Hospital systems spent untold millions buying physician practices, only to find they didn't have the appropriate support systems and expertise to run them.
Some systems created management service organizations that provide billing, staffing, recruiting and other practice management services.
But many hospital-owned MSOs haven't fared well. They are flocking to consultants for advice on everything from stopping the flow of red ink to expanding services to merging with other MSOs. They also have difficulty recruiting management talent, which is in high demand and low supply.
Heather Bossin, a principal at Medimetrix Consulting in Cleveland, estimates there are 350 MSOs that are fully or partly owned by hospitals. She counts only MSOs that are distinct legal entities, such as subsidiaries, and not hospital departments. Hundreds of other MSOs have been formed by physicians and other nonhospital investors at such a rate that no one has an exact count.
Medimetrix is surveying hospital-sponsored MSOs and sponsoring a benchmarking symposium to help them improve their operations.
Bossin says some MSOs have learned from past mistakes and are trying to partner with physicians rather than control them. For example, MSOs are giving physicians equity and a bigger voice in governance. The most enlightened ones are expanding into medical management functions such as outcomes measures and utilization review.
One example is St. Louis-based Unity Health System, which resulted from the merger of five hospitals. The system is merging several MSOs into one, called Unity Support Services, in which physicians hold five of the seven board seats. The MSO serves both 116 employed physicians and 1,600 independent physicians.
The independent doctors belong to the system's physician-hospital organization, which negotiates managed-care contracts on their behalf.
USS is attempting to expand medical management services throughout the health system, including PHO physicians. Medical management tools allowed the medical group at one founding hospital, St. John's Mercy Hospital, to reduce bed days by about 35% in 1996.
"We feel we offer some value to physicians. We want that benefit going to physicians who want to work with us," says John Schuster, president of Unity Support Services.
Still, fundamental questions about the viability of hospital-owned MSOs are being raised.
For one thing, hospitals need to link their physicians to a broad network.
As a survival strategy, some MSOs are trying to cozy up to independent physicians, who are struggling to keep up with the technological and financial demands of the market such as electronic medical records, electronic data transfer to third-party payers, and automated phone systems that contact patients about routine lab results and office appointments.
"Where before the MSO was a vehicle to provide support to employed physicians, now they have to make the MSO attractive enough for outside physicians. If you can't make it attractive, you will fail," Bossin says.
But it's not clear that this is a good strategy. James Unland, president of Chicago-based Health Capital Group, says he hasn't seen any MSOs successfully attracting independent physicians. "Often the project is just too large in scope, and the community-based physicians are viscerally suspicious of hospital-based MSOs," Unland says.
Some consultants now advise hospital systems to create a virtual contracting network by helping independent physicians form strong networks and then creating a joint-venture MSO with the network.
That will require hospitals to view themselves as partners and relinquish more of the revenue stream to physicians. Already, several sources say, battles are being waged as physicians demand bigger shares of bonus pools and revenues from nonphysician services.
Meanwhile, a few hospitals have quietly put their practices on the market. TA Associates, a Boston-based venture capital firm that specializes in physician practice management companies, has been approached to buy at least 10 hospital practices. New York-based Cain Brothers, a capital and advisory firm, has been representing an undisclosed tertiary hospital that is trying to unload its MSO along with 120 primary-care physicians.
But at this point, more hospital systems appear determined to persevere with efforts to make practices succeed through MSOs. Nashville-based PhyCor, a leading physician practice management company, has signed agreements to manage PHOs, but despite ongoing negotiations has not agreed to purchase a hospital-based practice.
Paul Keckley, PhyCor's vice president of strategic development, believes some hospitals won't sell their primary-care groups because they fear competition from large, multispecialty groups.