How to optimize an MSO's financial performance - management service organization

Healthcare Financial Management, Feb, 1998 by Jeffry A. Peters

Few objectives are more critical to healthcare executives than increasing market share by creating financial and strategic alignments wit h physicians. The vehicle of choice for accomplishing this objective is typically a management services organization (MSO). But MSOs are not as straightforward and easy to implement as they may appear. Even when launched successfully, MSOs often encounter serious operational and financial problems. Indeed, MSOs have become the major source of financial losses for hospitals and health systems.

Why MSOs Fail

MSOs fail because of physician exclusion, hospital structures, inappropriate compensation, practice-buying frenzy, and one-size-fits-all staffing.

Physician exclusion. Although they are knowledgeable about operating physician practices, hospital and health system executives frequently exclude physicians from MSO governance and turn them into mere employees. When this happens, physicians do not feel empowered to drive the business.

Hospital structures. All too often, hospitals and health systems impose an unwieldy hospital-based management and cost structure on physician practices that may involve, for example, bureaucratic decision-making processes, complex reporting requirements, and corporate allocation of overhead. Imposing such an administrative structure does not take into consideration the unique characteristics of physician practices, and management of the practice, therefore, may be ineffective.

Inappropriate compensation. Rather than basing physician compensation on practice income, hospitals and health systems normally guarantee physicians fixed salaries. As a result, physicians have little financial incentive to maintain productivity or take an active interest in the practice's business operations.

Practice-buying frenzy. Overeager to gain strategic competitive advantage over physician practice management companies, hospitals and health systems pursue an aggressive practice acquisition strategy and often pay too much for practices. As a result, the MSO may have difficulty ensuring that the practices provide an adequate return on investment.

One-size-fits-all staffing. Hospitals and health systems often hire a manager who excelled at managing a hospital department or division to head up their MSO. Managers accustomed to the sometimes laborious approval process of a hospital or health system may be ill-suited to managing a physician practice, where decisions are made much more quickly and directly. In addition, the MSO manager may not have experience with certain vital practice functions, such as contracting with a local HMO to provide all physician care to its enrollees.

Evaluating the MSO

Healthcare financial managers should evaluate their MSO to determine its strengths and weaknesses. Such an evaluation should examine the MSO's business scope, physician practice acquisitions, physician compensation, governance, management skills, management information system capabilities, organizational structure, and fee structure.

Business scope. Is the MSO in the "right" businesses, or has it been restricted to low-profit or no-profit service lines? Because hospitals and health systems need to grow market share, MSOs often focus exclusively on low-margin primary care and start-up physician practices. The sources of MSO profitability, however, are capitation management, ancillary service management and ownership, and management of or billing for specialists' services.

Physician practice acquisitions. To what extent has the MSO acquired physician practices in the past? Were contracts structured to enable physicians to function as a single group to develop the practice? Has the historical price paid for practices been too high? What percentage of the acquired practices have become liabilities?

Physician compensation. Are physician incentives aligned with those of the hospital or health system and MSO? Are physicians compensated or rewarded for increasing volume and revenue while controlling the practice's direct expenses?

Governance. Do physicians have significant and meaningful representation on the MSO's board of directors as well as important MSO committees, such as operations, finance, and quality improvement? Do physicians help drive strategic and operational decision making?

Management skills. Does the practice stag have the training and experience to develop a physician practice and manage it profitably? Do they understand managed care, contracting, financial management, medical management, business development, marketing, fee setting, billing, and collections? For example, do they know how to select, install, and operate systems that capture all charges and support a patient bill with adequate documentation? When the practice receives payment, can staff verify that the payment is in line with specified fees in the physician's managed care plan? Can they analyze referrals, admissions, and patient days and then recommend how physicians can modify practice patterns to provide more cost-effective care? Finally, can they develop methods to increase practice volume?