Some basics of physician group practices

1. Some Business Foundations
of Physician Group Practices
Part 1: Basics of Costs and Revenues
David Butz PhD
Ross School of Business, University of Michigan
CareEvolution
DabAnalytics LLC
November 2011
© David A. Butz. Please do not copy or distribute without written permission.

2. Disclosure
David Butz received his PhD in
I am not supported by any
Economics from Northwestern
commercial entity. University. After eight years on the
I do not sell any medical Economics faculty at UCLA, he
moved to Ann Arbor, MI, where he
goods or products. has served in various capacities on
I have no relevant financial the faculty of the University of
Michigan‘s Business and Medical
conflict of interest to disclose. Schools. Dr. Butz devotes most of
his research effort to the economics
of health care delivery. Other
research interests lie in health care
outcomes research, industrial
organization, law and economics,
antitrust, and supply chain
contracting, where he has published
numerous peer-reviewed papers.

3. Buying and Listening to an iPod
To buy or not to buy?
 Bill is thinking of investing $450 to buy and
configure a new iPod.
 He figures the iPod will last 3 years, which
means $150/year, or $3/week, or 5¢/ song.
 On these terms, he decides, ―Yes! I will get
more than 5¢/ song of enjoyment.‖
 Good reasoning.
To listen or not to listen?
 After buying, Bill finds himself short of cash. In an
effort to save $3, he goes 1 week without listening.
Faulty reasoning.
3

4. Health Care:
Fixed Costs But a Variable Cost Business Model
 Healthcare costs are mostly ―up front‖ or
ongoing and fixed. Variable costs are modest.
 This is also true of many other industries.
 Bill allocates overhead of 5¢ for each song in
order to account for his $450 up front
investment. This is called ―cost accounting.‖
 We pay by the song (―fee-for-service‖), so
everyone believes that the way to manage costs
is to listen to fewer songs!
4

5. Distribution of Variable vs Fixed Costs of Hospital Care
Rebecca R. Roberts, MD; et al. JAMA. 1999;281644-649.
Results: In 1993, the hospital had nearly 114,000
emergency department visits, 40,000 hospital
admissions, 240,000 inpatient days, and more than
500,000 outpatient clinic visits. The total budget for
1993 was $429.2 million, of which $360.3 million
(84%) was fixed and $68.8 million (16%) was
variable. Overall, 31.5% of total costs were for
support expenses such as utilities, employee
benefits, and housekeeping salaries, and 52.4%
included direct costs of salary for service center
personnel who provide services to individual patients.
5

6. Tracking and Billing For Costs
Set Charges; Send a Bill Alternate Methodology
1. Assign costs. 1. What is the diagnosis?
 >11,000 ―Intermediate product  Principle Diagnosis (Prin Dx)
codes‖ at a large hospital.  Secondary Diagnoses (Many?)
 Figure variable costs and then
allocate overhead  Total Cost.
2. What care was delivered?
 Principle Procedure (Prin Px)
2. ―Charge description master.‖
 Secondary Procedures (Many?)
 A list of facility charges.
 A nearly 1:1 mapping
3. What algorithm defines $?
w/intermediate product codes.  Hospitals: Diagnosis Related
Groups (MS-DRGs)
3. Track resources item-by-
item; then send a big long  Physicians: Relative Value
Units (RVUs)
bill for each encounter.
6

7. Background on Billing and Coding
 Coding: Describes/documents both the medical necessity
(Dx) of patient care and the actual work done (Px).
 Motivations include:
 An accurate medical record
 An accurate report of services rendered, for fair and
timely reimbursement
 Compliance – There are heavy financial penalties for
individuals and organizations that violate the basic rules
 Professional Liability – Poor documentation puts
individuals and organizations at considerable risk
 More – Research, teaching, operations, public health, …
7

8. Nomenclature (for Physicians AND Other Providers)
Diagnosis (Dx) Codes Procedure (Px) Codes
Describe medical necessity – Describe work – what the
why the patient is seen. patient is having done.
ICD-9-CM: International CPT: Current Procedural
Classification of Diseases, 9th Terminology. Incl. ―E&M‖ codes.
Revision, Clinical Modification. HCPCS: Healthcare Common
A 3-, 4-, or 5-digit number. Procedure Coding System.
Note: The Affordable Care Act A 5-digit number.
mandates that all providers move
soon to the 10th Revision. APC: Ambulatory Payment
Classification for outpatient
services done at a hospital.
8

9. The Common Denominator of Reimbursement
Different payers have many Always, two questions:
different methods to reimburse
different provider services. 1) What is the medical
In every case, though, the necessity? (Dx)
provider must document the 2) What are the services
medical necessity using a
―Principle Diagnosis‖ and rendered? (Px)
perhaps many secondary
The information is part of the patient‘s
diagnoses.
medical record. The answers may
And in every case, the provider trigger payment to more than one
must document the procedures provider, as when a surgical Px yields
performed. There is a ―Principle separate professional fees to the
Procedure‖ and perhaps many surgeon and anesthesiologist, as well
secondary procedures. as a payment to the hospital.
9

10. Straightforward and Consistent, but w/Exceptions
What if there is no What if we aim to flag/group
medical necessity? certain types of patients?
 A person who is not sick  A person‘s illness is caused
seeks out a specific service. by an external injury.
 Get a flu shot. Donate an  A motor vehicle accident. A
organ. Discuss a problem fall. A burn, poisoning, …
that isn‘t a current illness or  In this case, supplement
injury. Examine a normal the usual CPT code with an
newborn. … ―E code,‖ and proceed …
 In this case, substitute a There are many such cases.
―V Code‖ for the usual CPT Follow up if and only if you must.
code, and proceed as usual. Don‘t be intimidated when you
don‘t know some detail.
10

11. Physician Nomenclature
Relative Value Unit (RVU) Conversion Factor ($)
A number assigned by CMS to A single number that for each
each Px code that reflects the CPT code maps RVUs into
value of the physician services dollar payment amounts.
provided, and thus payment.
MPFS: Medicare Physician
The sum of three components:
Fee Schedule
1) Work RVU
Simple methodology: Take
2) Practice Expense RVU the RVU and multiply it by the
3) Professional Liability RVU conversion factor.
Physician productivity is often Other payers often reimburse
measured using wRVUs. as a percentage of MPFS.
11

12. Physician Nomenclature
Conversion Factors Example
Conversion CPT Code 99201
Year Factor Change
2000 $36.61 “Office or Other Outpatient
2001 $38.26 4.5% Services, New Patient”
2002 $36.20 -5.4%
2003 $36.79 1.6% wRVU: 0.48
2004 $37.34 1.5%
PE-RVU: 0.69
2005 $37.90 1.5%
2006 $37.90 0.0% PLI-RVU: 0.04
2007 $37.90 0.0%
2008 $38.09 0.5% Total: 1.21
2009 $36.07 -5.3%
2010 $36.87 2.2% Reimbursement = 1.21 * $33.98
2011 $33.98 -7.9%
= $41.11
12

13. Median Median Median Median
Hospital Count LOS Charge Hospital Count LOS Charge
UNIVERSITY OF CALIFORNIA DAVIS MEDICAL CENTER 10 5.0 $132,083 MISSION HOSPITAL REGIONAL MEDICAL CENTER 14 4.5 $64,161
EL CAMINO HOSPITAL 19 5.0 $103,964 SCRIPPS GREEN HOSPITAL 18 5.0 $63,726
VALLEYCARE MEDICAL CENTER 13 4.0 $99,539 GROSSMONT HOSPITAL 14 5.0 $63,164
ALTA BATES SUMMIT MED CTR-SUMMIT CAMPUS-HAWTHORNE 17 5.0 $96,851 COMMUNITY HOSPITAL MONTEREY PENINSULA 13 4.0 $59,453
ALTA BATES SUMMIT MED CTR-ALTA BATES CAMPUS 10 5.0 $95,913 SHARP MEMORIAL HOSPITAL 15 4.0 $57,511
CEDARS SINAI MEDICAL CENTER 42 5.0 $92,363 EISENHOWER MEMORIAL HOSPITAL 33 4.0 $57,403
JOHN MUIR MEDICAL CENTER-WALNUT CREEK CAMPUS 16 4.0 $89,927 SCRIPPS MEMORIAL HOSPITAL - LA JOLLA 15 5.0 $55,670
JOHN MUIR MEDICAL CENTER-CONCORD CAMPUS 14 3.0 $82,750 SADDLEBACK MEMORIAL MEDICAL CENTER 22 6.0 $55,150
SAN RAMON REGIONAL MEDICAL CENTER 11 5.0 $81,761 HOAG MEMORIAL HOSPITAL PRESBYTERIAN 30 5.0 $55,061
SANTA ROSA MEMORIAL HOSPITAL-MONTGOMERY 17 4.0 $80,297 CITY OF HOPE HELFORD CLINICAL RESEARCH HOSPITAL 11 4.0 $52,545
STANFORD HOSPITAL 21 4.0 $77,921 ST. JOSEPH HOSPITAL - ORANGE 26 5.0 $51,482
UCSF MEDICAL CENTER 10 7.5 $76,349 HUNTINGTON MEMORIAL HOSPITAL 16 5.0 $51,146
PENINSULA MEDICAL CENTER 18 5.5 $74,200 ST. AGNES MEDICAL CENTER 19 4.0 $49,698
COMMUNITY MEMORIAL HOSPITAL-SAN BUENAVENTURA 12 3.0 $73,680 LONG BEACH MEMORIAL MEDICAL CENTER 13 4.0 $48,839
DOMINICAN HOSPITAL-SANTA CRUZ/SOQUEL 11 4.0 $72,660 SANTA BARBARA COTTAGE HOSPITAL 16 3.5 $46,268
PROVIDENCE SAINT JOSEPH MEDICAL CENTER 13 4.0 $70,141 ST. JOHN'S HEALTH CENTER 17 4.0 $41,355
TORRANCE MEMORIAL MEDICAL CENTER 14 5.5 $67,701 CLOVIS COMMUNITY MEDICAL CENTER
METHODIST HOSPITAL OF SOUTHERN 18 4.0 $35,861
CALIFORNIA PACIFIC MED CTR-PACIFIC CAMPUS 34 4.0 $65,683 CALIFORNIA 10 4.0 $33,821
ST. JOSEPH'S MEDICAL CENTER OF STOCKTON 12 4.0 $64,828
All CA 2008 hospitals with N 10.
Charges represent ―list‖ prices only. They vary a lot!
13

14. Next, One More Bit of Information
Health Care Charges: Big Markups!
Source: http://www.medpac.gov/documents/Jun10DataBookEntireReport.pdf
14

15. Corroboration …
Mean Charges:
$29,000
Mean Total Costs:
$9,100
Markup: 219%
15
http://www.hcup-us.ahrq.gov/reports/factsandfigures/2008/pdfs/section1_1.pdf

16. Time here is too precious to turn over to institutional detail.
How is All of This Reimbursed? Look Here:
And this is just for Medicare/Medicaid …
16

17. Orthopedic Surgery Plays a Central Inpatient Role
These are
disproportionately
Medicare patients.
17

18. In each case, Medicare provides
a nice, short, slick overview. 
Other third-party payers
often but not always
follow Medicare‘s lead.
18

19. Inpatient Rehabilitation Facilities
Source: MedPAC, March 2011 Report to Congress, p.211.
19

20. Why Not Focus Solely on Our Professional Fees?
 Start with your fees, for the same reason that flight attendants
tell you to put on your own oxygen mask first.
 But re: the big picture, it‘s obvious: You‘re the QB/steward.
 Your actions affect outcomes, both clinical and financial.
Knowing costs makes a difference!
 You have a responsibility to patient, payer, employer, family,
colleagues, and the health system.
 If there is one fundamental policy issue that enjoys near
unanimity, it is that fee-for-service must go away.
 As a practical matter, you are the one going forward who will
be called to account for costs.
20

21. Too much of this remains in Managed Care 2.0!
Managed Care 1.0: Openly Adversarial
―Instead of free choice at the time ―Managed care, as its name implies,
of illness, employees henceforth involves those methods of financing
were forced to make a choice and delivering health care services that
among competing private health manage, or intervene, in care decisions
plans that would then have a made by patients or doctors.‖
contractual right to regulate
Gaynor, Martin, and Haas-Wilson, Deborah, ―Change,
medical treatments the employees Consolidation, and Competition in Health Care Markets,‖
and their families received at the Journal of Economic Perspectives, Vol. 13, No. 1, Winter
1999, pages 141-164.
time of illness. The preferred term
in the industry for this intrusion
These are representative of a
into the doctor-patient relationship
is ‗managing care.‘‖
1990s consensus that
managed care revolved around
Reinhardt, Uwe, ―The Predictable Managed Care restricting the prerogatives of
Kvetch on the Rocky Road from Adolescence to
Adulthood,‖ Journal of Health Politics, Policy and physicians and their patients.
Law, Vol. 24, No. 5, October 1999, pages 897 –
910. This legacy remains.
21

22. The New Yorker, 14 December 2009
“Testing, Testing,” Atul Gawande
―Our fee-for-service system, doling out separate
payments for everything and everyone involved in
a patient‘s care, has all the wrong incentives: it
rewards doing more over doing right, it increases
paperwork and the duplication of efforts, and it
discourages clinicians from working together for
the best possible results.‖
Source.
22

23. Investors are right to ask, especially since CMS is the industry’s price leader:
What Does the Future Hold?
http://www.medpac.gov/documents/Jun10_EntireReport.pdf
23

24. Meanwhile, Physician Group
Practices Have High Fixed Costs!
Fixed costs are reflected in PE and PLI RVUs Mean
 Work RVUs  52%
 Physician time
 Technical skill and effort required
 Mental effort, judgment, physician stress, …
 Practice Expense RVUs  44%
 Based on an assessment by CMS of the mostly fixed costs of
running an efficient practice, effectively amortized over many patients.
 This includes office space, staff, IT, utilities, taxes, etc.
 If a group practice is small and unable to capture economies of
scale and scope … then this reimbursement is too low.
 Professional Liability Insurance RVUs  4%
24

25. If Bill’s iPod costs $150/year and songs are “priced” at 5¢ each.
Economics of Fixed Cost Businesses: Throughput!
$300
Costs
$250 Revenues ($0.05)
Revenues ($0.04)
$200
$150
$100
$50
$0
0 250 500 750 1,000 1,250 1,500 1,750 2,000 2,250 2,500 2,750 3,000 3,250 3,500 3,750 4,000 4,250 4,500 4,750 5,000
Break
Even
Low Utilization: High Utilization:
Big Losses Big Profits
25

26. A 3-physician medical oncology practice in Allentown, PA.
Hematology Oncology Associates
 Friedman, et al., ―Taking the Pulse of a Practice,‖ Oncology Issues, 2005.
 Previously private practice group; bought by Lehigh Valley Hospital in 1999.
 Hospital-based (Dorothy Morgan Cancer Center).
 Also an office practice: patient visits, labs, nurse, and certified registered
nurse practitioner.
 The practice subcontracts billing to the hospital.
Productivity Measurement and Compensation:
 Physicians are ―salaried‖ but strongly incented using wRVUs exclusively.
 Individual RVU thresholds and group threshold. Bonus based linearly on
RVUs over the threshold, but only if the group threshold is also met.
 If the practice loses money, the physicians feel some hit in their salaries.
 ―Salaries are therefore reflective of the direct productivity of the physician.‖
 Various hospital obligations, including teaching, committee work, weekend
rounds, and night call. How are these factored into compensation?
26

27. Some Business Foundations
of Physician Group Practices
Part 2: The Group’s Business Functions
David Butz PhD
Ross School of Business, University of Michigan
CareEvolution
DabAnalytics LLC
November 2011
© David A. Butz. Please do not copy or distribute without written permission.

28. Why do physicians form group practices?
 Negotiating leverage with payers.
 Better night/weekend coverage
 ED On-call can be better distributed across a larger group.
 More opportunity for professional development.
 Potentially better infrastructure
 Higher levels of support & broader scope, as well.
 Better capitalization.
 Better amortized overhead.
 Better specialization of talents.
 Stronger leadership (e.g., an MBA, MHA, …)
 President/CEO: Represents group to Sr. management, payers, …
 Manages day-to-day operations of the group.
 But … Practice leadership is almost uniformly MD.
28

29. Consider the cost of taking ED “call” …
The Cost of a Cardiologist’s Capacity
Conventional Wisdom: Cost of capacity:
At any given moment … How does ED call affect …
•Must carry a pager. •The capacity of my practice?
•No alcohol. •The capacity of my group?
•Can‘t travel far. The cost looks quite different.
•Leisure could be disrupted.
Put differently, what is the cost of
the flow of on-call services
cardiologists provide?
How much could this really cost?
For you as a professional, and for your group, the ultimate
question: How best to allocate your limited capacity?
29

30. Group Finances & Governance
 Business model driven by RVU generation.
 Ancillary
fees are important, but for most groups professional
fees provide the lion‘s share of revenue.
 Group/physician productivity: measured by RVU‘s.
 Musthave organizational by-laws & principles of
governance and professional expectation.
 Compensation and staffing arrangements (e.g., ED call)
 Business functions
 Group access guidelines
 Professionalism
 Medical records
 Compliance
30

31. The Medical Staff and its By-Laws
Physicians are “Self-Governing”
 Policies and Governance Procedures
 Credentialing and Privileging
 Levels of Appointment
 Active
 Honorary
 Consulting
 Affiliate
 The Medical Staff‘s Relationship with the Hospital
 Hospital Rules and Regulations
 Physicians‘ Rights and Responsibilities
 Most prominent: ED call obligations & Professional Liability Insurance
 Administrative Responsibilities, etc
 Due Process
31

32. Physician-Led Health System Infrastructure
 Departments/Sections  Standing Committees
 Conflict of Interest
 Formal Programs: Trauma,
 Compliance
Transplant, Bariatrics, …  Risk Management
 Centers: Cancer, Stroke,  IRB
 Formulary Committee
Spine, Cardiovascular, …  Medical Device Committee, …
 Women‘s Health  Materials Management
 Central Sterile Supply
 Ancillary Services  Capital Budget
 Blood Bank  Planning
 Respiratory Therapy  Mortality & Morbidity
 Transport  Disciplinary Committees
 Dialysis  Privileging
 Housecleaning  And much more …
 Dietary
 And the list goes on …
32

33. Clinical Programs, Verified
Centers, & Regional Systems
Ex: Trauma Accreditation by the American College of Surgeons
 Rigorous standards
 Patient registries
 Explicit staffing requirements with job descriptions
 Governance (Quality Assurance, Accountability, Feedback loops)
 Documentation, beginning with patient registries
 Protocols
 Call schedules
 Structured outreach and education
 Specific training requirements
 Re-accreditation every 3 years, including site visits by reviewers
 Pre- and post-hospital requirements.  Much more
 Regional and often statewide, inclusive systems of care.
33

34. Management Functions Run the Gamut
General Accounting Billing/Claims
 General ledger Processing/Collections
 Standard, reporting  Billing
 Day end journal  Scheduling
entries of deposits  Registration
 CME tracking  Insurance verification
 Bank reconciliations  Medic+
 Revenue allocation  A/R
 Collections
reporting at month end
 Claims Processing
 Group purchasing
 Adjudication
Human Resources  Processing
 Reporting
 Payroll
 Collections
 Benefits
 Mail telephone techniques
 Medical / Dental / Vision
 Aging analysis
 401K
 Monthly collection reports
 Life Insurance
Source: Rocky Mountain MSO 34

35. Management Functions Run the Gamut
Office Operations Human Resources Marketing
 Medical records  Training Satisfaction surveys
 Coding  Recruitment  Patient retention
 Supplies  Place ads strategies
 Ancillary ordering,  Screen applicants  Direct mailing
 Set up interviews
tracking  Building ads
 Check references
 On-call telephone  Press releases
 Policies & Procedures
service  Brochures
 Evaluation/Merit System
 Patient  Phone book listings
 Background Checks
appointments
 Counseling Managed Care
 Patient triage
 Health information Credentialing & Contracting
 Prevention
Licensing/Malpractice  Contract analysis
 Credentialing/CME  Contract negotiations
 Licensing & renewals  Contract management
 Medical Malpractice  Sub-capitation
Source: Rocky Mountain MSO 35

36. Intermediaries Include:
Management Group Purchasing
Service Organizations
Organizations GPOs are organizations that act as purchasing
intermediaries that negotiate contracts between
 Provide services to
their customers—health care providers—and
physicians and their
vendors of medical products. GPOs‘ sources of
practices.
revenue include contract administrative fees,
 Administrative tasks, other fees obtained from vendors, and fees
including billing, IT, resulting from direct charges to customers.
compliance, etc. According to a 2009 study, on average, GPO
 Can also provide group contracts account for about 73 percent of
purchasing of services, nonlabor purchases that hospitals make.
supplies and benefits. Source: Group Purchasing Organizations: Services
Provided to Customers and Initiatives Regarding Their
Business Practices, General Accounting Office, August
2010, Page 4.
36

37. Employed Physicians and System Alliances
Employed Physicians Pennant Health Alliance
Why have an independent  Physician/hospital network
physician group at all?  ―Sponsors:‖ 9 hospitals and 100+
outpatient venues.
Why not have the hospital  UMHS, 6 Trinity hospitals, Metro Health
buy them out and run Hospital in Wyoming, MI.
them. This could align  Services emphasize supply chain, IT, and
incentives and reduce revenue cycle.
overhead costs.  Streamlining business processes,
reducing costs, increasing revenue
and providing the best health care
for our patients.
 Support and strengthen independent
MI providers.
37

38. Intermediaries Include:
Patient-Hospital Independent Practice
Organization Association
 Longstanding and tested. A single- or multi-specialty association of
 A separate legal entity otherwise independent physicians for
formed by physicians and at purposes that may include some or all of
least one hospital for the following:
purposes of joint contracting.  Contracting among the other IPA
 The PHO objective, in other physicians, with independent physicians,
words, is to negotiate with health systems, and with payers.
contracts with third-party  Care coordination and guided referrals.
payers to provide both  Modest administrative services.
physician and hospital
services.
38

39. Status Quo: Physicians Organize in Many Ways
Captive Group Practices Independent Group Practices
Group-Model HMOs Independent Group Practice/Network Model HMO
Physicians contract via the group HMOs & Physician Groups have multiple partners
Fixed patient fee (PMPM) Commit to as little as a fee schedule
Little autonomy, but …
guaranteed patient flow and …
Staff-Model HMOs Independent Practice Association (IPA)
Physicians are salaried HMO employees A loose physician arrangement
No financial risk and no upside The IPA negotiates on behalf of physicians
Stable lifestyle The IPA provides other nominal services
The physician maintains considerable autonomy
Integrated Delivery Systems
Physicians are salaried hospital employees
No financial risk and no upside
Stable lifestyle
Hospital-Based Practices
Practices/Depts. are "owned" by the hospital.
Physicians are salaried.
Stable lifestyle
39

40. Professional Liability Insurance (PLI)
 Historically,
procured by the group through the commercial
insurance market.
 Administratively,
the group stands as intermediary
between physician, plaintiffs, defendants, insurer, hospital.
 The physician is just one interested party among many.
 Largergroups (hospitals, as well) are now forming group
captives, or more formally, risk retention groups (RRGs).
 The group and its physician members are self-insured, up
to a point, with insurance and re-insurance to hedge
against the largest claims.
 The legal, financial, regulatory, and management hurdles
are substantial. The potential, though, is huge!
40

41. Which Services Matter Most to Orthopedic Groups?
Imaging, procedures, etc.
matter, but isn‘t growth
still hospital-based?
41

42. Community-Based Group Practices
 Even more business-focused, RVU-driven, referral-
based: available, affable, and then able.
 The medical staff may be quite ―diverse.‖
 Side deals may abound; trust may be short.
 Dr. Smith has a nice deal as trauma director.
 Who still takes ED call and who has managed to opt out?
 Your colleague, Dr. Lee, is a terrific surgeon (or not), but she does 250 of
the total 450 cases, and at 61 years old shows no signs of slowing down.
You are splitting up the residual with others.
 Your group and most others have relationships and
admitting privileges at multiple hospitals, as well as
interests in various other venues.
 Your interests, attention, and physical presence may be more divided.
 Care may be more difficult to coordinate.
42

43. A 3-physician medical oncology practice in Allentown, PA.
Hematology Oncology Associates
 Friedman, et al., ―Taking the Pulse of a Practice,‖ Oncology Issues, 2005.
 Previously private practice group; bought by Lehigh Valley Hospital in 1999.
 Hospital-based (Dorothy Morgan Cancer Center).
 Also an office practice: patient visits, labs, nurse, and certified registered
nurse practitioner.
 The practice subcontracts billing to the hospital.
Productivity Measurement and Compensation:
 Physicians are ―salaried‖ but strongly incented using wRVUs exclusively.
 Individual RVU thresholds and group threshold. Bonus based linearly on
RVUs over the threshold, but only if the group threshold is also met.
 If the practice loses money, the physicians feel some hit in their salaries.
 ―Salaries are therefore reflective of the direct productivity of the physician.‖
 Various hospital obligations, including teaching, committee work, weekend
rounds, and night call. How are these factored into compensation?
43

44. What do we make of the trend of hospitals buying up group practices?
Employing a Physician is a ≥$500K Investment
Hospitals lose $150,000 to $250,000 per year over the first 3
years of employing a physician — owing in part to a slow
ramp-up period as physicians establish themselves or
transition their practices and adapt to management changes.
The losses decrease by approximately 50% after 3 years but
do persist thereafter.
…
For hospitals to break even, newly hired PCPs must generate
at least 30% more visits, and new specialists 25% more
referrals, than they do at the outset. After 3 years, hospitals
expect to begin making money on employed physicians when
they account for the value of all care, tests, and referrals.
Kocher R. and Sahni N.R. Hospitals' Race to Employ Physicians - The Logic Behind a Money-
Losing Proposition N Engl J Med 2011; 364:1790 – 1793, 05/12/ 2011.
44

45. Some Business Foundations
of Physician Group Practices
Part 3: What the Future May Hold
David Butz PhD
Ross School of Business, University of Michigan
CareEvolution
DabAnalytics LLC
November 2011
© David A. Butz. Please do not copy or distribute without written permission.

46. Front/Center: What Sway Do Group Practices Have?
Still true going forward?
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47. What Do We Mean by “Fragmented?”
Donald Berwick: ―A common criticism of U.S. health
care is the fragmented nature of its payment and
delivery systems. Because in many settings no single
group of participants — physicians, hospitals, public
or private payers, or employers — takes full
responsibility for guiding the health of a patient or
community, care is distributed across many sites,
and integration among them may be deficient.
Fragmentation leads to waste and duplication — and
unnecessarily high costs.‖
―Launching Accountable Care Organizations — The Proposed Rule for the
Medicare Shared Savings Program,‖ NEJM, 31 March 2011.
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48. Conventional Wisdom from NEJM, Dec. 30, 2010, R. Kocher and N. Sahni,
“Physicians versus Hospitals as Leaders …”
“Much of [the US’s high health ―Achievement of this level of care
care] cost derives from high rates coordination will require the
of unnecessary hospitalizations development of larger integrated
and potentially avoidable delivery organizations —
complications, and these, in turn, preferably, accountable care
are partially driven by fee-for-service organizations (ACOs) that
incentives that fail to adequately incorporate primary care practices
reward coordinated care that structured as patient-centered
effectively prevents illness.‖ medical homes and that can
… support new investments in
information systems and care
―The desired consequence of these
teams and can maintain service
changes is enhanced tertiary
hours resembling those of retailers.
prevention, leading to substantial
A move toward ACOs will mean
reductions in unnecessarily
major changes in the structure of
expensive specialty referrals and
physicians‘ practices, …‖
tests and avoidable complications.
…
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49. Thomas L. Greaney, New England Journal of Medicine, December 22, 2010.
“Accountable Care Organizations–The Fork in the Road”
―ACOs offer a much-needed vehicle for integrating
health care delivery and reducing the well-documented
shortcomings of the system that are attributable to
payment and organizational features that reward high
volume rather than low cost or high quality.‖
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50. Avery Johnson, Wall Street Journal, March 28, 2011
“The Model of the Future?”
“The health-care law promoted accountable-care
organizations. But it's hard to know what they are.”
 "An ACO is like a unicorn; everyone thinks they know what
one is, but no one has ever seen one," says Gene Lindsey,
President and Chief Executive of Atrius Health.
 Elliott Fisher, the Dartmouth Medical School professor who
helped coin the term ACO, and who worked with members of
Congress to draft the ACO concept into the health-care law,
concedes that "there are some really important questions
about whether this will work."
 But, Dr. Fisher adds: "I think it's the best hope we have.‖
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51. Health care’s greatest bottleneck will be MDs
 1910:The Flexner Report leads to many medical
schools closing.
 1965:The push to train more physicians begins. By
1980, the number of graduates roughly doubled.
 40 years of rapid workforce growth.
 1980– 2010: No appreciable increase in the number
of US-trained MD graduates (allopathic).
 Going forward, US-trained MDs reaching
retirement age will almost offset new allopathic
graduates. An abrupt near-steady state.
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52. Revisiting Operations Management
Each year, starting circa 1970, roughly 16,000
physicians have entered the ―workforce pipeline‖ by
graduating from allopathic medical schools
(throughput). They spend four decades practicing
before reaching retirement age (flow time). If there is
no attrition at all during these four decades, it follows
that in 2010, with the pipeline full, the size of the US-
trained, allopathic physician workforce (i.e., inventory)
is roughly ____ physicians.
40 Years
16K/Yr 640,000 US-MDs when full.
1970 2010
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53. Elevate the Workforce
The Future of Nursing: Leading Change, Advancing
Health, Institute of Medicine, Nov 17, 2010.
http://www.iom.edu/Reports/2010/The-Future-of-Nursing-Leading-Change-Advancing-
Health/Recommendations.aspx?page=1
Recommendation 1: Remove scope-of-practice barriers.
Advanced practice nurses should be able to practice to the full
extent of their education and training.
Recommendation 2: Expand opportunities for nurses to lead
and diffuse collaborative improvement efforts.
Recommendation 3: Implement nurse residency programs.
Recommendation 4: Increase the proportion of nurses with a
baccalaureate degree to 80 percent by 2020.
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54. Elevate the Workforce
The Future of Nursing: Leading Change, Advancing
Health, Institute of Medicine, Nov 17, 2010.
http://www.iom.edu/Reports/2010/The-Future-of-Nursing-Leading-Change-Advancing-
Health/Recommendations.aspx?page=1
Recommendation 5: Double the number of nurses with a
doctorate by 2020.
Recommendation 6: Ensure that nurses engage in lifelong
learning.
Recommendation 7: prepare and enable nurses to lead change
to advance health.
Recommendation 8: Build an infrastructure for the collection
and analysis of interprofessional health care workforce data.
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55. “Patient-Centered Medical Homes in Ontario”
Walter W. Rosser, M.D., Jack M. Colwill, M.D., Jan Kasperski, R.N., M.H.Sc., and Lynn Wilson, M.D.
New England Journal of Medicine, January 6, 2010. 10.1056/NEJMp0911519
―The Family Health Team [FHT] model ―Physician payment is based on age- and sex-
[introduced in 2004] is designed to expand based capitation that is calculated from
the capacity of primary care through Ontario‘s fee-for-service experience. Additional
development of interdisciplinary teams and fees are provided for services deemed to
to improve the breadth and quality of care require added emphasis …
through incentives provided by a blended …
payment model. Today, about 720
―Since income is not based primarily on
physicians in 150 FHTs serve more than 1
physician visits, practices can explore broader
million patients. [emphasis added.]
roles for team members … The total number
… of visits per patient has not declined, but more
―Physicians have responsibility for a defined visits appear to be occurring with team
panel of patients and are assisted by other members other than the primary physician.
health professionals, such as nurses, nurse …
practitioners, psychologists, pharmacists, One effect that is already obvious is an
social workers, and health educators. A increase of approximately 40% in physicians‘
typical physician panel includes about 1400 incomes: the average net income for a family
patients, smaller than a typical U.S. practice. physician has increased from $180,000
Inclusion of a nurse practitioner adds 800 (Canadian) in 2004 to $250,000 within FHTs …
patients to the expected practice size.
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56. “Patient-Centered Medical Homes in Ontario”
Walter W. Rosser, M.D., Jack M. Colwill, M.D., Jan Kasperski, R.N., M.H.Sc., and Lynn Wilson, M.D.
New England Journal of Medicine, January 6, 2010. 10.1056/NEJMp0911519
―Per capita, Canada has one third fewer Consider reading this article while replacing
active physicians than the United States, every occurrence of ―patient-centered‖ with
15% more primary care physicians, and half ―capacity-centered.‖ Is the meaning much the
as many specialists. Consequently, the same? Put differently, does a capacity-
heavy responsibilities of Canadian centered business model provide the
specialists promote shared care with family economic foundation that enables a patient-
physicians, and specialists rarely see centered medical home?
patients without referral. … Ontario‘s large
investment in FHTs signifies its commitment For a different perspective on medical homes:
to enhancing the capacity and quality of The Patient Centered Medical Home
primary care. [emphasis added.] (Robert Graham Center, November 2007)
… http://www.graham-center.org/PreBuilt/PCMH.pdf
Ontario continues to convert fee-for-service The analysis does not presume any particular
practices to patient-centered medical homes, focus either on ―capacity‖ or on the importance
so far with positive results, including more of management principles. On the contrary,
graduates entering family medicine. there is a sense that medical homes ―counter
market dynamics‖ that otherwise obstruct
equity, efficiency, and quality.
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