Does it pay to own a physician group practice? For many hospitals and health systems that acquired physician practices in the 1990s, the answer seemed to be “no”; many divested physician groups that failed to meet financial performance expectations.

But not all. Many health systems, reluctant to give up on a strategy in which they already invested so much time and money, found ways to make the strategy work. One such system, MultiCare Health System (MHS) in Tacoma, Wash., entrusted its physician group, MultiCare Medical Group (MMG), with ownership of the financial turnaround challenge and was amply rewarded for its trust.

MMG was formed by the merger of several mature practices and independent practitioners in the core service area of Pierce County and adjacent south King County. MHS acquired MMG not only as a strategy to meet the challenges of looming capitated managed care and rapidly diminishing public payer resources, but also to preserve the health system’s referral base. Like similar ventures across the land, a hospital departmental structure was established to administer the new group.

Initially, MMG appeared to thrive. Favorable managed care contracts were negotiated and shared risk surpluses were distributed to the physicians and MHS. The group continued to expand until 2000. In 1998-99, an integrated outpatient electronic health record and a practice management system were implemented, replacing paper charts and three legacy practice management systems. The medical group began monitoring care quality in earnest using the clinical information system, and significant outcome improvements were documented.

Growing Storm Clouds

As operations matured and marketplace economics worsened, MMG faced growing operating and governance challenges.

In becoming a hospital department, the medical group relinquished direct control over its financial and billing operations to the hospital’s finance and billing departments. Support services that the physicians had previously provided for themselves were taken over by hospital departments with little practical experience in physician office nuances. Along with these services came allocated health system costs that the practice could not bear.

Traditional sources of ancillary revenue, such as group-owned laboratory and imaging services, were accounted for in the respective hospital service lines rather than being attributed to the medical group. This approach to accounting removed 15 to 30 percent of practice revenue and guaranteed a loss from operations.

Accounting for the merged practices was changed from traditional cash based accounting, which had made sense to the physicians in the day-to-day management of their private practices, to an accrual-based accounting system that the physicians found difficult to apply. Differences in practice culture across the region and in original practice purchase contracts caused the employed physicians to become mistrustful of MHS and question its approach to management.

Finally, reporting of practice operations was taken over by the overall hospital department financials, and the physicians were essentially flying blind in terms of understanding and controlling practice costs.

The Impetus for Change

Nationally, hospital margins suffered early in the new millennium, and MHS’s margin was no exception. Facing declining managed care and public payer reimbursement and poorly performing stock-market investments, the health system’s board focused on clinical components that showed operating losses. The medical group attracted the board’s attention because of the size of the perceived loss and uncertainty as to the value of the medical group to the system.

About the same time, Washington was entering a crisis period in medical practice payment that continues today. Several large practices failed or downsized. Specialists fled the state. Recruitment of new providers became increasingly difficult. Physicians, especially proceduralists, started searching for other revenue streams to offset diminishing compensation.

When MMG began burning through MHS’s cash reserves, the boards and senior management of the health system and the group were motivated to find a lasting solution to the problem.

Focusing on a Financial Turnaround

At the start of the turnaround process, all parties realized that the best approach lay in vesting the group with a degree of self-determination and control, and in having the physicians hold themselves accountable for clinical and business outcomes.

Although there was some physician resistance to this approach, the majority of the physicians and their leadership opted for assuming responsibility for improving medical group performance. The physicians clearly understood the advantages of continued access to health system electronic integration and collaboration versus disintegration and direct competition. The CEO and the board of the health system also understood the importance of the employed medical group to achieving the vision of integrated care they had energetically sponsored over the years.