The rapid decline of private practice physician groups has dramatic implications for health systems employing physicians in large numbers. As employment has surged, health systems are faced with creating a new operating model to manage the physician relationship and unlock the promise of clinical integration upon which many employment deals rest. Success in building a cohesive employed physician group, however, is elusive for most health systems. Instead of building an integrated employed physician group, many systems are stuck at the initial stage of development: aggregating physicians into a single organization. The systems that are successfully integrating employed physicians are doing so by recognizing the three major development phases, each part of the same process.
The three phases are: aggregate, assimilate, integrate
Phase 1: Aggregate
The first phase is all about growing the scale of the employed group of physicians. In some cases this is an offensive strategy to move into a new market or to garner new referrals going to competitors. In other cases it is a defensive strategy, to ensure specialists are not acquired by competitors.
The rapidly aggregation of physician practices over the last decade has been in a response to several factors:
- Uncertainty of health reform
- Deteriorating private practice financial models
- Lifestyle expectations
Uncertainty caused by the vague nature of health reform has caused skepticism within the physician community; according to the Physicians Foundation 2012 survey, 77 percent of physicians are pessimistic about the future of medicine.1 Physician groups often view employment as more stable due to the scale a health system provides.
Deteriorating financial models have made private practice less rewarding. Administrative costs are increasing much faster than reimbursement. For instance, practice operating costs per FTE physician increased 63 percent from 1998 to 2008.2 Moreover, new reimbursement models, such as bundled payments and accountable care organizations, require physicians to look at new partners to be relevant in coordinating care for the populations they serve. Employment becomes an easier solution than direct negotiation with every party.
The generation of physicians as entrepreneurs has shifted. Increasingly younger physicians are less interested in managing the business of a private practice. Almost twice as many physicians under 40 years old (46 percent) are looking for employment compared to their peers age 55 years and older (25 percent).3
The result is staggering. In 2012, $18.8 billion was spent on physician medical group activity, with the largest deal between HealthCare Partners Inc. and DaVita Inc. for $4.2 billion.4 Today, over fifty percent of physicians are hospital employed, up from twenty percent in 2003.5
Aggregation strategic pitfalls
Within the aggregation phase, some systems are successful while others are cementing failure. Two strategic pitfalls exist in the aggregation phase:
- Employing physicians simply to create scale without a plan to move to the next phases
- Building scale for the wrong reasons
Employing physicians to create scale without a plan to move to the next phases is a failure to focus on the end goal of integration. If left to the physician recruiters and deal makers, employment models will be customized to each specific situation with promises of no change to operations, practice patterns or staffing. This makes it difficult to assimilate the individual practices into a single "group."
Building scale for the wrong reasons is a failure to understand why the employment tool should be used and when. If the organization is hospital-centric, physician employment models focus on the specialists who admit the highest revenue cases to the hospital rather than what the organization needs to capture and serve a specific market area.
Phase 2: Assimilate
As a system moves into the assimilation phase, system activities focus on how to organize previous independent practices into a cohesive physician enterprise. It is in this phase that most health systems become stuck, often derailed by decisions made in the earlier phase and the inability to lose physicians to create a single operating model.
Those systems who succeed often do so by focusing on creating common:
- Governance
- Operating expectations
- Financial reward structures
A large group of highly trained professionals typically requires a large degree of empowerment and self-governance to remain engaged. However, education of the operating realities needs to be included in any empowerment effort. Many physician groups are not used to the business and clinical activities of the health system; similarly, many health systems do not understand the governance of individual practices.
To create an effective governance model, the employed physician enterprise must encourage physicians to be active strategic agents in the business of healthcare. While their day-to-day administrative workload is dramatically, and often thankfully, reduced once employed, health systems continue to need their focus on the market and populations.
Practice operations also need to change. Not only do new information systems and HR policies change, but so to must the practice look, feel and external perception. The strength of scale requires that the individual physicians be seen as a common brand. This typically includes:
- Practice name and identification
- Hours of operations
- Mix of services
- Productivity assumptions
- Minimum practice size
- Visual and service standards
- Staffing
- Facilities
Not dissimilar to other well-known brands, the employed physician group must have a brand and operations that reflect that brand.
When it comes to incentives, financial rewards are very tangible. As such, what is financially rewarded will be very visible to the members of the employed group. If the focus is only on volume (e.g., wRVUs), the group tends to shift away from managing payor mix, from focusing on the needs of a population, and instead looks for the volumes to fill its practices. Even in an employed practice setting, the physicians cannot be immune from the macro-economic realities of healthcare. As market-based reimbursement increases for primary care (nurse practitioners up 18 percent, physicians up 16.7 percent 2007–2011) compared to specialists (up 15.7 percent 2007–2011)6 the employed physician group must also respond.
In addition, the review of referrals outside the system and cross-subsidization in the managed care contract rates must be carefully managed to ensure that the best patient care is delivered in a fiscally responsible way.
Assimilation strategic pitfalls
The strategic pitfalls of the assimilation phase generally revolve around two aspects:
- Leadership
- Infrastructure
Settling for poor leadership is the key pitfall of the assimilation phase for most employed physician groups. Moving professionals from independence to a single operating model is not completed without deft leadership. Because the direct revenues are of a different scale than the hospitals, health systems often underappreciate the need for dynamic leadership to migrate the employed group from a collection of individuals to unified operations.
Scale requires infrastructure. Moreover the infrastructure needed to run a large multi-specialty physician group (employed or otherwise) is not the same infrastructure as is required to run a health system. Employed physician groups must continually invest in the ability to create connectivity and communication across the group if it expects to assimilate the individuals to something greater.
Phase 3: Integrate
Over time, the physician enterprise starts to work as a team, driving consistency in experience and care, and becomes an integral part of the system's strategy and differentiated value proposition. During the integration phase, two elements take on renewed significance: clinical models and multispecialty group culture.
The clinical model for primary and specialty care is dramatically changing with the increasing emphasis on population health and risk-based models. Organizations are implementing a more focused approach to specialization, often using a team of providers to better manage patients across their disease/illness journey and ensure care is received and coordinated within the network system.
When integrating different physician groups, organizations need to define the clinical model(s) they should pursue over the next decade and the implications for the broader enterprise.
Additionally, every successful physician group practice has a strong, well-established culture that acts as a glue to hold the group together. It does not matter if the group practice is physician-led (Mayo Clinic, Virginia Mason), an integrated delivery system (Kaiser) or a mixed alignment model (Advocate Health Partners), the development of a strong organizational culture by all its diverse constituents is critical to working as a cohesive team. Establishing a multispecialty culture takes determination, resources and time. The amount of resources and time are directly proportional to the diversity of the individuals and indirectly proportional to the consistency of the communication and day-to-day operations.
Integration strategic pitfalls
The strategic pitfalls of the integration phase generally revolve around two aspects:
- Lack of commitment
- Inappropriate strategic focus
Developing the culture of an employed multispecialty physician group takes time. No matter what controls and incentives are put into place, the formation of a strong culture will not occur in a year. As a result, one of the major pitfalls of the integration phase is the expectation that the employed group will be a cohesive team without going through years of consistent cultural formation.
Many employed physician groups will never develop a durable culture that leads to integration because their purpose is not bigger than themselves, the group or the system. Perhaps the largest barrier to moving an employed group from aggregation through assimilation to integration is its very foundation. What is the employed physician group's purpose? Too often the employed physician group has its foundational purpose tied to the financial success of the health system (generate referrals, fill the beds, capture attribution, etc.) rather than a broader purpose to serve a population base.
As a result, the significant pitfall in the end starts at the very beginning. Why is the health system building an employed physician group? Without a clear purpose to serve the customer, the development of a strong integrated multispecialty group is impossible.
| Phase | Key Strategy |
Indications You Are Headed Off Course |
| 1. Aggregate |
Acquire and recruit a market-balanced mix of physicians into an employed physician group under a common set of expectations | - You have more specialists than primary care (particularly cardiology, neurosurgery and orthopedics) - The organization only considers inpatient admissions as the indication of alignment |
| 2. Assimilate |
Bring the disparate physicians into a single governance, operating, and clinical model | - You are heard telling an acquisition target “you can keep your operations the same as they have always been” - You let the acquired practice keep its name and you refer to it by its historical group name |
| 3. Integrate |
Create a culture focused on the populations’ needs such that there is not differentiation between the aims of the physician group and the health system | - There is no clear expectation about the organization’s purpose or how clinical activity will be aligned - Finances are about downstream revenue or patient attribution rather than total cost of care - The vision is integration rather than population health |
Conclusion
In summary, employed physician groups have three development phases: aggregate, assimilate and integrate. The ability to move quickly through these phases depends on the focus of the organization to thinking two steps ahead of the aggregation phase to build a multispecialty physician group culture that is focused on the populations and their needs.
Footnotes:
1 “Survey of America’s Physicians: Practice Patterns and Perspectives.” Survey conducted on behalf of The Physicians Foundation by Merritt Hawkins | Completed September, 2012. Accessed on February 15, 2013.
2 “MGMA benchmarking report: Medical practices diligently monitoring their costs.” Medical Group Management Association (MGMA), 2012.
3 Tabulation of 2007-2008 AMA Physician Practice Information Survey; Physician Placement Starting Salary Survey: 2010 Report based on 2009 Data; MGMA
4 Lee, J. “Market Meld.” ModernHealthcare.com. Posted May 26, 2012
5 Harris, Gardiner, More Doctors Giving Up Private Practices, New York Times, March 25, 2010.
6 http://www.forbes.com/sites/brucejapsen/2012/07/10/primary-care-doctor-pay-jumps-past-200k-as-obamacare-market-push-new-pay-methods/
Kate Lovrien and Luke C. Peterson are principals at Health System Advisors. Together they have spent more than 25 years advising senior healthcare leaders on their market and organizational strategy. They can be contacted at Kate.Lovrien@HealthSystemAdvisors.com or Luke.Peterson@HealthSystemAdvisors.com.
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