Merging for Success

In November 2002, the CEOs of five sizeable Massachusetts medical practices - normally competitors for patients and managed-care contracts - got together to talk about business. As Harvard Vanguard Medical Associates CEO Kenneth Paulus recalls, all were looking for ways to manage what had become a “very difficult and complex healthcare market. We were meeting to see what we could do to survive, basically.”

Eighteen months later, Harvard Vanguard and three other groups merged to form one of the largest multispecialty physician groups in the eastern Massachusetts market. And Paulus is in a position to navigate instead of being pushed by the flow.

Thanks to troubling business issues that all practices face - rising costs, limited access to capital, failing negotiating clout with health plans, and uncertain reimbursement levels - Paulus thinks more practices will soon be following Harvard Vanguard’s lead. Forming larger multispecialty practices, he says, is going to become an emerging trend.

Why not merge?

Large group mergers, notes Ryan O’Connor, vice president of membership for the American Medical Group Association, based in Alexandria, Va., have been rare in recent years. “We haven’t seen this trend [to large, multispecialty practices] as active as it was in the late ’90s,” he says.

The reasons have been cultural, not economic. As practice management companies acquired and combined practices, operations tended to flounder when they reached somewhere around 200 physicians. “The culture of group practice is very tough,” O’Connor points out. It can be undermined by a disconnect that often occurs between professional managers - who become indispensable as practices grow - and physicians.

While physicians are concerned about delivering care, managers, by necessity, focus on operational controls. The two interests can and do conflict. Then, too, there are compensation issues in multispecialty practices. A primary-care provider in a large practice might not make as much as a specialist; resentments can fester.

The most successful multispecialty practices, Paulus says, have deliberately collaborative cultures. O’Connor likens it to “the symphony orchestra versus the bowling team. On the bowling team,” he says, “everybody wears the same color shirt, but everyone is really bowling for their individual, highest possible score. In an orchestra, everyone’s working for the greater good of the group.” Orchestras, he adds, are significantly harder to operate than bowling teams, and not a few orchestral practices have given up in recent years.

So while many practices “are still very much in a growth mode, they’re usually looking to grow by one or two physicians at a time,” says O’Connor.

But by 2002, Harvard Vanguard and its three new partners - formerly known as South Shore Medical Center, Southboro Medical Group, and Dedham Medical Associates - decided they needed to pick up the pace.

“It was more of a compilation of pressures that every single physicians’ group operates under: increasing malpractice rates, low reimbursements, the increasing costs of doing business, and the need to invest in new technology,” Paulus says.

“When you put all that together,” merging began to make sense to the prospective partners.

Finding the funds

Executives from five physician groups met in part “to get to know each other” and in part, says Paulus, “to consider what, if anything, we could do together to put our groups in a better place.” As talks heated up, one group dropped out, deciding they were “not ready to … change their organizational structure and independence,” according to Paulus.

Harvard Vanguard itself had a long history of aggressively changing shape as market conditions changed. Founded as Harvard Community Health Plan in 1969, it merged with Pilgrim Health Care to form the largest HMO in New England in 1995. Two years later, it reorganized as a separate nonprofit with a new name, Harvard Vanguard, to run 14 multispecialty health centers. In the years since, it has refashioned itself to own and operate pharmacies in order to negotiate directly with pharmaceutical companies for the best prices.

Getting the best managed-care contract, supply, and insurance prices, it turned out, also seemed to demand size. And for the smaller practices and for Harvard Vanguard itself, equipment demands remained high. One of the partners - Dedham Medical Associates, an 80-provider practice, estimated it would need to spend $7 million during the next seven years to implement an electronic medical records system on its own.

Coming up with that kind of money is a challenge, to say the least. Most businesses, of course, borrow to finance big purchases, using their inventories, accounts receivable, and assets as collateral. Physician practices, however, usually have no inventories to borrow against, their receivables are often subject to the vagaries of reimbursement policies, and their biggest assets (usually real estate) are often held in the names of individual partners, not the practice.

 Banks do loan money to groups, but usually only up to the individual physician’s credit limit or enough to buy something tangible, like real estate - not quickly depreciating software.

Until recently, capital for expansion often came from nonbank sources. In the late ’90s, physician management companies provided it, but when the management companies collapsed, small practices’ ability to borrow money dried up.

Before that, hospitals provided some capital, or even technology, as they acquired and tried to integrate medical practices into their systems. But that model, Paulus says, “didn’t work. [Hospitals and physician practices] are two different lines of business. Each is very important to the healthcare system. But they don’t need to own each other.”

All of which has left physician groups without ready sources of money for expansion. “More and more,” O’Connor points out, “medical groups are struggling to get access to capital.”

The Boston groups ultimately determined that getting bigger - this time by combining with other physicians, not necessarily hospitals or management companies - would help.

Success at hand

So far, the strategy seems to be working. In the first three months after the merger was announced - in April 2004 -Paulus reports, “we’ve lowered our malpractice costs by pooling across a larger population of physicians. We’ve been able to control some administrative costs by sharing them, and have moved forward with sharing [information technology] costs. On the contracting front, we can more closely mirror the marketplace [for managed-care services].”

Paulus is confident he can avoid some of the “bowling team” problems that have afflicted other multispecialty practices.

“We haven’t had the [compensation] problem yet. C ompensation here is based on a productivity model, so the structure is transparent to all. And, look, specialists make more money,” says Paulus.

Weaving the combined practice together, he adds, will take time and effort. But he says he’s certain the combination gives his physicians powerful tools not only to deflect accelerating market pressures, but to achieve a more rewarding professional life.

Bill Sonn can be reached at editor@physicianspractice.com.

This article originally appeared in the October 2004 issue of Physicians Practice.