The year 2001 is shaping up to be a watershed year for physician managers. The deterioration of PPMs is giving doctors a chance to buy back their own practices. Insurance companies are raising premiums at more than twice the rate of inflation but remain reluctant to share the extra revenue with doctors, sparking protests. Meanwhile, technology-wary venture capitalists are warming to the idea of healthcare investments even as the economy shows signs of slowing.
As physicians face the new year, much of their focus will be on improving the financial stability of their practices. That could mean a continuing shift away from risk contracting, as medical groups have been badly burned by shrinking health plan reimbursements, the implosion of the practice management companies and ill-fated efforts to assume the financial risk of delivering care.
Physicians have started to flex their muscles in managed care negotiations, with varying degrees of success. Specialists, who are in strong demand, should be able to improve their clout, but growing variations are likely in the deals groups are able to strike.
"We're in a situation where managed care itself is making a substantial change in the compensation of providers. It's changing literally overnight," says Dave Gans, survey operations director for the Denver-based Medical Group Management Association.
"We're seeing an overall decrease in the percentage of organizations with capitation contracts," he says. "What you observe is anecdotal information, not national data."
Based on that anecdotal information, Gans says, "Many physicians would prefer a defined compensation program rather than a risk-based program." He says he believes that payers are somewhat receptive to a shift back to fee-for-service schedules, but only at highly discounted rates.
Others dispute that idea. Raymond Cisneros, a Philadelphia-based national healthcare partner for professional services firm Deloitte & Touche, says he believes that payers will win out this year. "Most of the increases we're seeing on the insurer side is to help them recover lost revenues, not with the anticipation of paying providers a lot more," he says.
Cisneros says managed care organizations have been hurt financially not only from legislative actions such as the 1996 Health Insurance Portability and Accountability Act and the 1997 Balanced Budget Act but also from fierce competition within the managed care industry. HMOs in particular suffer from a negative public image.
"They still don't do a good job of explaining what they do in terms of the benefits of managed care. They don't really tell their story well," Cisneros says.
The bottom line, however, is "physicians are still getting screwed one way or another," says Terry Mieling, director of the healthcare finance group for Merrill Lynch in Chicago. Insurers may be asking for a double-digit rate increase in 2001, but Mieling says that hospitals are renegotiating their contracts with managed care organizations, asking for up to 20% to 25% more from commercial insurers than they were paid in 2000. That range dwarfs the expected 4.5% to 5.5% hike in Medicare reimbursements to providers and would squeeze the revenue available to doctors.
"One wins one year, the other wins the next," Mieling says of hospitals and insurers. "Physicians always seem to get caught in between."
Still, a source of optimism for physician reimbursement may be the continuing shortage of specialists, who have the bargaining leverage to command higher fees from payers. "Eventually that trickles down to all levels," including general practitioners, says Yale University health economist Howard Forman, M.D.
Additionally, a mostly congenial relationship between payers and providers may help ensure fairness. "(Insurers) want their customers to be happy," says healthcare venture capitalist Eve Kurtin, managing partner of Pacific Venture Group in Encino, Calif. "They want to make sure they provide good quality, and they see that paying the physicians a fair wage is something that's good for them."
"The first concern when it comes to higher premiums is to make sure physicians' needs are addressed," she says.
Conversely, Forman says, "Physicians ultimately are not as profit-motivated as (people) in other industries. Physicians have a first priority to their patients."
Because of their role as caregivers, physicians stand to benefit immensely from their significant goodwill with the public. Patients generally have been clear in their willingness to pay for quality and flexibility and, accordingly, insurers and employers have heeded the call for more choice in healthcare by increasing access to pricier PPO-style plans.
"Managed care organizations are responding to that need," says John Word III, founder and president of California Choice, a health insurance marketing cooperative based in Orange, Calif. "The PPO is becoming more popular, so the difference in rates between PPOs and HMOs is not what it used to be."
Whether this trend continues may depend on the health of the economy. Analyst Mieling explains, "Because of the strong economy, employers have been forced to give a smorgasbord of benefits to recruit and retain top employees." But if conditions weaken and the tight labor market eases, he suggests that companies could rein in their generosity and potentially force millions of people into more restrictive HMOs.
Kurtin, however, sees this as a remote possibility. "If the economy turns bad, that's going to have a more direct effect on us (in the investment community) than what employers are doing," she says. "We are not going to go back to HMOs."
In fact, healthcare venture capitalists are rather bullish heading into 2001.
Alan Schechter, managing partner at BSKB Medical Ventures in Costa Mesa, Calif., says bluntly: "There will be no significant downturn. There's too much momentum (in the healthcare sector) and there's too much technology on the next wave waiting to burst through."
Schechter says products resulting from current research in biotechnology and the Human Genome Project present good investment opportunities because they involve real advances, unlike many failed online companies. "There's no technology there (in medical dot-coms). Healthcare Internet plays are big smokescreens because you can gather the same information elsewhere."
He also cautions managed care companies to abandon the unpopular "gatekeeper" model when it comes to breakthrough treatments. "I still think they're going to get hammered (in public opinion) on reimbursements and on declining new treatments and new drugs. I don't think that HMOs are going to want to foot the bill," Schechter says.
"No one has the absolute crystal ball," Kurtin acknowledges. "But insurers are doing better and (medical) services will pick up again." She notes that the healthcare services sector had "a major falling-out with the financial community" in the late 1990s, just as Wall Street started fawning over Internet companies.
"Healthcare is coming back in its attractiveness," Kurtin says. "There's a lot of money out there to place," and investors always have an interest in anything with a solid, sustainable business model, she says.
Kurtin says she believes that PPMs brought on their own demise because they cobbled together medical practices without considering gross profit margin and potential for growth of merged operations. "The PPMs couldn't leverage anything. It can't be so labor-intensive," she says. "There has to be a technological benefit to leverage the system."
To their credit, physicians are starting to take greater control of their own practices. Specialists and many hospital-based doctors "seem to be hanging on out there" in group practices, says Chuck Korogi, director of client development for San Diego-based medical billing service and software developer Per-Se Technologies. But, he says, there is a lot of "decontracting" going on, even for doctors who work directly for hospitals.
"Physicians have historically accepted whatever the hospital negotiated for them," he says. For some doctors, such as those in emergency rooms and teaching hospitals, "Sometimes the best strategy is not to have a contract," he says.
In other cases, Yale's Forman says, "We're seeing a lot of workarounds in contracts," in which payers negotiate coverage directly with small employers and even individual patients. But that approach is not for everyone, as it tends to shift risk away from managed care companies and onto physicians.
Jerold Fadem Sr., M.D., president and CEO of Orlando, Fla.-based Vitacare Solutions, a group representing physicians in IPAs, says negotiating strategy is a function of individual circumstances. "The amount of leverage that an IPA or another group has is really dependent on the group's impact in managed care," he says, predicting that negotiation rapidly is becoming individualized.
"Some doctors have canceled managed care contracts and some are all managed care," says Fadem. "Healthcare is a local phenomenon, and the local characteristics produce the end result."
Indeed, physicians who sever ties with PPMs or hospital systems may gain autonomy but lose bargaining power, so some independent practitioners have started to band together.
"You're going to see them starting to rally almost to the point of quasi-unionization because they have no leverage with insurance companies," Schechter says. This strategy, he says, helps these physicians join with colleagues in group practices to open "multiple fronts" in negotiations with payers.
Whether this tack will be widely adopted remains subject to debate. Wall Street healthcare analyst Todd Richter of Bank of America Securities says, "I see no change in the negotiating dynamics across the entire healthcare industry." He believes that those who negotiated well in 2000 will do the same in 2001.
Richter forecasts that hospitals and pharmaceutical manufacturers will see the greatest revenue increases this year, simply as a function of supply and demand.
But for physicians, "In general, rates are better than they have been for a while," he says.