is, is the average hospital gets 40 percent of its revenue now for its outpatient services, and so hospitals have become very successful at adapting and become un-hospitals.

That even becomes more of a compelling argument, that if they are assembling a facility continuum, that the one thing that pervades a continuum of facilities is the physician direction of the patient. So I think that makes an even more compelling argument.

MR. GINSBURG: One reaction I have had to this discussion of hospital leadership of physician organizations is that the situation must be unique in each community.

There are some communities like Orange County where it is a matter of coming to a working relationship with the longstanding, already-built physician organizations. Probably--and there are some other communities where there is nothing there, where physicians have traditionally been in small practices. And I guess most difficult is when the physicians have not concentrated their practice in a single hospital.

Let’s say you have a community like this where-- you know, a fragmented physician force without particular loyalties to hospitals. It looks like the hospital is the best opportunity to develop a physician organization, but what would be effective that a hospital could do to generate an organization of physicians that it could work with? Or is that too hard?

MS. GROSSMAN: No, I’ll take a crack at it.

It really depends on the type of insurances that are available, and the answer is very different depending upon whether it is managed care or commercial plans that dominate the area, or whether there is senior managed care versus regular managed care, you know, the institutionalized patients. All these things take different ways of attacking the problem, if a hospital has an interest in any one segment.

We have seen cases where essentially, for instance, North Ridge Hospital is a good example in California, where it invested an enormous amount of money to attract this doctor who is a specialist in neonatology to have a center there and set it up, and that sucked away virtually all the business that UCLA used to get in that area and became very, very important as a business center. So also Huntington and Pasadena set up a very nice retinal type center for a few chosen specialists there, which essentially took over a lot of business from the Dulheney Clinic in downtown Los Angeles area.

So strategies that they adopt there, they actually go in and select a specialist and do those things. But in a managed care environment, the specialist is a secondary kind of a person. It’s the second level of interaction. If it’s a tertiary specialists, it’s the third level of interaction. So you really need to grab the primary care physicians who are there before you can get to the third stage physician.

That becomes a little bit tricky, and that is where this ownership by foundations, or ownership or large amounts of financing through the back door that allows the practice to continue doing its work in the general practice area. These things happen there, also.

But which of these succeeds? I think, again, it varies according to each of the markers, and what your real business plan is and why you are doing it.

MR. GINSBURG: Any other comments? J.D.?

MR. KLEINKE: I think one of the key things that a hospital can do to add value and sustain what they’ve got going on with physicians is education. The whole idea of business grand rounds, I mean, hospitals have been the sites where physicians have learned about medicine and I think it’s--I have actually done some of the facilitation on what I have heard of as business grand rounds.

And I have had doctors come up to me and show me their new cap contract, and they have accepted $18 for all physician services, primary care and specialty, on a Medicare population. Eighteen bucks? And my face falls and I say, "Do you really understand this, you know, capitation and $18 per member per month?" And he says, "Well, that’s okay, I’ll make it up on volume."

Here is a situation where the hospital provided a contracting shell or process for the physician, and consultants came in and said, "You do it this way, and you do your gain-sharing that way, and the numbers work this way, and you just mail out the contracts and everybody will sign them," and there was no educational component, there was no communications, there was no sense of why. Just, "If we get the model right"--again, it is the technocratic approach to what is not a technocratic community.

Another case in point: A very dear friend of mine just finished residency, and she finished residency, top 10 percent of her class in medical school, just got out of an internal medicine program in Colorado. And I was talking about something very casually and she said, "Wait a minute. What is HCFA?" Oh, HCFA is actually 40 percent of your boss, is what I tried to explain.

But the bottom line is, they are so busy--hospitals have spent a lot of energy, and this is because consultants make a lot of money to help them spend that energy, on trying to get the model right. And then we get into alphabet soup: Is it an MSO? Is it an IPA? Is it a PHL or an IDN?

It really doesn’t matter. If physicians understand why the world has changed this way and why gain-sharing works the way it does and why global packaged pricing needs to occur, then I think they have done an invaluable service to the physician communities, instead of "Here’s our model, and we’ve decided you fit in here, and here’s your contract."

You create, again, that is further disenfranchisement. It doesn’t create any enfranchisement, and that is the single greatest value that a hospital as an organizing force can bring to bear on the market.

MS. GROSSMAN: I agree with that in general. I think it is, if you can pull it off and have the capability in hospital management to do it, it is wonderful.

I don’t want to leave the impression here that hospitals are good at organizing physicians or managing physician networks. They are terrible at doing that, for the most part. What they have going for them is their immobility and their margins and their dependence on local physicians. They are there for the long haul, for better or worse.

They are almost never the preferred place for physicians to start in organizing locally, because there are deep, long-standing antagonisms between physicians and hospitals in almost every situation, no matter how close they may be and how dependent they may be upon each other. And there are many physicians who would go anywhere, willingly go anywhere and have, than their local hospital, often to their own detriment, mutual detriment.

But the fact is that they do have--they are favored for whatever reason, Medicare being one of them, with reasonable margins right now. They have resident management who can at least, you know, understand what HCFA is and know how to count. And they have some money, and they often have an information system. It may not be a great information system, but they have an information system, so they are a local nidus of organization.

A lot of the current efforts to form physician-hospital organizations have been very unsuccessful because hospitals don’t know how to do it, and they will make a lot of mistakes on the way and burn a lot of money on the way toward working this out. But they are certainly among the major contending local forces for doing this, and their localness is a major advantage.

MR. GINSBURG: Thank you. I would like to turn to another area of questioning, which is about capital, and it is about the amount of capital needed for a physician organization and what role it plays. I would like to begin with a simple question. I mean, maybe, I suspect our panelists will know where I’m getting. But how much capital is necessary to finance a physician organization, and what is it used for? And of course my implication, one of the implications of asking it is that probably the PPMC model has brought a lot more capital to it than is probably needed to support the organization.

Did you want to start, J.D., on that?

MR. KLEINKE: The answer to how much capital is needed is "a lot." What the capital--and this gets back to the macro issues about what is really going in health care, which we get back to the example in Arizona.

There was a physician group that was forward-integrating into the managed care arena and was becoming an HMO, and becoming an HMO--whether it is truly becoming an HMO all the way, with the face of the organization all the way up onto the TV, at the TV level, and sell to the employers level, that truly becomes the branded HMO, or becomes the de facto HMO, which is what a physician-hospital system that subcontracts on a global cap basis or percent of premium basis to the HMO is--becoming that, going from a line item of service, i.e. fee-for-service physician, to that entity that does bear risk is the real black hole for the capital.

The most important thing involved in all that is to assume risk. You need solvency. You need loss reserves. You need the ability to market the plan. You need the ability to build the information systems.

In the old days the paper chart worked great, and the more information you lost, the more you had to redo tests and the more you could bill for. In a global capitation environment, whether it’s direct to the consumer ultimately like the inner group was with Thomas-Davis, or if it is simply the percent of premium from Pacific Care, managing the process requires a tremendous amount of information and a lot of capital goes into that as well, as well as buying things like stop loss insurance, et cetera.

Basically, the IPA or whomever the organization is needs to replicate--and this is part of the redundancy, and maybe the capital is redundant. There is a redundancy in a moving model where you are trying to build out an HMO around a doc plan that still has to co-exist with the broader HMO. You have to build a redundant infrastructure, to the point where health care is, if nothing else, a set of redundant infrastructures, one on top of another.

MR. GINSBURG: Yes, so you are saying that the reserves and the information system are the really expensive things, and that is where the redundancy comes, because that is what an HMO is building as well.

MR. KLEINKE: Precisely.


MS. GROSSMAN: J.D. was actually describing a situation where the physician organization is becoming a health plan or an HMO. That is a different game, really, because that does require a lot of capital and other things.

But physician organizations can actually survive as a good organization and provide care and do a lot of their delivery of care without really spending a lot of money, and there is no need for it. If you don’t get involved with high-priced consultants and great visions of glory, then I think it is very easy to finance a small IPA and work within a very limited budget.

We have, I have had many, many clients, very successful physician groups that have made a lot of money for the doctors, but the scope of the plan was very well defined. They knew exactly what they were trying to do in getting together.

In one case, it was a case of accepting senior capitated care in the Los Angeles area, and they set the goal that they needed 10,000 lives, and in three years they were able to get 10,000 lives. And 10,000 lives at about, you know, $400 per member per month, is not a small amount of money. They found that that was really able to support this group of, I think, eight or nine internal medicine practices that worked with the local specialists.

Interestingly, even the specialists were capitated, while the internal medicine doctors were given the option of either being capitated or fee-for-service, and it seemed to work very well for them. They provided a lot of care for the patients to prevent them from getting into hospitals. So contrary to what you hear from managed care, about managed care, when it comes to treating senior population, if you don’t provide extraordinary care, you will end up having to provide that in a very expensive setting, and that is the end of the business.

So what I found there was at least that, you know, they were able to run it with not a great deal of money being thrown at them, and essentially generating the money from the profits they make by providing good quality care. But, you know, if you want to go public and have the kind of multiples you find in the Internet world, it is unreal. It is just not possible. You know, there just aren’t 15 percent margins in a doctor’s practice that you can skim off and then expect them to make more money. It just doesn’t work.

MR. GINSBURG: I would like to pursue the extent to which what you said and what J.D. said is in conflict or really is closer. In a sense, you are saying that in a sense there really wasn’t much in the way of capital needed to build reserves for the risk they were taking or, you know, for their information systems.

MR. KLEINKE: Yes, essentially the--you know, these reserve capital requirements and other things came about because the HMO industry decided to essentially, you know, debunk this whole physician-sponsored or provider-sponsored organization idea of direct contracting with providers. The idea was that you go and say "Now the doctors are taking the risk, and therefore they need to have reserves just like an insurance company."

But let’s look at it and see what are the risks that are entailed in this thing. Other than out-of-network cost, the risk is with the hospital and with the doctor. They have to provide some extra care for which they may not be reimbursed for a period of one year. That is the risk they are exposed to.

So clearly doctors who are providing the care and the hospital that is providing the care should be willing to eat that amount of risk to get into business. It is not a big, real big issue, but when it is mated into like a commercial plan and you are looking at it from a third party point of view and viewing it as an insurance company, all these other catastrophic events and other things came into place.

And it is always easy to get stop loss to cover for these real catastrophic events, so you can minimize the risk further. So my feeling is that if providers want to provide care, local care together with the hospital, they essentially should be able to cover most of the risk with the extra sweat that they will spend, and that is not a very critical amount.

MR. GINSBURG: Do you have a reaction, J.D.?

MR. KLEINKE: Yes. I would agree with that generally, that insofar as an organization, physician organization, you are not going to forward integrate and try to beat the HMOs at their own game, that then it isn’t necessary to raise that much capital, especially in the presence of stop loss.

I would argue that it sounds like that group got kind of lucky, unless they had great stop loss coverage. Because Medicare patients, as we know, I mean about 49 to 50 percent of the total costs are they end up in the hospital and they end up in a few ICU train wrecks that kind of blow the entire budget. If that is adequately insured, then it isn’t that big a deal.

I was referring to the amount of capital that is necessary for the full forward integration, and that is to capitalize the difference between the medical loss ratio or the 80 cents out of the dollar and the dollar, the premium dollar. And to be able to capitalize that, build the claims processing systems, and develop all of the marketing programs and all of the enrollment and eligibility systems, that is where I think the big capital spending comes into play.

MR. GINSBURG: So I think we have some consensus that it seems to depend on what functions the physician organization wants to take on. Do they want to do that full forward integration? But they don’t have to. They can do more limited things and thus have less capital needs.

You know, something that struck me while you were talking is that some of the risk in--I mean some of the uncertainty in taking on risk, that we might want to distinguish between the initial thing, when you take an amount that turns out to be way different than you need, as opposed to the ongoing year-to-year thing. Once you are in this, Medicare risk or private insurance risk business on an annual basis, the uncertainty is much, much less.


MS. GROSSMAN: Yes, I was thinking that the--first I want to recall that the reason why IPAs have spread so much faster than group and staff model HMOs is because of their lower capital requirements, so that one should keep in mind that not needing a lot of capital is a great advantage in competition in local markets.

But I also want to focus on the underlying reason why physicians get involved in organizations to begin with, and why some of those organizations have visions of becoming integrated health systems and others remain fairly localized and less well organized. I think it has a lot to do with the market and how competitive and aggressive third-party payers and other health care organizations are locally.

Physicians do not want to be in organizations. It is something they are forced into, and they are forced into it for survival. If they don’t perceive a threat to their survival, they will not join, or they will remain in what might in fact be optimally sized organizations, groups of five to ten without outside linkages.

So the more threat they feel, the more likely they are to join organizations and the greater the pressure to be efficient, at least in the short term, the larger these organizations have tended to become, in part to gain market power to bargain for better prices. And of course once you have got a large organization, then the internal dynamic is, "Well, what can we make of this organization? Let’s integrate care. Let’s create a common information system. Let’s realize real efficiencies."

How do we realize real efficiencies? Well, we remake the work. How do we remake the work? Well, we need disease management, we need hospital order entry systems, we need computers on every physician’s desk, we need to be able to have seamless transfer of physicians and referral systems that are electronic and all this stuff. Pretty soon you are into hundreds of millions of dollars over several years in information system costs and in personnel investment.

You won’t get there unless the market forces you to get there. So that if you go to some places around this country, Chicago is an example, New York is still to a large degree an example, you will not find physicians very organized, and you won’t find them organized because the market hasn’t forced them to become organized.

Or when the market, the apparent pressures, competitive pressures, end up being more apparent than real, and consumer choice forces organizations to disintegrate and decentralize, you will find lesser needs for capital over the long term.

MR. GINSBURG: I would like to proceed to where physician organizations can get the capital. We have established that there are very different amounts per physician needed, depending on what you are going to do. So this was brought up before, the local hospital is a source of capital. Wall Street, at least in the past, has been a source of capital.

And would anyone like to just, from the perspective of physician organizations wanting to do different things, what are their options, and what are the pros and cons of getting capital from different sources today? Jacob?

MS. GROSSMAN: Well, the smaller organizations almost always capitalize by making the participating doctors to contribute a certain amount, and usually that gets them going to a certain phase, and then they need to go to a second round of financing of some sort.

The problem with Wall Street really is that, you know, somewhere along the line someone has to define an exit strategy. It is very, very difficult to define an exit strategy when you are talking about a lifelong relationship between a doctor and a patient. There is no exit there. It is a continuing relationship. And it is very difficult to see growth and returns when you don’t have a defined exit strategy.

So I think, you know, the other side of it is, there is a possibility with these if providers can directly contract with Medicare, for instance, to be able to control that entire dollar amount, and do it and have it controlled with the hospitals and doctors working together, the capital requirements may not be very great. If you get rid of all the paperwork and other things that HCFA requires or the HMO industry requires, the operations itself can be profitable, because you are really taking off 18 to 20 percent off the top which goes into marketing and other dollars coming back into the provider pool to be able to do something.

So I think, you know, again the business need has to be established as to why you need this money, and I don’t see that very clearly. Often it is for, you know, fairly loose ideas, mostly because someone else has it, we also need the money, that type of an attitude.

So my feeling is that, you know, self-financing is probably the stablest one, with the hospital and the doctors playing a role in it, and it seems to work in a lot of the clients that we have. They have been able to work together and really help the community.

The other big problem in health care is the fact that much of health care is local. You know, local delivery of care is what is important, yet the market force that is driving it is a national one. Employers come in, like TRW, Hughes, and they say they will not tell a local employee in California to use a national plumber, for instance; they can go to a local plumber. But when it comes to health care, they would only go with national organizations.

So it makes it very difficult for local, regional entities to assert their rights because the contract was made at the national level. And that is the challenge. As long as it remain that way, it is very difficult for the local, regional ones to play an important part.

MR. GINSBURG: J.D., do you have a comment on options for capital?

MR. KLEINKE: Well, I think--no, I would agree, that has been my observation and experience. I think that, getting back to my earlier remarks about PPMs, I think that it made a lot of sense to the investment bankers that health care was changing, and therefore they should raise money on Wall Street and give it to docs so that they can create liquidity for their otherwise intangible asset.

And that was, you know--and I have survived that myself. We got involved with taking our company public, and there is a logic on Wall Street that defies the real world’s logic. It is an internal logic, and frankly those people get very wrapped up in this, and as a result they convince a lot of people of a lot of things. And because that world seems to be driven by greed, naked greed--unapologetic greed, often--they tend not to flinch when they are tapping into that in other people, and physicians are human beings like everyone else.

MR. GINSBURG: The one thing I am hearing in this discussion is that the difference between physicians developing an organization, wanting to do something, looking around for where they can get the capital, versus the PPM model which was Wall Street perceives that, hey, this is a good opportunity, physicians need capital, let’s go out an offer it to them, so it probably was very different types of arrangements, deals given, where the impetus was coming from. And since a lot of the PPM funds went to basically purchase the assets of established physicians, as opposed to providing what you are all describing, you know, the working capital, the information systems and some reserves. David?

MS. GROSSMAN: I think, though, there was another element to the Wall Street logic. Fortunately I wasn’t part of it. And that was that you could standardize practice and franchise these names and make brands like McDonald’s or the muffler business or whatever, and that this was a business waiting for that to happen. And if you could do that, you could then introduce enormous efficiencies and pull out enormous amounts of money that were just waiting there on the table to be pulled out.

The problem is, they didn’t understand the work. They didn’t understand the product. And when I get confused about what is happening in health care, I always try to ask myself, "Well, how does this system actually work? What is the work that is being done? What is adding value, and what is the characteristic of it?"

It is a very difficult sort of work to standardize. That is not to say it is impossible to standardize, but it takes an enormous amount of investment in not only software and information systems but in personal relationships over a very long time, to bring this to realize real efficiencies in ambulatory practice. And assuming that they are there, and I believe that they are there but they have never been realized, in part because no one has had the patience or figured out how to break through the distrust that is present in most physicians of outside managers.

So there was just no way that a national brand could create a branded product that had legitimacy in this market, and I think it was a metaphor that didn’t work, a simple transfer of a metaphor without real critical thinking.

MR. KLEINKE: There have been a lot of things in health care that have given rise to that argument. John Wenburg’s work inadvertently probably gave rise to more thinking about this and belief in this, in the ability to industrialize and rationalize the care process. And then you hear about the Beta blocker studies that the HMOs all do, and there are issues, and this is a debate that is going to go on until the end of time.

There are, to certain degrees there are things in medical practice, there are inexplicable variations that are inexcusable. And they are well documented, and the more databases that become available and accessible, the more we are going to be able to document these, and that gave rise to that.

And this, of course, ran in parallel--you have got to look at the context--this ran in parallel with chain reaction consolidations of everybody else as well. Rick Scott believed he could turn hospitals into Holiday Inns, and as long as there is that thinking on the hospital side and the HMO side, then it stood to reason that the argument could be made that physician practices can be turned into Federal Express outlets, as well.


MS. GROSSMAN: Yes, I just wanted to get back to this issue of source of capital and make the point that I think that there are still lots of markets around the country with not a lot of aggressive managed care, and that many physician organizations are still sensing pressure with respect to their incomes, and so they are accessing these private sources of capital which I think have always been a mainstay for physician practices.

It could be their local bank, it could be private capital investors, venture capitalists perhaps, and sometimes joint ventures, even with national companies, but for very particular activities. Little Rock is a good example of this, where there isn’t a lot going on but physicians are concerned, and there has been a lot of development of ASCs and some mergers that have taken place, and many of them have been funded by--you know, somebody at one of the medical practices said, "You know, we don’t need these PPMs. We can run our business just fine. We go down to our local bank and, you know, get a $10 million check and build a building."

MR. GINSBURG: This would probably be a good time to take a 10-minute break, so please be back a minute or so before that and we will go on for the next two topics.


MR. GINSBURG: I would appreciate it if people could take their seats and the panelists could return to the table.

The next topic that we are going to go into is how physician organizations are paid for services and how physicians are paid within those organizations for what they do.

In fact, it is widely assumed that the efficiency and practice style of physicians is intimately related to how their services are paid for. Further, there is a distinction between financial incentives designed to influence the organization and those targeted at the individual practicing physicians. It is also frequently asserted that physicians’ job satisfaction is a function of the degree of their clinical autonomy.

So the first question is, it is clear that methods used to pay physicians are related to medical management decisions. To what extent has global capitation--and I am talking about payment to the organization, now--has global capitation facilitated clinical autonomy and fostered quality improvements?

So the question is, to what extent--I’ve got an answer here.

MS. GROSSMAN: I was going to rescue you, Paul. I didn’t know how long to let the silence go on.

The answer is, we don’t know. We won’t know, at least with any precision, I think for some time. I think we can say honestly that capitation doesn’t make quality worse, at least in the ambulatory care sector, though we don’t know that with absolute certainty.

I think that from my personal experience--and I think that all of us have to really at this point in the development of the health care system, have to fall back on personal experience--I see both enormous opportunities and enormous problems associated with capitation. And let me talk a little bit from my own experience.

As I mentioned, I am a member of a physician organization that represents all the clinicians at Massachusetts General Hospital. Obviously we are atypical in many ways, but we are illustrative of some things that are going on in the health care system.

We now, the Partners Health System, of which we are a part, has about 250,000 capitated lives, and my practice is about half--at this point consists about half of capitated patients, that is, patients for whom Partners Health Care organization has contracts with payers who pay Partners a lump sum each year, and therefore for whom the organization is at risk.

When this began with the first major risk contract, which was with an HMO called HMO Blue, which is the local Blue Cross-Blue Shield HMO, then was the biggest in town, we were asked by the physician organization to form what were called pods. Podding is now--it is not toilet training, though I guess some of the members, some might argue that it could have been done better for some of the members of our group.

But this is a group of roughly eight to twelve, in this case primary care physicians, who were required by our organization, once we became at risk, to meet weekly for at least an hour and to do a number of things, one of which was to review all complications and deaths, so every death in our practice has to be presented to our colleagues; to also do some continuing education; to discuss hospitalized patients; and to discuss all patients getting home care and sort of high-cost patients.

As part of this process, we also had to pick a leader, a physician manager for this pod, and we also, because we meet together, we can receive education and information in an organized way from the physician organization. We also have case managers who have been hired by the physician organization, or by the hospital in some cases, who meet with us on a regular basis, as well as nurse-practitioners.

So this is a level of organization which we had never had before, and in some ways is quite stimulating. It is an opportunity to share cases; it is an opportunity to learn from one another; it is an opportunity to ask questions, develop local practice guidelines, and has enormous advantages and potential to reorganize and create opportunities for improved practice.

Now I don’t think that potential has been fully realized, and the reason is partly a failure of organization and partly a failure of education on the part of we as physicians. We are not prepared to really reorganize the system of care. We might have blinding insights once in a while about how to do things better, but no one in the group--a couple of us happen to have training in quality management, but that is an exception and a rarity, and is a function of the fact that we live in an academic health care center.

So the same--I think the major thing is that, the point I want to make is that this is, I think, a marvelous development that is directly a function of capitation, but its potential requires support. It requires capital, I guess you might say, in the form of assistance--statistical, technical, other kinds of assistance--to realize the full potential.

MR. GINSBURG: Thank you. Jacob?

MR. KLEINKE: I look at capitation as actually a risk transfer mechanism, so it is like, "Hey, this is something I don’t want to do, so let someone else handle it. I’ll take my little profit off the top and put it in my pocket, and let them worry about the rest of it."

So when it becomes such a risk transfer mechanism, usually there is a potential for failure there, because they are just looking at the medical loss ratio and saying, "I’ll hand this over to a bunch of guys, and I’ll keep my share of the profit and walk away from it." Eventually, they themselves don’t add value to the whole process.

So when physician organizations actually accept risk, accept global capitation, they have an enormous opportunity as well as a challenge. If they took it simply because the HMO is tired of handling it and giving it to you, then they have a potential for problems also.

We have found that, you know, there are practices where once they accept the risk, they work together with the hospital and are really coming up with some innovative ways of managing this amount of risk. In some cases, as I told you earlier about a case in Southern California where they made all the primary care doctors as non-capitated, told them you can charge as much as you--I mean, "You can do as many procedures as you wish, we won’t ask any questions"--while the specialist care was more controlled and the specialists were capped.

So it is kind of reverse of what we normally hear in the managed care market, where the primary care is capped and the specialist is fee-for-service. And it worked for them, because by allowing the doctors to do these extra tests--for instance, if a patient, an older patient came in with some kind of a fever or something, rather than giving Tylenol and masking it they will take the trouble sometimes of even doing an x-ray if necessary to see whether, you know, it is the early stages of a pneumonia or something like that and be able to catch it.

And it has worked well for them, and they documented it and made some presentations, which was interesting for me as a layman, that they were willing to look at it from a different point of view and attack this paradigm where they have an amount of money available, and how do you best use it?

As far as whether it changes your medical management and other things, absolutely does. The moment you give them capitation, virtually every practice we have seen, 20 to 30 percent less tests are being done on those patients.

And I am going to say something to you, and please don’t take it out of context. It is kind of an amusing story of one of these doctors who was working in one of these managed care plans, was telling us that they found that deviated septum is something that every ENT doctor uses as an excuse to provide extra services and make a lot of money. And when one of the patients came to see him and he was the medical manager, he said, "There’s nothing wrong in breathing through your mouth for a little while."

What he was really trying to say was, deviated septum, this operation doesn’t really cure you in many cases, so there is no harm in living with it. But the way it sounded, it came out kind of crude, like "I don’t want to pay for it."

So I think it does--you find them doing less tests in some cases, and with older patients doing more tests. Is it good or bad? Again, it is up to the doctor, because ultimately it is the doctor and the patient that is important, and the doctor has to make the decision. We hope that those decisions are being made in the interests of the patient and the health of the patient.

MR. GINSBURG: Jacob, in the organizations that you have worked with, how does the organization, in contrast to the pod that David Blumenthal was describing, what types of mechanisms do you find used most commonly in organizations to get the individual doctor to pay attention the capitation incentive that the organization has?

MS. GROSSMAN: Well, what David described is really very much the plan in most instances. They don’t call themselves a pod, they don’t subdivide the entity, but there is almost always a medical management committee consisting of some primary care doctors and a few specialists.

They do sit and talk. They have a very rigid process by which authorizations have to be--most good ones--they have to be, you know, one way or the other disposed of within 24 hours, so that nothing is sitting on anyone’s desk. They do discuss these things and they talk about, you know, comparative--they look at the profile of physicians within the same practice, try to get an idea why is it that they have one person has a large length of stay for certain types of cases, and sometimes it is very trivial.

We have had cases where one doctor made three different rounds in three different hospitals, and he would arrive at this one hospital just a little before the lab tests would arrive. And so by the time he left the place, the lab tests wouldn’t be there, so he would have to come back the next day. So it added an extra day, something very still like that that they eventually catch and are able to correct.

But a pod is nothing more than, you know dividing the whole pie into smaller groups so that each one is accountable to the same thing. When it becomes a large enough group like theirs, with over a thousand doctors, you need to create pods. You can’t look at as one entity.


MR. KLEINKE: That case is compelling because it gives some flesh to what I think is the landmark study that James Robinson published in ’95, and he looked, after risk adjusting, he looked at hospitalization days per thousand for Medicare groups in California that were capitated versus those that weren’t. And the range generally was about 60 to 90 days per 1,000 reduced for the capitated groups.

And I did the math, I can’t remember exactly how, the exact numbers, but I did the math for the book, what does that roll up to in terms of what a consumer feels or what somebody would really feel. And all other things being equal, that translates to, I think it was $1,100 a day for a California hospital, that ultimately translated to $26 per family of four per month in the State of California.

Twenty-four bucks for a family every month in their insurance premium, whether it is coming out directly out of your checkbook or it is coming out of your cafeteria benefits plan, is a significant amount of money. And I think, having said that, and the example about the lab tests and being more attuned to the process of care when there is some financial pain associated with sloppiness, I think ultimately drives the market toward capitation or some variant of it.

I think capitation, getting back to the metaphor of we have been through a real version 1.0 with capitation, without having it be risk-adjusted, there has been all kinds of issues, we have turned docs into adverse non-selecting insurance type companies. But ultimately I think that capitation or something like it is inevitable, absent a true consumer revolution instead of a lot of noise, but something like an MSA program or something that would turn the otherwise irrational or unconcerned with cost consumer into consumer into something more disciplined on the market side, you work the supply side as a result, and you work that by modifying not consumer behavior but producer behavior.

There is a lot of talk, there is a lot of backlash right now against capitation because a lot of people are afraid of it and they don’t understand it. But if you look historically, it is almost an accident we have fee-for-service as opposed to a capitated model.

Back at the turn of the century in the labor camps and along the railroads, contract practice, it was called contract practice back then, was the way that large pools of employees were treated. The mining company or the railroad company paid $2 or $3 per head to the doc who traveled along and was captive.

When it came time to bring this into the system, there were a lot of physicians, particularly in the West, who tried to instill this back in the communities after the labor camps disbanded and the railroads were built, and the profession of medicine itself roundly rejected contract practice, recognizing in that an accountability. None of us want to have to be financially accountable for something if we can get away with it.

I don’t know how many people deal with this organizationally in their own organizations, but when people are confronted with their own financial accountability, there are issues. You want to resist it to the bloody end.

But I don’t think there are conflicts inherent in capitation that are any grosser or greater than the conflicts inherent in fee-for-service medicine. Everybody knows what happens to C-section rates when you go from a fee-for-service C-section to a global fee for deliveries, regardless if it is C-section or normal delivery. It usually gets cut in half over time.

I just think, again, this is a version 1.0 problem, that it is health care, and it is two steps forward, one step back, and capitation has caused a lot of problems. It has forced physicians to think like adverse selection avoiding insurance type executives, as opposed to a truly enlightened capitation system, either virtual capitation--I won’t go into the details of that--or another kind of system that allows for true risk adjustment, would reward a physician for being very good at taking care of very sick people. That is the system we ultimately need to drive at to correct a lot of the economic dysfunction that really is 100 years in the making.

MS. GROSSMAN: I had meant to make the point about risk adjustment. I am glad, though, that you did, J.D. Let me illustrate very graphically how this presents itself to a primary care physician who is at risk.

I was referred by a surgeon, a transplant surgeon at the Mass General, a patient who had had a liver transplant. That patient’s drug costs are about $1,000 a month, and when Harvard Pilgrim Health Plan and some of the other HMOs were--and this fellow is disabled so he is eligible for Medicare--when they, when the Medicare product became more attractive, he said, you know, "Guess what, doc? I’m going to join Harvard Pilgrim Health Care."

Now this is a--and my "pod", and I did this exercise just this week because I was interested in knowing, we are all academic physicians so we have a skewed practice

--each one of us has one or two transplant patients in their practice. Now that patient is an enormous burden on a capitated practice, and is likely not only, even if he were not at risk for drugs, is someone who is in your office, you know, who (a) sees the transplant surgeon monthly, but also has numerous other problems that require constant attention. And there are many other patients like that.

Without risk adjustment, those patients cannot survive in a capitated market. And the initial impression, the first impression that all of us had when we went at risk, or the first question we had was, are we going to have to give up what we all took most pleasure in as physicians, primary care physicians affiliated with an academic health center, and that is the ability and opportunity to take care of very sick outlier kinds of patients?

So some--this system, capitation, can’t work without better risk adjustment. And we also have in integrated health systems enormous problems implementing risk adjustment. We have, in my hat, wearing my hat as a health care researchers, we have been helping the Partners Health System figure out how risk varies across the multiple physician groups that are members of the Partners Health System.

Recall that we have about 900 primary care physicians, many of them community-based. There is quite a lot of spread, as you might guess, within the Route 128, 495 area from one physician group to another, and the amount of risk that is inherently associated, using the best available risk adjustment technologies, the amount of risk and expected expenditure associated with risk.

But community physicians are not anxious to transfer money to academic health centers, just because you can show that the risk of the patients associated with those--with your patients is higher. All of them feel like they are operating on slim margins. They are not--they don’t feel like they are making a great living, and if you sort of walk into a meeting and say, "My patients are sicker, please give me $10 out of your cap," you are not an overwhelmingly popular person.

So we have not figured out, even if we had good risk adjustment technology, how to manage the transfer of money within markets between patients--between physician groups who handle lower-risk patients and physician groups who handle higher-risk patients. This is a problem that all physician organizations are going to have to deal with politically. And unless payers find a way to compensate those groups externally and accurately for the risk they bear, it is going to be very hard to keep high-risk patients, for them to find a home within a capitated physician organization.

MR. KLEINKE: Well, maybe that is something useful an HMO can actually do, which would be--because the whole--this is a much larger policy issue, which is, the whole function of insurance is that the healthy subsidize the sick. And this is the essence of that, because if you ask this guy, if it is a consumer world, then you are asking this transplant patient to pay the transplant patient’s ACG-based payment. He is not going to--he is going to become an uninsured person, or uninsurable person except in the case of Medicare.

So what that ultimately leads to, I think, is the idea that the HMO ought to kind of refocus itself on what it really is, which is a collectivizer of a huge heterogeneity of financial risk, and it decides because, you know, it is a civil war if the physicians are trying to decide. The HMO decides, using methodologies like the ACG methodologies, figuring it out, testing those methodologies, and looking at how behavior does change, because five physicians in a room fighting it out is not a solution for that at all.

MR. GINSBURG: Does the HMO have any motivation to invest in doing risk adjustments? Or, you know, is there a notion, "Well, you know, that’s the Partners’ problem."

MR. KLEINKE: I think they have tremendous motivation in doing it, because ultimately they are going to have the happiest physicians, physicians who feel like--as opposed to the arbitrary capitation rate that is just handed down and forces the physician to become a cherry picker, I think that they end up with more satisfied physicians, I think. This is speculative because no one has studied this. And they should end up with more satisfied consumers. Or you could say exactly the opposite, that--

MS. GROSSMAN: We are in the process of trying to sell risk adjustment to our payers right now, and we haven’t found an overwhelmingly positive response. One of the reasons is that when they start risk adjusting, they will take money away from some physician groups and move it to others, and that will create controversy and dissention in an already turbulent, tumultuous health care market.

For them, there is no percentage in it unless someone important demands it of them. Now the question is whether we as a system are important enough to demand that of our payers. And one of the reasons for an enlightened integrated health system with substantial market power would be to provide precisely that kind of pressure, but it happens very infrequently. Mostly right now when risk adjustment occurs, it is because government demands it.

MR. KLEINKE: Or there is collectivization. If you look at Minneapolis, Minneapolis has successfully introduced risk adjustment into the virtual capitation model because there is one employer-based coalition demanding it and imposing it en masse for the bulk of commercial lives in that market.


MS. GROSSMAN: One of the challenges the HMOs have is really being able to understand what the risk is. Often you would be surprised at how pathetic the information systems and the data they have, it has all been, you know, lumped into certain categories, so you have no way of knowing what exactly happened to the patient.

So there is very little analysis that they can perform on the data to even go back and say, "Was there a co-morbidity here that resulted in a higher risk?" None of those questions can be answered, so they are very much dealing with a black box here in terms of premium that comes in and the medical loss ratio. That is one of the things that happens.

The second thing is, as long as they don’t have this information, it is up to the physician side of it to be able to provide this information, to enlighten them on what has happened. Unfortunately, what that means is that, you know, they should have a full picture, they only can talk about their own experiences which may involve some adverse reactions. But then there are these other good doctors who are sitting out there treating well patients and incurring a lot less, and they will keep quiet, and it becomes difficult to divide the pie.

MS. GROSSMAN: Let me try to bring back this discussion to the question of physician organization and what it shows about physician organization.

When we have tried to get, within the Partners Health System, agreement on a system of risk adjustment, and have done all--because we have, because we are an academic health system, we have access to health services researchers, we have access to data analysts, we have--we can do complicated analyses and present them in a credible way. The problem we run into is that there are differing interests within the system.

And so the question is, why would a community physician, over this issue or any other issue, give up something for the whole? And why would any member of a physician organization sacrifice their short-term interests for some long-term goal? The long-term goal being making the system fairer and making it more cohesive and giving it longevity.

And the answer is, they have to get something back. So what do they get back at the current time? Well, it is pretty hard to pinpoint, but you could, and giving something back is on the mind of the managers of our community health network all the time. So, you know, you can come up with lists.

Better information systems. Well, that is pretty expensive, but it is being worked on. Or, much easier and the thing that most organizations give back to their physicians right now, is better prices in contracting, and marketing, therefore.

Now that works as long as there is true price pressure, and as long as there are enemies, common enemies to deal with, usually in the form of managed care organizations. If managed care organizations are less fearsome and if price pressure lets up, there will be less that organizations can give back to doctors in the form of advantageous pricing contracts. So the ability to--so that is one advantage.

A third advantage are things like continuing education or internal consulting or staff support or billing, the kind of MSO back office functions. Those I think are less--actually the only compelling glue right now that I think holds these organizations together is the opportunity to negotiate better prices, and we haven’t yet developed these other services to the point where physicians truly see the added value sufficiently so that they are willing to pay in the form of giving up something when it is required to give up something in the interest of fairness.

MR. GINSBURG: I think we need to move on to some other topics. Given who is on the panel, I wouldn’t want to give up the opportunity to ask the panel about information systems in physician practices, as far as where are we now, as far as what useful things are on the shelf and what do you think we are going to have that is better in a short period of time? Jake, would you want to start us off on that?

MS. GROSSMAN: Okay. You know, when you look at the information system demands, there are three basic areas where you have to--they are quite distinct. One is the health plan area, which is the HMO. The other one is like an integrated delivery system, which can be an IPA, MSO, whatever it is that accepts global cap. They have a certain set of demands. And then there is of course the physician office requirements of billing, you know, keeping track of appointments and services that are rendered. You create the HCFA form and all those things.

So let’s talk about each one of them. Let me start with the physician demands, local physician demand. Those packages are quite cheap actually, if you buy the individual ones. They are not very expensive, maybe a few thousand dollars, and they can do most of the stuff that is involved.

But when you start talking about a large group of physicians, 50 or 60 physicians practicing out of one place, then the demands become very different. And now you are talking about these, you know, millions of dollars that are invested in the same system, doing very similar functions but, I mean, more elaborate functions for a large group, including appointment scheduling for all these doctors in various sites and things like that. So the range of cost there becomes, you know, substantial.

So one of the things that happens when a physician organization is put together is, they--someone says, "Let’s choose this one system for all our member doctors." But if you look at the arithmetic involved in it, you will find that eventually in those cases the single physicians will be financing the purchase of the operation, essentially subsidizing what is happening to the larger group. The average per doctor cost for running one of those big systems is so much higher than what a solo practitioner would experience.

So that is one of the real problems for a group like this that wants to buy and provide a service for all the member doctors. We have a case of a 22-hospital organization in the Dallas area, and they decided to do this, invest in one big system for all their doctors. I think they have like 120 doctors who have signed up in the last three years, and they have over 5,000 doctors in that area who are eligible. So it goes to show that, you know, the economics doesn’t always work out in that case.

The second area where the information systems becomes very important is truly in managing the capitated dollar, and that is the one place I think people cannot afford to take any risk. They simply have to have good control of what comes in and what goes out, and if they don’t do that, they are--again, you know, it is a black box situation. You are playing, you know, according to someone else’s rules and you are trusting the system, and it won’t work.

One of the biggest mistakes I have seen there is that they let the HMO handle this accounting. For instance, in Texas there is a big controversy there with about 500 doctors who have refused to sign an agreement with Aetna, because Aetna capitated the doctors and promised to give them all the reports but never gave them the reports.

So at the end of the year they come back and said, "Sorry, you guys overutilized, you have lost all your withhold, and this is your penalty that you have to pay." They never get an idea throughout the year that things are going wrong, because Aetna just simply does not have a system to give them those answers properly.

And that is true of most HMOs. You know, Oxford had problems because it could not manage just the information that was in the form of what people are using in point-of-service sales or out-of-network cost. So eventually it becomes catastrophic and they sort of--you know, we have this problem with the Wall Street and so on.

But basically the idea that these doctors or organizations that are coming in want to control capitation, it is a good idea, but trying to relinquish that bookkeeping work to the HMO is sort of like a small businessman inviting the IRS to be your bookkeeper. Just won’t work, and at some point it is going to cause you problems, because they are going to find out how much money you are going to make and it is going to be bad for you.

And so one of the things we are finding out on the successful ones, they are going out and saying, "I don’t care what it is, we are going to try to control this cost of capitation, understand at least the basic needs of how the inflow and the outflow match each other."

The problem there is that now we have hundreds of different ways in which the providers are being paid. You heard, Joy mentioned this famous statement, I think the second misquoted in this industry, which is if you have seen one IPA, you have seen one IPA.

Doctors seem to think therefore their IPA has to be different. This was true in the early days of California when you had, you know, three or four IPAs. You had to create the fifth one that was different from the first four. But now you have about, you know, 500 models to select from. There is no reason to be unique, unless it is some kind of a perversion of the consultant or the venture doctors.

And in the process they end up making the whole situation very complicated, you know, four levels of discounts, five levels of withhold. And they can make it totally revenue-neutral and make it very simple, profitable for everyone, reduce the operation cost and be more transparent in the management.

That is the critical part. You have to be able to see on a realtime basis, how much money have I put in for orthopedics and how much am I spending for orthopedics, and try to be able to go back and drill down and understand which doctor is causing the problem or which patient is causing the problem, and for what reason.

If you can’t do that kind of real management, if you don’t have the system to do it, you are bound to have a lot of manual work going on. And the problem with manual work is that things can fall between the cracks. One of the biggest PPMs in the country, and I won’t mention the name, had 43 databases that were all not talking to each other.

So there is no way, you know, you want to make one change in one place, you have to do it in 43 places, and someone has to be able to take care of it. When you look at how they run the operation, there are a bunch of people sitting out with wonderful Lotus spreadsheets, so you are downloading data. When things change, it doesn’t come back to you in the right form, so your predictions are off from reality. This is the kind of thing that happens in management that most people don’t understand, and that is happening, very sophisticated companies spending millions of dollars.

And the third level, of course, is of course the problems of the HMO, and it is so obvious that when you look at the reports that the HMOs put out, that they just don’t know what they are doing with their money. They are treating it like the old indemnity type situation where they get in some money and essentially they pay the bills for that month, and if it exceeds their budget the increase the premiums next year. But that game has fallen flat now because of the fact that they are restraining them from, you know, using premium increases every year.

We find ourselves again in the situation, unless the HMOs have the right information systems to manage the business arrangements they have, it is just not going to work. And they are expensive, but not having them is much worse.


MR. KLEINKE: I guess it wouldn’t be sufficient just to answer that the Internet will fix it all.

Karl Schramm, a colleague of mine, Karl Schramm, I think many people probably remember Karl. He used to run the HIAA, and he was one of the founders of my company and is still on the board of HCIA. He talks about the rhetoric gap in health care, that health care has one of the largest rhetoric gaps of any industry. People say a lot of things but they don’t actually do them.

I think information technology is probably the single biggest recipient of the rhetoric gap problem in health care, and HCIA, my company, HCIA and a lot of the other companies in our sector, we were--we had a lot of very big ideas and a lot of high hopes about informatics and the power of information to change everything. And we ran into some pretty cruel reality a few years ago when we recognized that information technology was not changing health care, it wasn’t being accepted and it wasn’t really being sufficiently adopted.

I think there are a lot of reasons for that, and I think they have a lot to do with the whole point of this discussion, which is to what degree do economics really drive behavior? And the correlator to that is, to what degree do the economics drive information systems usage?

The reality is, is that most of the information we have had to work with, to measure and compare and benchmark and do all the rest of it, has been claims information, legacy data that is based on lots of shoddy practices and things like that traditionally. And the EMR, the electronic medical record, and all of these things that were supposed to come in and fix all of this, none of them have really worked because they have generally conflicted with the economics of provider behavior and the economics of HMO behavior.

Healthion is a great example. I don’t know if people are familiar with Healthion. It was--Jim Clark started it, and it was going to use the Internet to change the way the HMO did business: online enrollment, online eligibility, you could get your claims submitted. As a member, you could be a web-enabled member, and everything that you need from your HMO can be paid for really quickly.

Bad economic premise. Two-thirds of Aetna/U.S. Healthcare’s net income last year came from investment income, and you don’t get investment income from getting people enrolled quickly, and checking their eligibility and making sure that the referral goes through. The information system--in short, there have been economic incentives in the HMO world to have bad information and to have faulty processes and not to invest in IT. Oxford’s disaster is very typical of a larger disaster, which is that inefficiency pays on the plan side because the consumer has to pay out of pocket until the information gets reconciled.

On the provider side it was the same problem. Until DRGs came along, it paid not to know what your variations in drug use and lab use, test use and radiology was, because the sloppier it was, the less you knew about it, the more you could bill for. And so we are dealing with, you know, generations of economic disincentives to measure and understand, and it hasn’t changed at all.

When I was with HCI, we launched a product called Response Plus, and Response Plus was the first product on the market that could tie the UB-92 record or the traditional claims form in the hospital with SF-36 or functional health status data. We would survey people before the admission, after the discharge, and then at three, six and nine months.

And this was right in the breech, 1994, it was going to be outcomes measurement, quality improvement, all those wonderful things everybody talked about up on podiums like this in all these conferences, that IT was going to drive a quality revolution in health care. We were the first on the market with this, and there were two other entrants eventually. And of the 5,100 hospitals in America, we had a third of the market share of this product. We sold eight of them, and we sold eight of them because this didn’t--you know, everybody talked about quality and outcomes management but nobody ever really invested in it.

What I am seeing in the integrated delivery systems that I deal with and the physician practices that I deal with isn’t an improvement along these lines; it is actually a deterioration. As we move from a fee-for-service world to a capitation world, the data is getting scarcer, because the only thing that ever motivated an information transfer traditionally was the need to get paid and the need to upcode and all those other things that have driven the information technologies of health care.

So I think it is a real struggle. I think that this is an issue that we are in a really 0.0 mode here with regard to this. And really, frankly, I don’t have any answers. I had a lot of smart answers about this when we were taking the company public, and we had a lot of theory about how this was all going to work, and none of it has really come to fruition.

What I think I finally have come down to with regard to all the rest of it, again, and I don’t want to sound like a broken record here, but I was a true believer in informatics and in methodologies and data and all the rest of it until I started really following physicians around clinics and talking to them about the data. I think again it comes down to a cultural interface issue. People try to design the perfect system but they never incorporate any real clinical understanding of how it really works.

And, again, the accountability issues that David raised at the very beginning of the talk I think are critical here, and that is that there is an ultimate, absolute accountability. If I am accountable on a malpractice basis for a drug allergy that didn’t get coded, I am going to keep checking, I am going to keep taking the same history over and over, I am going to keep doing the same lab tests over and over because I don’t trust an information system that could ultimately--a glitch in which could ultimately destroy my career.

MR. GINSBURG: Just a quick one, David.

MS. GROSSMAN: Yes. I just want to say that I do believe that information technologies can improve the practice of medicine and will be an advantage to physician organizations that can incorporate them at some point in time. I could give you personal anecdotes about that.

But I do believe also that there is an enormous cultural barrier to overcome. The hope is that younger--this is one area where younger physicians really may behave differently than older physicians.

MR. GINSBURG: That’s good. Let me give you the plan for the rest of the meeting. We are running a lot later than I had thought. Our panelists have had fascinating things to say. There are a lot of questions we haven’t gotten to.

I think one of the best things to do with these questions we haven’t gotten to is, let me ask each of the panelists if they would want to make one point that they were preparing to make and haven’t gotten to because of the questions that I haven’t asked. And you don’t have to do it. We have covered all the things we came here to say.

MS. GROSSMAN: I just have one point, and it has to do with the fact related to how can providers, physicians and others, take better control, and I believe it has to do with the fact that more and more of direct contracting is going to result in that type of a relationship.

We have a situation where 3,000 employees of a school system posed the question: Can you prove to use what kind of care you have delivered for the money that we have paid? And it was very interesting analyzing the data for them and showing them, for instance, that their point-of-service plan was actually costing them less than--they were a self-insured entity--was costing them less than the managed care component, simply because the point-of-service had a very high deductible and the patients were not getting to the first doctor, and therefore there were no referrals set up.

So it is sort of interesting, I think, that type of analysis of data, to show people what is the value that is being delivered for the health care, rather than just talk in terms of premium amounts. It is going to make the distinction between good quality and mediocre ones. And I think managed care has a tremendous amount to contribute to this, because for the first time physicians are willing to sit and talk about, you know, being rated with report cards and so on.


MR. KLEINKE: Yes, just a final comment. I would argue that, just to get back to the real core thesis here, and that is how are these physician organizations going to proceed, I think the IPA or the independent practice association model is probably--you know, given that no one knows the answer to the future of the health care system, no one knows what it will look like in 25 years, given that--the IPA is the most flexible and nimble and fungible type of organization that will allow for rapid adaptation.

I think it will allow for the super thinning layer of what an MCO really does, which is a lot of back end office functions. It represents a way of, on the fly, building networks, reassembling them based on changing market conditions, et cetera.

And I think that that ultimately is how this is going to play out, that IPAs will define marketplaces and market segmentation by consumers in a health care market. And the key to making those work ultimately is physician leadership, you know, everybody again focused on the hospital or focused on the information technologies or focused on the legal/financial structures, regardless of what bizarre theory was tried and tested and failed.

And ultimately it comes down to, it is about physicians. Physicians do drive 80 percent of the cost of care in this country, and ultimately they are the ones accountable. And it is funny to look back at all these models and theories and Wall Street schemes and the rest of it, and getting the physicians on board, if they could only cooperate, seemed always to be this afterthought; that if we create the perfect model, the perfect technocratic solution to this problem, then the docs will get it and they will get on board.

I think the process has to go in the exact reverse. And that is why also the IPA model works, as well, because it has to ultimately be implementable and physicians have to be educated and understand it, and the cultural needs have to be addressed, or none of it is ever going to work.


MS. GROSSMAN: I guess I am thinking out loud here. The ideal conditions and attributes of a physician organization might include the following:

First of all, true cost accountability, so I don’t think you are going to have effective physician organizations without a cost controlled environment. That doesn’t mean it has to be a market-based--a market or competitive-based competition, but there has to be real pressure on cost that physicians feel.

Secondly, there has to be a source of data about quality, and without that physicians cannot ever know how they are doing. Even if they don’t want to know initially, it is very hard to be intelligent about practicing if you don’t have any data comparing yourself to your colleagues or comparing yourself to the preferred practice, and that means some minimal level of organization.

I do believe that organized physicians probably practice, in general, better medicine than solo practice or small organized--small groups of physicians. I think the organization needs to be physician-led, or at a minimum physicians feel--I think physicians need to feel that they are in control.

And I think it needs to be of modest size, and I would guess that effective organizations on the order of 20 to 30 physicians, accountable and self-governing, would probably be, my guess is, about the right size, where everyone can know one another and feel as though that their concerns are heard. That doesn’t mean you can’t be part of a larger organization, but some effective accountability at that level.

That would be--and I also think it ought to be multi-specialty for the ideal delivery of care, and I think that multi-specialty practice is ultimately the most efficient, allows the best exchange of information and the least costly obtaining of information that is--that primary care physicians need and specialists need.

So those are some attributes that I would ascribe to the preferred physician organization.

MR. GINSBURG: Thank you. What I am going to do is take just a minute or so to try to bring up some main points that I have scribbled down, and then go to the audience for questions. And if it is okay with you, I thought we would run a little late so that we can have time for your questions.

We talked about how physician organizations have to be local organizations. They can’t be managed from afar. There has to be involvement of physicians in decisionmaking. They have to respect the people who are leading the organization.

We mentioned how the hospital is often, while not optimal, often the most practical way of physicians forming organizations, getting the management support they need, getting the capital, but that we have had many, many examples of this not being done well, but we also have some examples where it has been done successfully that others can learn from.

We talked about the issue of capital and talked about that the amount of capital an organization needs depends in large part on the role that they are attempting to play and the degree to which they are getting into the insurance business. Interestingly, the amounts of capital that have been brought by PPMCs appear to be way beyond what any of the panelists thought that organizations need to actually function.

And hospitals and other local capital sources were seen as very important ways that physician organizations could get capital; that the Wall Street model, as a model where physicians were approaching, doesn’t seem to be very important; that the Wall Street actually was more of Wall Street seeing opportunities for branding, standardizing, and perhaps supplying some capital, was a very distinct thing, and that is what for various did not work.

We talked a lot about capitation and about what an organization taking capitation, some of the steps it makes to work down to the physician level, to get physicians to practice differently. One thing that I missed in introducing this topic is the context for capitation, which I didn’t really mean was uncontrolled fee-for-service but really was often the alternative of a lot of specific authorizations and management control by the insurance plan, as opposed to the insurance plan making the capitation payments and then having the control come about within the practice.

Risk adjustment was brought up as a particular problem that we could be hearing more and more of as far as a real impediment to implementing the use of capitation in plans, and perhaps some of it was from David but I think it was from other people too, that when HSC did its Boston site visit we heard a lot about that issue. In fact, we heard about it two years ago. We heard it much louder in our visit this past fall.

On information technology, we heard about the fact that there are--a lot of it is simple things; that the cutting edge that we have often heard in information technology, which still seems to be somewhat away, has not developed, perhaps because there wasn’t a business case from the perspective of the practice for actually paying to have that information technology put in.

Let me invite the audience to make questions, to ask questions. We have got a microphone up in front, and the panel would be pleased to answer them. We have got two microphones, so you can go to that one.

Jon Gabel?

MR. GABEL:: Yes. My question is really an agree/disagree statement, and J.D. and David, your comments particularly stimulated this question.

As I listened to you, it sounded as if what you were describing is a world where purchasers, employers, employees, in the case of HMOs still are not buying on the basis of measurable quality, and that all--and that the independence of physicians which David describes, their unwillingness to be standardized, and the failure--the simplicity of the information systems to invest that J.D. talked about, all that is as a result because purchasers at this point are not looking for to purchase on measurable quality, and everything would change, so much of what was said would be upside down if their attitudes would change. Agree? Disagree?

MR. KLEINKE: I agree completely. Last year, despite what--we are in version 3.0 of HETUS right now--last year 12 percent of all employers who purchased health care benefits even looked at HETUS or were aware of it, and only 1 percent--not of them, but 1 percent generally, so one of the 12 points made any of that data available to their own employees.

MR. GABEL:: I thank you for quoting my study, too.

MR. KLEINKE: Is that you? It won’t happen again, Jon.

MS. GROSSMAN: I wanted to stop you there. Only a third of plans report to HETUS. But it’s also, HETUS is also measuring the wrong thing. It is measuring plans rather than doctors, and patients don’t care about plans. They care about their doctor and their hospital, and they don’t act on--and I think that the reason--I agree with the first part of your statement.

I don’t agree that everything would be changed if we had the information. And the reason I don’t think everything would be changed is that there are very few--we are not yet at a point where the public is ready to use the information for decisionmaking. In fact, wherever it has been available, it has been very hard to prove that the public has used it in any important way, or that purchasers have, as you have demonstrated.

So I don’t think that quality information is sufficient to change the way physicians behave. I think a much more complicated set of societal events has to take place. Necessary, but not sufficient.

MS. TAYLOR:: Amy Taylor, The Agency for Health Care Policy and Research. I have got two related questions.

One is, as all these systems are evolving in ways that I think patients want these days, exactly what does characterize an HMO? I mean, what could you, if you were say to do a survey of a patient, what could you ask about their insurance plan that would characterize an HMO? How does an HMO with a point-of-service plan really differ from an indemnity plan with a preferred provider organization?

And on the other side, where is, as we are describing these amorphous systems, where is in some sense the locus of control coming from, because if it is not coming from above, how are we sort of going to achieve cost savings if patients can go to specialists whenever they want. I throw that out to all of the panelists.

MS. GROSSMAN: Let me tell you one of the cases that we have here is about the Community Hospitals in Indianapolis. The way they have controlled it is by actually paying, even though it is a point-of-service plan for specialists, but they have a prearranged payment amount based on contract capitation.

MS. TAYLOR:: Uh-huh.

MS. GROSSMAN: So essentially what that does is, it fixes the total budget for the month and then it gets divided in a certain fashion.

MS. TAYLOR:: Is that like out-patient DRGs?

MS. GROSSMAN: Well, it is ambulatory also in this case, yes. It can also be even continuing visits after an operation, all the things. And at this time, you know, it is an evolving thing. We have at least two clients who are using it with different degrees of success. There is a lot of grumbling amongst the doctors because they don’t quite understand this paradigm of payment.

But that is one way in which you can, you know, make point-of-service accountable, because essentially if it becomes totally free, free service, I mean free access, then the total dollars that are spent will be the same amount, so you get less. So that is one way of controlling it.

MR. GINSBURG: Actually, I want to continue this questioning for a while, but I know a couple of people have to leave. Please fill out the evaluation forms. We really make use of them.

Amy, did you have a follow-up question?

MS. TAYLOR:: Well, no. The question was how do you characterize an HMO, and you still haven’t--

MR. GINSBURG: Oh, okay. Sure.

MR. KLEINKE: Well, you bring up an interesting point. The HMOs are all--the HMOs start to look like indemnity plans when they liquify their networks and become point-of-service plans. The indemnity plans have to manage costs, so they start to look more like--and it all sort of kind of moves into this grand middle.


MR. KLEINKE: One of the bolder predictions in my book is that ultimately the HMOs are going to consolidate back into what looks like the health insurance system we all grew up with, which is six huge national carriers, a bunch of Blue Cross plans, but the fundamental differences are that these have evolved from the old indemnity which were administrative companies into something that have--that actually does take global risk, is at least putting an economic cork in what was a completely unmanaged situation before from a financial perspecive, and almost instantaneously transfers that risk down into its provider systems at the local level.

So the HMO looks a lot like--it looks like an oligopoly of old, big marketing companies, ever thinner margins, very boring business. But what is interesting is, the HMOs have also created these little internal intellectual property units, like United Healthcare has their--U.S. Healthcare has that Quality Algorithms, United Healthcare has Applied Healthcare Informatics.

And we are seeing a real cultural schizophrenia inside these plans, because on the one hand they have become these big, large national execution oriented businesses while developing this little intellectual property business inside that is supposed to help them figure out Beta blockers for heart attack patients and all those other profound clinical insights that they all give down to the provider networks.

And ultimately I think that is an unsustainable business model. I think those intellectual property units will get spun out and they will become like contract service companies or consulting types of things. You are already seeing this with Humana’s Medstep Program and Pacific Care branding out Secure Horizons, that they bifurcate into two very different kinds of business.

MS. TAYLOR:: I guess I’m going to--how meaningful is it, when we have statistics that now 60 percent of the population is in an HMO, or 57 percent, or 65 percent is?

MS. GROSSMAN: It is certainly not very meaningful from a physician’s standpoint, you know. I think it is very hard, I mean, for physicians to tell what the differences are between plans.

MS. TAYLOR:: Because there is no one-to-one correspondence between how they are paid, and--

MS. GROSSMAN: Well, for one thing, a given plan like Tufts in my--when I get my list of enrollees from Tufts, I get a list of enrollees in about seven different products, and I have no idea which product corresponds to which benefits or which management systems.

MS. TAYLOR:: Uh-huh.

MS. GROSSMAN: So I think it is getting--it is becoming increasingly meaningless as a designation. Nevertheless, if you listen to someone like Leonard Schaefer, he is very clear that HMOs are bad and PPOs are good, so he must have some idea of what HMOs mean.

MS. TAYLOR:: Thank you.

MR. DuMOULIN: I am John DuMoulin with the American College of Physicians/American Society of Internal Medicine. My question has to do with the future of capitation. The sense I got from the panel was that risk adjustment would be the next evolution of capitated payments, and we know that the Health Care Financing Administration is working on that quite a bit on the health plan level, but I was curious what the panel thought in terms of that translating down into the physician group practice level and individual physician level. Is that really a viable future, and how far off is that concept?

MR. GINSBURG: Do you want to take the question?

MS. GROSSMAN: I think it is very hard to risk adjust with very small patient populations, so that I think you can risk adjust at the plan level because you have got, you know, hundreds of thousands of lives. You can probably risk adjust at the large physician group level, but it means a substantial number of, probably 50,000 or 60,000 lives within the group to get stable estimates of risk and expected expenditure over time.

So I don’t think it is going to end up having much application at the individual physician level. However, you can, if you have a reasonable size group, create mechanisms for holding people harmless for high-risk patients and therefore blunting the pain that is associated with having sick patients in your practice.

MR. GINSBURG: Actually, if I could follow up, David, the--just at the level that you were talking about within Partners, to what extent does the technological--the methodlogical progress that HCFA makes in paying health plans, how much of that will be relevant to the next level down, as far as a plan making payments to a hospital or, you know, a physician practice?

MS. GROSSMAN: Well, it is hard to know. It is hard to answer your question because we only have the technologies that have largely been funded by HCFA, but the technologies are getting better all the time. They still only explain, you know, 10 percent of the variation, but that is a lot better than 1 percent, and I think they work--they would improve fairness of payment if applied within health care organizations, but they won’t eliminate unfairness. There still will be unfairness, and there still is a need for alternative systems like carve-outs and risk pools to supplement risk adjustment.

MR. GINSBURG: Sure. One quick follow-up. Is there a need for some R&D that is on issues that will be specific to allocating payments within an organization, that HCFA won’t get to because they are only focusing on paying plans?

MS. GROSSMAN: I think there is, and we--I think it is an area where, first off, you need some organizational research and maybe some case studies that would help you understand what the dynamic is within organizations of accepting or not accepting risk adjustment. But then I think you also need to press the methods a little bit, and of course data is a big, big problem, and capitation is an enemy of risk adjustment because it eliminates the incentive to collect data.


MR. KLEINKE: I think we actually have an infrastructure in place to do that is very effective. Lisa Iazone in particular has published widely on studying the use of different adjustment methodologies on the in-patient side. She has migrated over to this issue, which is more population-wide, risk adjusting. She just had a very interesting article in the New England Journal in December, I think, which looked at--the current HCFA method is very much an interim--HCFA likes interim payment plans, they also like interim risk adjustment plans.

And the interim risk adjustment plan is based only on in-patient diagnosis, which is great for those people who have been admitted but it doesn’t really describe 60 percent of the elderly population. But she has studied this and she has compared it, and she has done great work in that department, and I expect her to continue.


MS. MILLER: Thank you. Linda Miller with Volunteer Trustees.

You were describing earlier the variety of physician organizations and specifically how they relate to hospitals. Is there a different organization or a different relationship with Columbia, Quorum, Tennant, the for-profit hospitals, from the not-for-profit hospitals, and is anything emerging that looks different?

MS. GROSSMAN: We have Columbia as a client in Dallas area. It is no different. They are trying to do what is being done in the community hospitals, with a lot less success because the doctors distrust the hospital even more.

MS. MILLER: Are they willing to put up capital in the same way that some of the other hospitals referred to earlier today are?

MS. GROSSMAN: Again, you know, the need for capital in forming an IPA is not very much, and to that extent they do, but the real problem is that because the partners don’t quite see eye to eye and don’t trust each other, it makes it even more difficult to get the mission going, and that is more the challenge of the for-profit institutions.

MR. KLEINKE: That has been my observation, that the not-for-profits and for-profits, their behavior is converging as well. Daughters of Charity is probably the most cash-rich organization in health care right now, not counting pharmaceutical companies. And the only difference really is, Columbia actually used to use unmarked bills when they were--


MR. KLEINKE: --the physician practices. But the behavior is the same and the economic models are all the same, and they have the same issues with Stark and corporate practice medicine laws.

MS. GROSSMAN: I think in Orange County we have seen kind of a little different bifurcation. St. Jo’s Hospital System developed a foundation and brought all these different types of physician entities under their wing, and had single signature contracting. And Tennant has gone the opposite direction in that market and they are actually unraveling their friendly, physician model IPAs and turning them over to the physician owners, saying that as they get larger it has to be physician ownership to make the organizations feasible, and they are still doing--assuming they are following the Stark rules, et cetera, providing support for physicians but sort of in a less stressed fashion.

And I think there are also examples of hospitals in that market that are, because the large physician organizations, some of them are unraveling, like Med Partners, the hospitals are stepping up to the plate and saying, "Well, we don’t want to buy your practice but we sure would like to have you back under our fold. So you don’t have an office space anymore because you sold it to Med Partners, but we’ll figure out how to legally provide you with some office space so that you will come back under our fold."

So I think there is, you know, lots of different models out there and, you know, it really depends on the market.

MR. GINSBURG: I would like to close the meeting, and I would like to thank first a number of people that haven’t been up on the panel from the Center, that did a great job in preparing this meeting: Ann Griner, Gina Rule, Roland Edwards, and Craig Hardinghurst who has worked as a consultant for us. I would like to really thank all four panel members that have done a terrific job.


[Whereupon, at 12:30 p.m., the meeting was adjourned.]