Physician network audits can improve financial performance

Healthcare Financial Management, Oct, 1998 by C. Thompson Hardy, Stanley J. Kasmarcak

A physician network audit is one way to evaluate the strengths and weaknesses of a network's performance in five key areas: practice operations, financial management, strategy and vision, managed care readiness, and organizational governance. An objective, comprehensive audit can help identify real versus perceived problems that are troubling a network. Then steps can be taken to align incentives and improve operating results.

The strategy of bringing physicians into an integrated delivery system (IDS) by acquiring physician practices is being challenged by many healthcare industry observers. They predict that system-owned physician networks will fail to achieve their primary goals of integrating a community's healthcare providers, managing the delivery of services, and reducing healthcare costs in a capitated payment environment. They cite some common symptoms of unsuccessful system-owned physician networks as being:

* Reported annual financial losses of IDSs ranging from $30,000 to $120,000 per physician;

* Failure of the physician network or the IDS to negotiate a significant number of or generate sufficient covered lives from capitation contracts; and

* Lack of network physician commitment to integrate their practices, manage care delivery, take advantage of the system's potential for economies of scale, and share IDS motivations and goals.

Some systems are rethinking the strategies that led to physician network development and investigating their restructuring options, including outside management contracts, risk sharing or equity participation by the physicians, or spinning the network out of the IDS. Many systems, however, are unwilling to abandon their network initiatives. In some instances, there is concern that alternative structures for the network are unproven and may fail to yield better results. In others, there is optimism that operating results will improve once the significant investment in practice acquisition and infrastructure development has been completed.

An objective, comprehensive review of network performance can identify areas for improvement in network management. A physician network audit is a diagnostic tool that evaluates the strengths and weaknesses of a network's performance in five key areas: practice operations, financial management, strategy and vision, managed care readiness, and organizational governance. A well-executed audit can provide a variety of benefits for network management, including evaluation of network strategy in the current market environment, quantification of a network's performance, and improved relations among the IDS's physician providers. The most significant benefit, though, is objective identification of real versus perceived problems in a troubled network.

Reviewing Network Performance: A Case Example

The following example illustrates how a financial and operational physician network audit can highlight misinterpretations, reinforce correct assumptions, and suggest areas for corrective action.

A family practice composed of five well-established family physicians historically had generated income and incurred expenses that approximate industry norms. The physicians agreed to sell the practice to a local IDS at the end of 1995. Their motivations for selling included concerns about future revenues, the desire to access additional capital, and the opportunity, through the sale, to realize the value of a business they had built over the years. The physicians also wanted to be relieved of the majority of their practice management duties.

Two years after the transaction, the practice's reported losses were $90,533 per physician per year (see Exhibit 1). Coupled with these losses was a growing tension between the physicians and the IDS as each rationalized the causes for the poor practice performance. Network management implied that physician productivity had dropped, leading to decreased revenues, and that physician overhead management had become lax. The physicians implied that the physician network managers lacked expertise, spent practice funds unwisely, and couched financial statements to make the practice look bad.

Given this antagonistic [TABULAR DATA FOR EXHIBIT 1 OMITTED] atmosphere, it seemed integration of goals and motivations could not be achieved. A physician network audit, however, provided several insights into the practice's operations.

Practice operations. Total revenues per physician had, in fact, decreased by $10,000 when compared to revenues of the year prior to the sale of the practice. The audit, however, revealed that following the purchase of the practice, the IDS had transferred all laboratory and X-ray services formerly associated with the group to other laboratory and X-ray departments within the IDS, along with the $30,000 per physician in revenues generated by these ancillary services. Actually, total revenues to the IDS had increased by $20,000 per practice physician. The audit also revealed this increase had been obscured by an increase in days in accounts receivable from 75 to 115 during the two years following the acquisition while a new billing and collection system was being implemented.