The evolution of primary care networks

Healthcare Financial Management, July, 1998 by Douglas E. Hough, Marc D. Halley

Many articles have chronicled the sad history of hospital- and system-owned physician practices and primary care networks.(a,b,c) Examples abound of ill-defined practice affiliation strategies employed by hospitals and systems, including panic buying of physician practices; purely defensive response to competitors' encroachments on "loyal" physicians; and "opportunistic" acquisitions of practices without premeditation, strategy, or purpose. These inauspicious beginnings have been exacerbated by inexperienced or ineffective practice management teams, inadequate investment in infrastructure, the imposition of hospital-based information and financial systems on the acquired practices, inefficient billing and collections processes, inadequate marketing, and inappropriate treatment of employed physicians as "hired hands."

As a result, primary care networks have not achieved their projected financial returns. Only one of every six hospitals that acquired physician practices has reported reaching breakeven or better.(d) Anticipated synergies have not emerged, and inordinate amounts of senior management time and energy have been devoted to interventions for these once self-sustaining practices.

The consequences of these problems are pervasive and long-lasting. Already-scarce capital resources may be wasted, hospitals and systems risk IRS charges of improper private inurement, bond ratings may be put in jeopardy, and physicians may become disaffected. An increasing number of hospital and health system executives are resigned to the fact that these problems are inevitable. Others are considering divesting their networks to physician practice management companies or back to the physicians themselves.

Both divestiture and acceptance of continued financial losses threaten to squander an asset of potentially immense strategic value. Rather than ignore or spin off their primary care networks, hospital and system leaders first need to articulate or reaffirm the strategy that drives these networks: to support the system's market-share or covered-life strategy through the development of viable retail outlets.

Second, leadership needs to understand the physician enterprise (the "theory of the business" in Drucker's terms(e)) as a low-margin business driven by a small-transaction, revolving-credit model, rather than the high-price, infrequent-use model historically used by hospitals.

Third, and most important, the current difficulties in which hospitals [ILLUSTRATION FOR EXHIBIT I OMITTED] and systems find themselves become more manageable if primary. care networks are viewed as part of an evolutionary process that requires significant investment of capital, time, energy, and management expertise to yield positive results. Hospitals and systems that reach the final stage of this evolution will have a formidable and sustainable strategic advantage.

Although hospital-owned primary care networks are a relatively recent phenomenon, those that have followed a disciplined strategy toward effective implementation are experiencing a three-stage evolution comprising practice acquisition, network development, and true integration (see Exhibit 1).

Practice Acquisition

Stage one, practice acquisition, is deceptively simple. About all that is needed is enough capital. Once the euphoria of a successful acquisition passes, however, the challenges of practice ownership surface: decreasing physician productivity; physician compensation models not tied to performance; higher staff benefit costs; and significantly higher expenses for new or remodeled facilities.

Days in accounts receivable and bad debts begin to climb as practice sites are disengaged from the receivables management process. Accrual-basis accounting practices become sources of confusion and mistrust among physicians. Employed physicians continue to exert significant influence in their practice sites, which can stymie attempts to improve and standardize operations across practices. (Resistance to change is heightened by the "nothing but payroll will change" promise used by some hospital executives during the practice-acquisition process.)

Health system executives discover that primary care practices cannot be managed as if they were another hospital department. More fundamentally, the primary care network has not yet been integrated into the system's overall strategy. The system frequently does not promote the network or drive overall patient volume, particularly managed care patients, through it.

At this stage, system executives need to promote communication and coordination among multiple sites that have varying preacquisition cultures and operating systems. Success in these communication and coordination efforts is indicated by the occurrence of the following operational imperatives:

* All stakeholders understand the theory of the primary care network business and create a realistic vision and set of expectations for this strategic resource;

* Physicians are engaged in developing the network, rather than adapting to a fixed structure;