Smaller Aggregates Prove Better at Realizing
Economies of Scale, Lowering Overhead
Physician groups were supposed to be the salvation of the medical profession in the era of managed care, a way for doctors to use their joint clout to wring more money out of health maintenance organizations.
But in the past year or so, a basic truth has emerged about these groups: bigger is not better.
In fact, it seems the bigger a physician group gets, the worse it is likely to perform. Whereas some of the smaller ones have flourished, many of the larger ones have been disasters.
Smaller groups, those with maybe five to seven physicians, have in general been more successful in achieving economies of scale by consolidating office space and overhead and allowing members to back one another up, experts say.
Larger groups such as Bristol Park Medical Group, Costa Mesa, and Monarch HealthCare, Mission Viejo, have struggled.
But the big, publicly traded provider networks, such as Long Beach-based MedPartners Provider Network and San Diego-based FPA Medical Management, which both collapsed last year, failed on numerous fronts to live up to their promise. They were unable to streamline their operations and did not manage to use their leverage to obtain higher fees from the HMOs, according to Eileen Raney, national practice leader of the integrated health group with Deloitte & Touche.
“Their back-office operations were a disaster,” said Raney. “They did not even know that they were in deep financial trouble until it was too late for them to do anything about it.”
Caught in the Middle
Many physician groups found themselves caught because the HMOs have shifted the burden of providing healthcare at the lowest possible cost to the providers. A report by the California Medical Association shows that the state’s capitation rate,the monthly amount provider groups get from HMOs for each member they care for regardless of the medical services provided,has fallen by 35%, from $45 a month in 1990-93 to $29 in 1997-99.
In addition, the CMA maintains, health plans have delegated more administrative responsibilities, such as utilization review, quality assurance and claims processing, to provider groups, thereby increasing their financial burden.
“The HMOs thought that by reducing capitation payments, they would make the physician groups more efficient,” said Raney. “But maybe they were too aggressive, because the result was that many groups ended up in financial trouble.”
That was not what doctors were expecting when they sold their practices to physician groups at a time when managed care was on the rise.
Then, it seemed attractive for private physicians to become part of a group and receive a guaranteed salary rather than have to hustle for patients, said consultant Steve Valentine with the Camden Group in El Segundo. But those salaries have suffered as health plans have tightened the screws over the years.
Fees Reduced
“For six years in a row, we had to reduce across the board the fees that we pay our physicians,” said Dr. Sam Romeo, who heads University Affiliates IPA in Alhambra, a group of 3,000 physicians. “Nobody liked it, but it’s what we had to do in order to practice medicine and stay solvent. Last year the health plans increased the premiums they charge employers, and we expect to see a trickle-down effect in physician fees this year.”
The HMOs, meanwhile, say they are not the ones driving provider groups into insolvency.
“It is true that a number of medical groups are under financial stress,” said Walter Zelman, president of the California Association of Health Plans. “But there is a considerable amount of tension throughout the managed-care system. The consumers want choice and access but only pay a small portion of the fees, and the government and the employers want to keep the cost of health insurance down. As a result, health plans are not making a lot of money, doctors are making less or the same amount of money than before, and the buyers are benefiting.”
As health plans raise their premiums in response to the public outcry for better service, payments to physician groups are expected to go up. Valentine believes that many groups are seeing the light at the end of tunnel.
“In particular, the more tightly organized and integrated medical groups are receiving the benefits sooner (rather) than later,” he said. “For the more loosely organized IPAs (Independent Practice Associations), it may take longer, but they too are getting more efficient.”
IPAs are umbrella organizations that simply provide administrative services and distribute health plan payments for doctors. They differ from medical groups, which put doctors together to share offices, patient information and other resources in an effort to reduce costs.
In some form, whether large groups or small or simply IPAs, physician groups are expected to survive.
“There’s two ways of looking at them,” said Cesar Aristeiguieta, a resident at LA County-USC Medical Center. “On the one hand, it is a good thing for physicians to pull their resources together and to have a more representative voice when dealing with government and with insurance companies. The drawback is when a physician group assumes the risk of an insurance company and physicians are put in the role of rationing care. As a doctor, you don’t want to be put in position where you make medical decisions on the basis of your own income.” n
Pettersson is a staff reporter at the Los Angeles Business Journal.
“The HMOs thought that by reducing capitation payments, they would make the physician groups more efficient. But maybe they were too aggressive, because the result was that many groups ended up in financial trouble.”
, Eileen Raney
Deloitte & Touche
