How Physician Practices Can Prepare for a Health Care Marketplace

What is the path forward for physicians who want to remain in private practice, outside the constraints of health system employment? How will the environment change and what new demands will that place on practices and physicians? What follows are the observations of one industry-watcher who has worked on all sides of health care, but who now spends most his time focused on the interests of those who pay for it. No crystal ball, but several trends are clear.

There are now concrete signs that health care’s purchasers are exhausted and seeking new solutions, that a competitive marketplace is emerging and getting increasing traction. As they abandon ineffective approaches, the paradigm that has dominated the industry for the past 50 years will be upended. The financial pressure felt by buyers will transfer to the supply side health industry that has come to take ever more money for granted.

For decades, fee-for-service payment, inclusive health plan networks, and a lack of quality, safety and cost transparency have been enforced by health industry influence over policy, effectively neutralizing the power of market forces.

Without market pressure, physicians have felt little need to understand their own performance relative to that of their peers. The variation of physician practice patterns within specialties has been high, with some physicians’ “optimizing their revenue opportunities” by veering wildly away from evidence-based practice. Even so, until recently in this dysfunctional environment, it has been nearly impossible to identify high and low performers.

The impacts of this variation on cost have been staggering. Health care premiums – where costs throughout the system converge – have grown 4.5x times as fast as general inflation for more than a decade. Over the same period, personal health care expenditures – contributions to premium and out-of-pocket payments – have consumed $4 of every $5 dollars of the growth in household income, and the percentage of working age Americans (and their children) with private coverage fell by 14 percent.

While implementation of the health reform law dominates the health care news, there is little in it that will substantially drive down cost or improve quality, at least in the near term. The much-heralded Accountable Care Organization (ACO) program is still mostly based on fee-for-service reimbursement, allowing the rank and file of health systems to cruise without really changing care and cost patterns.

At the same time, though, a mushrooming cottage industry is dedicated to disrupting the many ways that health care organizations profiteer. Most are within niches – e.g., primary care, evidence-based formularies, chronic disease management, oncology benefits management – but a few have taken a more multi-vectored approach.

One of the most powerful of these mechanisms is the narrow, high performing network. A core tenet here is that “choice” in health care, particularly in the absence of performance information, is a false value. Giving patients’ access to doctors who consistently produce poorer outcomes at higher episodic cost does nobody any favors.

The logical solution is to identify physicians who produce better care at lower episodic cost, then contract with and steer to them. The smart money will also pay them higher rates for excellence.

Evaluating physicians is not difficult. It requires medical/surgical, full continuum regional claims data sets large enough to yield credible patient sample sizes for specific conditions. Snapshots in time or more longitudinal data will do. Analytics can help purchasers zero in on high vs. low performers, so they can steer to the high performers and, just as importantly, avoid the low ones.

My rapidly growing firm – we develop and operate work site primary care medical home clinics that become aggressive medical management platforms for mid-sized and large employers – directly contracts significant cost reductions for a range of services, including drugs, advanced images, ambulatory surgeries and pain management. In the process, we focus on identifying the subset of physicians who are most likely to produce better health at lower episodic cost for our patients.

The point here is that a rapidly growing cadre of sophisticated purchasers – the early adopters are in large corporations but benefits managers in smaller self-insured firms are catching on as well – now realize that buying value requires scrutinizing physicians and other providers. Narrow networks built on this approach are exploding around the country. One firm I recently encountered has developed narrow regional provider networks in 138 markets around the country.  The premium costs of members of Savannah Business Group, a small regional business health coalition that uses data to identify high performing providers and then contracts directly with them, are significantly below those of non-members in the same metroplex.

Last year Walmart contracted with six Centers of Excellence – Mayo, Cleveland, Geisinger, Scott and White, Mercy Springfield and Virginia Mason – for costly heart, spine and transplant procedures. Not only did Walmart get very favorable pricing, but each system agreed to share its protocols, share data associated with the procedures, and work collaboratively on transitions with each patient’s local physicians. Think through the economic impact this one maneuver has had for Walmart, as well as for local health systems, and the power of the approach becomes evident.

Obviously, if purchasers are intent on understanding physician performance, it makes sense for physicians to understand their own as well. Oncology Metrics is a firm that aggregates, analyzes and benchmarks clinical, resource, productivity and financial data from oncology practices around the country. Practices and physicians receive detailed information about how they compare to their colleagues, which provides a basis for understanding what needs improvement. Physicians without access to this kind of information are flying blind in terms of market capability.

The business requirements of becoming market competitive are enormous. Practice efficiencies become critical, so it may make sense to participate in groups and management services organizations that offer shared arrangements on practice management, billing/collections, human resources, health information technologies, group purchasing, and other mission-critical functions. At the same time, better real time sharing of patient information with other physicians becomes essential to care coordination, which in turn can positively impact quality and cost outcomes. And, in an environment that must ultimately move away from fee-for-service to some form of risk, an ability to confidently manage a population of patients within parameters is paramount. Larger practices with more resources are necessary to finance the infrastructure required for this level of management, as well as to facilitate the team-based care that is needed to optimally manage clinical and financial risk.

When markets work, they lavish rewards for excellence and are unforgiving of mediocrity. Look at Toyota and Chevrolet, Google and Hewlett Packard, Costco and JC Penney. Health care has largely evaded the disciplines of the marketplace for decades, at immense cost to American patients and purchasers.

Enough financial pressure has now built that that time appears to be fading. Physicians will succeed who understand that the challenge is as much in business as clinical processes. Those who simply hope for the best probably will not.

Brian Klepper, PhD is an independent health care analyst and Chief Development Officer for WeCare TLC Onsite Clinics. His website,Replace the RUC, provides extensive background on the role that the AMA’s RVS Update Committee has had on America’s health care cost crisis. This essay originally was published in Medscape Connect Care and Cost Blog.

13 replies »

  1. Good write up. But what surprises me most is the current US healthcare system is still largely dependent on the fee-for-service model, in contrast to what the ‘Un-Affordable Care Act’ postulates. I believe Obamacare’s plan to shift to the value-based model will not do enough to reduce healthcare costs and improve the quality of patients’ lives. Additionally, physicians can prepare themselves for any type of market because they are being given the stick from the feds. Let’s hope there is still light at the end of the tunnel after this.

  2. What amazes me in these conversations is that we all look at OECD data to conclude that our system is inefficient, but we choose not to look at how other OECD countries operate in order to produce better efficiency.
    With very minor exceptions, in all developed countries most doctors are paid fee for service. Even in so-called socialist systems like Canada and the UK, primary care is private and small. How on earth did we come up with the notion that fee for service and small independent practice is the root of all evil?

    And by the way in Germany they stent everything that moves, or so it seems, and they still have better expenditure rates. The data in your slides is a bit dated and we have been surpassed in that area (see the latest OECD database or the Commonwealth Fund compilation from 2010 – Multinational Comparisons of Health Systems Data, 2010, Gerard F. Anderson and Patricia Markovich Johns Hopkins University)

    None of the things we are trying to “transform” are different in other countries across the board (see http://onhealthtech.blogspot.com/2013/03/around-primary-care-world-in-80-seconds.html for a primary care comparison), and the things that are different, we label as politically impossible in the US, thus rendering any solution, impossible as well.

  3. Dr. Mike: Please go to this link – https://docs.google.com/viewer?url=http%3A%2F%2Femployerslikeme.org%2Fwp-content%2Fuploads%2F2013%2F03%2FKlepper-ATL-Employers-Like-Me-30613.pdf – which is the PP deck I used to deliver the keynote at last month’s Employers Like Me conference in Atlanta. Slide 3, developed by Jerry Reeves MD, a nationally prominent health plan manager, illustrates a consistent 6x-8x difference in episodic cost to obtain the same outcome for physicians within the same specialty managing specific conditions within a given market. These data came from Vegas, but the principle applies to any market.

    Slide 17, from the International Federation of Health Plans, shows unit pricing for selected common procedures for the US, Britain, Canada, France and Germany, with the US being consistently and exorbitantly higher. Slides 18 and 19 show OECD data on the rates of PCTA and MRI utilization across developed countries. As you can see, the US figures are off the charts. Slide 7, which also uses OECD data to plot lifespan (as a limited surrogate of quality) against health care expenditures per capita show that the US is in the middle of the international pack on quality but more than double the rest of the developed world on cost. In other words, we by far provide the lowest-value health care.

    The explanation you provide – that costs are hidden from consumers – is true, but it only partly explains the problem. In the US, the health care industry has literally captured the regulatory process – the formulation of bills and rules, and the specification of the value of medical services through the AMA’s Relative Value Scale Update Committee (RUC). (See http://www.replacetheruc.net). You may be aware that 6 Augusta, GA primary care physicians recently lost a lawsuit against CMS and HHS that argued that the defendants were negligent in failing to require the RUC, a de facto Federal Advisory Committee, to adhere to the public interest requirements of the Federal Advisory Committee Act. Both the district and appeals courts ruled that that the law in question was beyond the jurisdiction of the courts and could only be addressed by Congress, so the merits of the content of the case could not be considered.

    It is not merely that fee-for-service reimbursement is opaque rather than transparent to consumers. Egregious unit pricing is also in the interests of payors (i.e., health plans), who often make a percentage margin on total health care expenditures. My onsite clinic/medical management firm routinely buys generic drugs, lab services, advanced images, pain management services, dialysis services, ambulatory surgeries and a host of other health care products/services for a fraction (25%-60%) of what our clients buy them for.

    The pricing is one problem, but the utilization is another. Exorbitant pricing, promoted through distorted RVU values generated through the RUC’s lobbying process, make certain procedures extremely lucrative, and facilitate tremendous utilization. Data published several years ago in Health Affairs showed that a high percentage of community oncologists delivered chemo-therapies that veered away from the more-evidence based treatments delivered by academic oncologists, favoring agents that produced a higher margin. An otherwise unexplainable 15x increase in complex spinal surgeries between 2002-2007 was associated with nothing other than reimbursement (see http://www.ncbi.nlm.nih.gov/pubmed/20371784).

    There is a large literature here, with example after example. As I’ve described in detail in many articles, the health care cost crisis is rooted in a combination of fee-for-service reimbursement; a lack of quality, safety and cost transparency; and the subjugation of primary care. A variety of mechanisms abet these larger structures, but all are also reinforced by the industry’s capture of the nation’s legal and regulatory framework.

    It is not as simple as “giving patients more skin in the game,” because so much of the health care cost machinery is embedded in law and rule, and driven by levers other than patients. The current primary care visit duration of 7.5-12.0 minutes, down from 20-25 minutes 30 years ago, is a function of valuing by the RUC, with the complicity of health plans that have continued, despite overwhelming evidence (see Barbara Starfield’s work) that empowered primary care results in better quality at lower cost, to pay primary care physicians only for visits. Rushed visits mitigate against complexity, and so the rate of referrals to specialists has more than doubled over the past decade (see the January 2012 Archives of Internal Medicine study on this). Traditional complex primary care patients who are now seen by specialists are associated with MUCH higher rates of utilization of diagnostics and procedures, and generate 10x-15x the cost, with higher complication rates associated with the great risk.

    Moving from a fee-for-service reimbursement methodology, which pays physicians and institutions for every product/service they deliver, independent of appropriateness, is an incredibly bad model that has been and continues to be jealously protected by the industry’s lobbies in DC, which is why the ACO reimbursement, originally conceived to be based on risk, has not made the transition yet. In my own firm, we are paid a per patient management fee while passing through the operational costs with no margin. This means that instead of being financially incented to deliver unnecessary care, we are paid to manage the process, an entirely different approach that, in a sane world, would become the norm.

    Hope this is helpful.

  4. Dear sir, could you please explain upon what evidence you based your statement that physician variation has had a staggering impact upon insurance premiums? In considering your response to my first unfortunately worded post, could you enlighten me as to what the stenting rate is when physician variation is eliminated – will it then be the same as in other developed nations? Thank you for in advance for your response.
    Also, I am still confused about the FFS thingy. For example – is a direct pay practice also FFS or is that to be called something else altogether? I would imagine that if we are still to consider it to be a fee paid for service in a direct pay practice, that that implies that the direct pay practice also exhibits egregious unit pricing and delivery of said services independent of appropriateness? For surely it is that fact that a fee was paid that guarantees such a travesty and not the matter of who pays the fee.

  5. Dr. Mike,

    I’m not in the habit of making unsupported statements, or of being accused of making them. I have a long history of writing about health care business – I am the Business of Medicine columnist for Medscape, among other activities – and I have provided many, many examples of what I mean. It is not hyperbole to note that stenting in stable heart patients occurs at 4x in the US what it does in other developed nations, or that orders for advanced images rise 6x among physicians who purchase an advanced imaging device, as the Medicare Payment Advisory Commission documented. Physician orders are one main driver of inappropriate health care costs, and there’s a mountain of evidence to support this.

    It is also reasonable to believe that readers of an expert health care blog like this one have an understanding of FFS reimbursement. I’m not writing for the local paper here. FFS is a mechanism that encourages unbundling of services, egregious unit pricing and the delivery of services independent of appropriateness.

    If you disagree with something I wrote, please be specific and courteous, and I’ll be glad to respond. Calling something ridiculous and making sweeping statements isn’t helpful. If you’d like to have a substantive discussion, please be concrete.

  6. It really detracts from an article when you include misleading statements. To imply that “fee for service” has contributed to a neutralization of market forces is only true when your readers understand what fee for service means, and this should be explained each time as the entire modern world depends on fee for service/goods as the very definition of market forces. It is not the concept of fee for service that is evil in medicine, it is the concept that the consumer of health care services has no influence over the price – unlike what is a very profound influence in almost every other place in the market.

    Also to imply that variations in physician practice have had a staggering impact on insurance premiums is ridiculous. While it certainly does contribute, you could have made your points without hyperbole that borders on outright falsehood. Eliminate all variation and premiums are still likely going to be higher than anywhere else on earth.

    I’m not even disagreeing with your main point, which is valid. Just don’t get there with misstatements.

  7. What a wonderful concise analysis but a little misleading on the lead. Essentially a solo physician / small group practice is on the road to extinction as the costs to be plugged in or take risk are just too high and complex. That aside, the view that these larger healthcare networks or systems, be they narrow or comprehensively broad can compete in a free market capitalistic way is an important concept. It seems that our country can’t understand healthcare unless they see it in terms of our free-market economy. The fact that it hasn’t functioned that way for 50 years is largely missed. We must hope and work toward this transition where providers are at risk and buyers have a choice, as it truly is the solution that fits our country. Of course, it will not happened without the structural changes that come from creating healthcare systems that have the ‘mission critical’ components noted in this essay. Thanks for a great summary.

  8. As most of you know here, one of the latest trends in health care is for large hospital chains and networks to buy up private and independently-owned physician practices. ObamaCare encourages this trend based on the theory that if patients can be seen under a single large healthcare umbrella, be it a chain or network, the quality and continuity of their care will greatly improve. In theory that may be true, but what is most definitely true is that this is causing the cost of health care services to go WAY up. This is mainly due to the fact that hospitals and their affiliated clinics are reimbursed at a much higher rate than private and independently-owned practices are. For instance, an insurance company, be it private or public, will reimburse the cost of an EKG done at a hospital or one of its affiliated clinics at roughly FOUR times the rate compared to what it would if the same EKG was done at a privately owned and operated clinic.

    It’s definitely not the case that a hospital chain/network is better, much less FOUR times better, than a private, independently-owned clinic at performing and interpreting an EKG, or any other test or procedure for that matter. There is no qualitative difference at all between the two EKGs, full stop. But because large hospital chains and networks receive an excessive amount of reimbursement money from the insurance industry as well as get to tack on an outrageously huge so-called “facility fee” to EVERY patient’s bill — something that private practices also can NOT do (see links below) — they use all of this excess reimbursement money to pay for an overly fat and bloated management structure, as well as provide medically-unnecessary services like five-star quality meals and inpatient massage therapy.

    So, I say we make reimbursement rates the same across the board, whether a test or procedure is done at a private, independently-owned clinic or a hospital-owned chain/network, and eliminate “facility fees” being charges to inpatients, as well as outpatients being seen at hospital-affiliated clinics. That way private and independently-owned physician practices will once again be able to compete on a level playing field with hospital chains/networks, which will force hospital chains/networks to cut out a lot of unnecessary costs, from an overly fat and bloated management structure to five-star quality meals and inpatient massage therapy.


  9. The Health Care Marketplace has metamorphosed over the years,there’s no denying it.As such,many physicians are looking at integrating their practice and mutual interdependence,possibly due to the blossoming expectation to adopt costly automated medical record and pharmacy order entry systems,not to mention the pay-for-performance bonus systems by both health insurance companies and government agencies.These require sophisticated care delivery and data reporting systems,costs of which are over the roof for individual practitioners.Hence the need to pool together.