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How Physician Organizations Are Responding to Managed Care

Issue Brief

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

Conference Executive Summary

Independent No More:

Conference Transcript

Harvard Vanguard Medical Associates in Boston

Conference Materials

Thomas-Davis Medical Centers, formerly Tucson and Pheonix

Conference Materials

Independent No More:

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

Community Hospitals in Indianapolis

Conference Organizational Scenario
January 1999

ommunity Hospitals Indianapolis (CHI) is a vertically integrated system serving a nine-county region. It encompasses four tertiary care hospitals, six immediate care centers, three nursing homes, and over 270 affiliated primary care physicians in about 120 offices. Physicians enjoy a variety of relationships with CHI. Some are employed. Some are independent, with privileges at one or more CHI hospitals. And others are members of groups that have joint ventured with CHI as majority owners. Whatever their economic affiliation, nearly all are members of MedPrime or SpecPrime, CHI-sponsored IPAs for primary care physicians and specialists respectively. Through these entities, the system pursues managed care contracting, medical management, and tries to foster general collegiality among otherwise disconnected physicians. CHI, feeling financial strain from acquiring a large number of physician practices in the mid-1990s, is contemplating ways to reconfigure those arrangements in the near future.

The Indianapolis Market

Four hospital-based systems dominate the provider market. Each is a sponsor of-or partner in-a health plan, which share the market with two other plans. Managed care is concentrated in PPOs. HMO penetration is low, although a large amount of this business is paid on a global capitation basis to PHOs. Most physicians are in small, single-specialty groups, and most PCP practices have been purchased by one of the four health systems. Despite a significant oversupply of specialty physicians, health care costs are relatively stable, and consumers are generally satisfied with the cost and quality of health care. The area is demographically unremarkable, and the economy has been thriving for a number of years.


CHI organizes its physicians through two subsidiary IPAs, each with its own physician-dominated board. Nearly all CHI doctors belong to one or the other. MedPrime encompasses CHI’s 270 family practitioners, pediatricians, and general internists. Specialists belong to SpecPrime. Doctors attend regular administrative and clinical meetings under the auspices of the IPAs, but they may be affiliated with CHI in one of three ways.

Historically, CHI’s physician partners were most commonly independent contractors in solo practice. In the mid 1990s, competing health systems threatened to buy up CHI’s physician base, forcing CHI into defensive acquisition of about 100 physician practices. This is the second kind of partnership. Most of those deals bound doctors to five-year contracts at generous salaries. In the ensuing years, financial losses among the owned practices led to a third approach. Under this approach, CHI has set up limited liability corporations (LLCs) with four local groups of five to 20 physicians, large by Indianapolis standards. The physicians own 51 percent of the LLCs. CHI-affiliated physicians practice under their own name, not a CHI brand.

MedPrime and SpecPrime were established to facilitate medical management and accept risk. Risk contracts are negotiated by CHI’s PHO, Indianapolis ProHealth. ProHealth contracts with payers on behalf of the network providers and receives capitated payments. The division of the capitated dollars is determined jointly by representatives from the hospitals, MedPrime and SpecPrime.

Physicians interface with MedPrime and SpecPrime through Care Councils, defined by specialty, which meet bimonthly. These meetings, facilitated by MedPrime’s medical director, bring 10-15 primary care doctors (of any relationship to CHI) and appropriate SpecPrime physicians together to discuss coordination of care and best practices, in a continuing education environment. Recently, the Care Council meetings have been used as peer review sessions, in which individual doctors disclose their productivity and performance data to their colleagues in a "non-judgmental" environment. MedPrime Executive Director Tom Vandergrift says, "one of the philosophies MedPrime has is that in the long run to be successful in managed care, there has to be a collegial partnership with specialty colleagues, not an adversarial relationship. You haven’t seen in this delivery network primary care physicians, for example, leveraging referrals on the specialists in return for reduced fees." Specialists, he says, are generally reimbursed on contact capitation, a system that attempts to reward doctors based on the frequency and difficulty of the procedures they perform in a capitated environment. Clinical programs that have emerged have reduced hospitalization among patients with congestive heart failure, asthma, and other ailments.

Some CHI physician practices receive practice management services from a for-profit subsidiary of CHI’s foundation, a company called Indianapolis Medical Management. This Management Service Organization was developed over ten years ago as a selling point to area physicians in the emerging managed care environment. CHI had built a new hospital and was interested in attracting new physicians. IMM offered capital, staffing services, group purchasing, and administrative assistance, allowing new physicians to set up a practice without joining an existing group. One IMM official said the model was highly successful at a time when CHI was competing with other hospitals in the recruiting of new doctors, because it allowed them to quickly set up an independent practice. Over time, IMM has expanded beyond CHI hospitals, franchising its service to five other hospitals in central Indiana that needed expertise in managing owned and affiliated physician practices.

Overall, CHI is reported to be financially stable, but administrators say that system-wide margins aren’t what they need to be to finance growth. The system is intensely assessing costs and revenue opportunities, and it has been looking for a merger partner for some time. The most pressing "drain" the system is trying to plug, is its relationship with its employed physicians.

Stemming Losses

CHI is preparing to significantly reconfigure its physician relationships, especially with the practices it owns and employs. "Everybody’s losing money on employed doctors. We are now in the process of trying to figure out how to better align the incentives of the employed physicians," says John Fohrer, IMM’s COO. While a new system has yet to be determined, it appears that the MSO will play an increasingly important role in mediating day-to-day concerns between the hospitals and the doctors. One participant said a goal may be to leverage the investment it has made in primary care through an identifiable "product", i.e. a brand in the marketplace.

As for the process through which this change is being contemplated, Fohrer says: "CHI is being pretty open with its medical staff to say we did this when we did it because we needed to retain our primary care base. And we have lived by the letter of the contracts. But most of the contracts pay doctors more than what they’re producing and providing benefits in excess of what they ever had before. The bottom line is that it’s a drain on the institution. Long term it’s not a strategy you can sustain."

So far, CHI has had few options in physician compensation beyond adjusting salary up or down, based on performance and productivity, as employed doctor’s contracts have come up for renewal. The hospitals have been constrained in adjusting many physicians down as far as their numbers would indicate, out of fear that they will go elsewhere. The best they can do, says Fohrer, is a "stairstep" approach that docks pay modestly year by year. CHI reports no significant dissatisfaction or defection among their physicians, perhaps because competing systems have come to realize they can’t risk overpaying for physicians either.


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The Center for Studying Health System Change Ceased operation on Dec. 31, 2013.