With the changing environment for medical practice, physician practice models will continue to evolve. These “supergoups” create economies of scale, but their advantage is not only in the traditional economic sense. Practices with enough size are able to better meet the challenges of medical practice with increasing regulatory demands, explosion of clinical knowledge, quality and information technology initiatives, and an increasingly tight labor market. Smaller practices can adapt some of these strategies selectively. Depending on the topic, smaller practices should think differently about how to approach the challenges of practice.
Over the last several years, there has been an increasing consolidation of physician practices in general, and urology has been no exception. Although many of these consolidations or mergers have been between two small practices, others have involved the creation of previously not seen urology groups covering large geographic areas as the result of a merger of many practices. These “supergroups” have varied from in size from 20 to 50 urologists. What defines a supergroup? The simple definition may be a group of urologists who can expand the line of services well beyond traditional urologic practice. These groups create value in two large categories: horizontal and vertical integration. Horizontal integration combines existing practices in the activities of traditional physician practice. Vertical integration refers to the addition of services to customers that are likely a natural extension of the conventional activities.
What are economies of scale? In simple economic terms, the term means a decreasing cost of production as the number of units made increases. It also can refer to the decreasing cost of an activity as the scale of an activity (ie, marketing or distribution) increases. Does the formation of supergroups produce economies of scale? Is that the reason to merge practices? If not, what is the value proposition? If so, how often are groups successful? Why has this activity increased significantly over the last 5 years?
By way of introduction, advising physicians to merge for economies of scale in a true economic sense is wrong. The prize is not cutting overhead the way a physician might traditionally think but improving management and enhancing revenue. Typically the model is to merge practices into a single entity, but physicians often do not consolidate their offices. There are areas in which money can be saved: sharing a management information system, electronic medical records (EMRs), or administrator at a level that each group could not afford individually. These are economies of scale, but most physicians think of economies of scale as overall cost reductions. Overall, total costs generally go up but the benefits from these cost increases come from improved billing and collection performance, coding, better management of personnel, human resources, HIPPA compliance, and information technology.
Increased size strengthens the group practice’s negotiating position with hospitals, employers, insurance companies, managed care organizations, and other third-party payers. This development may enable a physician to participate with a third-party payer who had not even considered contracting with the physician or smaller group before the practice merger. As information related to patient satisfaction, peer review, quality assurance, and use management becomes more important, practices that have these data available have a better chance of succeeding. This also makes the merged group more attractive to such payers, possibly enabling physicians to obtain better payment rates than they received before the merger. Forming a larger group practice enables merged practices to maintain or strengthen their market share in the area. The merged practice is able to offer more full-service care and greater continuity of care for patients. The size of a larger group enables the physicians within the practice to provide better coverage for one another in a more cost-efficient manner. The resources that a larger group possesses may allow the physicians within the merged group to attain goals and advance their practices beyond what would have been attainable before the merger. The increased financial resources of the group may allow the group to purchase major medical equipment, recruit greater expertise in management, offer additional ancillary services, and recruit additional physicians.
This article covers the following topics and elaborates on the general thoughts mentioned previously:
External forces driving mergers
Organizational goals and structure
Categories of economies of scale
Business operational activities
Horizontal integration
Resources and knowledge
Information technology and quality improvement
Vertical integration
What are the external forces driving merger activity?
To most practicing physicians, the answer to this question is apparent. Urologists may differ, however, as to which of the many forces is the most important to encourage merger for their group or them personally. I discuss these drivers in no specific order, but all have been cited as a reason for this activity.
Decreasing reimbursement from the federal government is clearly one of the primary drivers. Over the last 5 years, physicians essentially have seen no increase in payments, which turns to a negative because expenses continue to rise. Commercial rates are often pegged to federal (Medicare) reimbursement. Several years ago, physicians also experienced a decrease in reimbursement for pharmaceutical purchases and dispensing of in-office medications for chemotherapy, taking away a source of profit that subsidized complicated cancer care. Third-party commercial reimbursement trends have varied depending on region of the country, so it is hard to make any sweeping statements.
For urologists, a second important driver has been the manpower shortage: it is difficult to recruit new partners. This shortage has been created by the surge in demand from the aging of the population and our different practice patterns. New diagnostic tests and new treatments for old problems have increased the workload for urologists. Two simple examples are (1) the increasing number of radical prostatectomies being done currently compared with 10 to 15 years ago with the increase in prostate-specific antigen testing and (2) the increase in female incontinence procedures with improvements in results and patient morbidity. Finally, some speculate that because of the increase in “hassle factor” of practice, physicians are retiring earlier.
A third driver is the increasing complexity of urologic practice from a business and clinical perspective. On the business side, physicians have tried to improve the running of their practices by becoming more involved. This task has become more difficult, however, in the setting of the increasing burden of keeping up with federal and third-party contracting issues, the “alphabet soup” of unfunded mandates from regulations (ie, HIPPAA and others), and the need for information technology in a background of flat reimbursement and the physician’s desire to do more clinically. On the clinical side, the definition of a full-service urologic practice has changed with the trend to subspecialization either after fellowship training or based on area of interest; most physicians realize it is hard to be good at everything! With subspecialization, many physicians prefer to have a colleague who also subspecializes—an additional driver to a larger size.
Fourth, physicians from all specialties—especially urologists—have realized the practice benefit of vertical integration. With flat reimbursement and increasing inefficiencies at many hospitals secondary to their own problems, many urologists try to avoid going to the hospital unless absolutely necessary. Simply said, they are much more efficient in their own offices, and because of improvements in treatment options, more procedures can be done through office-based or medical-based therapies.
Finally, I often ask physicians if, knowing what they know about medical practice today, they would create a model of a one- or two-person group. Although not universal, most people say that the status quo is not sustainable without some significant changes to scope of practice or income.
Organizational goals and structure
Over the years, many different legal structures have been discussed as alternatives to complete merger. Although a detailed discussion is beyond the scope of this article, large groups usually create one legal entity with consolidated business operations and different operating divisions. Ultimately, the correct structure accomplishes a balance to allow the discipline for developing and implementing a group strategy while preserving appropriate physician or divisional autonomy. In other words, centralize what adds value but leave flexibility for local decisions that do not affect the entire group. To further explain these thoughts, some examples may help.
Because compensation is a way to drive behavior, many groups leave physician compensation to the divisional structure. Often, some significant percentage might be tied to individual productivity. Any compensation derived from central services such as imaging or laboratory testing is often divided based on number of physicians rather than referral volume, however. To be successful, programmatic development should occur with a group perspective in mind. As the program is implemented, many divisional issues may occur around logistics, such as schedules and operational support by divisional staff. All parts of the large group need to work together to ensure success rather than evolve into blaming “them” for the problem. In this situation, “them” is actually “us.” Finally, what about implementing an EMR? This is clearly a group decision that affects divisional operations. To be successful, all physicians need to meet a minimum standard of adoption so that the group can achieve their objectives likely around quality of care and cost savings to pay for the implementation.
What about economies of scale? Can an organizational structure support this premise? The answer is yes. With more physicians supporting a central structure, the group can decide which services it wants to bring inside versus what services it wants to outsource. For example, do you need a chief financial officer? Should you have a bookkeeper and have an accounting firm on retainer? The latter construct is a good example of employing the less expensive worker who is doing a significant amount of work and having a contract with the higher priced expertise, the certified public accountant whose time is needed on a more limited basis. Cost comes from underemploying an expensive resource; however, employing a group of certified medical coders who work in your central business office is a good example of a valuable in-house service. What about an administrator? A larger group can afford a more sophisticated, experienced, and professional manager who can more than pay for the position and not cost more on a per physician basis than the cost for a less experienced person in a smaller group. The person easily pays for the position through managing the many issues that develop as a larger group forms, develops, and refines a strategy in the ever-changing health care environment.
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