Doctors’ Groups Search for Line Between Dollars, Sense

You probably won’t find the term “shakeout” in a standard medical dictionary, but it seems bound to work its way into the local doctors’ lexicon.

For many physicians--and for at least a few of their patients--this has been a year of disruption and uncertainty, with doctors’ managed-care organizations straining and sometimes collapsing under cost-cutting pressures.

Experts say it’s a crisis of management, with well-run groups learning to survive while the less competent fall by the wayside. But even more, they say, it’s about money--too little of it to satisfy the demands of the public, insurers and doctors.

The woes of the physician groups, which were supposed to put doctors back in charge of care while controlling costs, have added new fuel to the debate over the wisdom of managed care itself.

Caught squarely in the money crunch are groups in the so-called “delegated risk” business. They enter into contracts with health maintenance organizations to provide the full range of medical care for covered patients at a certain per-patient monthly rate, called a capitation fee.

One common type, called independent practice associations (IPAs), contracts on behalf of doctors--sometimes hundreds at a time--in solo and small-group practices.

Penny Stroud, a consultant based in Burlingame, Calif., estimates that IPAs manage the health-care needs of 6.3 million Californians, making the IPAs the largest type of HMO delivery system (the Kaiser Permanente system is second largest, with about 5.8 million covered. Stroud says about 4.7 million of the state’s residents are covered by other types of risk-bearing groups, such as the contracting arms of large group practices, clinics and other provider groups.

IPAs and similar entities can--and often do--get into hot water when they agree to rates that don’t cover the doctors’ cost of care.

According to the California Medical Assn., there are about 300 of these groups statewide, and 75% to 90% of them are experiencing financial stress.

Two of the largest, MedPartners Providers Network and FPA Medical Management, have gone into bankruptcy. One of the largest groups in the San Fernando Valley, the Southern California Independent Practice Assn. (SCIPA), closed this summer.

There are still several other large physician groups remaining in the Valley after the demise of SCIPA, as well as at least one significant newcomer. The major groups include:

* Lakeside Healthcare, based in Glendale, which includes both an IPA and a large group practice. Over the past year, the group has shut down its West Valley operation and shed about 15% of its patient enrollment. Lakeside now covers some 80,000 patients in the San Fernando Valley.

* Facey Medical Foundation, based in Mission Hills. A nonprofit group owned by the UniHealth organization, Facey covers about 80,000 people under managed-care contracts. It is affiliated with Facey Medical Group, a large group practice. Burbank-based UniHealth is in the process of selling off five for-profit units that administer IPAs (all outside the Valley area) as it converts into a not-for-profit foundation. But Susan Dunn, a UniHealth spokeswoman, said it has no plans to sell Facey.

* Northridge IPA, based in Northridge. This group, with more than 35,000 patients enrolled, was set up by Catholic Healthcare West, the owner of Northridge Hospital, to help fill the gap left by the SCIPA shutdown. It began on Aug. 1.

* Other Valley groups include Greater Valley Medical Group, based in Mission Hills, and Community Medical Group of the West Valley, with headquarters in Calabasas.

Most of physician groups are privately held and not licensed by the state, so their finances aren’t made public. But all of them are telling pretty much the same story these days: even well-run groups are struggling to stay in the black.

“It’s no secret that the margins in this business are almost nonexistent in the best of cases,” said Northridge Hospital president Roger Seaver. “We’ve structured it to work,” he said of the new Northridge IPA, “but no physician is getting overpaid right now.”

Dr. Francisco Federico, Lakeside’s founder and president, says his group has been through an ordeal that has left it a stronger business, currently running in the black, though facing the burden of paying off bank debt.

“We’ve never been operationally more sound,” Federico said, “because we’ve spent the last year and a half focusing on operations.”

Focusing on operations, in Lakeside’s case, meant cutting reimbursement to physicians and cutting ties with a major HMO, Woodland Hills-based Health Net. Federico said primary-care doctors saw a cut per-patient fee of about 7%, with specialists getting about 9% less, while shedding some 15% of the group’s patients and leaving the West Valley area by shutting down its Tarzana-based operation.

“It wasn’t a lot of fun, to be sure,” Federico said. “Some doctors had to stop seeing some patients; other doctors had to join other groups to see their patients.”

But with the amount of money Lakeside was getting from HMOs, he said, it couldn’t do otherwise.

When an IPA leaves a market, it creates a coverage vacuum that can leave patients in the lurch--looking for new doctors--if the physicians can’t join or form a new IPA and enter new contracts with HMOs.

When Lakeside pulled out of the West Valley, for instance, Tarzana Hospital put together a new IPA, called Valley Health Medical Associates, which now has several thousand covered patients. This and other IPAs, including the new Northridge group, are now working to fill the much bigger gap left by the closure of SCIPA, which had covered about 62,000 patients.

Chastened by tough times, those who remain in the physician-group business say they’ve learned from the mistakes of those who failed. One common refrain: You can be too big as well as too small.

Physician groups, for example, must be big enough to marshal bargaining clout and pay for administrative expenses.

“You have to get to a certain size to achieve certain economies of scale,” said Lakeside’s Federico.

But doctors interviewed for this article say they want groups to be small enough to keep the doctor members in touch with each other and to keep watch on the group’s costs.

Edward Betz, a Sherman Oaks internist, says the groups that failed typically “had 100,000 or more patient lives; one doctor didn’t know another.” In such cases, he said, “It’s easy to lose control.”

Steve Valentine, an El Segundo-based health care consultant, says big IPAs are especially prone to cost-control problems because their members don’t all work together in the same practice, where “you can get your behaviors together” and agree on appropriate standards of care. He said, “In an IPA 400 [doctors] are doing things 400 different ways,” and the IPA has to manage all of them.

Michael Alper, president of Woodland Hills-based Meridian Healthcare Management, which administers IPAs and other managed-care groups, also sounds the smaller-is-better theme. He sees the new Northridge IPA, which Meridian manages, as an example of the “evolution of local provider networks.”

Its population--with more than 35,000 enrollees and about 200 physicians--is far smaller than that of the failed MedPartners, which Alper said had more than a million enrollees in California alone. But those big numbers didn’t seem to produce more money for the doctors.

“MedPartners’ deals weren’t significantly better than that of local IPAs,” Alper said. “Local networks have a lot of advantages. Physicians and hospitals work together a lot more closely. There’s some accountability, because people know each other and are working with each other.”

The collapse of some IPAs also may have shocked health plans into dealing more favorably with doctors. That’s the view of Darc Keller, the chief executive of the Los Angeles County Medical Assn.

“Some health plans have religion,” Keller said. “If they didn’t know before, they know now [that] you need physicians. If you take them out of the system, you’re in crisis.”

Physician groups may have also learned something about limiting risk. David Olson, the senior vice president for investor relations at FHS Inc., the parent company of Health Net, said IPAs are moving away from “dual-risk” (also known as full-risk) contracting.

Before, the groups agreed to fixed fees for both physician services and hospital costs, Olson said. Now the HMOs contract directly with the hospitals.

Olson thinks the physician-group system is on the mend and is proving that managed care can work.

“The one thing we’ve demonstrated here in California,” he said, “is that doctors who work together in an IPA or group setting can produce high quality health care in a manner that is conscious of cost.”

Other observers don’t sound quite so optimistic, saying the groups still face tough going and need more money. Premiums paid by employers to the health plans have started to rise again after several flat years, but most of the increase does not seem to have made its way to the providers--at least not yet.

Olson says premiums are rising between 6% and 7% this year for Health Net, while Valentine says hikes industry-wide are running at 8% or more. On the provider end, Alper says payments to physician groups are still flat. Federico, who got a 2% increase in fees for Lakeside from HMOs for this year, and expects something better than that for next year.

Meanwhile, he said, the groups’ costs keep mounting as employers, the public and politicians demand more services. And Alper says insurers are still selling health coverage for a price that doesn’t cover the real cost of the care that patients get and the IPAs must provide.

“There appears to be a fundamental disconnect between the underwriting process and the actual delivery of services that occurs because of capitation,” he said.

Valentine says he’s “still very bullish on IPAs,” but he sees trouble ahead for the health care industry as a whole. With costs rising on many fronts--new staffing mandates on hospitals, more use of specialists, new avenues for litigation against HMOs--”We have a huge day of reckoning coming.”

WEB LINKS

Health-care related sites in cyberspace:

www.cmanet.org: California Medical Assn. site, includes consumer information on choosing health plans.

www.lacmanet.org: Los Angeles County Medical Assn. site, includes public health information.

www.insure.com/health: Consumer guide to health insurance.

www.corp.ca.gov/hpd/hpdenf.htm: Health plan division of the state Department of Corporations, which regulates HMOs.

www.healthscope.org: Physician finder.

www.medbd.ca.gov: Medical Board of California. Consumers can check board certifications on doctors, file complaints.

www.drkoop.com: Health news and chat rooms.

www.hmopage.org: HMO complaint site.