On July 1, 1995, TriValley Primary Care, PC, Perkasie, Pa., was born, the product of 14 primary care physicians practicing at six sites. Our reasons for joining together were to strengthen our leverage in an increasingly competitive environment, to secure our futures and, most important, to improve our ability to provide high-quality care to our patients. The best way to do this, we found, was to form an integrated, physician-owned, strategically savvy group practice. (See the authors' previous article, “Physician-Owned Groups: The Best Strategy for Success,” May 1999.)

Almost four years later, TriValley Primary Care is a success story.¹ We have added five physicians and three nurse practitioners, for a total of 22 providers practicing at five sites. (Currently TriValley is finalizing the acquisition of four solo practices and their consolidation into a single practice site. Each of the four physicians will become a stockholder. These acquisitions will increase the number of providers to 26 practicing at six sites.) Our sites are integrated through common clinical and management policies; centralized billing, personnel and accounting systems; and a single income distribution model. Our revenue has increased 150 percent since 1995. Physician income has risen an average of 50 percent. Patient visits have increased 40 percent. Managed care capitation payments have gone from 5 percent to 50 percent of revenue. (Only one practice participated in managed care when the group was formed.) And while the group incurred significant start-up expenses, it now has no debt due to start-up activities or operations. (We have assumed some debt to finance leasehold improvements.)

How we did it

Developing a successful medical group is hardly a quick or easy task. It requires careful planning, lengthy discussions and often difficult decisions. Our group spent more than a year in preparation, working through the following key issues. (Many of the administrative issues physicians must address have been covered elsewhere.^2,3)

Defining the organizational form. The first major decision in our planning process was identifying what form our organization would take. Initially, we were thinking in terms of a management service organization (MSO) owned by the physicians. It would allow the physicians to remain autonomous while providing some weight in negotiating managed care contracts. But as we tested that idea in discussions with managed care companies and other insurers, we discovered that the MSO is a somewhat vulnerable strategic entity. Because of its loose structure, physicians can easily opt in or out, thus limiting its negotiating power.

We then decided that our best option was to form an integrated group practice. Each physician would receive equity in the new group proportional to the value assigned to his practice. (New physicians would be eligible to invest in the corporation and become stockholders after two years of employment.) It was a major shift away from the initial idea of an MSO and, although the group would be physician-owned and -led, it meant giving up some autonomy, so we allowed ourselves several months to consider whether this form of organization truly met our individual and collective needs. Ultimately, we decided that it did.

Defining our values and mission. Early in our planning process, we conducted a values survey among the participating physicians, asking questions such as these: What is the value of this group to you? How will this group benefit patients? How will this group be different from other groups? What do you value as important in your practice?

We summarized and discussed the results, and we determined that we shared these key principles:

• A strong commitment to the patient and the community,

• Organizational development based on learning (i.e., the opportunity to develop leadership, teamwork and management skills among the group's members),

• Participation by all physicians,

• Recognition of the legitimate interests of other stakeholders in the health care market and the need to partner with them to enhance the quality of care,

• Open communication that fosters trust and fairness,

• A belief that quality and cost-effective care are not mutually exclusive,

• An understanding that exclusive contractual agreements or equity partnerships by parties other than the physicians can limit strategic flexibility in a rapidly changing industry,

• A strong strategic orientation with constant vigil regarding change in the health care environment,

• A clear sense of mission to help guide the decisions of the organization.

These values became the foundation for our new organization and helped us develop our mission statement, which reads, “TriValley Primary Care is committed to providing quality medical care that is community oriented. We pledge to provide ethical, comprehensive and compassionate care in a cost-effective manner to all members of the families we serve.” This mission statement is critical to our organization in that it guides our decision making and helps us communicate our purpose and values to employees and patients.

Preparing for the transition. As soon as we had settled on the idea of an integrated group practice, we began helping individual physicians deal with the transition. This included clarifying the benefits of the merger, dealing with financial issues of personal debt and real estate, explaining the process to family members and working through the impact of the merger on career and retirement plans. It was important that all aspects of the merger be understood in relationship to each physician's personal situation. It is not an easy task to give up a practice you have spent years building, and it takes considerable time and effort to develop new relationships, to trust one another and to learn to work within the dynamics of a larger group. The time we invested in transition issues was very important in developing relationships, creating commitment and helping physicians deal with the changes in their personal lives.

Developing a strategic plan. To test the feasibility of forming a group and to project how the group might look in the future, we developed a detailed strategic plan. The plan included the following elements:

• Based on our mission statement, we developed the group's goals. These range from becoming a community leader in providing high-quality, cost-effective care to ensuring practice viability and quality of life for the physicians.

• We conducted market studies. We obtained population demographics from county economic development organizations and estimated the market size of each of the townships within a five-mile radius of each office. From this information, we estimated our current market share and made assumptions about our potential for growth.

• We predicted monthly cash-flow requirements for the first 18 months. The projections were based on assumptions regarding revenue, expenses and capital requirements. Revenue forecasts included market growth factors, gains or losses related to moving from fee-for-service to capitation, and improved billing and collections. Expense forecasts incorporated changes in physician income and potential savings from integrating the practices. Capital or one-time costs and gains included initial payments from managed care contracts; startup fees for legal, accounting and consulting work; marketing costs; and loans and payments related to accounts payable and physician salary adjustments.

• We developed a five-year forecast, exploring how different scenarios would impact revenue, costs and physician salaries. We estimated our patient and payer mix (fee-for-service, Medicare, commercial managed care, etc.), our reimbursement levels and different patient populations' utilization rates for primary care services. We then analyzed how a changing patient and payer mix might affect the combined practices' revenue over five years.

• We detailed our plans for consolidation, including preparing a timetable of the integration process. The key elements of this timetable were negotiating and signing the various agreements required for the merger; establishing a common accounting system for the new entity; ensuring commonality in coding and billing procedures and policies; reviewing and approving all insurance policies; communicating with and training staff members; completing managed care negotiations; approving the final budget and five-year forecast; notifying all parties, including insurance plans, of the new organization; and integrating our computer systems.

• We created detailed plans for physician compensation during the transition. For example, each physician was guaranteed a salary in the first year equal to his salary in the year before the group's formation. Adjustments would be made after the first year to achieve greater consistency. Such financial details were laid out for each physician in an individualized report.

• We developed a committee structure and governance structure for the group. All stockholders were elected as members of the board of directors. We also formed an executive committee that included the officers of the board and at least one member from each practice site. We established key committees to deal with clinical, compensation and financial issues, as well as strategy and negotiation.

Partnering with others. We believe that true partnerships are based on common strategic interests and organizational values. As we prepared our strategic plan, we worked to create partnerships with other entities, such as managed care organizations, other specialist groups, hospitals and integrated delivery systems. We discussed with them the details of our plan and how it would align with their interests. This was also a way to test many of our planning assumptions and modify them as necessary.

Arranging financing. Using the strategic plan as our base document, we made presentations to two financial institutions and arranged lines of credit. To provide additional working capital, our plan called for a 10 percent salary withhold from each of the physicians' base salary. This money was to be repaid after one year (and it was). Further, we agreed that the accounts receivable from the former practices would be loaned to the group to provide additional working capital. These loans have also been repaid.

Preventing coding and reimbursement problems. Correct coding and reimbursement are essential to the success of any group practice, yet these issues often go unaddressed during a merger. To achieve consistency between practices and to alert physicians to problems of both undercoding and potential upcoding, we conducted a number of seminars for our physicians and staff members.

Communicating with employees. To facilitate the change process, we held periodic discussions with employees about how the new organization would impact them. Based on employee feedback, salaries were grandfathered to limit the impact of the change. Within six months, we developed and implemented a comprehensive pay and benefits program and distributed an employee handbook. We also invited employees to voice their concerns or offer suggestions and then help us take whatever steps were necessary to make the merger a success for everyone.

Post-merger agenda

Our year-long planning efforts contributed greatly to the success of our organization, but continuing our success after the merger has required ongoing work.

Strategic orientation. We believe that a vigilant and active approach to setting strategy is the only means by which a group can control and ensure its future (to the extent that it is possible). Our group's strategic alliance committee has met with the local hospital about how we can work together, has negotiated risk contracts with an integrated delivery system and has developed relationships with other specialists. The committee has also evaluated proposals from various regional hospital systems that want to join with us in a joint-equity model. (While this challenges our principle of independence, we understand that certain growth opportunities require additional equity participation; this has been part of the learning process for TriValley.) We have also entered into discussions with area employers and have formed relationships with local government representatives to broaden our contacts within the community. Twice each year, we hold strategic-planning retreats to review critical issues facing the practice and our future.

Staying on top of key issues. Our executive committee meets two to three times per month and aggressively pursues key issues for the group. For example, we are now addressing inpatient case management and are in the consensus-building phase of developing a hospitalist program.

Physician compensation. Our compensation model was developed with physician input and acknowledges a number of issues. Five percent of the salary pool is set aside to cover non-revenue-producing activities (such as board and committee work and community activities); the remainder is divided between a shared pool (40 percent) and a productivity pool based on visits, collections and charges (60 percent). We are considering adding a quality component. Our compensation committee updates the compensation model every quarter and asks all physicians to review it and provide feedback, particularly on the model's fairness. The model seeks to reward both productivity and group citizenship and to keep incentives aligned with the group's goals.

Clinical quality. Our clinical committee pursues the group's commitment to quality by reviewing clinical guidelines and suggesting ways to implement them. The committee also considers such issues as the meaning of payer report cards, consistency in clinical record keeping, evaluation of clinical protocols and regimens, patient education and chart audits.

Organizational infrastructure. The success of any organization depends on a solid management and organizational infrastructure that supports the entity's strategic direction. This infrastructure includes the following elements:

• Financial reporting systems, including monthly accrual and cash basis reports;

• A strong committee network in which all physicians participate;

• Staff training;

• Centralized administration, billing, personnel, payroll and accounting;

• Information systems;

• Strong physician recruitment.

For us, this infrastructure has helped us to achieve “excellent performance in both generating income and controlling costs.”¹

What the future holds

Planning for the future requires making some basic assumptions about how you believe the health care environment will look in the coming years. These assumptions then drive your strategic decision making. Our key assumptions for the future are the following:

1. The health care system will be realigned, moving away from business models based on the flow of reimbursement. Instead, the health care system will focus on the quality and integration of care, as well as community well-being. This means that hospitals and physicians must form true partnerships in which the interests of both receive equal weight. One party should not be subservient to the other. Instead, coalitions must work together to ensure quality of care.

2. “Big” will not necessarily mean “better.” Groups (particularly primary care practices) must reach a critical mass to be effective, but simply getting bigger is not the answer to all problems. (See “Big Business and Bad Medicine.”) In fact, size can pose many management problems. Thus, we believe physician groups will come together as virtual multispecialty organizations integrated by a concern for quality of care, as well as by information systems that can track patients and benchmark outcomes. Indeed, it has been suggested that the wisest strategy may be to avoid asset-based, large-scale integration in favor of “virtual integration, which emphasizes coordination through patient management agreements, provider incentives and information systems rather than investment in a large number of facilities.” ⁴

3. The nature of health care as a product will change, moving away from being a commodity (purchased based on its price) to a differentiated product (purchased based on its price and quality). In other words, employers will purchase health care based on its value.

For a physician group, succeeding in the future means reaching a size of maximum efficiency, seeking true partnerships with others, investing in an information-system infrastructure, defining clinical pathways and outcomes, and working with other providers, hospitals and payers as equals, not subordinates. The practice must have a vision that drives it, a mission that focuses on the patient and an infrastructure that supports quality.