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AS SEEN IN
September 7, 1998Medical Economics
THE BUSINESS MAGAZINE OF THE MEDICAL PROFESSION
High incomes, low costs:
How do they do it?
Sixteen
multi-specialty groups have been recognized for stellar financial
achievement. What do they know that you don't?
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It's an exclusive array of practices to be sure, and the doctors who work in them are paid handsomely. These groups are not necessarily well-known or innovative, but they seem to have figured out how to make money. They're the 16 practices the Medical Group Management Association has recognized for having physician compensation that's equal to or greater than the median compensation for all multispecialty practices, and below-median cost per surgical procedure.
MGMA chose the 16 "better-performing practices" from its 1997 cost survey, a compilation of production and income data self-reported by groups. An although 353 multispecialty groups participated in the survey, only 70 were able to provide enough data to be in the running for the best practices appellation.
Still, the chosen 16 have much to brag about. Their median physician compensation, including direct pay and benefits, was $224,597 - just shy
of the 75th percentile for all multispecialty groups surveyed,
and 14 percent
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"You need to stay focused on getting patients in the door and seeing them efficiently. That's where the money comes from."
Jayne Oliva, MBA
The Croes Oliva Group
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best practices are in rural or semirural area, where labor and other costs are lower and competition for patients may be less intense.
But hard work appears to be an even more significant factor. The median number of procedures per physician for the better-performing practices was 11,264, exceeding the median of 9,479 by a whopping 19 percent.
At first blush, it may appear that only groups that are predominantly fee-for-service would be able to rack up enough procedures to qualify them for MGMA's best-practices list. But some of the top groups, such as Springer Clinic in Tulsa, OK, and Alton MultiSpecialists in Alton, IL, are about 50 percent capitated. Procedures per physician (which include virtually all billable physician services, including office visits) are high in those heavily capitated groups because patients come in more frequently for preventive visits, and the doctors tend to treat patients themselves
instead of referring to specialists outside the group.
How do the 16 stellar practices promote a culture of hard work
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higher than the overall median of $196,620.
Similarly, median net collections (excluding overhead) for the better-performing practices were $520,813 per doctor - again close to the 75th percentile for all groups and about 17 percent higher than the overall median of $444,915.
So, why are these groups so flush?
Lower operating costs is one answer. Overhead consumed only 51.5 percent of net medical revenues for the better-performing practices, compared with 56 percent for all multispecialty groups surveyed. Location probably plays a role here, too. Nearly half of the
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Who is eligible
for better-performer status?
For the last two years, the Medical Group Management Association has been selecting "better-performing" multispecialty practices based on two financial criteria: median total physician compensation or better, and below-median operating cost per nonsurgical encounter inside the practice's facilities. Single-specialty groups are not in the running because of their limited numbers in MGMA's annual cost surveys. Thirteen groups qualified for better-performing status in 1996, 16 in 1997.
The selection criteria are not without problems. Many of the groups participating in MGMA's cost survey didn't provide enough data to calculate cost per procedure, which disqualified them from being considered as better-performing groups. Also, the criteria give an edge to practices in areas with lower labor costs, and hurt groups in locations where intense managed-care competition has deeply cut reimbursement.
"Our personnel costs are lower because wage rates are lower," says general and vascular surgeon Steven Hoekstra, president of the 29-doctor Galesburg Clinic in western Illinois. "We're seeing the same thing that corporate America is realizing: You can make money in rural areas because costs are lower."
Indeed, Tulsa, OK, with a population of 500,000, is the largest city with a better-performing practice. Chicago is the largest metropolitan area containing a better-performing practice, but that group is located in a suburb far south of Cook County.
Notably absent from the list in both 1996 and 1997 were practices in California and Minnesota, two areas widely known for the sophistication of their medical group management - and their low payment rates.
Nonetheless, the financial achievements of the better-performing practices are significant and their methods are worth taking a look at, says David N. Gans, director of MGMA's survey operations. "These practices have characteristics that set them apart. They have higher net medial revenues, more staff support per physician, and lower costs per encounter, which indicates that the higher staffing costs are more than offset by increased efficiency. These are well-run practices, and doctors should be using the performance standards set by better-performing practices as benchmarks for their own groups."
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and cost-containment? In a series of four articles, we'll examine the winning strategies - and the mistakes - these groups have profited from. We'll begin by looking at how groups maintain their culture while providing the right financial incentives for doctors. In subsequent issues, the spotlight will shift to how best performing groups handle strategic planning, quality improvement, and staffing and ancillary services.
Income distribution:
getting the formula right
Every group knows the importance of compensation formula - and the discontent it can create among doctors. The 80-doctor Springer Clinic, which has been a better-performing practice for two years running, thinks it has hit on the right mix of incentives to boost physician productivity.
Springer motivates physicians by paying them an increasingly higher percentage of revenues the more patients they see. For example, a primary-care physician may get 40 percent of collections for the first 25 patients seen in a day, 50 percent for the next 10, and 60 percent for any beyond 35. The concept is the same for specialists, but the numbers change depending on the specialty.
The group distributes revenue from non-Medicare ancillary services in a similar way. Once overhead for ancillaries is charged off, the remaining revenue is split among referring physicians according to individual production; those in the lowest-volume tier receive 40 percent of their net collections, while those in the highest receive 60 percent. (Revenue from Medicare ancillaries is split equally among the doctors to avoid violating Stark regulations.)
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The arrangement not only encourages physicians to work in extra patients, it makes them more aware that the clinic's profits come from volume, says Rick Callis, Springer's administrator. "The revenue from the first 15 to 20 patients you see just covers your overhead."
Capitation, of course, adds another wrinkle to the compensation formula. Currently, primary-care physicians are paid a flat sum based on their panel size for capitated patients, and on a productivity basis for the rest of their patients. The group however, is looking into paying a combination of the flat rate plus a fee per patient encounter to its capitated primary-care doctors. That would offset incentives inherent in capitated arrangements to undertreat patients.
Any incentive system requires constant oversight because, no matter how carefully constructed, it can be gamed, says internist Seth Garber, a principal with healthcare consultant William M. Mercer. "With fee-for-service, the problem is churning, and with capitation, it's underutilization," he says. "Imagine the worst thing that can happen and then do what you have to do to prevent it, because you'll certainly get what you incentivize."
New doctors must embrace the culture
The right monetary incentives won't in themselves make a group financially successful. Groups tend to overestimate what can be achieved through incentives alone, consultant Garber says. "If you have someone who's always coming in late and doing a crappy
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job, that's a management problem, not a compensation problem, and you need to do something about it."
When adding physicians to a group, pay close attention to whether they mesh with the prevailing worth ethic, clinical philosophy, and group decision-making process. "You will get what you recruit for, "says Garber. "If you tell people they only have to work 9 to 5 and they don't have to worry about costs, it will be very difficult to turn them into cost-conscious doctors who stay until the work is done."
To ensure that it's hiring the right people, the 65-physician Quincy Medical Group in rural western Illinois outlines specific performance goals during the recruitment process. These include hours in attendance at the clinic and productivity, says pediatrician Richard Schlepphorst, the group's medical director. "We expect something from our first-year associates."
Springer Clinic shortens the learning curve for new recruits by assigning each a proctor from his or her department. Proctors, who report to the board quarterly on their protÈgÈs' progress, are expected to help the new doctors build productivity and to show them the ropes about managed care - when to make referrals, order tests, and admit patients.
The clinic is serious about performance standards, says FP Richard Reinking, Springer's former board chairman. "We've let a couple of associates go in the last three or four years because they weren't productive."
When new doctors come aboard via the merger route, they require
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at least the same attention the group gives to individual newcomers.
Springer learned this the hard way. In September 1995, the group merged with Green Country Physicians, a 23-physician osteopathic group. "It was a miserable failure," says Springer board chairman Jerry Pucker of the attempt to acclimate the osteopaths. "Most of them have left, and we aren't unhappy about that."
The friction stemmed more from disparate ways of doing business than from the different practice styles of allopaths and osteopaths. One problem was that many of the Green Country physicians admitted mostly to the osteopathic hospital where they did their training, even though another hospital had a lower per diem rate. "Their loyalty was admirable, but it cost the group money on capitated contracts," Springer ophthalmologist Mark Allison says.
Also, unlike Springer, Green Country had no strong centralized administration. "Green Country was not really a group practice so much as a collection of independent practices," says ophthalmologist William Anthamatten, one of a handful of Green Country doctors still practicing with Springer. "There was immediate animosity with Springer rolling in and saying, We're going to do it our way." It was a switch from a mom-and-pop operation to a Wal-Mart approach. Not that that's bad, but it took some getting used to."
At Springer, doctors are required to go before a management committee to get
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approval for major purchases. "As long as I've been here, I've never had a request turned down," says Allison. "But I've always been able to back up what I want with numbers. These are things you do before you buy something, if you're a good businessman." Springer's physician leaders now realize that for a merger to succeed, the new arrivals have to be willing to assimilate into Springer's culture. "If we bring in 20 people again, we'll evaluate them as individuals and do our darndest to educate them in how the group works," says Allison.
Besides seeing doctors who are comfortable with group decision-making, Quincy considers another cultural factor in recruiting: roots in the area. "It's expensive to recruit, and 50 percent of residents leave their first practice within two years," says William Sullivan, Quincy's administrator. "Most end up practicing within 100 miles of where they did their training, so it makes sense to look for local people." Following that tack, Quincy has reduced its turnover rate among new physicians to less than 20 percent.
Another better-performing group, Physicians' Clinic of Spokane in Washington state, won't consider a merger unless prospective partners agree to a particular governance style. The 33-doctor group has developed a matrix that indicates whether an issue is decided by management or by the board or whether it must be put to a vote of the shareholders. "If they can't be comfortable with decisions made according to the matrix, we don't want them," says rheumatologist Scott Baumgartner, the group's president. But to help blend dissimilar cultures, some new group members are asked to sit on the board.
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Such no-nonsense approaches are characteristic of successful practices, Mercer's Garber says. "I would rather see someone leave early or not join at all than see an organization twist itself into a pretzel to meet unrealistic expectations."
Doctors have to tolerate oversight
to reap higher profits
Groups that monitor the practice patterns of their doctors are in a much better position to succeed in taking on managed-care risk. In loosely organized groups, each doctor tends to look out for his own interests, and, consequently, nobody makes the touch calls for the good of the group.
An individual or committee in the practice has to have the responsibility, authority, and ability to act, Garber says. "Name any topic and the group should be able to answer four questions: Who is in charge? What can he do? How does he do it? What kind of information is he acting on?"
It took a financial crisis for the Springer Clinic to realize it needed stronger management oversight. Last year, the group had an unexpectedly low return from the risk pool it shares with St. Francis Hospital, where the group admits most of its capitated patients.
The amount of those bonuses had been so reliable that Springer budgeted them to fund the doctors' productivity bonuses, says internist Riley Hill, Springer's director of managed care. "Our hospital performance is very important to us in providing income from our managed-care practice," he notes.
The shortfall resulted from an increase in hospital days for commercial HMO patients combined with higher-than-anticipated productivity from the
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doctors. Based on the compensation formula, the doctors were entitled to larger bonuses than were available in the fund. The group dipped into its reserves to cover the difference, and the problem was immediately brought before the practice's compensation committee and seven-member board.
The solution was to change the compensation formula so that doctors' bonuses were tied to the fund's actual value rather than its projected performance. This assured that future shortfall would be felt immediately as lost income. Then the board took another important step: It temporarily assigned Hill, who at the time was chairman of the group's patient-care committee, to do a daily review of every hospitalized patient. That way, he could identify those who could be discharged or moved to a step-down unit.
"It was immediately successful, and embarrassingly simple," recalls Reinking. "In the past, we tried everything to bring down the days, including nurse case managers and educating physicians.
Commercial HMO hospital days are now where they should be - below 200 per 1,000 enrollees, down from 240 - and Medicare hospital days are down 30 percent. "If utilization hadn't been brought under control, we would have lost $800,000 to $1 million this year," says Jerry Puckett.
Physicians accepted Hill's scrutiny of their hospitalized patients not only because they were desperate to relieve the financial pinch, but because of who he is - a doctor. A nurse case manager, who could technically have done the job, wouldn't have had Hill's success.
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"First off, the doctors don't answer their pagers when a nurse manager calls," says Hill. "The second thing they do is say, 'You don't understand.'"
"When I call, I have reviewed the chart and examined the patient. So the physicians know they have to think a little harder when I ask why we can't move him to outpatient management. They don't argue with me a lot." It also doesn't hurt that Hill is a respected clinician who has held highly visible leadership positions with the group, Reinking adds.
Alton MultiSpecialists, another better-performing practice, takes a more collegial approach to oversight. Every Monday at lunch, all 23 physicians in the group meet to review and approve every referral to be made within and outside the group that week. The whys and possible alternatives are discussed.
While tying up the entire physician staff to discuss each referral may seem excessive, many Alton physicians see it as an important teaching and learning opportunity. Pediatrician Carolyn Brannon recalls the group's decision to have pediatricians do routine checks of ear tubes at less cost than referring those patients to the group's ENT.
This kind of information sharing, leading to cost savings, is critical to Alton's success, says pediatrician Steven Zenker, the group's medical director.
Since its founding in 1982, Alton has courted capitation as its niche in this Illinois suburb of St. Louis. In addition to its 23 staff physicians, Alton contracts with a network of about 70 specialists and a few primary-care physicians throughout the St. Louis area. A few of the affiliated doctors also regularly attend the Monday meetings.
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Alton's doctors believe the key to profiting from managed care is to accept capitation for as many services as possible and exercise strict utilization control to hold down costs. The group currently is capitated for all professional services. "We tried a couple of contracts for primary-care services only, but found they weren't profitable," Zenker says.
The group has realized a greater return on capitated managed care than on fee-for-service. Slightly more than half of practice revenues come from capitation, while slightly less than half of encounters, relative value units, and costs go to servicing managed-care patients, says Ginger Drone, Alton's administrator. Alton is eager to take on global capitation, but it has not yet been able to make a deal with a hospital to provide inpatient services. "The hospitals also recognize the importance of capturing the revenue stream," Drone says. "They want to control the risk dollars and parcel them out to the doctors."
Overhead wars exist in the best-run groups
Despite the efforts of the better-performing practices to promote cohesive cultures, they're not immune to the old bugaboo of practice management: overhead distribution.
At Alton MultiSpecialists, pressure from some specialists to revise the way overhead costs are allocated threatened to tear the group apart. After trying to resolve the situation internally, the group asked a consultant to help devise a new formula.
Under the old formula, each physician paid 50 percent of revenues up to $300,000 to overhead and 35 percent of revenues beyond $300,000. That resulted in surgeons and
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specialists paying between 42 and 50 percent of revenues to overhead.
Under the interim formula adopted after eight months of discussion, overhead will be allocated equally to all physicians, with specialists contributing an additional 15 percent. The extra money will be distributed to primary care physicians as reductions to their overhead charges because their incomes are lower. Surgeons and specialists now pay 38 to 50 percent of income to overhead.
The new compensation formula allows specialists in the highest income brackets to capture a little more of their gross. Still, the specialists are paying more in overhead than they would in solo or single-specialty practices. So some of them continue to push for more relief.
Although hoping for a compromise, administrator Drone is prepared for the worst. "We've decided to do what's best for the group, and if some doctors leave, so be it," she says.
Overhead distribution is also a subject for debate at Springer Clinic, but it's not as big a problem as in other groups because Springer does so well financially, says Mark Allison: "You get a lot less discontent when your doctors are making $200,000 than when they're making $100,000."
Even so, Allison acknowledges that he pays a far higher proportion of his gross revenues to overhead than he would if he were on his own. But referrals from his colleagues also keep him awash in patients. His nine-person support staff keep patients moving through surgery, making Allison one of the most productive ophthalmologists in the region. "You can't just look at your overhead percentage and say, "I'm doing well," says Allison.
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"If you're on your own and have lower overhead but see fewer patients, you're not doing as well. You have to look at the bottom line."
Reluctance to pay higher overhead was a factor in some Green Country doctors' decision to leave Springer, William Anthamatten says. While increased volume and access to managed-care patients has more than offset the higher overhead he pays, Anthamatten believes some of his Green Country colleagues may have lost money by sharing overhead.
In these days of increasingly sophisticated cost accounting, the allocation of overhead raises another question: Is it wise to charge back all identifiable costs to the individual physicians who incur them? Until 1995, Quincy doctors where charged directly for their staff, liability coverage, and supplies. But that formula resulted in below-market compensation for primary-care physicians, who have the highest overhead, and made recruiting difficult. It also drove up accounting costs. "We just found it counterproductive," says Diane Weber, the group's chief financial officer.
The group now deducts all overhead expenses from gross revenues and divides the net among the doctors according to their productivity. To keep overhead from ballooning, however, Quincy relies on management review. Ten of the group's 62 physicians currently serve on its finance committee, which is primarily responsible for keeping tabs on expenses. "When a physician asks for another nurse, we look at comparative data both internally and externally to see if it's warranted," Weber says. "Since we eliminated all the
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overhead charge-backs, we haven't seen a rush to add more staff."
According to allergist and clinical immunologist David Wright, who came on board last July, the group's overhead expenses compare well with those of doctors in solo practice. "Having just come from solo practice, I can attest that expenses are kept to a minimum here, " he says.
Unlike Quincy, the 48-physician PAPP Clinic in Newnan, GA finds that its practice of charging back direct expenses to doctors keeps costs down. Physicians foot the bill for a wide range of expenses, including staff salaries, rent based on the number of square feet each physician occupies, transcription service, malpractice insurance, and medical supplies.
"A physician will think twice before he hires someone he doesn't need, or ask for an extra exam room," says urologist Bob Mann, Jr., president of the group. There's no friction among the doctors, he adds, because the practice has always allocated expenses this way and physicians expect it.
However it's done, overhead allocation must be seen as equitable by all members of the group. Overhead also helps center attention on practice costs, which is critical for maintaining group profitability as payers cap fee schedules. "You need to stay focused on getting patients in the door and seeing them efficiently," says practice management consultant Jayne Oliva in Burlington, MA. "That's where the money comes from."
By Howard Larkin, a freelance writer in Oak Park, IL, specializing in health-care financing, management, and policy issues
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