Prescription for Survival : Physicians Form Groups, Align With HMOs in New Environment

In the fast-changing health-care business, many worried physicians in the region are banding together and forming medical groups in the hope that being bigger will help them attract more patients.

The mergers reflect an effort by physicians to tap into the surging number of patients who have signed up with health-maintenance organizations, which contract with a select list of hospitals and doctors. HMOs typically don’t contract with sole practitioners or physicians in small practices. So by combining practices, doctors believe size and geographical reach will give them clout to win more HMO contracts and get better rates from health insurers and hospitals.

Although many physicians don’t want to join big groups, health-care reform is expected to keep pushing managed-care plans like HMOs. That will continue to erode the number of traditional patients who can choose any doctor, which will make it extremely tough for small physician practices to survive.

Stewart Brooks, 49, a Simi Valley pediatrician, figures he lost about 20% of his patients in recent years because employers pushed many of them to join HMOs. After 18 years of working with only one partner, Brooks last May lumped his practice with four small physician groups in Simi Valley and formed Family Health Care Medical Group Inc. That group is now a corporation with 25 salaried doctors, annual revenue of about $14 million and 120 employees, including a chief executive who negotiates contracts with HMOs and oversees the financial management of the corporation.

“To practice in the 1990s, you have to be willing to adapt,” said Brooks, who is now seeing many of his former patients because they have signed up with Family Health Care through an HMO. Overall, Family Health Care now has contracts with a dozen HMOs to see patients.

Since joining the medical group, Brooks is working harder, seeing more patients and his income is about 10% higher than a year ago. “I’m happy with the group,” he said.

Most medical groups in the San Fernando Valley area and Ventura County are still relatively small, with fewer than 50 doctors each. The biggest medical group in the area is one related to Kaiser Permanente, the state’s biggest HMO. Kaiser has more than 300,000 members, or patients, in the San Fernando, Santa Clarita and Antelope valleys, and they are seen almost exclusively by 535 doctors through the Southern California Permanente Medical Group.

The other HMOs in the area do business with various medical groups, including several larger ones: Greater Valley Medical Group in Northridge with 30 doctors; Community Medical Group of the West Valley with 36 doctors, and Facey Medical Group in the Valley with about 65 doctors.

Size is critical because under managed care, HMOs in the area typically pay a medical group between $35 and $40 a month per patient no matter how often that patient comes in for treatment. Because no one knows exactly how many HMO members will make office visits, the larger the patient base, the more effectively a medical group can spread its risk.

Greater Valley Medical Group in Northridge will get bigger this month when it merges with Simi Hills Family Medicine Group, a five-doctor practice in Simi Valley. Greater Valley approached Simi Hills last fall, wanting to expand in that area and drawn by Simi Hills’ 10,000 HMO patients.

Alberto Odio, a family physician with Simi Hills, said his group was doing fine financially but decided to join Greater Valley Medical because Simi Hills didn’t want to be forced into a merger later with a big group it didn’t like. Odio said that the Simi Hills group will still maintain some independence, including being able to refer patients to specialists without having to go through Greater Valley Medical’s review procedure.

The merger will also give Greater Valley Medical more than 55,000 patients, most of them HMO members. Still, the group says it needs to get bigger and so is considering forging other alliances. “There hasn’t been anybody who hasn’t knocked on someone else’s door,” said Gail DellaVedova, Greater Valley Medical’s administrator.

“What we’re going through right now is a lot of churning,” said John Edelston, a health-care analyst in Woodland Hills. Edelston predicted that in a few years there would be just a few major medical groups, with those that provide high-quality care to a large number of people in the most cost-effective manner having the best chance of surviving.

John McDonald, chief executive of the huge Mullikin Medical Group based in Artesia, which also operates in the Valley, says a doctors’ group needs to have at least 75,000 HMO patients to be viable. And the bigger the medical group, he said, the more potential for savings by combining back-office work such as record-keeping and billing.

Mullikin, with annual revenue of $340 million, entered the Valley in 1992, when it merged with Burbank Medical Clinic and Hawthorne Community Medical Group. Today, Mullikin has a half-dozen offices and 40,000 patients in the Valley. “We certainly hope to expand and add other members,” McDonald said.

Big medical groups such as Mullikin worry hospitals and health insurers, which have also been consolidating to battle in the new managed-care arena. As the number of medical groups shrinks while those that remain keep getting bigger, HMOs see themselves having less clout when it comes to dividing up the HMO premium dollar, which roughly is split between HMOs, hospitals and doctors.

CaliforniaCare, an HMO owned by Blue Cross of California and based in Woodland Hills, recently said it would no longer automatically accept a newly merged or acquired medical group into an existing contract. “These mergers have resulted in giving a lot of leverage to these (physician) organizations,” said Ferial Bahremand, CaliforniaCare’s director of provider services.

Bahremand said it’s not clear if these mergers have reduced costs because of the extra layer of administrators that medical groups create. And in some cases, she said, there have been longer waits and more complaints about billing errors from HMO patients whose doctors belong to bigger medical groups.

CaliforniaCare currently contracts with about 30 medical groups in the Valley area and has no exclusive contracts. But health insurers are expected to seek leverage by contracting with a much smaller number of hospitals and medical groups in the future.

Also, insurance companies such as Unihealth America of Burbank and some hospitals, including Glendale Adventist, through related foundations, have recently acquired medical groups to have better control of doctors’ practices. Other HMOs are contemplating purchases of medical groups. “I wouldn’t rule that out,” said Sam Ho, medical director of Woodland Hills-based Health Net, the state’s second-largest HMO.

Though tensions between HMOs and medical groups are rising, some have very close relationships. Community Medical Group of the West Valley was founded in 1979 at the urging of Blue Cross of California, which wanted to enlist doctors to see its new Health Net patients.

Community Medical started with nine doctors who saw only 500 HMO members, or 1% of the group’s practice. “It was just an experiment in a new paying method,” said pediatrician Marvin Kanter, one of Community Medical’s founders and the group’s chairman and chief executive. But over the years, Community Medical’s HMO clients outgrew its conventional patients as the group signed contracts with FHP, CareAmerica, PacifiCare and many other health plans. Today, Community Medical has 36 salaried doctors in a dozen offices in the Valley. Their HMO patients number 43,000.

Kanter, 56, says he sees more physicians signing up with medical groups, especially younger doctors such as Robert Hanson, an internist who joined Community Medical in 1990 soon after getting out of medical school. Hanson, 36, works about 40 hours a week and is on call only one night a week plus every fifth weekend, allowing him ample time to spend with his wife and 4-year-old son. “It was an easy decision,” Hanson said.

But many doctors are wary of medical groups and managed care, and past mergers suggest that future combinations of physician practices will be anything but easy.

Before the five physician groups in Simi Valley could merge and form Family Health Care Medical Group, the 25 doctors met for four hours a week for a year with Jim Agronick, a health-care administrator they hired to merge the various groups together.

Together, they had to wrestle with legal matters and set up both a corporation and a partnership. They had to negotiate how much ownership each doctor would get--in the end 20 physicians became equal owners. And they had to decide on salaries for each doctor, which varied depending on their group’s valuation of a doctor’s existing practice.

“We had a certain amount of tension in some of the meetings,” said Agronick, 34, who had previously worked for five years as a vice president at CareAmerica, the Chatsworth-based HMO. “At any point, the whole thing could have unraveled.”

Agronick, who is now the group’s chief executive, said the medical group had a small loss last year and is still working out the problems of combining multiple record systems and staffs. But since the merger, Agronick said, the group has picked up 12,000 new HMO customers. Still, “we’re not secure at all,” he said.

In fact, the next step for his Family Health Care Medical Group is to think even bigger. “Ultimately, we’re going to be part of a larger network.”