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Hospitals Improve Practice Management; Look to Balance Bottom Line, Other Goals
This article was published in Inside PPMCs, 1/15/00
While the vast majority of hospital-owned physician practices are big money-losers, and some hospitals are unloading them, most health systems want to keep them as part of their overall strategy and to improve the practices' bottom lines.
Near the top of the list of turnaround techniques at both Montefiore Medical Center in the Bronx and Baptist St. Vincent's Health System in Jacksonville, Fla., is placing physicians on productivity-based pay systems, say the top primary care executives at both systems. They are Adam Henick, executive director of Montefiore Medical Group, and Earl Mally, administrator of Baptist St. Vincent's Physician Practice Management Co.
Other key strategies for these primary care practices have been jumpstarting collections, advertising the hospital connection to bring in new patients, raising rates from payors, cost-cutting, and eliminating underused capacity.
Special Factors Make it 'Theoretically Impossible' to Profit
Henick, a 20-year veteran of physician practice management and a consultant and lecturer on the subject, says that for nearly all health systems, it is "theoretically impossible" for hospital-owned practices to generate positive cash flows due to many factors on the revenue and cost sides that are different than those faced by physician-owned practices. While many of the factors can be reduced or eliminated by good management, many others cannot, says Henick, leaving hospital-owned practices at a permanent disadvantage for the bottom line, and raising the question of other health system goals as reasons to hold onto the practices.
On the revenue side, billing and collections usually suffer a drop when a hospital buys a practice, Henick says. A "hospital tends to centralize the billing of practices it acquires," he notes. The result is distance between the physician and the billing process. "The further the dollar moves from the physician," he says, the more "you start losing your accountability."
Also, hospitals typically participate in more insurances than most privately owned practices, he notes. When a hospital buys a practice, carriers are usually added, billing becomes more complex, and there's a higher likelihood of collection failures, he explains.
At Montefiore about one year so far, Henick has strengthened billing and collections systems. He plans to reduce the number of insurances used by the primary care group to "less than 15" from approximately 30 when he started, he says.
Also on the revenue side, privately owned practices commonly perform and bill for a number of ancillary items such as cardiovascular and lab services, Henick notes. These services and revenue streams are often lost when a health system buys a practice, he says.
Most importantly on the revenue side, many hospital-owned practice physicians are on fixed salary contracts, and therefore "are not incented to be productive," says Henick. He has placed all Montefiore primary care physicians (including OB/GYN) on productivity-based compensation systems, and the improvement in performance is already clear, he says.
On the cost side, many hospital-owned practices must meet standards for their specialties, such as those set by the Joint Commission on the Accreditation of Healthcare Organizations standards for clinical practices, and so may need nursing supervisors and other staff that physician-owned offices do not, he says. Nonphysician or "ancillary" employees are generally paid on hospital scale, which tends to be well above regular physician practice scale. Such employees also participate in rich hospital benefit plans, Henick notes.
Hospital-owned practices if purchased from physicians must depreciate the purchase and interest costs. If built from scratch, hospital practices tend to spend much more on fitting out offices than privately owned practices, Henick says. Hospital-owned practices usually spend more for real estate and for information services than private practices, he adds. Reimbursement from payors does not reflect any of these extra costs of hospital-owned practices, he notes.
Global Capitation: Key to Strategy
The health system has two main reasons for keeping - and expanding - the primary care group that Henick runs. First, he says, there is a "harvesting strategy" under which the full range of services from Montefiore Medical Center are available to patients of the group. Second, there are "global capitation or expanded risk contracts that health plans are willing to make with integrated delivery systems such as Montefiore," he notes. Such contracts - common in the West but not in the New York metro area - "need significant market share in primary care, which the owned practices provide," he explains.
Of course, Montefiore's hospital and faculty specialty group are essential parts of the mix. Montefiore Hospital is the nation's largest teaching hospital (780 residents), and has a strong reputation in its Bronx and southern Westchester markets, Henick says.
Early in 2000, the primary care group is taking over operation of six clinics from HIP, a major staff-model HMO in the New York area. The patients remain HIP subscribers but look to Montefiore for care, he explains. These six clinics add to the 29 that the primary care group already has, most of them built from scratch. By the end of 2000, the primary care group will have more than 200,000 globally capitated lives, he predicts.
Global capitation is essential to a sound primary care strategy for hospitals in the high-cost New York area, Henick says. In his previous job with the largest health system in New Jersey, Saint Barnabas Health Care System, he made management improvements but found that the system could not harvest substantial benefits from the practices, and that global capitation was not possible in that state. The practices were sold.
Being attached to a large teaching hospital has cost and quality as well as marketing benefits, Henick says. Most importantly, he has very low recruiting costs to bring in highly qualified physicians.
The Baptist St. Vincent's Health System centers around five hospitals that merged in 1996 and serve Jacksonville, Fla., and surrounding counties. The association with the hospitals enables the primary care group - managed by a hospital-owned management company - to advertise an urgent care after-hours unit and nurse contacts after that, says Earl Mally, administrator for the company. The group also pitches the good quality care associated with the health system.
Marketing Based on Hospital Ties
Consistent with the health system's overall marketing strategies, the 75-physician group has also taken these steps in the last couple of years, Mally says:
Raising rates from payors: The large size of the group patient load and the connection with the hospitals helped win rate hikes from nearly all payors.
Moving to areas of high population growth: Both as a nonprofit wishing to serve its community, and as a business entity reliant on future markets, Baptist St. Vincent's Health System targets such areas, and the primary care group often leads the implementation.
Retaining 85% of patients after consolidating offices: The Baptist and St. Vincent's systems, merged in 1996, each had separate primary care networks, often with offices across the street from one another, Mally recalls. Fourteen offices, mostly with one physician each, have been closed, and four more will be closed early next year to complete the consolidation, he says. By retaining all the physicians whose offices were closed and keeping in touch with the patients, 85% stayed.
The process for choosing which offices to close gave the final decisions to the physicians, Mally says. The management firm gave the physicians financial data on each office and presented the system's goal of good coverage of the entire region, enabling the physicians to recommend which offices to close and which to expand. They "learned a lot about the business side of their practices," he adds.
Also strengthening the management company is its contract with another large primary care practice, the 40-physician Jacksonville Health Care Group. Over the last several years, that group has closed two offices through a similar physician-centered process, and added many carriers from its earlier sole reliance on Prudential, Mally says.
Looking ahead, with the consolidation nearly complete, Mally says that the Baptist St. Vincent's primary care group is operating much more efficiently than several years ago. "Mature offices" - defined as at least 3-5 years old in the same location and without a change in physicians - are "very close to breakeven" now and some will probably break even in 2000, he predicts. At the same time, the network is investing in new offices in high-growth areas.
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