As the new year begins for the nation's nearly 30,000 medical groups, physicians find themselves squeezed on one side by government and private payers that are aking for reimbursement cuts and on the other side by an unexpected rise in medical-care costs fuled by aging baby boomers who are asking for new treatments and drugs.
In 1997 HMO profit margins declined, prompting some plans to increase premium rates and ask doctors to take pay cuts and reduce utilization of services and tests deemed unnecessary. In extreme instances, HMOs have removed higher-cost physicians and groups from their networks.
The outlook for HMO profitability in 1998 also is bleak, according to a survey conducted by Milliman & Robertson, a Seattle-based consulting firm. Milliman predicts HMOs will increase premiums and cut payments to providers to meet Wall Street's earning expectations.
Another hit on some groups' revenue stream will come from Medicare's 1998 fee schedule, which will reduce payments for many specialists. Meanwhile, new government regulations,
technology and growing information system needs also are increasing overhead costs (See related story, p. 34).
In response, medical groups are expected to move forward with clinical and operational improvement projects designed to pare administrative costs and position their groups to win more favorable managed-care contracts. They also hope to win back some measure of control over patient-care decisions and to reduce patient-care costs without jeopardizing quality.
Those practices without enough local market clout or management skill will pursue mergers and affiliations with larger groups, hospitals and physician practice management companies. Mergers are inevitable as the healthcare industry moves toward larger organizations designed to increase managed-care contracting clout within geographic markets, experts say.
"We will have longer-term relationships and aligned incentives between physicians, payers and hospitals as the industry consolidates," says Ronald Loeppke, M.D., vice president of medical affairs of Nashville-based PhyCor, the nation's largest PPM company.
"We are in an era of consumerism that is physician-driven and patient-centered," Loeppke says. "That leads to an era of accountability for physicians and providers. HMOs are asking for price concessions as their margins decline, but cost and quality are convergent lines. Groups that are doing that with clinical and operational process improvement programs will be in demand."
In the Twin Cities of St. Paul and Minneapolis, such managed-care payers as Medica Health Plans and Blue Cross and Blue Shield of Minnesota have been seeking to reduce medical costs through strict utilization management of physicians and hospital services.
In a controversial announcement last year, Medica, the state's second-largest HMO with nearly 1 million enrollees, informed physicians affiliated with HealthEast, St. Paul, and Allina Health System, Minneapolis, of its intention to cut their reimbursements as much as 10% unless medical costs are reduced. Medica merged with HealthSpan in July 1994 to form Allina, a large integrated delivery network. Medica has contracts with HealthEast.
Medica, which reportedly is losing money, cited increasing costs for X-rays, computed tomography scans and prescriptions. Medica informed physicians that studies of other markets indicated Midwestern doctors order more tests than physicians in other parts of the country. Consequently, Medica flatly told the more than 6,000 physicians in its network to reduce utilization or face the possibility of not receiving their salary withhold at the end of the year. For example, it will only pay 80% of the Medicare rate for a wide range of radiological tests performed in physician offices.
"(Medica) offered doctors the opportunity to control their costs and then (the plan) would be able to return more of their contingency reserve," says Jeff Chell, M.D., president of Allina Medical Group, Allina's 423-physician group practice. The group withholds 10% of doctors' salaries.
Medica's pharmacy costs have risen 20% over the past year because of the needs of aging baby boomers and higher-priced prescriptions that have entered the market, Chell says. Over the past three years, pharmaceutical companies have redirected their advertising more to consumers than to physicians, he says.
Consumer drug advertising has driven up pharmacy costs because many boomers are activist patients who research their treatment options and demand certain medications, Chell contends.
"Prescription costs are up, but we also have seen double-digit increases in utilization. We are not sure of all the reasons for that," Chell says. "HMOs did not envision that rapid an increase in costs. They have been somewhat delayed in passing on those costs to employers. Now we are seeing an attempt by health plans to catch up."
Chell says HMOs are addressing rising costs in three ways: By increasing premiums, by squeezing provider payments to encourage physicians to reduce utilization and by shifting financial risk to medical groups through capitated contracts.
"Doctors would rather get their money back, so they are looking more closely at utilization, and I believe Allina will return a substantial portion of the reserve," says Chell, adding that Medica has returned physician reserve payments in each of the past five years with interest.
At HealthEast, Brad Johnson, M.D., senior medical director of physician services, says several HMOs, including Medica, are trying to discourage utilization of certain services in an attempt to reduce costs. Other HMOs are using financial bonuses to encourage doctors to reduce utilization, he says.
"Some HMOs have told us they are going to pay us less than our costs for certain tests," Johnson says. "They intend to discourage us from ordering the tests, which will reduce their costs. This will only inconvenience patients, since our doctors don't make any more from ordering tests. We have removed that incentive. The only way around it is to send the patients to the radiology department of the hospital."
In response, HealthEast Clinics, a subsidiary of the four-hospital system, is beginning a cost and quality control program that seeks to improve the clinical delivery process, Johnson says. The system employs 80 physicians at 14 clinic locations and has another 1,100 doctors on its medical staff.
"We are looking to strike a balance between the need for physicians to gain control over patient-care issues with the financial aspects of delivering that care," Johnson says. "We feel, eventually, direct contracting with employers will improve quality and strengthen the physician-patient relationship."
Groups across the country are facing pressures from HMOs to cut costs, says Darrell Schryver, a consultant with the Medical Group Management Association, an Englewood, Colo.-based trade organization that represents 6,750 groups.
A group practice in Texas, for example, took a 40% hit on reimbursement because an HMO it contracted with was losing money, Schryver says. "This is forcing medical groups to ratchet down their costs," he says.
Medical groups are moving toward "zero-based budgeting" where they look at their costs-supply, support and patient care-and determine what their revenue needs are within the context of the managed-care contract, he says.
"Then the groups are going back to payers with hard data and saying this costs us more to deliver care than you are giving us," he says. "They talk, and depending on the group and market, they negotiate."
Schryver says groups that demonstrate high quality, cost controls and good outcomes will win contracts. "If you are one of 15 orthopedic groups and they don't need you, then they don't care what you say. You either take their price or you are out," he says.
But Loeppke says some forward-looking HMOs are not simply attempting to choose the group with the lowest medical-loss ratio in contract negotiations.
"With HMO profits down, groups are asked to reduce utilization, but there is a trend where HMOs are looking at the medical investment ratio," he says. "HMOs also want to contract with the highest-performing networks, the ones that deliver the highest quality and best outcomes. If so, HMOs get what they want, which is good margins."
One way physicians in PhyCor's groups, who will total nearly 35,000 after a planned merger with MedPartners, are seeking to become the best is through a clinical and operational improvement process, Loeppke says.
Under PhyCor's Institute for Healthcare Management, clinic medical directors and administrative teams are brought together monthly to redesign the clinical process and look for efficiencies, he says.
"We have been profiling and benchmarking best practices we have found throughout our affiliated organizations," he says.
For certain diseases, PhyCor's care management councils, as they are called, create condition or disease specific strategies for managing patient care. Strategies exist for asthma, diabetes, low-back pain and oncology care. Preventive services include behavioral and mental health.
"These disease management or case management programs can save our physicians money and improve quality," Loeppke says.
More than 2,000 practice guidelines or clinical pathways have been developed over the years to assist physicians in making patient-care decisions, according to the American Medical Association. Physicians have objected that some HMOs impose guidelines and expect all groups to abide by them rather than allowing doctors to develop guidelines they believe to be appropriate.
In California, the majority of medical groups are paid a flat monthly rate to take care of HMO patients for a negotiated range of medical services. Under this capitated system, California groups face more direct challenges of designing case management or disease management processes to reduce their medical costs.
At 280-physician Scripps Clinic in San Diego, Administrator Breaux Castleman says low profit margins will drive consolidation and operational improvement efforts. Scripps is considering forming its own practice management company and is in discussions with a half-dozen smaller groups in California and other states, Castleman says.
"Scripps is one of the large, well-known groups in the United States," he says. "We want to take our knowledge in care management and put together a group of affiliated clinics around the country."
On the urge to merge, Castleman cites declining capitation payments and increasing pharmacy costs, along with HMOs' and employers' unwillingness to raise premiums as reasons for the consolidation trend.
"Most groups have been under severe margin pressure the last three to four years," Castleman says.
"Technology (prescriptions and diagnostic tests) is driving our business, and the users need to pay for this technology," he says. Scripps' pharmacy costs have been increasing 10% to 15% annually, while premiums have declined 2% to 4%, he says.
Some groups, like Scripps, are requesting global capitation contracts-where the medical groups are responsible not only for physician services but hospital and other non-acute-care services, Castleman says.
"Global capitation is one alternative to taking a 20% cut in payments," PhyCor's Loeppke says. "Doctors are going to have to be willing to accept more risk. You receive more of the premium dollar, but you also assume control of the continuum of care."
Loeppke says physician groups should be at the center of the healthcare delivery process.
"We need the infrastructure and management, or physicians are worried they will fall on their face," he says. "We don't think the ultimate optimal approach is to carve out a bunch of segments of care. The best is to carve in components: specialty, home health, acute care."
Castleman agrees. "The physician is closest to the patient and is responsible for 80% of the costs," he says. "With proper management, why shouldn't the doctor organization oversee the entire healthcare delivery process?"
Nathan Kaufman, senior vice president of Superior Consultant Co., San Diego, says West Coast groups are more experienced in accepting actuarial risk and that gives them a tremendous advantage in contract negotiations.
"They are able to enhance their income by playing one hospital off another for rates, just like the HMOs do," Kaufman says. "That is forcing the hospitals to discuss mergers to prevent medical groups and HMOs from winning negotiations."
Another California medical group, 400-physician Catholic Healthcare West Medical Foundation, San Francisco, also sees similar trends, says Michael Wilson, its president and CEO.
"We will continue to work with operational improvement, resource management, outcomes measurements, increased patient access to clinics and physician leadership issues," says Wilson, who also is MGMA board chairman.
"We can't continue to take 10% cuts in reimbursement. The HMOs are beginning to understand this, and we are working with them on resource management issues to reduce costs," he says. "This is a quality-driven approach, which is what doctors are more comfortable with."
Operational projects include improving billing and patient registration and investing in information technology that includes developing an electronic medical record, he says.
Wilson says one of CHW's biggest projects in 1998 is developing a compliance program, which will require the addition of three full-time employees.
While cutting costs and improving quality are important, Wilson says groups need new leadership skills to thrive in the 21st century.
"The practice administrator really is a job of helping your key leaders and staff become more and more skilled in their areas of expertise," Wilson says. "We are moving away from the technocrat and into the strategist, one who can think about broad systems and processes. It goes to accountability. Give your staff the right tools and authority to act and get things done on their own."
Depending on the market and the size of the group, physicians are moving away from the traditional managed-care structure and toward a care-management model, Loeppke says. The change in emphasis will require a combination of clinical expertise and management skills, he says.
"The problem with medical groups is they typically are practices and are not businesses," Kaufman says. "The concept is a collection of individual practices with a shared overhead structure. As payments have gone down, the funds used to subsidize the inefficiencies disappear. Doctors find themselves practicing in multimillion-dollar structures with low incomes."
As a result, many groups have no choice but to merge into larger organizations or join practice management companies, he says.
"The priority for 1998 should be for groups to take a business approach to their practice and strategically position it to be the best in the market," Kaufman says. "At the end of 1998, we see groups in the same situation as now. As we go through the country, we still see these groups as works in progress. Their biggest challenge is to do the right thing and not make fatal mistakes."
Jay Greene is a frequent contributor to Modern Physician who specializes in healthcare business issues. He is based in St. Paul, Minn.