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Selecting a Market Driven Physician Network Structure
Selecting a Market Driven Physician Network Structure

Richard Krohn
Across the country, in markets large and small, urban and rural, physicians are executing managed care strategies aimed at reasserting their economic and clinical strength. Most commonly, these strategies focus on the creation of a local or regional physician network, based upon the principle of strength in numbers, blended with a healthy measure of product excellence. The profile of these physician organizations is a function of market conditions, and generally can be identified by their position along a linear scale of provider integration. This scale spans a range of provider integration, which proceeds from the least intensive (the traditional IPA model) to the cutting edge (the virtual network). Within the boundaries of these two extremes, lies a familiar alphabet soup of network models - the PPO, PHO, MSO, and IGP among others. The trick of course is to select a strategy and a network structure that meets the needs of purchasers, payers, providers, and consumers. The responsibility for developing and executing such a strategy and structure often falls to a core group of leaders, typically identified as the Network Task Force.

Matching the Network to the Market

In attempting to craft a market driven network structure, the network task force must confront a number of "big picture" issues. First, what structure best serves the network's vision and mission, and is most appropriate to the market dynamics of the network's service area? Second, what degree of legal, operational, and financial integration will the network structure demand? Third, what are the organizational components of the network? Fourth, what are the clinical components of the network? Finally, what are the operational characteristics of the network? Clearly, the provider, payer, and purchaser markets are the driving forces in answering these questions. These unique market segments must be evaluated separately and reconciled to the chosen network structure.

In attempting to match a structure to the strategic objectives of the network, the baseline criteria of network capabilities must be clearly established. Illustration 1.3 describes a linear spectrum of network integration defined by a progressive level of formal integration and operational capabilities. Each model in the spectrum answers a specific need, ranging from shared marketing and contracting to full service practice management.

Marketing Models

At the lower end of the integration scale are the traditional PPO and IPA networks, consisting of independent physicians and groups spanning a local or regional market. Participating physicians are served by a separate entity (the PPO or IPA) created to serve as a collective contracting agent. These entities are best suited to young or marginal managed care markets, because they possess weak network infrastructure, little if any selectivity, almost no shared synergies, and limited market clout. Recognizing these limitations, in recent years PPOs and IPAs have evolved into more aggressive contracting and physician service organizations, and are beginning to take on an entirely different look. Within legal limitations, some PPOs and open panel IPAs are offering Third Party Administrator ("TPA") services, credentialling services, and group purchasing services.

Advantages

  • increased contracting leverage for individual physicians
  • a low cost, flexible entry vehicle to physician integration and managed care contracting.
  • easy to gain membership, easy to terminate participation
  • preserves physician autonomy

    Disadvantages

  • limited marketing clout due to lack of integration
  • often specialty dominated and non selective
  • regulatory restrictions discourage meaningful collaboration
  • cost savings are difficult to achieve

    The marketing model has been the most conspicuous physician integration strategy pursued on a national scale, and has proved to be successful among physicians whose aim is to retain control of their practices while gaining the collective benefit of patient volume through collective marketing. This approach also serves as the springboard for further integration of practices and alliances with other provider organizations. This evolution of practice integration occurs through shared information services, shared medical management, shared long-term contracts, and shared practice management services.

    Contract/Services Models

    A more advanced version of the marketing model concept includes the introduction of more aggressive contracting capabilities, consolidation of back office expenditures, and joint venturing with other provider organizations. Still focused primarily on contracting and contract management, the contract/services model seeks to increase marketing leverage by acting as a single signatory for contracting purposes. These models, including the modified messenger IPA and the physician hospital organization (PHO), are separate entities that offer enhanced contract negotiation and management services, and shared back office services (such as billing, claims management, recruiting, marketing, group purchasing, and the like). The PHO introduces an added magnitude of integration, in that it harnesses the collective market clout of physicians and an alliance partner (in this case a hospital or health system).

    Advantages

  • advanced IPAs are attractive wraparound partners for equity model organizations
  • PHOs enhance marketing clout of each joint venture partner
  • for risk contracts, single signature authority
  • consolidation of back office expenditures

    Disadvantages

  • common lack of sophisticated contract and practice management expertise
  • cost savings are difficult to achieve due to lack of clinical integration
  • hospitals tend to dominate PHOs (because they contribute start up capital and management expertise)
  • similar regulatory constraints as those governing the marketing model

    Equity Models

    A new dimension of physician integration occurs when equity becomes a defining feature of the organization. Now, physicians achieve the type of clinical compatibility and share incentives that can be translated into effective practice management. Among physician led equity models, the Group Practice Without Walls (GPWW), the Physician Organization (PO), Physician Equity Model (PEA) are among the most common approaches. Providers have successfully breached the gap between the financing and delivery aspects of healthcare, by launching their own HMOs (the newest twist on this theme is the Provider Service Organization (PSO). In this configuration providers operates the HMO and either comprise or contract with a network of providers The GPWW is the least ambitious approach, in that it creates a consolidated practice entity specifically tasked to assume the business aspects of practice management, without formally integrating the operations of the participating practices. The Physician Organization (also known as an Integrated Group Practice, or IGP) is the professional component, completely physician owned, of a network that may include linkages to an IPA or other physician organizations, a hospital or health system, or a management company. The physician equity alliance is a derivation of this theme, in that physicians form a PO and exchange equity in their practices for equity in a management services organization (MSO). An equity partner (usually a hospital) provides additional start up capital. The MSO (also known as a Professional Practice Management Company, or PPMC) then provides comprehensive practice management services to the PO and community physicians. Alternately, physicians may choose to retain ownership of their practices but contract through and receive management services from the MSO.

    Advantages

  • Equity model organizations tend to be selective and achieve economies of scale and higher clinical quality standards
  • Regulatory statutes favor financially integrated physician organizations
  • a more efficient risk contracting framework
  • attractive to physicians, alliance partners, investors, and payers

    Disadvantages

  • Substantial up?front capital investment
  • loss of practice autonomy
  • complex governance and operations reengineering

    Specialty Network Models

    The Specialty Model network may be defined by clinical affinity or market opportunity. In the broadest setting, multi specialty networks offer a varying range of medical services, based on membership and need. The networks with greater managed care savvy are able to accept higher levels of risk and to manage that risk effectively. Typically, a multi specialty network will contract for a defined range of services, and if necessary, subcontract, or sub?cap covered services in the contract that are beyond internal capabilities or preference.

    Multi specialty and primary care only networks are created to leverage the collective clinical strength of a highly defined physician panel. These networks aim to predominate specific clinical orientations within a defined geography, in the hope of translating this market dominance into more attractive contracting arrangements, cohesive practice quality standards, and operating efficiencies.

    A third type of specialty network is the single specialty carve out. The contracting strategy of the carve out network is to offer specific specialty services, either within a single specialty or among related specialty services. This network tends to be wide in geographic scope, because a central objective is to drive volume through a select cadre of specialty providers, to the exclusion of other providers within the same service area. Again, the effectiveness of the carve out network lies in its ability to manage the financial and utilization components of risk, and its' ability to demonstrate that effectiveness to payers. Currently, the most active areas of carve out risk contracting are in such specialties as behavioral health, ophthalmology, cardiology, orthopedics, oncology, and chronic care. On a more limited scale, specialty networks have signed capitation contracts in areas such as catastrophic care, urology, ENT, and podiatry.

    Advantages

  • strong physician bonding and managed care compatibility
  • selectivity and strong medical management capabilities
  • ability to establish common practice cultures and operating efficiencies
  • ability to attract managed care contracts
  • ability to select providers and manage contracts efficiently

    Disadvantages

  • substantial startup costs
  • encourages exclusivity and physician cliques

    Employment Models

    Physician employment by large national PPMCs has been a fashionable trend in physician organizational development during recent years, sparking the meteoric rise, and equally meteoric decline, of many publicly traded companies. Although often not majority physician owned or governed if properly executed these organizations do effectively market physician networks and have been successful in wringing out excess cost and introducing sophisticated practice management and medical management processes that aid physicians in capturing and maintaining market share. Many physicians have been drawn to this option by the market clout such organizations possess, the practice management functions that are assumed by such organizations, and the upside potential of partial ownership (should they choose to accept stock in exchange for the value of their practice) of these rapid growth companies. Physicians are also responding to pressures resulting from income erosion under managed care, the need to manage risk, and the prospects of increased contracting leverage and off?loading of non-medical activities. Recent experience of the PPMCs has cast strong doubt about the sustainability of this model as a principle driver of physician integration.

    The Medical Foundation is a provider driven strategy that may include employment of physicians. In Corporate Practice of Medicine States, a Medical Foundation serves as a device by which a non-profit hospital may create a captive physician network through creation of a non-profit Foundation, which owns practices and serves as the exclusive contracting agent of those practices. A derivative of this strategy is the free standing Medical Foundation, which does not own practices but typically serves as the contracting agent of both practices and a non profit hospital, or a medical clinic, or physician network, again most often as a device to comply with Corporate Practice of Medicine statutes.

    Advantages

  • removes legal obstacles to physician-hospital integration (Foundation model)
  • non profit Foundation model allows access to tax exempt debt
  • physician receives cash and/or stock up front
  • physicians can focus on patient care
  • increased access to contracts
  • stable, fixed operating costs
  • access to sophisticated practice and medical management systems

    Disadvantages

  • often inconsistent business goals of participating entities (Foundation model)
  • loss of practice control
  • physicians don't always transition well to employee status
  • motivation and productivity are continual issues

    Recent market experience suggests that the for- profit employment model is an extremely leaky vessel; the record of hospital ownership of physician practices is equally checkered. In both cases the key failure has been to align the incentives of the participants and to fundamentally alter the economic equation of practice income-expense.

    Virtual Networks

    New technologies are allowing network planners to integrate practices informationally and clinically through the creation of a virtual medical network. By leveraging existing systems and the Internet, the network can establish shared business and clinical services within a reasonable expense budget. The virtual network expands core competencies, encourages growth through provider partnerships, and promotes competitive advantages without excessive capital expenditures or formal organizational consolidation. Initially, such virtual networks tend to offer contract management services such as claims processing and referral management, online eligibility verification, and also offer clinical management services such as demand and disease management programs, shared data warehousing and outcomes development, a secure medical Intranet and email capabilities. The unique advantage of this approach is that network members achieve a high degree of clinical and administrative integration without surrendering significant autonomy ? there is no formal economic integration of the underlying member practices. Equally attractive is the relatively modest capital investment required to launch the virtual network. The full potential of virtual integration has yet to be explored, but interest in the virtual network is growing due to its' practical application of "cutting edge" information technologies in a medical environment.

    Creating a Network Identity

    Faced with a multitude of choices, how do physicians determine the optimal fit of network structure and market demand? Are physicians motivated by a need to preserve autonomy or gain access to contracts? Do physicians want to take advantage of the market appreciation in the value of their practices by forming large, regionally and clinically diverse (or highly specialized) groups? Do physicians want to gain equity in a growth company (ex. a MSO)? Is there a market opportunity to package clinical services such as inpatient/outpatient, or related to specific disease states, in a network setting? What type of network will the market support?

    One of the defining characteristics of any network is its clinical composition. The public image of the network is often a function of its component parts, and the reputation of these individual components transfers directly to the identity of the network. Physician leaders must from the outset determine the optimal clinical parameters of the network. If the network is a physician organization exclusively, which physicians should be invited to join? Should groups and IPAs be targeted? Should the network be an open or closed panel? Should physicians be selected on the basis of credentialing criteria or managed care sophistication?

    For joint venture networks (such as a PHO) how should the network be positioned such that it does not become a captive of the health care institutional partner? Is there truly a shared vision, and is there a significant cultural gap? How will physician leadership be maintained if legal statutes limit physician representation on the PHO Board? How does hospital efficiency (or inefficiency) expressed in both fee for service as well as managed care contracting environments, effect the network's prospects for success?

    For equity models how will the physician organization, wraparound IPA, and management company relate to each other? In which entity does the true decision making authority lie?

    For specialty networks, what is the optimal mix of geographic reach, clinical capacity, and service diversity? How are members selected (and deselected)?

    The network Steering Committee must carefully examine these issues because a misstep at this point will only take on a snowballing effect during the network development process. Once the network has been judged to have made a serious strategic mistake so early in its life, it will be practically impossible to repair the damage to its' public image and restore its credibility among physicians.

    Depending on the services and product to be delivered, the network may establish partnerships with other providers to market a broader range of services to payers and purchasers. For instance, a linkage to primary care is considered fundamental to success as a specialty network, but additional relationships with acute care and ancillary services may also strengthen the marketability of the network. The correct mix and identity of these partners is again a function of the local market, but each partner should possess the same characteristics of efficiency and managed care mentality that define the network itself. Each potential partner should be validated in terms of their risk contracting readiness, service capabilities, culture, and infrastructure.

    Ultimately, the correct network structure is one that not only best matches prevailing market demand, but one that is flexible enough to adapt to a continually maturing health care marketplace. For instance, today's IPA may serve as the springboard of tomorrow's HMO. Successful physician integration is almost always a progressive process - but seldom a regressive one (meaning that a failed group practice is unlikely to serve as the catalyst of an IPA). For this reason it is important to execute a network structure defined by a level of integration that all members will tolerate, in the expectation that further integration can be achieved following a period of shared experience - and shared success.
    ___________________________________________________________

    Richard Krohn is a member and contributor of HealthBond. View his expert page on HealthBond.

    Richard Krohn is President of HealthSense. Krohn is a widely-published managed care expert as well as a dynamic speaker providing in-depth, practical and timely information on topics such as managed care contracting, strategic positioning for provider organizations, building new provider alliances, reengineering practice operations, developing market driven products, and creating equitable physician compensation plans.

    Suggested reading

    Grant, Peter, Health Care Restructuring: Horizontal Consolidation and Vertical Integration, Davis Wright Tremaine, San Francisco, CA.

    Kongstvedt, Peter, The Managed Care Handbook, Aspen Publishers, Gaithersburg, MD.

    Sept. 21, 2000

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