Capital is streaming into a variety of "emerging healthcare organizations," from physician-hospital organizations to independent practice associations, with no single model emerging as the biggest fish in the pond of integrated delivery, a new survey shows.
There seems to be a lot of uncertainty about which model is the right model to get capital, said Don A. Carlson Jr., president and chief executive officer of Chicago-based Ziegler Securities, a co-sponsor of the survey. Yet, physician-driven organizations are beginning to understand that their capital options are not hemmed in by hospitals, Carlson noted.
"We're starting to see a lot more direct involvement (by capital financiers) with newly formed physician organizations," he said. Physicians don't have to become hospital employees or accept capital guarantees from hospitals, the investment banking chief added.
Ziegler Securities joined the Integrated Healthcare Report, the Medical Group Management Association and five other organizations as a sponsor of the 1996 Capital Survey of Emerging Healthcare Organizations. The latest EHO survey, based on 1995 responses, expands on a baseline survey conducted in 1994 (April 10, 1995, p. 44). The new survey reflects a total of 537 responses from a mix of models, mostly PHOs (26.6%) and IPAs (23.1%), and isn't directly comparable to the previous survey. And the number of responses to this year's survey varies from one question to the next.
The 40-page report defines an EHO as a hospital or hospitals, physicians and/or one or more health plans that have consolidated, merged, integrated or affiliated in response to managed care and integration forces in their market.
Some 55% of 359 respondents said their EHO was wholly or partially owned by physicians. The next largest category-hospitals and healthcare systems-accounted for 37% of EHO ownership.
Physician practice management companies accounted for just 2% of EHO ownership, reflecting the relatively small percentage of physicians who currently participate in a PPM company. Less than 1% of respondents said their EHO was wholly or partially owned by an HMO or other health plan.
Surveyors also asked about EHO management. Although many of the 278 respondents to this question indicated hospitals and health systems (28.1%) and medical groups (24.5%) manage their EHOs, the largest management category was "other" (33.8%).
The 1994 survey roughly estimated current capital needs of all EHOs at $20 billion by extrapolating from 100 responses. However, this year's report didn't attempt to quantify all EHOs' current capital needs. Carlson said survey sponsors believe it's "definitely a growing number."
This year's report includes detailed breakouts of responding EHOs' current and future capital requirements and specific expenditures and projections by EHO category.
Asked to itemize "organizational capital costs," 178 respondents ticked off a list of start-up capital expenditures totaling $520.5 million, or a median of $280,000 per EHO (See chart).
The total doesn't necessarily represent all the capital required by EHOs because some survey respondents didn't answer the question. Within the start-up capital category, the highest median expenditure, at $1.2 million, was for medical practice acquisitions.
In the next three to five years, EHOs expect to spend $860 million on a variety of capital needs-a median of $1.4 million per EHO. The greatest future needs include capital for medical practice acquisitions, buildings and other acquisitions. Measured by median expenditure per EHO, respondents expect to plunk down $2.8 million, $2.1 million and $2 million, respectively, for those needs.
Of the seven EHO categories surveyed, management service organizations reported the largest total start-up costs-$108.5 million. MSO respondents currently spend a median $850,000, but in the future they expect to shell out $112 million, or a median of about $2.5 million.
Freestanding medical groups involved in adding smaller or solo practices anticipate future aggregate expenditures of $161.3 million. That's the highest anticipated capital requirement among the seven EHO models covered in the survey. In 1995, freestanding medical groups invested a total of $30.5 million in organizational capital.
Staff models also expect to spend quite a bit more in the future than they did last year. Respondents projected $63.3 million in future capital needs, up from $33.5 million in start-up costs. Per respondent, that's a median of $8.5 million in the future, compared with total organizational expenses of $2.4 million.
The report also includes capital financing data on medical groups "without walls," PHOs and foundation models.
Groups without walls, a type of EHO in which physicians maintain private, geographically dispersed offices but benefit from centralized administrative services, were the only ones to report an aggregate investment in start-up costs ($38.4 million) that exceeded expected future capital costs ($34.1 million).
The survey included a question about EHOs' involvement in capitated contracts. Of the 274 respondents answering the question, there was a nearly even split between EHOs compensated on a capitated basis (48.2%) and those that aren't (51.8%). Noting that nearly 50% of total survey respondents ignored the question, surveyors speculated that respondents may not consider capitation contracting "a priority focus." Among the capitated, the median amount of revenue at risk was 20%.