Sometimes if you build it, they don't come. Four years ago, two western Washington systems, anticipating an intense game of capitation, spent millions assembling a team of primary-care physicians.
But employers never stepped up to the plate.
Now, Sisters of Providence Health System, Seattle, and Franciscan Health System, Tacoma, are dismantling their joint physician network, saying it was built for a managed-care boom that never arrived.
The network, Medalia HealthCare, performs contracting and practice management for 275 physicians at 45 sites. The two systems are forming new groups that will have closer ties to system hospitals and will assume the practices April 1.
Like many hospital-owned medical groups, Medalia is losing money. Last year, Providence and Franciscan contributed $36 million, or $131,000 per physician, to subsidize the group's operations, says Budd Wagner, vice president of marketing and communications at Franciscan, a three-hospital system that belongs to Denver-based Catholic Health Initiatives.
Moreover, Medalia's centralized management structure struck out with doctors, who displayed their discontent by forming a collective bargaining unit last year.
Yet Medalia's demise also demonstrates the difficulty of operating a regional physician network in a fee-for-service environment, the founders say.
Under capitation, Medalia physicians developed referral patterns that were "not necessarily supportive" of the sponsoring hospitals, says Derick Pasternak, M.D., who became chief executive officer of Medalia in March 1998.
Capitation encourages Medalia to contract with specialists who offer the lowest rates, not necessarily those affiliated with Providence or Franciscan hospitals, Pasternak says.
"The new medical group is going to concentrate on those specialists who are in some way working hand in hand with the individual hospital," he says. Although it's illegal to require physicians to refer patients to a specific hospital, Pasternak says, "there is an alignment which we all know exists."
Pasternak recently was reassigned to become CEO of Providence's Puget Sound service area. He was formerly CEO of Lovelace Health Systems in Albuquerque.
When Medalia was created in January 1995, the state Legislature had just passed reforms to encourage migration to prepaid care, but those reforms were quickly reversed when a Republican-controlled regime took over.
Medalia forged ahead anyway, Wagner says, hoping that employers would drive reform, led by Boeing Co.'s initiative to reward employees for moving to prepaid care. In 1996, Medalia signed an agreement with Boeing to cover 28,000 enrollees. But other employers proved less amenable.
Prepaid care accounts for about 30% of Medalia's revenues-not enough to sustain its large managed-care infrastructure, Wagner says. Medalia's prepaid enrollment, just shy of 100,000, falls short of the 300,000 prepaid enrollees it had projected for year-end 1998.
According to InterStudy, a Minneapolis research firm, the HMO penetration rate in the Seattle, Bellevue and Everett, Wash., market was 28.6% in January 1998, equal to the national average.
"We had a turnaround plan predicated on significant growth in managed care, and in fact significant growth is not occurring in Seattle," Pasternak says. He says he believes primary-care groups will continue to lose money despite the introduction of productivity incentives and centralized purchasing. He adds that those losses are justified if the physicians develop closer ties to the hospitals.
Franciscan is establishing a single not-for-profit foundation with its own board and management to assume control of practices in the Tacoma market. Providence, which operates hospitals in Seattle and Everett, is creating two group practices as divisions of its operations in each city.
Both systems say the new structures will bring physicians into management and allow them to elect their own governance.
James Vandermeer, M.D., co-president of the Northwest Physicians Alliance, a chapter of the New York-based United Salaried Physicians and Dentists, says it remains to be seen whether the systems will solicit widespread physician opinions in developing the new groups.
The physician union and Medalia have been negotiating since July 1998. According to Franciscan and Providence, the new groups will negotiate separately with the union.
That will divide the union's resources, says Vandermeer, a family practitioner in Everett. But, he says, dismantling Medalia "is better than continuing as they were before."