Recovering From The PPM Debacle

In his 20 years as a health care lawyer, Jeffery M. Alexander has seen the rise, and often fall, of all manner of health care organization. A member of the Health Care Practice Group of the Providence, R.I., office of Brown, Rudnick, Freed, & Gesmer, Alexander has devoted much of his focus recently to physician management organizations, a term that encompasses management services organizations, physician practice management companies, and medical management companies.

Alexander has just written a book on the topic, Implementing a Physician Management Organization: A Guide to MSOs, PPMs, and MMCs. It looks at the legal, regulatory, and professional issues that arise when physicians decide to launch or affiliate with companies that help them manage their practices. In speaking recently with Senior Contributing Editor Patrick Mullen, Alexander dissects what went wrong with PPMs, and explains why he still sees a bright future for physician-run medical management companies.

MANAGED CARE: What forces spawned physician practice management companies, and how did PPMs differ from what preceded them?

JEFFERY M. ALEXANDER: You have to start with PhyCor, because it was the mother of what we think of as the PPM industry. PhyCor came about when some former HCA executives who had been in health care their entire careers were looking for a new market for their services. They came to the conclusion that the one overwhelmingly untapped area in health care was the equity in physician practices. Nobody had ever attempted to do anything with that financial base.

MC: In other words, PhyCor asked, “What can we provide to doctors so that they will let us tap into their equity?”

ALEXANDER: Exactly. That was the birthplace of PhyCor’s first-generation PPM model. There were three components to it: overhead savings to be achieved by managing physician practices through automation and centralized purchasing; ancillary medical service capture that physicians were not taking advantage of; and later, efficient management of risk contracting through HMOs. That wasn’t one of the initial reasons for PhyCor but became one of the things they attempted to do later. The overwhelming reason was the real belief that a company that managed multiple physician practices could actually make money through overhead savings and economies of scale.

MC: How did PPMs fare in providing ancillary services?

ALEXANDER: Companies that are looking for that type of PPM experience, mostly specialty PPMs, have for the most part been more successful.

MC: Why is that?

ALEXANDER: There are two ways to make money in health care, or in any business: reduce expenses or increase revenues. It sounds simplistic but it’s true. If you accept the fact that it is difficult to reduce expenses in a common physician practice, the other thing you have to look at is increasing revenues. So companies like American Oncology Resources and Physician Reliance Network, which are merging now, captured revenue streams that physicians weren’t getting in their office previously.

MC: That was because patients were referred to somebody else and that money went out the door with them?

ALEXANDER: To surgery centers, hospitals, whatever. I worked a few years ago with a neurosurgery PPM. Most neurosurgery groups in the country were made up of just neurosurgeons. A few cities had neurosurgery practices that consisted of neurosurgeons, neurologists, neuro-physiologists, neuro-psychiatrists, physical therapists, occupational therapists. Basically, these doctors had brought into their practices everything that could be done outside of an acute care hospital. This is revenue enhancement. This is an area where the PPMs have been more successful: orthopedics, nephrology, a number of other specialties.

MC: Regina Herzlinger, the Harvard business professor who has written about market-driven health care, would call that a focused factory.

ALEXANDER: Exactly. Most radiation therapy facilities for medical oncologists work at 40-percent capacity. It means that if you can operate a large facility at full capacity you can make lots of money.

MC: Meanwhile, some of the biggest general medical PPMs are leaving the business. How much of that do you attribute to the general factors you just laid out, and how much of it is due to unique circumstances at companies like MedPartners, FPA Medical Management, or PhyMatrix?

ALEXANDER: There are some things that are universal. The difficulty in making money from economies of scale is true across the board. Beyond that are some unique weaknesses that were specific to specific companies. For instance, MedPartners bought any company that moved. It not only bought and overpaid for multispecialty physician practices, it would buy a three-person orthopedic practice in the middle of nowhere and buy no other practices in that area, either because it didn’t want to or because nobody else would sell. What good is a three-person orthopedic practice? Where are you going to get any return whatsoever if that’s your only practice?

MC: So they were driven by the view that bigger is better.

ALEXANDER: And they bought into other types of health care companies. There didn’t seem to be any cohesion to what they were doing.

MC: Except that they were trying to impress Wall Street and show that their revenues and number of physicians were growing, to impress people who didn’t understand whether that made sense or not.

ALEXANDER: They were trying to be bigger and better than PhyCor. One of FPA’s downfalls was that it grossly overpaid for practices.

MC: That almost falls into the category of general mistakes in this sector.

ALEXANDER: True. PhyMatrix never had a cohesive business plan. They were simply buying practices. What kind of practices, what for, what were you going to do with them? I had clients who spoke to them, and I never had any comprehension of what their general business plan was. PhyCor on the other hand, to its credit, has always had a very cohesive business plan. It has always followed that business plan, which is probably why it’s been the most successful of these entities. Now it’s taken a hit recently and it’s obviously not as valuable as it used to be but you knew what PhyCor did. PhyCor managed physician practices. It didn’t manage physical therapy companies, own a billing company, or manage drug benefits. It managed physician practices. While it may have made some mistakes, and while the underlying business strategy may have been incorrect, at least it had a core business strategy that it has always stuck to. These other companies were an amalgamation of a hundred things other than practice management.

MC: That mutual antipathy between administrators and physicians seems to have worked its way into the bloodstream of American medicine right now.

ALEXANDER: Absolutely.

MC: How can that be purged? How do you move forward from the wreckage of these last few years? After physicians finally decided to get involved on the business side, to sell their practices to PPMs, many of them are left holding the bag, and they’re never going to get their money back.

ALEXANDER: But they may have their practices back. That’s the thing with a service industry. Physicians still hold the licenses, so they still have the ability to create that business again. And in many cases they got paid a lot of money and now have their practices back. In some cases all they have is worthless stock. But in a lot of places they got a lot of money up front in cash, so they now have cash and the ability to take the practice back and restart it.

MC: What would be your response to a physician who said, “I’ve tried the PPM option, and maybe I got some money, but I’m going back to the mom-and-pop operation that worked for me for 15 years. I don’t see why it can’t work for me again.”

ALEXANDER: Depends on the market. In some markets my response would be, go baby, go ahead and do it, that makes perfect sense.

MC: So if you’re in Boise, Idaho, that might make sense.

ALEXANDER: Right, or Gillette, Wyoming or Silver City, New Mexico. I’d say, “God bless you.”

MC: But if you’re in Sacramento?

ALEXANDER: If you’re in Sacramento, there’s no going back. Back isn’t there anymore. So what I would tell the doctors to do is to be smarter this time, which is not say that he or she did something so terribly unsmart before. The marketplace is smarter so he or she has to be smarter. In my book, I discuss what the physician should explore prior to thinking about doing anything. The three questions that physicians need to initially ask are: what, why and how. What is it you want to do? If you could develop the perfect practice for yourself what would it be? A lot of people hopped onto MedPartners’ bandwagon. It’s what I call the lemming-like approach to running a business. They’re doing it so I’m going to do it.

MC: Maybe they heard somebody across town just cashed out in a big way.

ALEXANDER: Right. A lot of doctors who went into these things are doctors who never ever should have been in this type of environment. I blame the doctor and I blame the PPM. Second question is why do I want to do that? Do I want to do that because the practice across town cashed out or because I think it’s better for my practice? The third question is how’s the best way to do it? What options are available to me, how will I create the environment that’s best for me or for my practice? The physician should be doing his or her own due diligence. It is incredible to me how many times doctors go down the road of massive restructuring without doing any personal review or due diligence.

MC: A possible trend over the next several months is that hospitals may try to scoop up some physicians who are being sprung by PPMs that are getting out of the business. What would be your advice to physicians who are having talks with the local health system that says, “We want to build a physician network and want you to be part of it?”

ALEXANDER: Physicians have to look long and hard at a hospital affiliation, and I know that’s a great generalization. There are a few hospitals that run excellent affiliated physician groups. They run them like a good practice-management company should. They run them like the size physician practices they are, they create economies by doing the same things the doctors should or were doing on their own. In many other instances — and the American Hospital Association itself has admitted it — hospital-run physician practices have been a disaster.

MC: What are the main reasons they’ve been a disaster?

ALEXANDER: The biggest reason that I have seen is hospitals tend to run physician practices as miniature hospitals. They don’t realize that they are among the most successful mom-and-pop businesses in the country, and should continue to run them the way they were run. You bought it because it was successful, so continue to do the things that made it successful. A lot of hospitals are very much into control. It has to be their baby, they have to control it the way they think it should be controlled. A good hospital administrator knows how to run a good hospital, but there is certainly no assumption that because you can run a hospital well, it means you can run a physician practice as well. It’s a totally different business.

MC: In the introduction to your book, you write that “Many physicians, particularly in mature managed care marketplaces, have bought into the idea that they have little knowledge, training and ability to manage ‘complicated’ health care businesses. Nothing is further from the truth.” What would you say to physicians who don’t want to affiliate with a local hospital or go with a for-profit PPM, but who want to get more organized and a little bigger?

ALEXANDER: Three things. First of all, business is business. If you have the knowledge to run a successful medical practice, you have a good chunk of the business knowledge that you need to possess to do something bigger. Second, you ought to get educated about what you don’t know. This is often a major stumbling block for physicians, because there are a lot of physicians who want to practice medicine. They don’t want to be business people, and that’s fine if you have that mind-set. There are lawyers in this firm who want to practice law and want to leave the management of the firm to other people. That’s fine. If that’s your attitude then you have to ensure that the people you’re trusting are people who are trustworthy. It sounds simplistic, but hiring somebody off the street to make your physician organization into something larger isn’t easy. Third and most important, you have to have buy-in from all of your physicians that what they want is actually control their own destiny. If you have a group of doctors who just want to be left alone to practice medicine, you need to create a mentality that allows them to do that and just take the business side of it away.

MC: One could argue that the best chance for physicians who just want to practice medicine is as part of a substantial physician organization that can go toe to toe with managed care plans.

ALEXANDER: Not necessarily, and I’ll explain why. If you want to just practice medicine, go become an employee somewhere; go to a staff-model HMO or a hospital or a clinic. They’ll let you practice medicine. If you want to practice medicine the way you want to practice medicine, then what you said is absolutely correct. You need to have a critical mass that allows you to control your destiny so that you can go toe to toe with managed care companies, ancillary providers, other doctors, health care facilities, whoever, and be able to strike an appropriate equitable bargain. You’re not going to be able to do that anymore in a two-person practice in most parts of the country, or if you’re an employee of a staff-model HMO.

MC: I just can’t imagine too many doctors, when they say they just want to practice medicine, meaning that they want to practice the way someone else is going to tell them.

ALEXANDER: There are still some. What they have to understand is that they have to think of a strategy that allows them to control their own destiny. They have to go back and to think about what I talked about earlier, the three issues of what, why, and how. The most successful physician organizations that I have seen in the United States are owned, controlled, and driven by physicians. That does not mean that the administrator, CEO, COO, and CFO are physicians. That means that those people work for physicians. The physicians own and control the entity. It does what they want it to, it creates a mechanism whereby they can practice good medicine profitably.

MC: Could that organization take a number of different forms or are there only a couple of models that make sense?

ALEXANDER: The circumstances rule. Primary care physicians had the opportunity to get involved in the medical management company model. That’s very exciting and it can be extremely profitable and give them not only control over their own destiny but truly give them control over health care delivery in their marketplace.

MC: Medical management companies as you define them are different from physician practice management companies.

ALEXANDER: Absolutely. The medical management companies that I’m thinking of, some of which we represent, generally do not buy physician practice assets or manage physician practices. In the instances that I know of where they do, it’s because the physician has asked them to help with managing his or her practice. They help physicians manage medical care delivered to patients under risk contracts. The inherent profit is created by appropriate medical utilization under those contracts.

MC: The group will either develop or buy practice protocols?

ALEXANDER: Usually develop or rent. Typically, you’ll find either an IPA, a large group of primary care physicians, or a large group of primary care physicians that wraps a larger primary care IPA around the group. That entity acquires the systems and personnel necessary to assist physicians and manage care economically under, in many instances, full-risk percentage-of-premium contracts. They can be very profitable. The ones I know of actually increase the level of the care received by the patient. As one physician describes it to me, it’s doing well by doing good. It is keeping patients out of expensive modalities of care who don’t need extensive modalities of care. It’s not keeping patients out of expensive modalities care to make money. Delivering care appropriately will bring cost savings in and of itself.

MC: What seems to be amusing about this is that it’s relearning lessons of the earliest health maintenance organizations from 50 years ago.

ALEXANDER: The other thing it’s doing is putting control back into the hands of the primary care physician who ran the health care marketplace up until the end of World War II. My mother’s experience growing up in rural Mississippi was that there was a GP in every town, and that GP was health care in that service area. Why? Because the primary care physician was the monitor, supervisor, coordinator, and — though I hate to use the term — gatekeeper of all of his or her patients’ receipt of care. Today, the goal is to give doctors modeling and data and software so they can review what they’re doing and can tell whether they’re delivering effective care to their patients.

MC: In essence, you’re describing evidence-based medicine.

ALEXANDER: What you find is not that the patient receives less care, but that the patient receives better care. In many instances, you’ll find that the patient receives more care because he or she is underutilizing, but receives care from the proper source. It certainly gives physicians an incentive to keep patients well.

MC: What do you see changing on the national health policy landscape over the next several years? Do you think we’re essentially done with any talk of large national health reforms?

ALEXANDER: To some degree. You will see the provider-sponsored organization statutes and regulations extended to allow physician organizations to be PSOs. The original creation of the PSO regulations was politicized and controlled by the insurance industry and hospitals. The result was that few entities applied to HCFA to become PSOs because the option was not attractive. It’s certainly not attractive to large physician organizations. Changing those regulations will make a big difference. I think then you will see the kind of cost savings that Medicare was looking for in Medicare+Choice.

MC: Other than that, your hunch is that practicing physicians can expect a continued hybrid of a private market and a very large government component with Medicare and Medicaid?

ALEXANDER: Absolutely. I think the true market shakeout has just begun. Recent Medicare and other reimbursement cuts on hospitals have just scraped the surface. You’re going to see a major restructuring of the hospital industry in the United States, particularly the tax-exempt hospital industry. You’re going to see more and more mergers, bankruptcies, reorganizations, reuse of properties. I think everybody just accepts that almost as a given at this point.

MC: So a lot of the hospitals built in the heyday of the ’70s will become assisted-living facilities and the like?

ALEXANDER: Sure. You will see a lot more HMO consolidation and I think you’ll see a ton more of HMOs giving much more control of the premium dollar and delegation of certain obligations to large physician organizations. I really do see a very bright future for properly structured, tight-knit physician organizations, particularly large primary care physician organizations. I really do think the future is theirs.

MC: Although they should expect there will be a fair amount of turmoil around them.

ALEXANDER: Absolutely. And I think there will be a terrible backlash toward them. When primary care physicians organize and HMOs, hospitals, specialists, and other providers find that they can’t break their zeal or upset the apple cart, those groups go through a process like the five phases of grief. First, they get angry because the primary care physicians are doing things without them. Sooner or later they get to acceptance, which is when they start asking physicians, “How can we work with you?”

MC: Thank you.

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