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Is it Time to Resurrect Physician Practice Management Organizations?

Beth Connor Guest and Michael E. Collins, for HealthLeaders Media, March 11, 2010

The introduction of President Obama's healthcare reform plan has once again stirred debate about how to move healthcare delivery into the future. The outcome of reform remains unclear, however a likely outcome is that physician reimbursement and compensation will continue to shrink for all specialties, and that any reform model enacted will result in a healthcare delivery system that will make smaller payments to physicians per increment of service provided.

The winners in the new system will be physicians who effectively collect patient data through an electronic medical record system, can demonstrate quality, and have the tools to seize control of a larger share of the healthcare dollar. Physician organizations with little access to capital, professional management, and data will lose out to practices that have access to current technology as a result of better capitalization and management.

In the healthcare delivery system of the future, it is anticipated that virtually all physicians will either be employed by hospitals or part of a large consolidated physician group. With rare exceptions, physicians will not be able to consolidate into large groups without assistance from business and capital partners. These environmental changes could create an opportunity for the resurgence of the physician practice management, or PPM, model.

What Is the Physician Practice Management Model?
Historically, many states have prohibited non-physicians from having ownership interests in physician practices through Corporate Practice of Medicine Statutes. As a result, physician practices have not had the same access to capital or business acumen as other healthcare businesses. The practice management model simply brings these advantages to bear on physician practices in a manner that is compliant with state corporate practice of medicine statutes.

In the typical model, a physician practice management company (the PPM) acquires all of the tangible assets, other than real estate, associated with a physician practice. The PPM then employs all of the personnel associated with the practice other than the physicians and certain clinicians who, under applicable state law, must be employed by the practice. The PPM provides all of the personnel and assets necessary to operate the practice in exchange for a management fee that includes reimbursement of the PPM's costs. In this regard, the PPM functions primarily as a capital partner to provide the capital necessary for the practice to expand, invest in ancillary services and information technology (including an electronic medical record system), and/or consolidate a market. The capital, plus interest, is repaid to the PPM through a management agreement.

The PPM runs the day-to-day business operations of the practice, and physicians are solely responsible for the clinical aspects. Each physician typically has an employment agreement with the practice that includes non-competition and non-solicitation provisions, to the extent they are permissible by law. Many states have statutes or case law that limit the enforceability of physician non-competes. The laws of each state must be analyzed to determine whether any non-compete is enforceable.

The PPM is paid a management fee in addition to being reimbursed for its costs. The amount of the fee depends upon the structure of the relationship, as well as the services provided by the PPM. In the original practice management model, the PPM also acquired, in exchange for a fair market value purchase price and to be paid as part of its management fee, a percentage of the profits of the practice before physician compensation ("Profit Share"). The Profit Share structure included in the first generation of physician practice management arrangements is the principal reason the industry failed.

Why the Industry Failed in the Past
In the late 1980s and early 1990s, first-generation physician practice management companies like PhyCor and MedPartners used a model in which the typical management fee consisted of the following:

  1. Reimbursement of the PPM's cost of providing the assets and personnel to the practice
  2. Profit Share of 15% of the practice's profit before physician compensation
  3. Up to 50% of any profits recognized by the practice as a result of new ancillary services financed by the PPM and any "profit" resulting from capitated HMO products.

The PPMs not only paid the practice for the tangible assets acquired and, in effect, leased them back to the practice through the management agreement, but also paid the practice a multiple of projected Profit Share. A portion of the purchase price was paid at closing, and the balance was typically paid over a two- to three-year period to prevent any decline in physician compensation during that time.

The model assumed that the overall profitability of the practice would grow under the revised management structure so that the physician's compensation would not decline even after payment of the Profit Share. The assumption of practice profitability growth was initially built on the theory that all healthcare expenditures would ultimately be on a capitated model. However, the healthcare delivery system did not, except in California, evolve to a capitated model.

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