Merger madness: Is your practice ready to survive?

Tips from practices that have been through the battle

A wave of mergers between managed care organizations and integrated health systems is leaving physician practices increasingly vulnerable to payer agreements, forcing practices to rethink the way they approach contracting. The lessons from executives who have experienced the impact of mergers first-hand: Think short-term, expect reimbursement cuts for specialists, and build name-brand awareness of your practice among the public.

"Always go into an agreement understanding you may have an agreement today, but that it may be very tenuous," warns Donald Hutton, FACHE, principal of the Atlanta-based Morgan Consulting Group. He adds that most payer agreements require either 90 days or 180 days advance notification of termination by either party.

Hutton should know. When he was associated with an Atlanta IPA consisting of 350 primary care physicians and 1,700 specialists, the group lost two payer contracts in 1995 due to mergers. The IPA’s original capitation agreement with Metropolitan Life survived one merger — Metropolitan’s absorption by Travelers to become MetraHealth — but not the second merger with United Health Care. "We entered into discussions with United but couldn’t come to terms. United did not normally contract in that fashion," Hutton explains. The result: a net loss of 4,000 patients to the IPA.

The predicament faced by Anne Zweidler, administrator for University Orthopaedic Sports Medicine in State College, PA, shows local mergers can have an impact as well. The Geisinger system, an integrated health system that Zweidler’s practice does business with, is merging with The Milton S. Hershey Medical Center, operated by Penn State University. The kicker: Penn State already owns a competing orthopedic practice in town.

"We’ve inquired to the health plan and they’ve told us that we won’t be taken off the panel," she says, but practice leaders are still nervous they will be dropped. "We haven’t gotten anything in writing, and certain patients have been telling us our physicians are telling them they will not refer to us," Zweidler says. The practice only stands to lose 5% to 10% of its patients, but leaders are more concerned with the impact on continuity of patient care.

It’s hard to view situations like Zweidler’s and Hutton’s as isolated when you consider the number of national mergers that have occurred among managed care organizations during the past two years. Statistics from Minneapolis-based InterStudy show that the top 10 national managed care firms accounted for 45.2% of nationwide HMO enrollment in 1996, up from 33.5% 10 years ago (see chart above). A partial list of these deals includes:

• Blue Bell, PA-based U.S. Healthcare’s consolidation with Aetna to form Aetna U.S. Healthcare;

• Minneapolis-based United Healthcare’s acquisition of MetraHealth;

• California-based FHP’s merger with Pacificare. (See table listing top 10 U.S. managed care firms by enrollment, p. 63.)

Add to that regional mergers among integrated delivery systems, and you find a health care industry with constantly changing dance partners.

So what can you do? Experiences culled from consultants and practices that are living through the mergers-and-consolidations binge offer the following tips:

1. There is strength in numbers.

It goes without saying that a 1,100-physician network with multiple locations has more negotiating clout than a 105-physician multispecialty clinic. Milwaukee Medical Clinic’s tactic in a market where consolidation trends are just beginning: to merge its multispecialty clinic with two smaller clinics to form Advanced Healthcare. The merger, expected to take effect Jan. 1, 1998, will make Advanced Healthcare the largest physician-owned group practice in southeastern Wisconsin. Advanced also created its own provider network of 1,100 physicians, consisting of these three clinics, three large IPAs in town, and other community-based physician practices (see organizational chart, p. 64).

"We’re trying to be a physician-driven network," says Eugene Monroe, president of Advanced Health Network. "We think that unless we consolidate efforts on the physician end, it will be hard to respond to change." The network already has signed an exclusive agreement with Physicians Plus Insurance Corp., a Madison, WI-based HMO with 100,000 lives that plans to enter the Milwaukee market early next year.

This tactic gives physicians much greater leverage with managed care organizations, agrees Ken Berkowitz, a consultant with Towers Perrin’s Miami office. "To become adept in the managed care world means either taking the bull by the horns and leading your own change or becoming very good contractors so that health plans will want to associate with you," he says.

Which leads to the second tip from our experts:

2. Create a name-brand identity for your practice or IPA.

Spend a lot of time educating patients about the high quality of service your group provides, and network with brokers in your community who influence employer purchasing. You want patients and members of the community to perceive your organization as so essential that it must be part of a payer’s provider network. "To the extent that you can create name-brand identity, then the payer becomes dependent on you," Hutton of Morgan Consulting says. But be cautioned that this kind of identity isn’t created overnight. Minneapolis-based Allina Health System has been attempting to differentiate itself in terms of service excellence for years in a highly mature managed care marketplace, and feels it still has work ahead of it, according to Bill Gedge, Allina’s vice president of payer relations.

3. Work hard to be a cost-effective provider.

To the extent your practice can demonstrate cost-effective outcomes, you will be a desirable network provider. "Payers have said in the past that they didn’t care about our outcomes, they just cared about our bottom line," says Zweidler of University Orthopaedic.

4. Spread out your payer mix.

No matter how great your practice’s payer satisfaction and cost-efficiency is, it pays not to become too dependent on one source of business. Minneapolis-based Allina Health System, an integrated health system, contracts with approximately 80 different payers. Even if there are only three major payers in your market, contract with at least two of them, Hutton suggests.

5. Think carefully about which organizations you want to align with.

Don’t feel you must sign every contract that comes your way. Berkowitz says it’s a matter of knowing your market, finding out which payers are growing in terms of membership, and looking at each payer’s philosophy of payment, medical management, and network management. Local regional payers are probably most susceptible to potential takeovers, Hutton adds.

6. Once the merger boom hits your market, expect merging payers to ask for reimbursement adjustments or more risk transfer.

Allina’s Gedge says provider incomes have dropped 10% or even 20% a year in some specialties. So far, the cuts haven’t driven specialists out of the market because they have been willing to take the cuts. Berkowitz of Towers Perrin has seen requests for risk transfers rather than ratcheting down of rates. Organizations that can successfully manage care under risk transfer and capitated agreements can do very well, he says.

7. Consider the impact of payer mergers and acquisitions on your patient mix.

A merger between two organizations can suddenly leave your practice representing the lion’s share of the new combined payer’s patient mix. Berkowitz says a medical group with 25% of a payer’s membership is in a pretty strong bargaining position. Hutton agrees this can represent a chance for a practice to have the upper hand in negotiations. Practices in this situation should look for longer-term agreements, penalties for early termination of the agreement, and financial arrangements that align incentives for the physician group and the payer.