United we stand

Power shifts marginalize physician practices –

unless we act and integrate

W ithin six months, three seismic events

By Joel Sauer, MGMA member
and CEO, Heart Center Medical
Group, Fort Wayne, Ind.,
jsauer@hcmgmail.com
p a g e 5 2 • MGMA Connexion • October 2008
changed my world as the CEO of a 55-
physician multispecialty practice. They took
place on a local level but illustrate what’s
happening nationally, as well. These
changes are marginalizing physicians’ influ-
ence on medicine and their personal des-
tinies. They mean that physicians had
better integrate with larger organizations or
watch both their incomes and influence
continue to drop.
Clearly, this is bad for doctors personally,
but I believe it’s also bad for the industry as
a whole.
Big players get bigger
Before I describe the events that affected my
practice, let me describe our market. Fort
Wayne, Ind., is a city of nearly 300,000 peo-
ple. Our home county has 750 licensed
physicians. Our group is the region’s largest
private practice. The physician community
in northeastern Indiana is fragmented and
dominated by two large health systems.
We’ve generally flown under the national
radar in terms of trends. I mention all this
because our market typically reads about
seismic changes; it doesn’t experience them
firsthand. Until now.
In September 2007, a Wall Street firm
acquired our main hospital system’s parent
company, and the corporate leadership
changed overnight. We suddenly didn’t
know our “partner” across the table. Later
that month, Cigna acquired an Indiana pre-
ferred-provider network, which had always
been friendly to physicians. This effectively
©2008 Medical Group Management Association. All rights reserved.

This Web version may be reproduced for individual use.


How three seismic events
in Fort Wayne, Ind.,
pushed a multispecialty
group administrator to
embrace integration
doubled the insurer’s patient population for
my group. In October, our pathology and
reference lab provider sold out to national
giant LabCorp.
All three transactions made major play-
ers in our health care market bigger and
more influential. The change in hospital
ownership brought new leadership, a new
strategic direction for physician partner-
ships, greater access to capital and a larger
national presence. The payer gained market
share and leverage in fee negotiations. Like
the hospital system, the lab company par-
ent brings a strong national presence,
including exclusive payer relationships
which effectively carve out physician office
labs.
©2008 Medical Group Management Association. All rights reserved.
O r g a n i z a t i o n a l G o ve r n a n c e
Drop in profit Year 1 Year 2 % Change
Revenue $1,000,000 $850,000 -15.0%
Expenses $700,000 $700,000 0.00%
Net margin $300,000 $150,000 -50.00%
Ominous signs for physicians
If all this sounds ominous for physicians, it
should. We’re both a partner and competi-
tor for the health care dollar to those busi-
nesses. Just like you, the leaders of these
organizations are trying to maximize return
on investment for their owners/sharehold-
ers. They recognize size and integration as
powerful strategic advantages.
Survey data from the Medical Group
Management Association indicate that more
than half of clinic-based physicians practice
in groups of three to 10. Other surveys sug-
gest that as many as 75 percent of U.S.
physicians work in groups of 10 or fewer.
Regardless, it is clear that this sector of the
health care industry is still largely frag-
mented. The disjointed architecture has
caused a loss of economic and political
influence for physicians. If left unchanged,
this state will not only have dire conse-
quences on physicians’ income but on
health care as a whole, as physicians con-
tinue to be pushed out of leadership roles.
On the hierarchy of the health care dol-
lar, I’d rank physicians a distant fourth in
terms of influence. The government is No.
1, as the leader of Medicare, the country’s
largest insurance plan. Next comes the hos-
pital industry, heavily influencing decisions
in Washington, D.C. Then come the payers;
the mega-national insurance plans have
clout at the federal level and also push local
markets through fee schedules.
Shooting the wrong enemy
Perhaps the most dangerous aspect of the
fragmented, island-based structure of
today’s physician community is that it pits
physician against physician in the competi-
tion for fees. In my market, like many of
yours, payers contract with the hospitals
before turning to the physicians. By the
see United, p a g e 55
MGMA Connexion • October 2008 • p a g e 5 3
This Web version may be reproduced for individual use.

United from page 53
time we have a shot at the health care dol-
lar, two competitors have already taken a
chunk: Payers have taken a piece for admin-
istrative overhead and profits, and hospitals
have taken a portion. Physicians largely
negotiate against one another for the
scraps. This plays out at nationally, as well,
where physician societies squabble with
Congress, more often than not taking
money from each other.
Integration common sense
Will integration and size really change any-
thing? If a payer in your market goes from
10 percent of your business to 20 percent,
will it be easier or harder to negotiate fees?
Few of us would answer easier. Bigger is bet-
ter.
Let’s turn the tables. As a practice admin-
istrator, would you feel better about your
chances for successful negotiation with a
major payer leading a group of 10 physi-
cians or 100? In that context, I’d choose to
be bigger. The same is true with my negotia-
©2008 Medical Group Management Association. All rights reserved.
This Web version may be reproduced for individual use.
tions with hospitals. I would much rather
come to the table representing a large, diver-
sified portion of admissions or revenue than
a smaller, focused portion.
Beyond negotiating strength, size also
brings volume – and diversity (assuming a
multispecialty model) – both of which are
imperative in today’s hostile climate. Con-
sider two independent gastroenterology
groups, both of which operate two-room
endoscopy centers with similar annual vol-
umes. Each earns a nice margin on its
respective book of business but faces a 30
percent decrease in Medicare reimbursement
over the next three years, with similar cuts
anticipated from commercial carriers. Given
the high overhead of this service line, a sig-
nificant cut in reimbursement is leveraged
by as much as 3:1 or more on profits. In
other words, a 20 percent decrease in reim-
bursement could result in a 50 percent to 60
percent drop in profits (see table, page 53).
That same high fixed-cost characteristic
now becomes an advantage if the practices
integrate and combine patient volumes and
see United, p a g e 56
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MGMA Connexion • October 2008 • p a g e 5 5
United from page 55 This Web version may be reproduced for individual use.

almost every situation these can be

Fixed-cost study Pre-merger Merged addressed over time. The resulting math
benefits the combined entity.
Total fixed costs $290,000 $290,000

Procedure count 3,500 5,000 Diversify investments to gain

Fixed cost per procedure
Increased margin per
procedure
Total increased margin
$82.86 $58.00
N/A $24.86
N/A $124,286
facilities. Instead of an endoscopy center sit-
ting idle after 3 p.m. weekdays and entirely
on weekends, it can now generate revenue
during those times – with no increase in
rent or other fixed costs. With proper man-
agement, the doubling of volumes should
drop per-procedure staffing costs, thereby
increasing the net margin per case (see table
above). This is powerful.
I’ve obviously made certain assumptions
with this illustration (e.g., potential
antitrust issues, shedding of rent), but in
economies of scale
In my illustration, two identical service
lines combined to gain economies of scale.
Let’s now suppose a gastroenterology center
joins a podiatry center. At first glance, few
would consider these specialties symbiotic.
However, here’s an opportunity to increase
patient volumes, thereby permitting
economies of scale and margin and diversi-
fication of the center’s revenue stream.
Integration can bring that diversifica-
tion. It’s not simple, but neither are the
alternatives.
Size can also enhance savings in
expenses. Each time you add a doctor to
your group, the cost is borne by a larger
number of physicians, ergo, the cost per
doctor decreases — without any other
action. This phenomenon comes with size

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p a g e 5 6 • MGMA Connexion • October 2008 ©2008 Medical Group Management Association. All rights reserved.
 This Web version may be reproduced for individual use.

(see table, page 56). Granted, such

Economies of scale Year 1 Year 2
economies do not affect all areas of the
practice proportionally, such as direct clini-
Medical records $250,000 $256,250
cal care, but larger size with solid manage-
ment can lower costs per doctor. Even
Physicians 10.0 12.0
without savings at the clinical level, there
are significant dollars committed to other Cost per physician $25,000 $21,354
administrative functions where savings
shouldn’t be discounted, such as billing and
collections, medical records, medical recep- groups will get easier, so the more tools we
tion and scheduling, building and grounds, have at our disposal, the better.
and general administrative costs. In such Consider fee schedules, for instance.
areas, the cost per provider should decrease How many of us have a full-time employee
with growth. or even a department devoted to contract
negotiations? I would hazard a guess that
many of you, like me, perform contract
Size means survival analysis and negotiations in our “spare”
Now let’s come at expenses from an angle time. That’s not how hospitals or insurance
other than raw cost. As a group expands, it companies handle it. We need to level the
can afford a more sophisticated infrastruc- playing field.
ture. In other words, for the same cost per Information technology, too, plays a crit-
physician it can afford a better product. ical role in practice management. Whether
Outside of contracting strength, this is per- the Centers for Medicare & Medicaid Serv-
haps the strongest motivator for growth. ices sticks with pay for performance or not,
Few of us believe that managing physician payment for quality — or at least the clear-
see United, p a g e 58

The
PA

©2008 Medical Group Management Association. All rights reserved. MGMA Connexion • October 2008 • p a g e 5 7
United from page 57 This Web version may be reproduced for individual use.

mgma.com
• Visit our integrated delivery sys-
tems Practice Solutions Web
page at mgma.com/IDS
• In the MGMA Store, enter E6844
in the Search Products box for
the electronic Information
Exchange “IDS & MSO Relation-
ships” (6844 for the print ver-
sion); 6730 for the MGMA Cost
Survey for Multispecialty Prac-
tices: 2007 Report Based on 2006
Data
• Visit our consulting group Web
page at mgma.com/consulting
ing of quality hurdles — is here to stay. My
group participated in Medicare’s Physician
Quality Reporting Initiative with pen and
paper, since we don’t have an electronic sys-
tem. We entered data retrospectively at the
billing office, adding largely uncompen-
sated work and potential distraction to a
department needing neither. We know we’ll
need to turn more to information technol-
ogy, but it costs money – lots of it.
Size allows groups to make these invest-
ments. Physicians, as the leaders of health
care delivery, must reassert themselves as
industry leaders. But this simply can’t hap-
pen from our fragmented, largely single-spe-
cialty silos. By integrating as large, multi-
disciplinary groups with sophisticated
administrative and information infrastruc-
tures, physicians will have the resources to
improve the quality of care. This is the
greatest asset they can bring to the health
care table.
Competitors for the health care dollar —
hospitals, insurance companies, ancillary
service providers, etc. — are consolidating.
Unity gives these entities even more lever-
age and makes it even more difficult for
physicians to compete. Perhaps worse, the
nation’s health care system is being led by
every sector except the physicians, which is
simply wrong.
Physicians must abandon the silo-based
architecture of small, single-specialty
groups. Integration can:
• Produce direct economic benefits for
physicians in revenue and expenses;
• Allow investment in infrastructures
required to remain competitive in this
marketplace; and
• Provide physicians the resources to
improve the overall quality and
efficiency of health care delivery.
Without such changes, both the private-
practice model and the industry as a whole
are in peril.
e-mail us Do you think medical groups can gain
influence through integration? Tell us at connex-
ion@mgma.com

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p a g e 5 8 • MGMA Connexion • October 2008 ©2008 Medical Group Management Association. All rights reserved.