Why Insurers Are Buying Office-Based Physicians

UnitedHealth Group is quietly expanding its ownership and services to physician groups

WHEN THE NEWS BECAME PUBLIC earlier this month that UnitedHealth Group was quietly purchasing physician groups in selected areas of the country, there was a flurry of news articles recognizing this as a new trend.

These news stories came after July 1. That’s the date when Kaiser Health News published an analysis of UnitedHealth’s strategy involving management and ownership of physician groups. The story focused on OptumHealth, a subsidiary of United that is “buying doctors’ groups, building management companies to organize physicians, fostering new partnerships with medical groups and hiring doctors at a group it already controls.”

Because UnitedHealth is one of the giants of the health insurance industry, its business strategies are closely followed by financial analysts and healthcare policy makers.

Other news accounts chronicled situations where health insurers own and operate physician groups or medical clinics. Such examples include the CareToday medical groups in Arizona that are controlled by Cigna (launched in 2006) and Concentra, which is an urgent-care system in Addison, Texas, that was recently acquired by Humana. Just eight weeks ago, WellPoint purchased 26-clinic CareMore Health Group, which is based in California.

In fact, four of the nation’s five largest health insurance companies have increased their physician holdings during the past 12 months. The exception is Aetna. Its CEO, Mark Bertolini, has publicly stated that Aetna will not participate in this trend.

For clinical laboratories and pathology group practices, there are implications to this trend if it gains momentum. Here is yet one more health industry sector that is ready to acquire independent physician groups and bring them under corporate management.

Operating Physician Groups

What happens if health insurers were to begin buying and operating physician groups on a large scale and throughout the nation? For clinical and pathology labs, this is an important strategic question.

Currently, independent physician groups have wide latitude in their choice of a primary clinical laboratory and/or pathology laboratory. It can be speculated that, once a physician group came under the ownership of a health insurer, that health insurer would want to control where that physician group sends its lab testing specimens.

It could be argued that payers owning physician groups would use the cheapest price per lab test as the primary criteria when selecting a laboratory to serve its physician groups. If that proves to be the case, that is positive for the two blood brothers. Their huge volume gives them a pricing advantage that local laboratories and hospital laboratory outreach programs cannot match.

Benefits of the Outreach Lab

On the other hand, hospital laboratory outreach programs—particularly those at hospitals and health systems which provide inpatient services to these same physician groups—could argue persuasively that performing inpatient, outpatient, and outreach lab testing on the same patient has significant benefits, particularly in settings where integration of clinical care is the goal.

This would be the classic economic choice between “lowest price” versus “added value.” Historically, the major health insurance companies have demonstrated a clear preference for contracting with laboratories that offer the lowest price.

However, it is not likely that health insurance companies will become a major force in the ownership and operation of physician groups in the United States, at least in the near term. That’s because another class of buyers is acquiring physician groups at a much faster pace.

Over the past 24 months, a large number of hospitals and health systems have been aggressive buyers of physician groups in their communities and regions. How aggressive?

“There is definitely a land grab over primary care physicians,” declared Ted Schwab. He is a Partner in the Health and Life Sciences Practice at Oliver Wyman. His assessment is mirrored by Paul DeMuro, an attorney at Latham & Watkins who represents physicians. DeMuro told Kaiser Health News that the prices buyers are paying for physician groups have spiraled upwards to “absurd” levels.

Health Market Is Evolving

The key point here is that it means something when hospitals, health systems, and now health insurers want to acquire and operate physician groups and medical clinics. It is the market speaking loudly.

Heightened activity to purchase physician groups also means something else. For every interested buyer, there must be a physician group that is willing to sell.

Thus, it is important for lab administrators and pathologists to understand what changes are unfolding in the American healthcare system that motivate ever more physicians to sell their medical groups and become—for all intents and purposes—employees of either the local hospital or a health insurance plan.

After all, traditionally, office-based physicians have had strained working relationships with hospital administrators and health plan medical directors. Yet, once these physicians sell their medical groups to hospitals or health insurers, they will be managed by these same individuals!

So what is changing in today’s healthcare marketplace that motivates growing numbers of physician groups to sell to organizations they often considered to be hostile to their interests as office-based physicians?

At the same time, how are these changes also motivating hospitals, health systems, and health insurers to pay premium prices to purchase physician groups, then operate these groups moving forward?

THE DARK REPORT believes that the answer to these questions lies in the pending arrival of several significant new care delivery models, along with specific changes in how reimbursement will be paid to providers. Credit for these developments goes to the Obamacare legislation of 2010, which mandates these changes.

Changes Are Coming

Thus, providers are reading the tea leaves. They understand that accountable care organizations (ACO) and medical homes will require a tighter integration of clinical care—along with the need to better track the patient and to proactively work with the patient to achieve both early detection of disease and active management of chronic health conditions.

As ACOs become operational, hospitals and office-based physicians recognize that Medicare and private payers plan to incrementally increase the number of basic health services covered by the ACO reimbursement model. In future years, ACOs are expected to evolve into the primary channel for reimbursement for both hospitals and physicians.

To make money in future years, hospitals and physicians understand that they will need to interact more closely with each other than at any time in the past. This requires infrastructure to support a real time electronic health record (EHR). It also needs a mechanism to foster closer adherence to evidence-based medicine practice guidelines, and a way to collect outcomes data to allow providers to deliver better quality care to patients at a lower cost.

All of this requires capital investment and collaborative services, which office- based physicians do not have—but hospitals do! This is probably why so many physician groups have allowed themselves to be acquired by hospitals and health systems in their communities during the past 24 months.

Bundled Reimbursement

All of these same pending changes in integrated clinical care and bundled reimbursement that now bring hospitals and physicians groups together, represent a threat to private health insurers. Executives at the payers recognize these threats.

Integration of clinical care—in the form of medical homes and accountable care organizations (ACO)—has the potential to greatly diminish the current role provided by health insurance companies.

Many experts believe that ACOs will assume many of the functions and roles currently delivered by private health insurance plans. So it should be no surprise that private managed care companies recognize this possibility. Acquiring and operating physician groups is one strategy they are willing to pursue to protect their healthcare business interests.

Develop A Strategy

Thus, the booming demand to acquire office-based physicians is a warning flag to all lab administrators and pathologists. It would be timely for clinical labs to develop effective strategies that can help them maintain access to these office- based physicians, regardless of whether they are acquired and operated by hospitals or health insurers.

Remember the Tidal Wave of “PPMs” in the 1990s? That Business Model Proved to Be a Total Failure

THERE IS SOME IRONY in the current land rush by hospitals and health systems to purchase and operate physician groups. That’s because private practice physicians went down a similar road during the decade of the 1990s.

It was the time of physician practice management companies and “PPMs” were the darlings of Wall Street. One after another, private medical groups lined up to sell ownership in their medical practice to PPM companies.

PPMs Would Increase Profit

Private equity companies pitched doctors with a game plan that said “Let us buy an equity share of your medical practice. You practice medicine and let us manage the business operations and sales to increase revenue and profits. The result will be a larger pot of profits to split at the end of each year.” (See TDR, July 14, 1997.)

The story of MedPartners, Inc., graphically illustrates the roller coaster ride experience by physicians who sold their group practice to a PPM. It was 1993 when MedPartners was founded by HealthSouth Corporation (during the time that Richard Scrushy was CEO).

Growth was rapid. MedPartners went public in 1995. It merged with Caremark in early 1996. The combined company, at its peak, had 238 practices, 7,250 physicians, and contracts for the care of 1.5 million patients. By 1998, MedPartners’ revenues totaled $7 billion. It was the nation’s largest physician practice management company.

But things unraveled just as quickly. A proposed $8 billion merger of MedPartners and PhyCor Inc., fell apart and share prices of PPMs collapsed.

In November 1998, MedPartners changed its name to Caremark Rx, began divesting its ownership of physician groups, and shifted its business mission to pharmaceutical services. That marked the end of the PPM era as other PPM firms disbanded.

Pathologists with good memories of the 1990s will recall that “single specialty PPMs” were sprouting up during those same years. (See TDRs, November 4, 1996; April 21, 1997; June 19, 2000.)

Pathology saw its share of these start-ups. The names of pathology PPMs included:

  • AmeriPath, Inc.
  • American Pathology Resources, Inc.
  • Inform Dx, Inc.
  • Pathology Consultants of America
  • Pathology Partners, Inc.
  • PathGroup, Inc.
  • Path Source, Inc.
  • USLabs, Inc.

By 2002, only AmeriPath continued to operate as a single specialty PPM, focused on pathology. USLabs had abandoned the PPM business model to offer reference testing services focused on cancer. It was acquired by Laboratory Corporation of America in 2005.

PPM Era Lasted 10 Years

In hindsight, the concept of having business people take an equity position in a private physician group practice and contribute to improved revenue and net profits through better management and sales development proved ineffective in the real world. The PPM era lasted only about 10 years.

Because of the poor outcomes for the PPM business model, important questions are yet to be answered as hospitals, health systems, and health insurers acquire growing numbers of physician groups. At the same time, one difference in the 2010s from the 1990s is the movement toward integrated clinical care, supported by electronic health records and informatics technologies unavailable 20 years ago.

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