Some MSOs are making money; here’s how

Follow the wizards down the yellow brick road

It may seem like magic, but it’s really just a little old-fashioned common sense — combined with psychology and organizational skills — and voila! You have turned around an unprofitable hospital-owned physician practice.

By now, everyone is familiar with the huge losses some physician practices can sustain when owned by hospitals and other organizations. But, perhaps no one bothered to tell you why they failed. Managed Care Strategies asked five people who have first-hand knowledge about medical group management to explain why the industry has done so poorly, and how hospitals and others can successfully manage these practices.

Physician practices may operate under a variety of models and be owned by many different organizations. But if they are to succeed, they must have the ability to control utilization and consumption of resources, says Michael J. Eberhard, president and chief executive officer of Medical Pathways Management Corp. in Torrance, CA. Medical Pathways helps MSOs and hospitals improve unsuccessful physician practices.

"You need to know how many patients you have in the hospital, how long they’ve been there, and what is the plan for getting them out; and this needs to happen in real time," Eberhard says.

They also need to have managers who can stay within a budget and still facilitate good quality health care, Eberhard adds.

New Health Management of Cleveland also consults with providers, MSOs, and others to find solutions for failing physician practices.

Physician practice owners sometimes call New Health Management to ask the company to investigate why they’re losing money on a physician practice. Typically, they theorize that the problem is that physicians have lowered their productivity, says Tom Hardy, director of New Health Management.

"So we may go in and look and find that the doctor’s activities haven’t dropped," Hardy says.

The doctor may be working as hard as ever, but the practice is losing more revenues in its laboratory work because the hospital or MSO has taken over that area. Or, maybe the new owners have changed the office staff, and patients are less satisfied with the new employees, Hardy explains.

"Or you relocated the doctor and haven’t taken into account the loss of practice volume that the move will generate," Hardy adds.

So finding the exact problem with any particular physician practice group may not be simple. However, the troubleshooting experts offer this guide to some of the more common problems and their potential solutions:

PROBLEM: The organizations that buy physician practices often put too much distance between physicians and the management.

"When managed care organizations (MCOs) own doctor practices they have a very difficult time getting the doctors involved in day-to-day medical management, and I think that’s a fundamental error," Eberhard says.

Solution: Doctors need to trust management, and the best way to do this is to make sure they’re a big part of the management structure, Eberhard says.

"They need to feel it’s their financial responsibility and have the budget to manage it," Eberhard adds.

Physician leadership also is essential.

"The single thing that you cannot succeed without is the quality of the physician leadership of the medical group," says Robbe Rygg, executive vice president of UniMed Management Co. in Burbank, CA.

"A leader is not someone who is anointed, and that’s what usually happens," Rygg adds. "Leaders are people who other people respect and follow."

PROBLEM: Physicians may grow disillusioned with the practice if the partnership or shareholder model isn’t equitable.

Some of the medical groups formed in the mid-1980s in southern California had sole proprietor owners or a limited number of owners, and they didn’t make partners of the physicians they hired, says Marc Moser, MPH, chief executive officer of City of Hope Medical Group in Duarte, CA.

Some of the partners were making a lot more money than the hired physicians, although the hired physicians were expected to generate a lot of the patient visits, Moser says.

This type of model creates resentment in the non-owner physicians, who feel exploited, and could lead to higher turnover and lowered productivity.

Solution: Moser was the CEO of a medical group that did very well financially, partly because it had a much more fair partnership model, he says.

Any doctors who met the group’s specific criteria were eligible to become shareholders. They had to complete a three-year internship and invest $35,000 in 100 shares of stock, which would be returned to them when they leave the company, Moser says.

"Then they’d make the same as a shareholder who had been there 25 years, with the only differential being that senior doctors had more vacation time," Moser says. "It was a very egalitarian model."

About 95% of the doctors who had been there three years became shareholders, and the organization remained vital and successful, Moser adds. "We received superior performance out of the physicians because they were motivated, and we got the pick of the crop of new doctors."

Physicians look at the entire package, including equity, compensation, and bonus plan; and they’re very sensitive to that entire package, Eberhard says.

PROBLEM: Physician group managers often accentuate the negative and eliminate the positive, causing physicians to become frustrated and less productive.

"They may have a great practice manager, but the only time they see the head of the MSO is when he comes in and says, You’re not producing enough,’ or We have to cut your employees’ pay,’" Hardy says.

Then the doctor might tell the practice manager that they cannot get the hospital to order a certain supply, and the manager replies, Sorry, that is the way the hospital purchasing office works.’

"So doctors feel they don’t have any clout, and all they hear from anybody who has clout are negative messages," Hardy says.

Solution: Become positive from the top down, Hardy says. "I believe the ability of the management to be positive and to encourage a productive environment is as important as the doctor’s pay incentive, given you’re paying doctors a reasonable amount," Hardy says.

The top MSO directors and the practice manager should be visible in the practice, and should communicate support to physicians to create a productive and organized environment.

PROBLEM: Physicians sometimes are not given the tools and information they need to increase their efficiency. Or, the MSO has unrealistic expectations about how much money will be saved on economies of scale.

Hospitals often bought these practices mostly to build their base of primary care physicians in their networks. This way they could offer physician contracts as part of a bargaining chip with MCOs, says Nellie O’Gara, president of First Health Associates Inc. in Avon, CT.

Since profitability was a secondary concern, hospitals often failed to invest in training and technology that would enhance efficiency and create economies of scale.

The other issue is that MSOs might think they’re going to save a lot of money on consolidating billings and office management for individual practices, but the expected savings do not materialize, O’Gara says.

Sure, it makes sense if you put many physicians on one billing and collection system, it will save money. "But, then you find out that the person who was doing the doctor’s billing and collection for his practice was his wife, and he never charged his practice for her work," O’Gara explains.

"So then you take this person out and start charging the business for it, and it costs more money," she adds.

Solution: Hospitals will have to plan on spending even more money up front to modernize information management systems and modernize physician offices, O’Gara says.

Once this is done, physicians will have the tools they need to increase their efficiency and can take advantage of economies of scale.

PROBLEM: The group’s primary care physicians (PCPs) make referrals to a specialist when the PCPs can take care of the problem.

Solution: Incentive should be aligned in a way that encourages PCPs to manage patient care, including handling all cases where it’s necessary for a specialist to become involved.

The incentives can be in the form of a cap on specialist services, or a bonus pool in where MSO doesn’t give out bonuses whenever referrals exceed expectations. "If you overspend your budget, there’s nothing left over; so, there’s no participation excess earnings,"Eberhard says.