Competition among contract management companies for hospital emergency department contracts and physicians has never been more intense.
Some administrators of hospitals with 250 or fewer beds say that when they seek proposals to staff their emergency departments, they get eight to 15 bids, more than double the number of five years ago.
And with a shortage of physicians trained in emergency medicine, armies of recruiters from contract management companies frequently call those specialists to offer them jobs at twice the pay they could get four years ago.
Half the nation's 5,200 hospitals hire contract management companies to manage their emergency departments. Those most likely to sign contracts have 100 to 350 beds, experts say. Because contract management companies have refined recruiting methods, most hospital emergency departments are better staffed and managed than they were 10 years ago, said Theodore Matson, president of Ambulatory Care Advisory Group, Chicago.
However, some executives, especially at smaller hospitals, are finding out that promises made by contract companies as they seek to win emergency department contracts don't always pan out (See chart, p. 32).
Contract management executives quietly admit some unscrupulous practices have been used to win contracts or staff emergency departments. Those executives say most misleading tactics are being eliminated by competition.
"Hospitals and medical staffs are more sophisticated in their needs and what they want," said David Singley, Coastal Healthcare Group's chief operating officer. "They go to multiple (contract companies). It has raised the standards."
The nation's second-largest emergency contract company, Durham, N.C.-based Coastal, staffs 377 hospitals with 2,000 physicians. Spectrum Emergency Care, St. Louis, a subsidiary of ARA Services, is the largest contract manager, staffing 501 hospitals with some 4,000 physicians.
Despite overall industry improvements, some companies offer unrealistically low bids to win contracts and later ask for more money to cover costs.
"We will not submit a bid where we can't at least make our expenses," said Stephen Dresnick, M.D., president of The terling Group. "There have been groups in the past that have said they could do the job very inexpensively, then three to six months into contract say they can't do it and need a subsidy from the hospital."
Sterling is a Coral Gables, Fla.-based emergency department firm that has contracts with 45 hospitals and has 450 physicians.
Another tactic that's used more frequently is a variation of the old "bait-and-switch" routine. Using board-certified emergency physicians as bait to win a hospital contract, some companies later will switch the board-certified doctor with a board-eligible physician, saying the more highly qualified doctor wasn't available because of unforeseen circumstances.
Another, more common practice is to promise that emergency physicians can be found who are willing to permanently locate in the hospital's service area.
"Our original contract called for the physicians to become members of our community and, for a long period of time (four to five years), they (the contract company) weren't able to reach that goal, so we went with another group," said Deborah Barnard, vice president of marketing for 94-bed Our Lady of Lourdes Health Center in Pasco, Wash. (See story, p. 34).
Ms. Barnard said the problem was a morale issue rather than a quality concern. "It was difficult for the support staff (nurses) to have to continually get used to new styles of practicing medicine," she said.
Increased competition also has resulted in lawsuits. Last year, Coastal and Sterling settled a 2-year-old lawsuit that was a result of a non-compete clause in a Coastal contract (April 13, 1992, p. 22).
In 1990, 117-bed Johnston Memorial Hospital in Smithfield, N.C., dropped its contract with Coastal because of alleged "inadequate staffing," instead choosing Sterling. But to staff Johnston Memorial, Sterling turned to the two physicians at the hospital who had contracts with Coastal.
Coastal contended that Sterling had coerced the two physicians to violate their non-compete clauses. The two companies settled out of court, although similar suits usually result in courts throwing out non-compete clauses as unconstitutional, experts say.
Competition also has spawned consolidation as emergency contractors seek to gain market share, contracts and physicians to help defray operating costs through economies of scale.
In the past two years, Coastal has led the way by acquiring at least five emergency management and billing companies, including Oakland, Calif.-based Medicus Medical Group, which had 80 hospital contracts.
"There is a shakeout in the industry because economies of scale can be accomplished through reduced administrative costs. To afford legal services and quality assurance, you have to have a huge business base," said Jack Page, M.D., Coastal's medical director.
"It is more difficult for smaller groups to keep up with demands of quality improvement, reimbursement and medical malpractice issues," said Clifford Findiess, M.D., president of EMSA Limited, Fort Lauderdale, Fla.
Dr. Findiess said intense competition with local groups also is making it more difficult to grow through winning new contracts. "Picking up a new contract is more difficult today because physicians in every emergency department are providing reasonably good emergency care," he said.
EMSA last year merged with Acute Care Specialists, Akron, Ohio, to increase its managed hospital contracts to 119; it services those departments with about 1,500 physicians.
Coastal shook up the emergency contract management field by selling its stock in an initial public offering on June 20, 1991.
"We went public to provide capital for acquisitions," Mr. Singley said. "It helps a little with recruiting (and retention)." Most of Coastal's 225 medical directors are eligible for stock options, he said.
Last December, Sterling merged with Frost Hanna Halpryn Capital Group, a Miami-based publicly traded investor group, and will begin to offer its employed physicians options to buy stock in the company later this year, Dr. Dresnick said.
"Coastal started it and has created a tremendous value for doctors. They can invest in their company. That's why we are doing it," Dr. Dresnick said. "It will also give us the ability to tap into the capital market for expansion."
According to MODERN HEALTHCARE's 1993 contract management survey, 15 companies contracted with 1,547 hospitals in 1992, a 5% increase from 1991. That compared with 6% growth in 1991 and 11% in 1990.
However, contract management executives insist that their companies areadding hospitals at double-digit rates.
"There is growth potential in the market," said Keith Goding, a vice president for Spectrum Emergency Care. "Some hospitals may self-operate. We call that the `unconverted market.' That's where we are targeting the services."
Experts estimate that from 2,600 to 3,500 of the 5,200 hospitals that operate emergency departments have contracts with a local, regional or national group. Most of the 1,700 to 2,600 other hospitals with such departments employ their own emergency physicians or contract with a local group they helped organize, management company executives estimate. About 5% of hospitals, mostly small or rural facilities with little trauma care, staff their emergency department with physicians from their medical staff, experts say. Only 10% of hospitals with more than 500 beds contract for emergency services (See chart, p. 30).
Competition for hospital contracts falls into several distinct categories, usually based on size and need, Dr. Dresnick said.
A large number of hospitals are looking for the least expensive way to provide emergency services, Dr. Dresnick said. "Under those contracts, they retain billings and contract with groups on an hourly basis," he said.
Larger hospitals generally negotiate fee-for-service contracts where the group does its own billing and provides ancillary services, Dr. Dresnick said.
"With fee-for-service contracts, the competition gets somewhat less intense," Dr. Dresnick said. "Not every group has the financial resources to do it."
"We bill the patient directly for services of the doctor, unless the payer mix isn't good enough to support the fees-then, the hospital subsidizes the contract," EMSA's Dr. Findiess said.
Some of the larger contract companies, including Spectrum, Coastal and Dallas-based EM Care, have contracted with multihospital systems that are building integrated delivery systems.
Other groups are exploring systemwide contracts because healthcare reform is encouraging hospitals to form networks or physician-hospital organizations. Some groups like Coastal also are planning to offer their services on a capitated basis.
"Our vision is that we are going to have fewer contracts signed, but we will see larger contracts, probably with multihospital groups and for multiple services," Mr. Goding said.
But Mr. Goding said most systems still leave emergency contracting to individual hospitals because of the need to involve local medical staffs in the decisionmaking process.
In addition to the 15 large groups, Dr. Page estimated that there are another 100 regional groups that have from three to 10 hospital contracts each. Overall, experts estimate there are anywhere from 450 to 800 such groups.
Competition to retain the services of emergency physicians is stiff because the demand exceeds the supply, especially for physicians who are board-certified in emergency medicine.
There are approximately 19,368 full-time emergency physicians, but 25,000 are needed, according to the American College of Emergency Physicians, a Dallas-based professional society. That includes 11,776 physicians who are board-certified in emergency medicine.
Emergency physicians earned an average of $158,000 in 1992, a 9% increase from 1991, according to a survey conducted by Daniel Stern & Associates, Pittsburgh.
Coastal's physicians are paid in a variety of ways, Mr. Singley said. Some are paid hourly rates with productivity incentives that can boost salaries 20%; others are paid on a fee-for-service basis with productivity incentives, he said.
The American Association of Emergency Physicians, a San Francisco-based group that opposes for-profit contract groups, contends that companies retain too much of their revenue as profits.
Contract management executives said administrative fees for some hospital contracts range from 10% to 50%, although the fees have been declining because of competition.
Coastal retains an average of 10% to 15% of its contract revenue, Dr. Page said. Spectrum said it keeps 15% to 20% for operations, Mr. Goding said.
Most contract companies are privately held and don't disclose revenue or profit information. However, publicly held Coastal reported it earned $11.2 million on revenue of $315.4 million in 1992, a 3.6% profit margin.
But Mr. Matson said competition has squeezed profits, leading many companies to expand the range of contract services made available to hospitals and physician groups. The companies also are preparing for reform by offering several lines of physician management contract services, such as anesthesiology, he said.
"Because of shortages of some specialists, some hospitals are looking to contract with an emergency company or to put together a panel of physicians to provide an entire array of specialties," Mr. Matson said.
Some questions have arisen over the competence of some emergency physicians hired by contract companies, especially at smaller hospitals. However, most companies said they use a rigorous screening process for selecting physicians. Criteria reviewed include credentials, references, malpractice history, criminal records and psychological traits.
"Once a physician passes our evaluation, then they are presented to the medical staff for their review and consideration," Dr. Page said. About 10% to 30% of physicians are rejected through Coastal's application process.
"If the doctor isn't performing, we will counsel the physician to improve quality of care," Dr. Page said. "It doesn't happen often, but personality problems is one of the largest reasons."
EMSA said its average contract is for seven years, and the average tenure for physicians is four years. Each year,10% to 15% of EMSA's physicians leave. Half leave voluntarily, while the rest are terminated, Dr. Findiess said.
Reasons for voluntary departure include decisions to become independent, to work for another company or to retire. Terminations usually are a result of problems with personality, quality or poor relations with medical staffs or hospital administrators, Dr. Findiess said.
Some 87% of Spectrum's physicians renew contracts each year, compared with the industrywide average of 70%, Mr. Goding said. Sterling's turnover rate is about 5% to 6%, Dr. Dresnick said.
Most national groups use information systems to track emergency physicians. Spectrum's physician data base, which it began in 1991, has about 500,000 physicians, Mr. Goding said. It obtained the information through a deal with the American Medical Association. The computer lists as many as 400 different variables, such as training and quality indicators for each physician, to help match a hospital's needs with available physicians, he said.