Over the past several years our health care system, and each of us within it, has experienced significant turmoil and change. The shift to managed care has caused physicians, hospitals, insurers and even Wall Street investors to pursue a number of different strategies designed to capture market share, negotiate favorable contracts, control costs and ensure their survival in a tumultuous industry. These strategies have involved creating new organizations, forming new relationships and inventing new practice arrangements.

We are now beginning to see, however, that many of these strategies have fallen short of achieving their objectives. In fact, in some cases, the strategies have actually jeopardized their stakeholders' futures, rather than bringing security.^1,2 What these errant strategies all have in common is that they focus on money and market share rather than patient care. In the early stages of managed care, for example, many physicians scrambled to secure contracts without first knowing how to manage them; hospitals acquired physician practices without understanding the different cultures and philosophies involved; and health plans benefited from initial cost-reduction efforts but had no plans for long-term restructuring. These moves proved to be more tactical than strategic. Often, they were ways to cope in the short term rather than thrive in the long term. The resulting new organizational models are now obsolete.

For physician organizations, the typical response to managed care was defensiveness. They stressed autonomy and getting contracts but talked little about negotiating, partnering, integrating and improving patient care.

A better way

Today, rather than leave the design of their organizations to others, physicians are increasingly becoming major players in the structural realignment of the delivery system. Physicians are learning that they will not find security by giving up control of their practices, joining together in ways that offer autonomy but no strategic clout, or subordinating their interests to the interests of hospitals and managed care companies. Instead, enlightened physicians are pursuing a strategy of equity independence, are truly partnering with other physicians, and are positioning themselves and their newly formed organizations as leaders rather than followers in defining the quality and cost-effectiveness of care. This strategy is logical because physicians are an indispensable part of the system and drive the lion's share of the cost of care, a point physicians have failed to make in the past. Indeed, this approach is an economic imperative for a rational system.

Our group, TriValley Primary Care, is an example of this approach to health care delivery. We describe the group as a strategically savvy, large, primary care, multisite, physician-owned and -directed medical practice. Our group was assembled in 1995 from six practices consisting of 14 physicians looking for the best way to provide high-quality, cost-effective care for our patients and to remain competitive in the long term. Almost four years later, we have 20 physicians, three nurse practitioners, a 150 percent increase in revenue and no debt. Recently, our group's success was included in the Medical Group Management Association's 1998 Performance and Practices of Successful Medical Groups report.³ We can attest firsthand to the fact that physician-owned primary care groups are the best strategy for physicians, for our health care system and for our patients.

Why other models fall short

Over the past several years, a number of different medical practice models have emerged. These models fall into three general categories, based on practice ownership and the degree of physician control and decision making:

1. Physicians loosely joined together (for example, an IPA),

2. Physician practices acquired by hospitals or integrated delivery systems (IDSs),

3. Physician practices managed by physician practice management companies (PPMCs).

Physicians loosely joined together. With the pressures brought on by managed care, many physicians have turned to entities that offer help in negotiating managed care contracts but allow them to maintain their autonomy and practice ownership. These organizations are fairly easy to form, but in general they have proven strategically vulnerable and lack substantial negotiating power in part because they are too loosely constructed. Physicians can opt in or opt out of these organizations rather easily, which is destabilizing in the negotiation of long-term contracts. Further, many of these entities are open organizations with little influence on physician behavior and their approaches to medical management. Unless these organizations focus on provider selection and integration of care, their futures will be limited.

Practices acquired by hospitals or IDSs. Just a few years ago, hospitals were on a buying frenzy, purchasing practices to solidify their patient bases and sources of referrals for specialists and hospital services. The success of this strategy is now in doubt. Hospitals have found it difficult to manage and integrate their practices and have been plagued by productivity slumps and high operating costs. One hospital paid $14 million for the practices of 20 primary care physicians only to lose $4 million on the deal.¹ Further, hospital administrators often are unaware of the cultural and operational differences between medical practices and hospitals.

For physicians, alignment with a major hospital does not guarantee security. (Witness physicians caught in the wake of Allegheny Health System's bankruptcy.)⁴ No one knows for sure how these relationships will ultimately turn out, but some hospitals may consider selling the practices back to the physicians.

Practices managed by PPMCs. Not too long ago, PPMCs were touted as revolutionizing health care. Their prospects cheered Wall Street investors, and physicians thought PPMCs could secure their futures. Theoretically, PPMCs were a desirable alternative to other models because they offered access to capital, shifted the administrative burden of the practice away from the physicians and provided economies of scale.

But the reality has turned out quite differently. Practice management firms, such as MedPartners Inc., are not simply experiencing financial trouble; they are abandoning the PPM business altogether. Economies of scale have proven elusive in this model, and capital has too often been squandered on increasingly dubious acquisitions rather than invested in achieving efficiencies and improving care. Additionally, PPMCs have had difficulty dealing effectively with payers because they are too geographically disperse.

Six myths

None of these three models can succeed in the long term, we believe, because they violate several basic principles of successful medical practice management. The models are based on six myths that, unfortunately, many physicians have also been duped into believing.

Myth #1: There is easy money to be made in consolidation. Recent experience has demonstrated that cost savings in health care are extremely difficult to find. For example, the cost structure of any medical practice is dominated by personnel costs. Staffing is the critical factor. But the transition to managed care often requires more staff members, not fewer, which creates a cost-control challenge.

Myth #2: Equity is not a factor in physician productivity. In other words, this myth holds that employed physicians are as productive as those who have an equity stake in the practice. This is not true. Physicians who become employees generally become less productive because their stake in the success of the organization is not as great.⁵ Equity participation is critical, and financial incentives can help to motivate providers. Financial incentives will be ineffective, however, if they are too small or are attached to questionable rules and measures.

Myth #3: Separating administration from clinical activities is more efficient. It's often believed that successful practices must place practice management in the hands of “professionals,” which frees the physicians simply to practice medicine. This is the concept behind MSOs, PPMCs and hospital-managed practices. In reality, however, this disconnection creates problems that challenge both the clinical and administrative processes. Practice management and patient care are intertwined; they cannot be separated. The physician is a key member of the team that manages patient care. If the physician is removed from this team, the organization cannot expect practice efficiency and high-quality care. It is critical that physicians play a role in the management of their organizations.

Myth #4: The basic goal of a medical practice is to gain covered lives and make money. The idea that practices exist first to make money is alien to most physicians. Instead, we understand that high-quality, cost-effective care is what counts most. Profits are simply a result. For many of the now-failing entities, however, the initial motivation was money, not patient care.

Myth #5: Focus on today, and follow the herd. Few of the organizational models discussed previously reflect a long-range view. Their proponents don't think of these as strategic entities and don't take into account basic assumptions about the future direction of health care. For example, many physicians have sold their practices to hospitals not because they believe in the long-term success of the relationship but because they want a quick solution to market pressures. Physician practices, like any other organizations, need to position themselves in terms of the future business model of the industry and not simply look at today's market.

Myth #6: We can succeed by ourselves or by controlling others. It is evident that the future of health care is moving toward more coordinated and appropriate care, shorter hospital stays and better preventive care. Physicians need to position themselves for this change. This means building truly productive relationships with others who have a stake in the system. Partnerships based on trust and commitment to high-quality patient care will replace acquisitions as a strategic and operational model. It is up to physicians to partner with hospitals and other entities, move toward shared visions and integrate care to meet the needs of the patient and the community.

The merits of physician-owned groups

Physician-owned group practices represent the best opportunity for improving the quality and cost-effectiveness of our patients' health care. Unlike other models, physician-owned groups represent true partnerships and true integration of practice management with patient care. If run well, groups can provide physicians with enough leverage to work with other providers, hospitals and payers as equals, not subordinates. It is the only model that makes sense for our health care system.

Editor's note: In an upcoming issue, the authors will share the strategy that has helped make their group a success.