Another Perspective on Practice Management Companies

Abstract

Lawton R. Burns and James C. Robinson set forth in their article the central premise that physician practice management companies (PPMCs), particularly those that provide services to multispecialty group practices, pose a strategic threat to hospital-led efforts to build integrated systems of care. Before responding to each of the six major points that Burns and Robinson offer as support for this conclusion, however, I would like to revisit their idea in the broader context of market strategy-that is, what long-term goals are sought by hospital-led systems intent on integration activity? It is essential to understand the authors' perspective on this before approaching the topic of physician practice management companies. Historically, hospitals sought to improve the quality of care in communities through the provision of institutionally based acute care services. The practice of medicine per se was a related but separate enterprise, usually associated with hospitals through medical staff organizations. As the market-employers, health plans, Medicare, state governments, and consumers-became increasingly uncomfortable with rising costs and continued institutional building programs, challenges were made in the form of payment systems. Thus, diagnosis-related group payments by Medicare were born, many employers and plans began to push for discounts, and consumers became increasingly sensitive to out-of-pocket costs. Gradually, the market-those who pay the bills and use the services-became more demanding. The value proposition in hospitals shifted from How many beds can you build? to How effective is your ability to manage population-based care and cost effectively? It is market forces that have prompted physicians to become affiliated with practice management companies, just as market forces have moved hospitals into businesses other than their core competency-inpatient acute care operations. The modern debate relates to the hospitals' efforts to meet the needs of local communities through means other than traditional hospitalbased services. Clearly, the notion of integration itself is not the issue; the market demands that physicians and hospitals work more closely and cooperatively as a means of building continuity and coordination of care. The tension rests in comparison of two approaches to integration: vertical integration, where the hospital owns and operates its own medical practices and HMO, and virtual integration, in which physicians and the hospital are linked contractually and incentives are parallel, but ownership is separate. Most hospitals believe integration must be vertical. As a result, they have purchased practices, built HMOs, and shifted capital and human resources from traditional core competencies in institutional management to these new lines of business. Unfortunately, the results of vertical integration thus far have been suspect. Operating losses from medical practice ownership and management have been substantial. Physician productivity in staff model HMOs and in hospital-employed models drops 30-40 percent and average losses per physician in hospital-owned practices range from $40,000 to $100,000 per physician, per year. Essentially, this is because the business of running a medical practice is not the same business as hospital management. Physicians in any model where they are employed are bound to fail because at the heart of medicine is the entrepreneurism of the profession. Thus, hospitals, like HMOs, have found that owning practices and employing physicians is destined for failure-not just in the form of financial losses, but also in the inability to deliver the value proposition, which is continuity of care delivered in appropriate settings at appropriate costs. Vertical integration by many hospitals is more about control of physicians than response to the market. Those hospitals that have embarked on such a path have justified it to boards and to their communities on the flawed central premise that the best and only way to build an integrated system is through hospital ownership and control of physicians. …