Threatened by market-driven reform initiatives, giant health insurers and physician management companies are launching business strategies that are reshaping the healthcare delivery system.
Health insurers that traditionally have been strong in the indemnity business are bypassing partnerships with hospitals and physicians, and, with their survival at stake, are building their own physician group practices. For the physicians entering these new relationships, health insurers bring capital, information system resources, managed-care expertise and marketing know-how. Conversely, health insurers gain long-term provider relationships and more control over how dollars are spent by physicians.
Among the more active participants pursuing physicians and organizing medical groups and provider networks are Aetna Health Plans, Prudential Health Care System and MetLife HealthCare.
"Insurers are diving into the delivery side, buying hospitals and physicians, because it's the quickest way to lay in the infrastructure necessary to convert their business to managed care in certain markets," said Jerry Pogue, a principal with Integrated Healthcare Development Group in Lake Arrowhead, Calif.
Big-league players. Although the traditional forms of integrated systems such as physician-hospital organizations, management services organizations and tax-exempt foundations drive much of the consolidation activity, various big-name health insurers and firms that specialize in physician group management are developing their own brand of integration strategies for survival in a capitated delivery system.
The idea, fashioned after the operations of HMO giant Kaiser Permanente, is to first build a primary-care network. Then its leverage is used to align hospitals and physician specialists needed for the seamless delivery system of the future. By acquiring medical group practices to operate health clinics, the insurer expands its role to include care delivery and its financing.
Industry analysts say physician practices are attractive acquisitions for insurers, HMOs and investor-owned companies because they usually are well-financed.
Health insurers and physician management companies that want a stake in the managed-care business are executing unprecedented partnerships with physicians and hospitals, diversifying insurance offerings, developing staff-model HMOs, and creating and opening their own primary-care clinics.
Both segments of the industry seek to build primary-care networks, employing physicians in markets such as Cleveland; Charlotte, N.C.; and Phoenix, Ariz.; where they sometimes encounter resistance from solo practitioners who yearn for independence. Another reason for building the networks is that some experts foresee shortages in those markets of primary-care physicians.
Because hospitals and physicians rely on the expertise of managed-care companies to help oversee the transition to prepaid healthcare, health insurance executives are recognizing the benefit of including cost-effective hospitals and physicians in their networks. They know low operating costs translate into lower premium rates for healthcare purchasers.
Aetna's approach. One of the most aggressive efforts by an insurer to acquire primary-care physician groups and open clinics nationally is the $1 billion effort launched last year by Aetna.
Aetna, which covers 13 million Americans in managed-care and traditional insurance plans, has targeted markets including Atlanta, Chicago, Charlotte, Dallas/Fort Worth and Washington/Baltimore as sites for some 20 clinics it plans to open by the end of the year. So far, it has opened about half the clinics proposed in those cities.
Diana Clark, director of business development for Aetna Health Plans, said the insurer's move is significant because it positions the company as a healthcare provider. "There's more to us than just claims management and health insurance," she said.
In addition, Aetna has spun off a physician management subsidiary, Aetna Professional Management Corp., which oversees administrative services at the clinics. The unit, called HealthWays Family Medical Centers, will serve its managed-care and fee-for-service enrollees.
Industry sources say Aetna is forming medical groups in its target markets by hiring medical directors for each practice who own 100% of the stock in new professional corporations and employ physicians. Ownership of the stock is contingent upon the medical director remaining an employee of Aetna; there also are restrictions on the sale of the shares. This type of arrangement is said to avoid problems with bans on corporate practice of medicine in some states.
Under this arrangement, physicians receive salaries, and Aetna's physician management company provides management support systems and capital for establishing and expanding the clinic networks.
Finding new recruits. To help increase the size of its national network of clinics, Aetna has embarked on a nationwide physician recruiting effort aimed at recent medical school graduates and solo practitioners who want to get out from under the administrative hassles of owning and operating an independent practice, the company said.
The centers, which emphasize preventive care, also accept non-Aetna enrollees who will be required to pay on a fee-for-service basis.
Last month, Aetna targeted Cleveland and northeast Ohio, where it has 400,000 enrollees in managed-care and traditional health plans, for the opening of 20 to 25 clinics over the next five years, according to David K. Ellwanger, market vice president. Details of the project's estimated costs weren't disclosed.
He said the company expects to open its first center there by August and another seven by December.
In Texas, Aetna said it will open 15 Dallas/Fort Worth-area primary-care medical clinics in the next several years at a cost of about $18 million. Aetna said it will pay physician salaries ranging from $110,000 to $130,000.
"When insurers or HMOs build or buy their own primary-care group practices, they gain some tangible competitive advantages," said Integrated Healthcare's Mr. Pogue.
For example, Prudential says its costs are 5% to 15% lower in the 16 cities where the company operates its own clinics, including Atlanta, Baltimore, Houston and Memphis, Tenn.
Deborah L. Origer, executive director of group model development, said the HMO establishes primary-care physician gatekeepers. Then it buys hospital and subspecialist services where necessary.
Prudential's plan. Prudential's strategy is to garner control of the market's primary-care base in order to have the leverage necessary to negotiate the best deals with local hospitals and specialty physicians.
Costs are controlled by physicians, who are enticed with salary bonuses based on efficiencies such as providing quality care and eliminating unnecessary tests and medical procedures.
Earlier this year, Prudential announced plans to add 18 new medical clinics in the Southeast by the end of 1994. It opened 16 centers in the region last year, a spokesman said. Prudential's HMO enrollment in the Southeast has surged to 700,000 from 450,000 in the past 18 months.
Most targeted physicians will at least talk with Prudential, according to Paul Hammonds, vice president of medical group administration. As more of their patients are being converted into HMOs and various other managed-care plans, many physicians are being forced to take a different view of what were previously considered diabolical enterprises, executives say.
Integrated Healthcare's Mr. Pogue said this type of venture proves successful where physicians and hospitals have been slow to integrate.
Under this arrangement, the HMO builds its own clinic network andrecruits physicians to staff it.
Working examples. A recent example of this was last summer's contract termination by the PruCare HMO of its provider arrangement with the Nalle Clinic, a 90-physician group practice in Charlotte, N.C.
The Prudential Health Care System of Charlotte last year announced construction plans for a $2.1 million, 20,000-square-foot medical office building to house 10 physicians who would be part of a new primary-care group called Charlotte Health Care Group, designed specifically for treating PruCare HMO enrollees.
Besides pulling its business out of Nalle, PruCare also switched hospitals, moving its inpatient contracts to Charlotte-Mecklenburg Hospital Authority, which owns 808-bed Carolinas Medical Center and 116-bed University Hospital, from 590-bed Presbyterian Hospital.
Sources said Nalle had an exclusive agreement with the HMO until 1990, when the physician group pulled out of the provider deal and opened its doors to other plans. This precipitated PruCare's change in strategic direction and resulted in the development of its staff-model HMO in Charlotte.
Although controlling the gatekeeper may give the HMO cost-control advantages, it won't change the way the healthcare delivery system operates. As a result, this form of care delivery may be more vulnerable to abrupt shifting of patients from one hospital to another when inpatient care is put out to bid.
In another innovative venture between providers and insurers, an investor-owned hospital chain is a joint-venture partner with an investor-owned HMO.
Last fall, Utah's Department of Insurance approved Tucson, Ariz.-based Intergroup Healthcare's plan to operate an HMO owned jointly with Healthtrust-The Hospital Co. and Holy Cross Health Services of Utah.
Intergroup, which is 60% owner of the new Utah company, is a publicly held HMO whose majority shareholder is Tucson-based Thomas-Davis Medical Centers, a 160-physician multispecialty group.
On the investor side, money continues to flow into the physician management business for use in acquiring medical group practices. For example, Durham, N.C.-based Coastal Healthcare Group raised $76 million last year in a public stock offering.
Increasing profitability. Whatever the financial relationship between the group and the company, the intent is to increase the profitability of the practice so it yields a significant return on the company's investment and demonstrates earnings growth for physicians, regardless of market forces.
One company that continues to attract Wall Street investors is Pacific Physician Services, a Redlands, Calif.-based pioneer of prepaid physician management services. It operates a network of physician practices consisting of 42 outpatient medical centers and manages prepaid healthcare for 270,000 enrollees in Arizona and California. Through its affiliate company, Pacific Physician Services Medical Group, it employs some 270 physicians.
Independent investor-owned companies such as Pacific Physician Services are unhampered by layers of administrative protocol in order to win approval for an acquisition. At investor-owned practice management organizations, physician practices can be acquired outright, without fear of political ramifications from hospital medical staffs.
PPS' recent acquisition of the 80-physician, $55 million Riverside (Calif.) Medical Clinic has provided the company with the "critical mass" of physicians necessary to achieve economies of scale from integrating other services and capturing outgoing referrals, said Thomas E. Hodapp, an analyst at Robertson, Stephens & Co. in San Francisco.
Because PPS physicians are employees, the management company can negotiate collectively with the managed-care plans on behalf of the 14 physician groups it operates in Southern California and in Phoenix.
Industry analysts said the company is eyeing the acquisition of a hospital, which it plans to staff with PPS physicians under a plan to control inpatient expenses on capitated contracts. However, PPS executives wouldn't comment about its acquisition strategy.
PhyCor leads market. Nashville-based PhyCor has spearheaded the consolidation of the multispecialty physician group segment, considered an enormously wide-open market for the burgeoning field of professional management. PhyCor is expected to remain the market leader with 19 clinics in 11 states under its management.
The company aims to triple its clinic acquisitions to 75 over the next five years, identifying largely "at-risk capitated organizations, often in partnership with the insurance component of healthcare delivery and potentially participating in managing the hospital component of the healthcare dollar," predicts Mr. Hodapp.
New competitors. In recent years, several other physician management firms have entered the market to compete with the "big four" medical practice buyers-Caremark, Coastal, PPS and PhyCor. They include:
Avanti Health Care of Chicago, created in 1990 through a joint venture between New York Life and a Chicago-based partnership of physicians.
HealthSpring Medical Group in Reston, Va., formerly American Health Care Group, formed 16 months ago with a $25 million cash infusion from E.M. Warburg Pincus, New York.
First Physician Care in Atlanta, started last summer through a "multimillion-dollar investment" from the venture capital firms of Welsh, Carson, Anderson & Stowe and the Sprout Group, both of New York.
MedPartners, a Birmingham, Ala.-based company established last year with $1 million in funding from hospital chain HealthSouth Rehabilitation Corp., also of Birmingham. It received $7 million from four venture capital firms in September.
New competition is inevitable as insurers and investors increasingly recognize that a successful delivery system with superior price advantages will be one that controls costs and works together efficiently to produce superior outcomes, within fixed-dollar parameters.