Mercy Health Partners in Toledo, Ohio, has announced it will shift its unprofitable network of 119 employed physicians back to private practice.
But unlike many other health systems that are divesting physician practices, Mercy is doing so from a position of relative financial strength. In a year when many health systems complain of diminishing margins, Mercy expects its 1999 net income to exceed last year's and anticipates an even better 2000, President and Chief Executive Officer A. David Jimenez said.
"This decision is not because we're falling apart financially. It's because we view it as a failed strategy," said Jimenez, who took the helm at Mercy in September. He was formerly a senior vice president at Adventist Health System in Winter Park, Fla.
"I think physician practices are best managed by physicians themselves," he added.
Mercy officials said the system has been losing close to $110,000 per physician, or $13 million, per year on the network. Despite that, the system posted net income of $2.1 million for the year ended Dec. 31, 1998, with net revenues of $557 million. Jimenez said the system expects to net a larger profit this year but declined to give a number. According to the system, its operating margin is positive.
Seven-hospital Mercy is affiliated with Cincinnati-based Catholic Healthcare Partners.
Jimenez said Mercy is on a financial upswing because of productivity initiatives and a new children's hospital that opened in fall 1998. He said the system is in a position to absorb practice losses until the practices are returned to physician ownership, which is expected to take up to two years in some cases.
Jimenez said the healthcare industry must react more quickly when strategies don't work.
"Because of (the) Balanced Budget Act (of 1997), because the margins are tightening, we can't continue to hold onto a failed strategy. We've got to be more aggressive dealing with these things," he said.
Most of Mercy's practices were acquired from 1994 through 1996, when establishing so-called integrated delivery systems was in vogue. But efficiencies of scale and strategic advantages didn't materialize, according to system officials.
Like many systems, Mercy consolidated practices, marketed them heavily to managed care and renegotiated employment contracts with doctors to add productivity incentives. But health system overhead boosted practice costs, and no significant new business was created. The family practitioners, internists, OB/GYNs and pediatricians had already been referring their patients to Mercy facilities before their practices were acquired, Jimenez said.
Morris Flaum, M.D., senior vice president of medical and academic affairs at Mercy, said the system anticipates it will cost millions of dollars to compensate physicians for early terminations of their contracts, though officials declined to provide an estimate.
Some physicians may choose to work through existing employment contracts, and others have contracts that expired, he said.
Neither Flaum nor Jimenez would say how much the system spent acquiring the assets.
Physicians may opt to contract with the hospital's management services organization for billing, practice management, supplies and other services. Mercy will continue to employ about 30 physicians in connection with its teaching program and indigent clinics.
Flaum said physician reaction has varied.
"Some physicians are upset. Other physicians indicated that they can see why the decisions were made," he said.