Physician-owned insurance companies once were seen as the best way for physicians to wrest control of their practices and patients back from nonmedical bureaucrats in insurance companies and health plans. Now many have fallen victim to the economic realities of the business and been forced to scale back or close their doors.
In October 1997, Gary Brown, M.D., a Philadelphia ophthalmologist, wrote in his position as chairman of Pennsylvania Physicians Care that with the changes underway in healthcare, "rather than look upon this as a time of despair, we physicians should view it as a time of opportunity and think proactively to provide the consumers with what they want . . . in this case: quality, choice and a reasonable price. By intimately involving physicians in the quality aspects, gathering large panels of professionals and hospitals, and employing solid management and sound business techniques, we as physicians will be able to provide the public with what it wants."
It sounded good, and Brown was enthusiastic when 4,000 physicians came forward to invest in the fledging organization.
But within just two years, Pennsylvania Physicians Care, which was serving 21,000 subscribers in 450 groups, had collapsed. Patients started experiencing denial of care until the state Insurance Department reached an agreement with Capital Blue Cross and Pennsylvania Blue Shield to assume Pennsylvania Physicians Care's contracts with the same rates, benefits and underwriting standards that apply to its other customers.
How did so much promise go sour so quickly? For Philadelphia lawyer John Jones, a member of the health law department at Schnader Harrison Segal & Lewis, the answer lies in the very nature of what the physician-owned insurance companies are trying to accomplish.
"These organizations are very difficult to finance," Jones says, "and Pennsylvania Physicians Care, like many of them that have been liquidated, was undercapitalized. It raised $22 million from physicians but didn't have reserves to sustain claims losses and didn't meet state requirements.
"When you have a group that has lost money and still wants to stay alive, it's a hard sell when it's only physician owned. They sought help from the state medical society, but it was voted down." Jones says the group also fell victim to increases in the cost of medical care and "just ran out of time."
Jones understands the reasons that drive physicians to want to open their own insurance company. "Having such an organization gives them a voice in managed care and some control over medical decisionmaking for the delivery of care. In addition, they believe that by involving physicians in the quality aspects of the company, they will be able to improve the quality of care. It also can give them more control over reimbursement and over their own practices. Patients are able to choose from a large number of providers when a large group of physicians has invested in the company."
He is quick, however, to also list the potential downfalls, with financing being the major problem. "If you have only individual physician investors instead of large companies, it's hard to have enough reserves to be able to cover your losses. In addition, the physician-owned companies often try to undercut their competitors by cutting premiums, and it's very hard for an undercapitalized company to cut premiums and then stay in business.
"They don't teach business in medical school, and it would help if physicians had more education about the business aspects of operating a managed care company. The doctors are in a difficult position. They just want to practice medicine and deliver quality healthcare, and they don't feel they can do that today."
Physicians owning insurance companies as a way of having more control over their own destiny is not a new concept. In the 1970s, when commercial malpractice insurance companies pulled out of the market, many state medical societies and physician groups started their own malpractice insurers, many of which still are operating successfully today. The Physician Insurers Association of America reports there were 48 active physician- or dentist-owned or operated insurers operating in 28 states in 1998.
But the history of physician-owned health plans has been much more mixed. In some states, generally those with low managed care penetration when the physician company enters the marketplace, they have done well. Plans sponsored by state medical societies in Colorado, Kansas, Louisiana, South Carolina and South Dakota reportedly are doing well. But the experience in other states often has been less successful as physicians have tried to create companies without the backing of their state society and have had problems with undercapitalization and strong competition.
One physician-owned group that started with the same goals and enthusiasm as Pennsylvania Physicians Care and has managed to survive, although currently as only a shell of its former self, is Physicians Care of California, started in 1994 by orthopedic surgeon Gerald Wilks, M.D.
Wilks maintains that IPAs, PPMs and other forms of physician corporations are not the answer. "The only cure is to control the premium dollar and market share," he says. "To do so, you have to have an insurance company yourself." In Wilks' vision of a physician-owned company, each physician member has one vote, and there are no gatekeepers and no specialty vs. primary care issues. Disputes are handled by the physicians themselves. The elimination of middlemen allows for higher physician reimbursement and lower premiums.
Now six years into the venture, Wilks is pleased that the company still is in business. "We're not as good as we want it to be, but we're growing," he says.
Physicians Care's solution to the undercapitalization problem also has turned out to be its major difficulty. The company first signed up only self-funded plans that simply paid their employees' medical bills, meaning that the plan only had to demonstrate its ability to process claims and not to pay them.
To gain the ability to go after contracts with large employers, it negotiated an agreement with a commercial firm that used its reserves and license to front the Physicians Care activity. Physicians Care hoped to raise enough money in two years to post its own reserves. The problem has been that several successive front companies raised their charge to Physicians Care so much that it no longer could afford to pay and had to drop its large group contracts.
It currently is talking with a couple of companies, Wilks says, but is probably months away from having something in place. Meanwhile, the company that at one time had 63,000 enrollees, most in employer contracts, is back to handling only self-funded business with about 5,000 members. "We've had peaks and valleys," Wilks says. "It's tough when things that you can't control hit you."
Wilks says he still believes it is possible for a physician-owned insurance company to cut out the middleman and save 10 to 20%. "We've proved that there's so much slop in this business that the commercial companies just take off the top. And our physicians invested in the company not to make money from their investment but to make money from bringing more people into their practices because of the attractive reimbursement rates." He says Physicians Care was able to be "very competitive" in the turbulent California market. "When we had to notify brokers that we were pulling out of the large group business we had a lot of unhappy people because they saw we were doing what we said we'd do."
He said quality was good because practicing physicians made the tough calls within their own specialty. Some physicians needed to be "educated," he says, when peers found tests and procedures that didn't make sense, but it was a collegial relationship. "People have gone to battle stations over issues, but they didn't have to yell and scream about it (as they would have with the staff of a commercial insurer) because they were talking to a colleague."
Like the managed care companies physicians complain about, physician-owned companies run the risk of conflicts of interest between what is best for the company and what's best for the patients. Wilks, however, says that didn't happen with Physicians Care. "We've had very few business conflicts. Doctors are able to police themselves. The majority practice good medicine and education has taken care of the few situations that have come up."
Wilks says he's confident that Physicians Care will remain in business, although it's likely to be a while until it again is able to rent reserves and market to large groups or until it reaches a strategic partnership with another organization.
News accounts from around the country tell of similar situations in which physicians initially embrace the idea of chartering their own insurance company and then find they either can't raise the needed capital on their own or can't maintain the business.
For physicians embracing the idea of chartering their own insurance company, Wilks' advice is to have money available and realize how much money may be needed, even if using another company's reserves. Once the business gets going and volume starts to grow, he says, it's necessary to bring in business people who understand insurance but also have the ability to think about it differently so the doctors' goals are met. He also does not rule out looking for partnerships with other organizations that share a common goal.
While Wilks looks for ways to make physician-owned companies viable, Jones isn't convinced that's the route doctors should follow. He thinks they should look for ways to join together behind some basic principles of care and leverage that power to regain some of the control they've lost to private organizations.
"I'm not sure that can be accomplished by owning a managed care organization," he says. "It may come through the day-to-day practice of medicine and the ability to avoid being taken advantage of by large hospitals and health systems.
"Perhaps it can be accomplished through large multispecialty practices that can then negotiate with the hospital chains. It seems that the days of the solo practitioner are almost over in today's healthcare market. Physicians have to find a way to come together that works."
John G. Hope is based in Harrisburg, Pa., and is a frequent contributor to Modern Physician.