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How Physician Organizations Are Responding to Managed Care

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

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

Thomas-Davis Medical Centers, formerly Tucson and Pheonix

Conference Organizational Scenario
January 1999

ntil its demise in 1998, Thomas-Davis Medical Centers was one of the oldest multi-specialty medical groups in the U.S. It was founded in 1920 and expanded from its home in Tucson to the Phoenix market in the 1980s. In the mid-1990s, the practice (and its affiliated, physician-run HMO, Intergroup) suffered economically and was sold twice in three years. In the process, it was separated from Intergroup and saw a quarter of its more than 200 physicians quit out of dissatisfaction and frustration. In 1996, the practice was acquired by FPA Medical Management of San Diego, a national physician practice management corporation. Management/doctor relations were strained under FPA ownership to the point that Thomas-Davis’s Tucson doctors unionized in 1997. When FPA went bankrupt, Thomas-Davis was dissolved, to the grave disappointment of the doctors, their patients, and the Tucson and Phoenix communities.

Rise and Fall

In 1920, Dr. Charles A. Thomas and Dr. Stirley C. Davis opened a medical practice together in Tucson. Over the next seventy years, their clinic grew into one of the largest and most reputable multi-specialty group practices in the southwest. In 1980, the physician-owners of Thomas-Davis Medical Centers observed that they were losing patients at a rapid rate to an early Arizona HMO. Thomas-Davis physicians joined doctors from the Tucson Clinic, a separate group practice, to establish an HMO called Intergroup Health Care. Through an exclusive contracting arrangement, Intergroup helped Thomas-Davis expand, and by 1986, the clinic had 10 locations in Phoenix and five in Tucson’s Pima County.

The combined Thomas-Davis/Intergroup struggled financially in the early 1990s, prompting two significant events. First, the company sold 40 percent of its stock to the public in 1991. At the time, Intergroup was the largest HMO in the state, with 379,000 members. Then in November, 1994, both Thomas-Davis and Intergroup were sold to Foundation Health Corporation for $720 million. The 133 physician-shareholders each received Foundation stock worth $3.2 million, according to the New York Times.

The leadership and board of Thomas-Davis remained the same through this transaction. But the doctors went from being owners to being employees of Foundation, losing their personal stakes and much of their governance role in the practice. Moreover, Foundation, a large, acquisition-minded HMO, had no incentive to treat Thomas-Davis and Intergroup as symbiotic partners. Instead, Thomas-Davis saw Intergroup become a tough negotiator for fees. Paradoxically, however, while physicians typically resist incentive-based compensation tied to productivity, Thomas-Davis doctors had worked happily under such a system for years. Foundation put the doctors on generous salaries, with much weaker productivity rewards. Some physicians let their case loads drop by half, and patients began complaining of not being able to get appointments. The clinic lost over 50 physicians in the wake of the Foundation sale, partly through doctors who retired early with their proceeds and partly through doctors dissatisfied with the loss of influence and equity in the organization.

With salaries high and productivity declining among some physicians, Thomas-Davis continued to struggle, losing $2 million a month in 1996, according to news reports. One former board member and Thomas-Davis physician says today the clinic resisted efforts from without and within to trim support staff and cut costs. In November 1996, two months after Foundation’s president had publicly promised not to unload Thomas-Davis, Foundation unilaterally sold the practice for $220 million to FPA Medical Management, a national physician practice management corporation in San Diego, while retaining Intergroup. FPA apparently wasted no time in imposing the efficiencies Thomas-Davis had been discussing for several years. According to former Thomas-Davis physicians and news reports, FPA released 26 physicians and cut doctors’ salaries by up to 50 percent, imposed unprecedented restrictions on referrals to specialists, and imposed coding policies that ensured minimum reimbursement for even complex procedures.

Concerns over the sale led Thomas-Davis doctors to begin discussing unionization even before the sale was finalized. Within two months of FPA’s acquisition, Thomas-Davis Tucson doctors voted 93-32 to join the Federation of Physicians and Dentists. About 20 doctors abstained from the vote and the clinic’s Phoenix doctors were not part of the union effort. FPA challenged the legitimacy of the vote, arguing that doctors are supervisory employees. Legal proceedings took most of 1997. In the end, not only was the union recognized by the National Labor Relations Board, but FPA was found guilty of unfair labor practices and forced into a settlement that encompassed back pay, working conditions, and purging of anti-union warning letters.

In the spring of 1998, FPA signaled that its financial problems might cause them to sell some physician practices, and in July, Thomas-Davis ceased to exist. The warning gave Intergroup a chance to ensure continuity of service for their members. The HMO claims to have underwritten the costs of keeping Thomas-Davis clinics operating for an additional two months, while patients and doctors made new arrangements. Intergroup also says after the closure was complete, 80 percent of its patient base was able to retain their primary care physicians.


The collapse of Thomas-Davis left nearly everybody involved dismayed. Especially frustrating to the physicians was the behavior of FPA management in the period just before the company’s insolvency. In March 1998, with its stock falling fast, FPA ousted its President and CEO, but paid him a $4.8 million severance package. In May, the company reported a $9 million loss for the first quarter, and six class actions suits against FPA alleging securities fraud and insider trading were disclosed. In July, after defaulting on millions in loan payments and announcing the closure of most of its physician practices, FPA executives voted themselves $3.5 million in pay hikes and bonuses.

One physician told the Arizona Daily Star: "It’s appalling. . . .I’m embarrassed it’s happening. From a community standpoint, this was a valuable resource for Tucson and Southern Arizona. We did excellent work, and that’s all gone now." Incidentally, Tucson’s other large multi-specialty group, Group Health Medical Associates, an arm of Tucson Medical Center, went out of business in April 1998, also a victim of its management’s inability to secure better reimbursement or control cost.

Former Thomas-Davis physicians described an awkward but ultimately manageable transition to private practice. Most Thomas-Davis doctors reestablished themselves in solo or small group practices, which has placed upon them new administrative burdens and introduced new inconveniences and inefficiencies into the delivery of care. Many patients can no longer get all their outpatient services in one building, for example, while billing and medical management became more difficult and labor-intensive when dealing with a multitude of payers.


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