The jury's still out on the fate of the many provider-owned health plans created in recent years, plans intended to bolster physician influence in the new managed-care environment. A number--more than half--have failed.
Physicians were relatively late to the managed-care game and ever since they have been scrambling to claim a stake in the healthcare market amid the significant shares controlled by managed-care companies, regional alliances of insurance companies and hospital systems, all established without the equity interest of physicians.
Managed care already has penetrated 98% of all healthcare markets, including those in rural America, according to a newsletter published in 1995 by InterStudy Publications of Bloomington, Minn. In all, about 65% of the population is enrolled in some type of managed-care plan, and 85% of all physicians practice with at least one managed-care plan.
Critics of the physician-led effort maintain that doctors are anteing up too little, too late--that many physician organizations are dangerously undercapitalized. Just a few claims for catastrophic care could put a small, doctor-financed HMO out of business, they say.
In addition, many argue that as doctors begin to take the same financial risks HMOs do, they inevitably will react like HMOs--they'll put costs and profit issues above patient considerations.
Yet proponents argue that physician groups are not trying to be mirror images of the Blues, Kaiser Permanente, Columbia/HCA or Humana. Instead, they are starting small and building on the natural strengths they bring to the healthcare marketplace.
In fact, some would say it's the doctors who hold the trump cards:
Still, more than one consultant has helped a pioneering doctors' group establish a business plan and get on its feet only to see it wander away from the initial goal of maintaining autonomy over patient care and reach, instead, for the money.
For example, Tom Garvey, president of the Garvey Group, Merrick, N.Y., says that MD Health Plan of Connecticut, a doctor-owned HMO licensed in 1987, grew to be the second-largest HMO in the state--117,000 enrollees--and was profitable for four of its first seven years. But then in 1995, the 4,500 physician shareholders sold the plan to Health Systems International of California, now part of Foundation Health Systems, for $100 million.
"The reason the doctors formed MD Health Plan was so they could have control, so they could maintain autonomy in their practices," Garvey says. "In fact, it was on its way to becoming one of the most successful managed-care plans in the country. And then the docs sold it. They got greedy.
"The problem with doctors is they have a very difficult time coming together and cooperating," he says. "Historically, they listen to the wrong people and make the wrong business decisions and then run for cover to hospitals. But hospitals are in a meltdown today."
Some physician groups make a concerted effort to avoid the lure of quick profits. Harrisburg-based Pennsylvania Physicians Care, for example, includes in its bylaws a stipulation that it cannot be purchased by an outside organization unless 90% of its physician investors agree to the sale. Regardless of the number of shares he or she may own, each investor gets just one vote. And only independent physicians, oral surgeons and podiatrists are eligible to buy shares; corporate entities are not.
President and Chief Executive Officer Richard Felice says Pennsylvania Physicians Care is keeping its focus on its original objective: control.
"This was never about money. Our physician investors were not promised a huge return. We promised them a share of the market and autonomy. This is about doctors being able to provide direct care for their patients in the way they see fit," he says.
Pennsylvania Physicians Care was launched with an initial investment of $22 million from about 4,000 investors. Today, 20 hospitals and about 1,500 physicians are part of the network. It operates PPOs in 17 counties in the Harrisburg area and has its sights on expanding statewide eventually. "We have enough capital to manage risk in 17 counties," Felice says. "We will not expand beyond our capability."
"Twenty-two million dollars isn't a whole hell of a lot of money to the big, national managed-care companies," Garvey says. But in the case of PPC, which is operating in the shadow of giant U.S. Healthcare, a Blue Bell, Pa.-based unit of Aetna, the amount is enough for a start, according to Garvey. "They have enough capitalization as long as they stick to their guns, compete on quality and choice and don't try to undercut prices. They are operating a whole lot smarter than many."
PPC's 23-member board of directors is made up entirely of physicians, half of whom are required to be in primary care. Felice has a staff of 25 to run the business end of the organization, allowing board members and investors to concentrate on medicine.
"We've tried to marry experienced managed-care people who understand the backroom with the noble mission of practicing physicians," Felice says.
Pennsylvania Physicians Care received its PPO license in April and "went live" at the beginning of July. So far, it has about 100 enrollees. It also has a license as a third-party administrator and is in the process of completing an HMO network for a planned start-up in the fall. About $3 million has been invested in the start-up.
The only statewide physician-sponsored and governed health plan is Unified Physicians of Federal Way, Wash., which offers a closed-panel HMO, an exclusive-provider organization and a point-of-service product.
Unified's big break came in early 1996 when it secured a portion of Washington's Medicaid HMO contract. Today, about 37,000 of Unified's 44,000 enrollees are Medicaid recipients. The relatively low number of non-Medicaid enrollees is likely due to the fact that commercial products have been available for only about a year.
Unified's President and CEO James A. Peterson, former director of Washington's Medicaid program, says Unified's POS product is the fastest growing in the state. It offers patients 100% coverage for services delivered by physicians in the network and 60% for services delivered outside the network.
Unified was capitalized with $12 million, raised through two stock offerings and two private stock placements to two regional physician organizations.
The investors include about 2,000 Washington physicians and physician assistants. The plan hasn't seen a profit yet; it reported losses of $4.8 million in 1996 and $3 million in 1995.
A third stock offering is planned in coming months to raise another $3 to $5 million in capital. Plan officials hope to sell the remaining one-third of outstanding stock.
Eleven physicians, including Chairman Edmund W. Gray, sit on the 15-member board of directors. The corporate bylaws limit the likelihood of an impulsive sale of Unified with a provision that requires ratification of any sale by the Washington Medical Society, a separate organization.
Unified's service area encompasses all of Washington and includes 5,400 physicians and 2,200 other providers-three-quarters of Washington's practicing physicians, Peterson says.
Sixteen of the medical groups, including PHOs and IPAs, receive capitated payments. The rest are paid fee-for-service.
Peterson is optimistic about Unified's prospects. "The key is that physicians must step up and want to be involved in getting (Unified) branded and creating a market identity. Without the support of the doctors, it would never work," he says.
Not all plans can share his optimism. The troubled Physician Healthcare Plan of New Jersey reported 1996 losses of $7.8 million on revenues of $2.9 million from 4,000 enrollees. As a result, the plan failed to fulfill the state's $1.5 million net worth requirement. Recently, the HMO subsidiary of Blue Cross and Blue Shield of New Jersey-HMO Blue-signed a letter of intent to purchase PHPNJ for an undisclosed amount.
On the other end of the country, California Advantage, formed in 1995 by the California Medical Association, has abandoned its goal of operating an HMO, according to published reports. It continues to market its PPO and other products, which have about 10,000 enrollees.
In addition, sufficient start-up capital has been a problem for physician ventures in both Florida and New York.
Steve Coulter, M.D., senior vice president and chief medical officer for Chattanooga-based Blue Cross and Blue Shield of Tennessee, believes the trend in doctor-owned HMOs will continue but that competition in major markets will push the growth into smaller cities.
"The trend will continue in markets with 10% to 30% penetration of HMOs," Coulter says. "The potential lies in the less mature markets."
Coulter says he is skeptical that organizations owned entirely by doctors can compete effectively in the crowded managed-care field. Inadequate capitalization is the primary impediment to success. Doctors' traditional lack of business experience, especially in the area of risk management is another obstacle, he says
"Doctors will have more clout if they organize themselves into large multispecialty practices and then find ways to forge partnerships (with hospitals and finance professionals)," Coulter says.
But three-way partnerships are rare. Partnerships today usually come in the form of physician-hospital organizations, which contract for administrative services, or insurance company-hospital organizations, which employ salaried physicians.
Omni Healthcare in Northern California began in 1985 as a partnership between Omni IPA, a 200-physician group, and St. Joseph's Medical Center, both of Stockton.
"Omni was set up as a defensive move to protect the hospital from losing control in the managed-care marketplace and as a defense against Kaiser," says Robert Edmondson, president and CEO.
But in 1992 Omni merged with Sutter Health, one of the country's largest not-for-profit community healthcare systems. Omni wanted the merger so it could expand into other communities. Three years later, control of the organization passed from Omni physicians to Sutter Health and St. Joseph's. Sutter has assets of $2.5 billion and serves more than 3 million people in Northern California.
Sutter now owns two-thirds of Omni's stock, a stake valued at around $40 million. However, although doctors no longer have equity interest in Omni, it is still provider-owned. Omni includes more than 3,000 primary-care physicians and specialists at 37 hospitals.
Despite the lack of equity ownership, Edmondson says doctors' concerns are taken seriously. "We're proud of the relationship we have with our providers," he says.
Thanks to Sutter's deep pockets, Omni markets a full line of medical, dental and vision coverage and most types of managed-care programs. But for now at least, it's not planning to offer a point-of-service plan. Omni operates in 26 counties throughout the Central Valley and it recently obtained a license to operate in the San Francisco Bay area and along the Northern California coast. It hopes to move into the Los Angeles market in the near future.
Family physician Elizabeth Gallup of the Kansas City area is a longtime proponent of physician autonomy in managed care. Her book, How Physicians Can Avoid Surrender and Lead Change, advises doctors that if they don't take control of their role in the healthcare market, outside interests will. Gallup's varied experience--she has consulted on the creation of a physician network and served as a hospital vice president and the executive director of a physician network--has given her several vantage points from which she was able to observe physicians dealing with change.
"Historically, physicians have ultimately nodded their heads in agreement with hospitals and payers to preserve peace and harmony at nearly any cost," she says. "This retrenchment has allowed other entities to decide the future of local medicine.
"Physicians can either scramble for cover every time the tectonic plates shift from the weight and stress of new healthcare strategies or create the movement with their own strategies.
"Today's protagonist physicians are saying 'no' to being nudged out of the decisionmaking loop. When they are ignored, they are developing their own networks," she says.
Yet Gallup is skeptical about whether physicians can exercise their clout in PHO arrangements. Often doctors find the decisionmaking process is dominated by the hospital administrators, she says. "PHOs may be a passing phase in the evolution toward integrated delivery systems, a last-gasp attempt at hospital leverage and superiority over physicians. We cannot assume that PHOs as we know them are a fait accompli."
These days Gallup is helping to build Community Health Partners, a network of physicians in fast-growing Johnson County, Kan., outside of Kansas City. CHP seeks to contract directly with managed-care firms. Last year it broke with Shawnee Mission (Kan.) Medical Center when the hospital announced it would merge with St. Luke's Medical System, one of the area's dominant hospitals. CHP's move was an effort to retain flexibility in obtaining managed-care contracts.
To date, CHP has slightly more than 100 doctors and two relatively small contracts, one with Humana Health Care Plans and one with Mutual of Omaha's Exclusive Health Care.
The CHP physicians hope to secure larger HMO contracts from some of the other players in Kansas City's crowded managed-care market. The group is determined to go it alone as a physician-owned entity to avoid any hospital involvement. CHP physicians say a key advantage they bring to the marketplace is a medical outcomes tracking system that, in addition to other tasks, helps manage costs.
"This system will be available to every payer in the market," Gallup says.
Garvey of the Garvey Group says, overall, he is convinced that small physician-owned organizations can succeed against large, corporate entities provided the doctors stick to their original mission and compete on the delivery side.
"The key is how they are structured, who finances them and who's on the board. Local ownership and control is extremely important," Garvey says.
He suggests, "Physicians should be listening to people who tell them things they don't want to hear."
F. Leigh Elmore is a Kansas City, Mo., freelance writer with experience working in a managed-care organization.