Hill Physicians Medical Group may be one of California's oldest and largest independent practice associations, but what makes it a standout among its California peers is that last year, it made money.
True, Hill's 1998 profit margin of 1.1 percent, or $2.3 million, was pretty thin. But compared with the dismal financial performance of just about every other California IPA and medical group of late, and considering the competitive area where Hill does business, the 2,500-physician organization's achievement is impressive.
Hill is a major player in a swath of Northern California that stretches from San Francisco to the crowded East Bay cities of Oakland and Berkeley through heavily populated bedroom communities eastward all the way to Sacramento--a region that has one of the highest levels of managed-care penetration in the nation.
"I can't name any (other) IPA in California that made money (in 1998)," says Jim Fojut, a partner in Cattaneo and Stroud, a Burlingame-based healthcare consulting firm that annually publishes an extensive survey of California IPAs. "Hill is as good as it gets."
With 350,000 HMO enrollees and growing, San Ramon-based Hill, founded in 1983, has kept a low profile for 16 years as so many of its upstart peers flared into notoriety and flamed out. Though all is not rosy for Hill--even top executives spot some financial storm clouds on the horizon--the company has earned a thumbs up for its astute management so far.
"I give them credit. They've done a good job," says Richard Oken, M.D., president of rival Alta Bates Medical Group, in Berkeley.
Another competitor, president of San Francisco's financially ailing Brown & Toland Medical Group, Michael Abel, M.D., says Hill CEO Steve McDermott "is aggressive and articulate, and his strategy is the right one."
To grasp that strategy, it's important to understand what Hill is not. It's not a physician practice management company with Wall Street ownership, which means it doesn't have to worry about absentee shareholders looking over its shoulder and demanding profits. Nor is it a company that owns its doctors' practices. The affiliated physicians retain ownership and simply contract with Hill for services such as HMO contracting, management of the complications inherent in HMO relationships and use of its information systems.
It's also important to note that Hill didn't achieve its status overnight. Unlike, say, MedPartners or FPA Medical Management, whose California demises were blamed on too-fast growth and too little time to develop internal controls, Hill has been around for a while.
Hill is a private company, capitated by health plans, which contracts with its participating physicians on a fee-for-service basis and exerts tight controls over utilization patterns. Of the 2,500 affiliated physicians, 325 have earned eligibility to buy shares in Hill based on the length of time they have worked with the company, patient volume and other factors.
Shareholder status obviously gives doctors a stake in Hill's success, though McDermott would not reveal the precise amount invested in shares. A single share costs $1,000.
Hill's earnings can be distributed to the shareholders as bonuses. They also can be, and in 1998 largely were, reinvested in the company--not an easy sell to the participating doctors.
One explanation for Hill's success, observers say, is it embodies the business truism that when it comes to negotiations, size matters.
"HMOs, like any purchaser, pay based on the value they see," says Hill's CFO, Rob Ramsey, "and we have a higher percent (than anyone else) of the market in most of the regions we're in." The essence of Ramsey's argument is that the HMOs with which Hill contracts--PacifiCare, Aetna, Health Net and others--must offer
Hill better terms than the terms they offer to smaller groups because they want to capture Hill's numerous doctors and patients.
Though Leeba Lessin, president of Northern California operations for PacifiCare, is reluctant to reveal particulars, it's clear that PacifiCare is willing to concede certain points to Hill, and not just those that relate to more favorable capitation rates.
"A lot of the negotiations (also) boil down to, 'What accountabilities will Hill fund vs. the health plan,' " Lessin explains. And when it comes to questions such as who pays for transplants and injectable drugs, or whose diabetes-management program will prevail, such negotiations often work in Hill's favor.
That may well be, but Hill's medical director and treasurer, Robert Feldman, M.D., prefers to emphasize that Hill's strong HEDIS scores, star ratings from the Pacific Business Group on Health and other quality indicators also are key to Hill's good relationships with health plans.
McDermott says that while historically HMOs have looked for the IPA that can offer the lowest prices, in the current provider climate, they increasingly are looking for a track record of stability and good management.
Whatever the reasons, "Hill has clout with HMOs," says Ron Kaldor, a Sacramento healthcare consultant and attorney.
It would be misleading, however, to focus only on Hill's success. Even with healthcare premiums on the rise again-which may bode well for Hill, Ramsey says, as it will likely lead to higher payments to providers--the company is facing significant financial obstacles.
In its most recent financial report, issued June 30, Hill stated that despite 1998's comparatively strong performance, after barely breaking even or suffering small losses in the previous three years, the company is "sobered by the challenges facing us and the industry as a whole." Specifically, the report said, Hill will need a lot of cash to implement its e-commerce project and to "consolidate some of the many IPAs (and) medical groups that are facing serious financial hurdles and may want to become part of Hill Physicians."
The report didn't reveal the exact amount of money Hill anticipates needing to underwrite these measures, but McDermott says Hill will have spent about $8 million on the e-commerce project alone before the end of this year ($5 million toward start-up through 1996 and $3 million in 1997, 1998 and 1999 combined). It is not yet clear how much money will be needed to support the project in the future.
McDermott expects the e-commerce project, which will use the Internet to automate medical claims, eligibility and referrals, to save the company millions by affecting everything from the number of people it employs to the cost of postage. A savings of $4 million per year on billing costs alone is expected once the project is up and running.
One possible source of capital would appear to be Catholic Healthcare West, the largest hospital system in California and owner of Hill's management services arm, PriMed. But CHW is experiencing a cash squeeze of its own, and McDermott isn't counting on it for financial support anytime soon.
He also has ruled out the possibility of Hill or PriMed going public. And as Kaldor, the Sacramento analyst, points out, three years ago, there were bankers and investment capitalists who eagerly would have put money in a company like Hill/PriMed, but after watching the rise and fall of FPA and MedPartners, that money is not available anymore.
Hill's need for capital isn't as problematic as it appears to be, Feldman and Ramsey insist, despite the implications of the June report. Regarding the e-commerce project, Ramsey says, so far, "the capital needs (required) have not been above what we can eke out of our operations."
Feldman says, "The cost of those things is coming way down and probably can be funded on a service agreement arrangement" with Healtheon Corp., which is creating the project's technology.
As for the cost of consolidating faltering IPAs and medical groups--and there are plenty that wouldn't mind being absorbed into Hill--the company doesn't expect to pay capital for them. Instead, Feldman suggests Hill might simply fold in the new groups and, in doing so, the groups, not Hill, would shoulder any debt they've incurred.
Assuming that the e-commerce project is launched successfully, it appears the ultimate challenge facing Hill is how to best manage its growth. McDermott has long had starry-eyed visions for Hill, but those visions haven't always panned out. In 1995, for example, Hill made an aggressive foray into Southern California and came close to acquiring three medical groups--about 450 physicians--as McDermott talked about transforming Hill into a "large, Kaiser-like organization." The deal fell through when CHW refused to finance it.
Now McDermott says he wants to be a dominant player in all of Northern California, including south of San Francisco where Hill has yet to get a foothold. There's no question that the opportunity so is there, but how McDermott can accomplish his goal and then manage his acquisitions profitably remains to be seen.
Still, no one expects him to rest on his laurels. "As long as (Hill) can, (it) will grow," Fojut says. Kaldor predicts whatever Hill does, it will be done with care. "I've watched medical groups that have merged into Hill over the years and every time, Hill behaves cautiously," he says. "They analyze groups carefully, and when they take bites, they take reasonable bites."
Careful, cautious, fiscally responsible and well managed--sounds like the classic formula for an IPA to make money.
Steven H. Heimoff is an Oakland, Calif.-based writer who specializes in healthcare business topics.