For a small but growing number of physicians, the way to succeed in today's healthcare environment is by forming their own managed care organization. By becoming health plan owners, physicians hope to improve the way they practice medicine and eliminate some of the hassles of managed care.
But the strategy has not been an easy one; years of medical education and clinical experience most likely do not provide expertise in the complexities of administering a health plan. Many early efforts failed, and even those provider-owned HMOs and PPOs that have survived have had a bumpy path.
The number of existing physician-run managed-care plans is difficult to pin down. A 1997 survey of medical practices by pharmaceutical firm Hoechst Marion Roussel, Kansas City, Mo., reported that about 5% of medical groups had an ownership interest in PPOs, and 4.2% of groups had an ownership interest in HMOs. Overall, approximately 100 provider-owned managed-care plans are believed to be in operation. Despite growing investments by physicians, the odds against success are high.
The first step is to find physician leaders who are committed to regaining control of medical decisions and quality of care issues. They must be willing to add the burdens of business executives to their clinical responsibilities. They also must be willing to make financial sacrifices to make their managed-care organizations reality.
The second necessity is sufficient capital, says Tom Garvey, a Merrick, N.Y., healthcare consultant who has written many business plans for doctor-owned HMOs. "The doctors need to find someone with a proven track record in creating these types of programs and then raise enough capital to put together a business plan. It is important that the doctors follow this business plan as closely as possible."
The spread of managed care seems certain to encourage physicians to undertake more insurance risk. According to Minneapolis-based InterStudy, managed-care penetration reached 31% of the population in 1997 but ranged as high as 36% in the Pacific region. And research from medical organizations consistently shows the vast majority of all physicians practice with at least one managed-care plan.
Here's a look at three physician-directed managed-care organizations and some of the physicians behind them.
PHYSICIANS INC., Houston
Ten years ago, recalls cardiologist Tom Garcia, few of his colleagues in Houston believed that area businesses would be interested in buying into the concept of managed care. But employers, eager to take advantage of lower premiums than they paid to indemnity plans, began to flock to the new plans.
Meanwhile, Garcia and his fellow physicians saw their relationships with patients eroding and their freedom to practice medicine hampered. Their initial nonchalance regarding managed care turned to concern, and they began to realize they had to do something to regain their control of the practice of medicine.
In 1988, the doctors made an initial effort to form an independent practice association. But the organization remained essentially dormant until 1996 when the board of the IPA raised $4.5 million to form an insurance company. They enlisted the support of 1,250 doctors and formed Houston-based Physicians Inc.
It was a hard sell, but today the network includes 3,200 physicians and 62 hospitals covering 16 counties in southeast Texas.
Physicians Inc. began marketing its products to employers in November 1997.
Each of the plan's 1,250 physician shareholders had to buy at least one share of common stock to gain a vote. At the initial offering, physicians could choose between two kinds of stock: common, valued at $1,750, and preferred, valued at $2,000. The common stock does not pay a dividend but the preferred pays a dividend of 5%.
Things started off slowly, says Garcia, who now serves as a board member. "At first doctors were confused; they did not know what to do and took no action. Once the doctors got involved, and saw what could be done, they became enthusiastic. By setting up our own HMO, doctors don't have to be responsible to business executives. As a locally owned organization, we can determine which practice patterns work and follow them, and we can do this without infringing on anybody's ability to practice medicine their own way."
Physicians Inc. offers two products. The San Jacinto Plan is structured much like an HMO although patients can go to any doctor they choose. There is a $15 copayment for a physician visit, a $75 copayment for emergency room visits, and a $500 copayment for inpatient visits. The other product, a traditional PPO, is known as the Bayou Plan. It allows employers to select a deductible of between $250 and $2,500. Patients can go out of network but they must make a higher copayment.
"The doctors did not invest in this plan for a financial return," says Charles Bessire, M.D., a family practitioner and board president of Physicians Inc. "They did so because they wanted to have a positive influence on the way medicine is practiced in Houston and wanted to return the physician-patient relationship to the center of healthcare. The idea has been received favorably in the local market."
The organization has a staff of 21 to handle business functions under the direction of Chief Executive Officer Mike Manley. Utilization review is handled by teams of four to five network doctors. Physicians are paid on a discounted fee-for-service based on the resource-based relative value scale.
According to Bessire, Physicians Inc. hopes to have 20,000 enrollees by the end of 1998.
Although it's an ambitious goal, he hopes to make it possible with aggressive marketing, especially to smaller firms.
The organization is in the midst of a second stock offering, with common stock priced at $2,000 a share and preferred valued at $2,300 a share.
The organization also has established a partnership arrangement with both the Texas Medical Association and the Texas Medical Association Insurance Trust. The latter will process claims, using the Internet to expedite matters more efficiently.
"We think this plan will work because the timing is right and the doctors involved are really committed," Bessire said. "The business community is behind us, and people in general are angry about the problems caused by managed care."
CALIFORNIA ADVANTAGE, Oakland, Calif.
J.C. Pickett, an orthopedic physician, put a great deal of effort into the development of California Advantage, a for-profit subsidiary of the California Medical Association.
But his labor -- and that of other California physicians -- was not enough. The physician-owned PPO, after posting aggregate losses of nearly $11 million, last month filed for federal bankruptcy protection and said it would liquidate gradually.
Formed in 1995, the plan was capitalized with $11 million and has 7,500 physician shareholders. Doctors initially had to buy at least one share valued at $1,000 to become owners and voting members of the organization. To ensure broad representation, as well to prevent any one doctor or group of doctors from gaining control, physicians could purchase no more than 10 shares.
The plan's network included 20,000 nonshareholder physicians. Nonstockholders were part of the California Foundation for Medical Care, a statewide network.
California Advantage offered point of service, PPO and exclusive provider plans and had about 9,000 enrollees, a fraction of the enrollment in such California managed-care giants as Kaiser Permanente and Wellpoint Health Networks.
The exclusive provider organization, the least expensive of the three plans, was similar to a traditional HMO, according to Jane Burns, vice president of investor relations. Enrollees could go out of network in the POS and PPO plans, but only if they paid more.
Although patients were encouraged to develop a relationship with a primary-care physician -- especially for less serious medical conditions -- they were able to go directly to the utilization management and gain authorization to see a specialist. This allowed patients broad access to providers and free choice. About 90% of the members chose the POS product.
Utilization review was conducted by an outside firm known as CostCare. To ensure that proper decisions were being made regarding authorizations, only doctors were involved in the review process. Doctors are reimbursed on a discounted fee-for-service basis based on RBRVS. The plan was directed by a 10-physician board -- six members elected by the California Medical Association, two elected by primary-care doctors and two by specialist physicians.
At one point last year, enrollment fell to about 3,000. But leaders undertook efforts to attract more capital and more enrollees.
"We are going after the Healthy Families program," Burns said prior to the bankruptcy announcement. "This is a state and federal funded program that gives coverage to uninsured children. Also, we have successfully pursued the small-business market."
When California Advantage conducted its most recent stock offering, shares were valued at $1,250. But since California Advantage ultimately plans to convert its Chapter 11 bankruptcy filing into a Chapter 7 liquidation, the stock will become valueless.
Leon Bender, a Los Angeles urologist and chairman of the board of directors, believes physicians involved in California Advantage made a strong commitment to the practice of medicine by joining the organization.
"When I stumped the state seeking shareholders, I told the doctors, if you believe the future of medicine is where you like it, don't buy a share. If you think changes need to be made, then buy a share and participate in making those changes. We have had an enormous amount of support from doctors and medical societies, but raising the money has not been easy. The doctors who have invested in this plan are willing to take a chance on their future."
Ultimately, however, creating a physician-owned managed-care organization is demanding, and there are no guarantees of success.
Pickett, a board member who spoke to Modern Physician before the bankruptcy announcement, says doctors should give thought to the economic ramifications of their practice decisions during this era of shrinking indemnity insurance.
He was willing to make sacrifices to see his organization succeed. He accepted lower income and spent many hours attending board meetings to make the plan a reality.
Pickett said his efforts weren't designed to achieve a financial profit.
"We have learned the importance of delivering care at a reasonable cost," he said. "Now doctors are moving into the administration of their own managed-care organizations. We can't get rid of managed care entirely but we can regain control of our profession by taking control of the organizations. Doctors should be paid on a fee-for-service basis. It does not make sense for doctors to be paid more for seeing fewer patients."
ALTRUHEALTH PLAN, Grand Forks, N.D.
Charlotte Hovet, a family physician and assistant medical director for the AltruHealth Plan in Grand Forks, N.D., firmly believes that doctors must play a leadership role in managed-care organizations. She doesn't have trouble accepting a profit motive in healthcare -- as long as whatever money a health system earns goes into improving public health.
"The No. 1 thing that determines quality of care is the skill, judgment and knowledge of the doctors involved," she says. "Physician leaders should run managed-care organizations. We are a community-based HMO where doctors actually direct healthcare and determine the quality of care received by patients."
AltruHealth Plan, a part of AltruHealth Systems in Grand Forks, represents an interesting development in physician-initiated managed-care firms. Originally, the plan was called Northern Plains Health Plan and operated as a not-for-profit entity owned by 150 doctors, United Hospital and Grand Forks Clinic.
The doctors and hospital administrators who started the plan wanted to retain local control of healthcare and felt large insurers were dictating the type of treatment people in Grand Forks received. Then, hospital and physician leaders decided that the best way to achieve their goal was through the creation of a not-for-profit integrated delivery system.
Last July, the clinic and the hospital, which previously were independent entities, became part of AltruHealth system, which is headed by a physician CEO.
The system is governed by a 10-member board, four of whom are elected by the community. Six members are selected by the health system, three from the ranks of the physicians.
"We are a physician-directed plan," says Executive Director Tim Sayler. "We created an infrastructure that assures that physicians will be in key leadership positions at all times."
Although the doctors no longer are sole owners of the plan, they help direct the health plan through its separate 10-member board: three board members are doctors; the other seven are community leaders.
Total enrollment is almost 12,000, and the HMO is divided into two plans serving businesses in Minnesota and North Dakota. In 1997, the plan eked out a net profit of $200,000 on total revenues of $12 million, according to Sayler.
As with other physician-directed health plans, AltruHealth's future ability to successfully manage insurance risk is not clear. But physician willingness to assume risk is unlikely to disappear anytime soon -- as long as physicians see creating and investing in managed-care plans as an opportunity to control their own medical destiny.
David Volz is a Plantation, Fla.-based freelance writer.