united we stand: power shifts marginalize physician practices unless we act and integrate

8/7/2019 United We Stand: Power Shifts Marginalize Physician Practices Unless We Act and Integrate

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ithin six months, three seismic events

changed my world as the CEO of a 55-

physician multispecialty practice. They took

place on a local level but illustrate what’s

happening nationally, as well. These

changes are marginalizing physicians’ influ-

ence on medicine and their personal des-tinies. They mean that physicians had

better integrate with larger organizations or

watch both their incomes and influence

continue to drop.

Clearly, this is bad for doctors personally,

but I believe it’s also bad for the industry as

a whole.

Big players get bigger

Before I describe the events that affected my

practice, let me describe our market. Fort

Wayne, Ind., is a city of nearly 300,000 peo-

ple. Our home county has 750 licensed

physicians. Our group is the region’s largest

private practice. The physician community

in northeastern Indiana is fragmented and

dominated by two large health systems.

We’ve generally flown under the nationalradar in terms of trends. I mention all this

because our market typically reads about

seismic changes; it doesn’t experience them

firsthand. Until now.

In September 2007, a Wall Street firm

acquired our main hospital system’s parent

company, and the corporate leadership

changed overnight. We suddenly didn’t

know our “partner” across the table. Later

that month, Cigna acquired an Indiana pre-

ferred-provider network, which had always

been friendly to physicians. This effectively

United we standPower shifts marginalize physician practices –unless we act and integrate

W

©2008 Medical Group Management Association. All rights reserved.

By Joel Sauer, MGMA member

and CEO, Heart Center Medical

Group, Fort Wayne, Ind.,

[email protected]

page 52 • MGMA Connexion • October 2008

This Web version may be reproduced for individual use.



doubled the insurer’s patient population for

my group. In October, our pathology and

reference lab provider sold out to national

giant LabCorp.

All three transactions made major play-

ers in our health care market bigger and

more influential. The change in hospitalownership brought new leadership, a new

strategic direction for physician partner-

ships, greater access to capital and a larger

national presence. The payer gained market

share and leverage in fee negotiations. Like

the hospital system, the lab company par-

ent brings a strong national presence,

including exclusive payer relationships

which effectively carve out physician office

labs.

Ominous signs for physicians

If all this sounds ominous for physicians, it

should. We’re both a partner and competi-

tor for the health care dollar to those busi-

nesses. Just like you, the leaders of these

organizations are trying to maximize return

on investment for their owners/sharehold-

ers. They recognize size and integration aspowerful strategic advantages.

Survey data from the Medical Group

Management Association indicate that more

than half of clinic-based physicians practice

in groups of three to 10. Other surveys sug-

gest that as many as 75 percent of U.S.

physicians work in groups of 10 or fewer.

Regardless, it is clear that this sector of the

health care industry is still largely frag-

mented. The disjointed architecture has

caused a loss of economic and political

influence for physicians. If left unchanged,

this state will not only have dire conse-

quences on physicians’ income but on

health care as a whole, as physicians con-

tinue to be pushed out of leadership roles.

On the hierarchy of the health care dol-

lar, I’d rank physicians a distant fourth in

terms of influence. The government is No.

1, as the leader of Medicare, the country’s

largest insurance plan. Next comes the hos-

pital industry, heavily influencing decisions

in Washington, D.C. Then come the payers;

the mega-national insurance plans have

clout at the federal level and also push localmarkets through fee schedules.

Shooting the wrong enemy

Perhaps the most dangerous aspect of the

fragmented, island-based structure of

today’s physician community is that it pits

physician against physician in the competi-

tion for fees. In my market, like many of

yours, payers contract with the hospitals

before turning to the physicians. By the

O rg a niza tiona l Gov erna nce

se e United, page 55

MGMA Connexion • October 2008 • page 53©2008 Medical Group Management Association. All rights reserved.

Drop in profit Year 1 Year 2 % Change

Revenue $1,000,000 $850,000 -15.0%

Expenses $700,000 $700,000 0.00%

Net margin $$330000,,000000 $$115500,,000000 --5500..0000%%

How three seismic eventsin Fort Wayne, Ind.,

pushed a multispecialty

group administrator toembrace integration





time we have a shot at the health care dol-

lar, two competitors have already taken a

chunk: Payers have taken a piece for admin-

istrative overhead and profits, and hospitals

have taken a portion. Physicians largely

negotiate against one another for the

scraps. This plays out at nationally, as well,

where physician societies squabble with

Congress, more often than not taking

money from each other.

Integration common sense

Will integration and size really change any-

thing? If a payer in your market goes from

10 percent of your business to 20 percent,

will it be easier or harder to negotiate fees?

Few of us would answer easier. Bigger is bet-

ter.Let’s turn the tables. As a practice admin-

istrator, would you feel better about your

chances for successful negotiation with a

major payer leading a group of 10 physi-

cians or 100? In that context, I’d choose to

be bigger. The same is true with my negotia-

tions with hospitals. I would much rather

come to the table representing a large, diver-

sified portion of admissions or revenue than

a smaller, focused portion.

Beyond negotiating strength, size also

brings volume – and diversity (assuming a

multispecialty model) – both of which are

imperative in today’s hostile climate. Con-

sider two independent gastroenterology

groups, both of which operate two-room

endoscopy centers with similar annual vol-

umes. Each earns a nice margin on its

respective book of business but faces a 30

percent decrease in Medicare reimbursement

over the next three years, with similar cuts

anticipated from commercial carriers. Given

the high overhead of this service line, a sig-

nificant cut in reimbursement is leveraged

by as much as 3:1 or more on profits. Inother words, a 20 percent decrease in reim-

bursement could result in a 50 percent to 60

percent drop in profits (see table, page 53).

That same high fixed-cost characteristic

now becomes an advantage if the practices

integrate and combine patient volumes and

s ee United, page 56

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page 56 • MGMA Connexion • October 2008 ©2008 Medical Group Management Association. All rights reserved.

facilities. Instead of an endoscopy center sit-

ting idle after 3 p.m. weekdays and entirely

on weekends, it can now generate revenue

during those times – with no increase in

rent or other fixed costs. With proper man-

agement, the doubling of volumes should

drop per-procedure staffing costs, thereby

increasing the net margin per case (see table

above). This is powerful.

I’ve obviously made certain assumptions

with this illustration (e.g., potential

antitrust issues, shedding of rent), but in

almost every situation these can be

addressed over time. The resulting math

benefits the combined entity.

Diversify investments to gain

economies of scaleIn my illustration, two identical service

lines combined to gain economies of scale.

Let’s now suppose a gastroenterology center

joins a podiatry center. At first glance, few

would consider these specialties symbiotic.

However, here’s an opportunity to increase

patient volumes, thereby permitting

economies of scale and margin and diversi-

fication of the center’s revenue stream.

Integration can bring that diversifica-

tion. It’s not simple, but neither are the

alternatives.Size can also enhance savings in

expenses. Each time you add a doctor to

your group, the cost is borne by a larger

number of physicians, ergo, the cost per

doctor decreases — without any other

action. This phenomenon comes with size

United from page 55

Fixed-cost study Pre-merger Merged

Total fixed costs $290,000 $290,000

Procedure count 3,500 5,000

Fixed cost per procedure $82.86 $58.00

Increased margin perprocedure

N/A $24.86

Total increased margin N/A $124,286

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(see table, page 56). Granted, such

economies do not affect all areas of the

practice proportionally, such as direct clini-

cal care, but larger size with solid manage-

ment can lower costs per doctor. Even

without savings at the clinical level, thereare significant dollars committed to other

administrative functions where savings

shouldn’t be discounted, such as billing and

collections, medical records, medical recep-

tion and scheduling, building and grounds,

and general administrative costs. In such

areas, the cost per provider should decrease

with growth.

Size means survival

Now let’s come at expenses from an angle

other than raw cost. As a group expands, itcan afford a more sophisticated infrastruc-

ture. In other words, for the same cost per

physician it can afford a better product.

Outside of contracting strength, this is per-

haps the strongest motivator for growth.

Few of us believe that managing physician

PAThe

s ee United, page 58

groups will get easier, so the more tools we

have at our disposal, the better.

Consider fee schedules, for instance.

How many of us have a full-time employee

or even a department devoted to contract

negotiations? I would hazard a guess that

many of you, like me, perform contract

analysis and negotiations in our “spare”

time. That’s not how hospitals or insurance

companies handle it. We need to level theplaying field.

Information technology, too, plays a crit-

ical role in practice management. Whether

the Centers for Medicare & Medicaid Serv-

ices sticks with pay for performance or not,

payment for quality — or at least the clear-

Economies of scale Year 1 Year 2

Medical records $250,000 $256,250

Physicians 10.0 12.0

Cost per physician $25,000 $21,354




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page 58 • MGMA Connexion • October 2008 ©2008 Medical Group Management Association. All rights reserved.

ing of quality hurdles — is here to stay. My

group participated in Medicare’s Physician

Quality Reporting Initiative with pen and

paper, since we don’t have an electronic sys-

tem. We entered data retrospectively at the

billing office, adding largely uncompen-sated work and potential distraction to a

department needing neither. We know we’ll

need to turn more to information technol-

ogy, but it costs money – lots of it.

Size allows groups to make these invest-

ments. Physicians, as the leaders of health

care delivery, must reassert themselves as

industry leaders. But this simply can’t hap-

pen from our fragmented, largely single-spe-

cialty silos. By integrating as large, multi-

disciplinary groups with sophisticated

administrative and information infrastruc-

tures, physicians will have the resources toimprove the quality of care. This is the

greatest asset they can bring to the health

care table.

Competitors for the health care dollar —

hospitals, insurance companies, ancillary

service providers, etc. — are consolidating.

Unity gives these entities even more lever-

United from page 57

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age and makes it even more difficult for

physicians to compete. Perhaps worse, the

nation’s health care system is being led by

every sector except the physicians, which is

simply wrong.

Physicians must abandon the silo-basedarchitecture of small, single-specialty

groups. Integration can:

• Produce direct economic benefits for

physicians in revenue and expenses;

• Allow investment in infrastructures

required to remain competitive in this

marketplace; and

• Provide physicians the resources to

improve the overall quality and

efficiency of health care delivery.

Without such changes, both the private-practice model and the industry as a whole

are in peril.

e-mail us Do you think medical groups can gain

influence through integration? Tell us at connex-

[email protected]


united we stand: power shifts marginalize physician practices unless we act and integrate

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