Advantages of Group Practice

Jon Hultman, DPM, MBA

 

Many podiatric physicians in one or two doctor practices are beginning to weigh the pros and cons of expanding to large groups, perhaps, by merging with other practices in their geographic areas.  One driving force behind this movement is the fact that healthcare “experts” continue to promote group practice as the most effective model for negotiating payer contracts.  While this is one good reason for joining or enlarging a group, it should not be the only one.  Before taking the first step in forming or joining a group, you should identify the potential advantages for your practice and make sure that they outweigh the disadvantages.  Because capturing the advantages of a large group is by no means easy or “automatic,” identifying potential advantages ahead of time will give you assurance that, if you do form a group, these will become the goals of the group and all the individual doctors within the group will work together to assure that they are captured. 

 

In the past, doctors worked independently with the focus of their practices relatively straightforward: a doctor “simply” needed to meet the medical needs of his/her patients.  If a profitability problem arose, the “easy fix” was to raise fees.   At the time, fees were fair, billing was simple, patient volume was manageable, and government regulations were few.  Marketing was also simple; if patients were happy with their doctor’s care, a practice would grow through word of mouth.  A one or two doctor practice model worked quite well in this environment, and doctors enjoyed their independence.  In fact, even today, the primary reason that many doctors give for avoiding group practice is that they want to retain their control and independence; yet, how much independence and control do doctors actually have in today’s environment?  Might today’s doctors be able to form groups and still keep this sense of independence and control?

 

Businesses come into existence for two reasons:  1) to meet a need and 2) to make a profit.  If they fail at either, they cease to exist.  This holds true too for medical practices.  Ultimately, doctors utilizing the optimum practice model will be able to provide the best care and also profitably meet the needs of the market.  The healthcare environment facing physicians today is quite different from that of the past described above.  Doctors now must meet not only the medical needs of patients, but also the “needs” of large bureaucracies (such as major employers, large unions, third-party payers, and governmental agencies).  Coping with all of these distractions from patient care, while producing sufficient profitability to maintain a practice, will become an even greater challenge in the future, especially given today’s environment in which fees continue to decline, third party billing is evermore complex, expenses and patient volume continue to escalate, and complying with a growing list of rules and regulations is becoming all but impossible for small practices.  Those planning for the future should take the time now to consider what type of practice model will make the most sense for them in the future.  That model must include effective means for negotiating payer contracts, meeting “quality” benchmarks, and utilizing electronic health records in a collaborative manner – one that meets “meaningful use” standards – while positioning for a future that seeks to reduce the number of medical errors, eliminate duplicate tests and unnecessary care, and reward doctors for “quality of care” rather than “quantity of care.”  A group model can facilitate a practice’s ability to meet these challenges, and the ideal model will facilitate both the delivery of higher quality care and greater profitability.

 

Size influences the effectiveness of a medical practice in much the same way that it influences the effectiveness of any type of business.  Each business “size” enjoys certain advantages and disadvantages in the marketplace.  Traditionally, small businesses compensate for a lack of available capital by being more flexible, offering more personalized service, and being capable of making faster decisions and moving more quickly on opportunities.  Also, they are often able to command a higher price for their personalized services.  Traditionally, larger businesses have tended to move more slowly, but their greater access to capital has enabled them to invest more heavily in equipment and information technology, pay for qualified employees, and spend more dollars on marketing and advertising services.  The best large, high volume businesses, which utilized improved business processes to achieve economies of scale, were able to decrease costs while improving quality and offering a wider array of services.  Today, innovative business processes, combined with the more effective use of information technology (which has become more affordable), is blurring the lines between large and small businesses – allowing larger businesses to maintain their traditional advantages while also capturing the advantages of smaller ones – quicker response and greater flexibility.

 

Based on my experience in working with practices of all sizes, doctors practicing in podiatric groups – especially those of six or more, well trained, hard working doctors – typically are able to leverage the group’s efficiencies and earn substantially above the average income reported in the profession.  This advantage alone presents a compelling reason for DPMs to look closely at forming or joining groups.  With improved business processes and greater efficiencies, I expect future group models to leverage their existing advantages even more, increasing their ability to profitably meet the needs of patients, payers, employers, and government agencies alike.  The advantages which larger groups are able to leverage include the following:  1) negotiating clout, 2) efficiencies, 3) array of services, 4) patient access, 5) access to capital, 6), marketing, 7) managing partners, 8) ancillary income, 9) corporate benefits, and 10) exit strategies.

 

Negotiating Clout

It is widely recognized that third party payers prefer to work with larger groups.  It is more efficient for them to negotiate with entities representing a large number of providers; however, this advantage is frequently offset by groups that are unable to control quality at all practice locations.  Effective quality management is especially difficult for IPAs and PPOs composed of independent practitioners who have come together strictly for the purpose of negotiating contracts.  Larger groups will be more successful at negotiating better paying contracts if they integrate operations and electronic medical records, thereby enabling them to measure quality of care, set benchmarks, and manage more effectively.  Because the delivery of better quality translates to improved outcomes for patients, with accompanying savings for third party payers, these larger groups will be able to secure improved contracts; they will be rewarded because they are delivering greater value.  These groups will also be achieving higher patient satisfaction – a critical factor for future success when re-negotiating contracts.  Larger groups also enjoy similar negotiating clout when meeting with vendors to set the price and terms for any industry product and/or service. 

 

Efficiencies

Typically, the larger an entity, the greater are its opportunities for leveraging the benefits associated with improvements in efficiency.  In the past, many businesses referred to improving their efficiency as achieving “economies of scale” – something mostly focused on reducing the per-unit cost of production.  With the integration of quality management tools and today’s technology, efficiency improvement is able to simultaneously improve both quality and productivity, while lowering costs.  The challenge lies in recognizing that efficiency improvement does not occur automatically just because a group is large; it takes a strong commitment on the part of the individual physicians in a group to rigidly adhere to the scientific principles necessary for achieving greater efficiency and quality.

 

Because medical practices are classic examples of the “high fixed cost” economic model, they capture an additional advantage through the formation of large groups.  Costs considered “fixed” are those unaffected by increases or decreases in volume – ones that remain constant, no matter how “busy” a practice is – and these are high in a medical practice.  Fixed costs include items such as rent, salaries, and malpractice insurance.  They account for the majority of a medical practice’s overhead.  Efficiencies, in the form of improved throughput, enable the large volume of a group practice to be spread over existing fixed costs, providing an advantage over the small or solo practitioner model with its smaller volume.  As patient volume and/or the number of services increase, the greatest percentage of costs remain constant, and a large portion of the additional revenue produced is captured as profit.  The net effect is that, the greater the volume of services, the more the overhead percentage drops, without costs being cut – resulting in a higher profit margin for all group partners.

 

Service Array

A group can offer a wider array of services than a one or two doctor practice.  No podiatric physician is interested in every aspect of practice, and no one is good at everything.  A group offers doctors the opportunity to focus on the areas they most enjoy and at which they are most skilled.  Each doctor brings his/her particular skills to the group and creates a new resource for referrals in his/her area of specialization.  Larger practices are in an enhanced position to attract new associates with unique skills and can more easily subsidize these associates’ salaries through the transition period required for them to build their own referrals and become capable of financially supporting both their salaries and overhead.  If a practice is lacking a specific service, whether it be wound care, sports medicine, rear foot surgery, or nursing home care, an opportunity exists for a new area of growth to be developed.  For some practices, this could include bringing in a specialist other than a DPM to offer medical or surgical services in areas complimentary to podiatric practice. 

 

A complete array of services makes a group practice a “one stop shop,” with experts who are able to handle any type of lower extremity problem that might be presented.  This is not only attractive to patients but also leverages the group’s marketing and contract negotiating opportunities.  Also, the ability to collaborate with peers within the group – to get a quick second opinion from someone with specific expertise on a difficult case – is something that makes practice more enjoyable for the doctors within the group and is a tremendous benefit for the patients.

 

Patient Access

The inability to gain quick access to a practice is one of the most common patient complaints and has accounted for the failure of many HMOs.  A well-managed, large, group practice is able to provide quicker access because it can offer an alternate doctor who is not fully booked when the patient’s “regular” doctor is unavailable.  For example, when a member doctor takes time off for vacation, or to attend a seminar, his/her patients can still be appointed, with no backlog building while s/he is gone.  Multi-location groups provide the additional convenience of nearby locales.  Larger groups are also able to expand capacity and improve access even further because they have the personnel to cover part-time, off-site, specialty clinics, such as wound care or sports medicine.  Specific conditions or patient types can be handled more efficiently in this type of specialized “venue” in which patients with similar conditions are seen in large numbers at one location.  All of these advantages which enable quicker access allow patients to be seen at the time they are most motivated, and this leads to practice growth.  This easy access, enabled by the large group model, offers a strategic advantage which is difficult for solo practitioners to duplicate.

 

Capital Availability

Many opportunities require a capital investment in space and/or equipment, and groups have always had an advantage in this area.  Their more immediate access to capital has enabled them to grow, increase space, add locations, invest in equipment, and move quickly on new opportunities.  Initially, physician practice management companies that purchased practices and formed large groups justified a need for their services with the promise that they would invest for the groups in the sophisticated information technology necessary for collaborating and capturing group efficiencies; however, they often did not follow through on these promises.  With today’s lower prices for sophisticated information technology, group practices themselves can invest in and fully implement the information systems necessary to the success of their practices.

 

Marketing

Larger groups have a significant marketing advantage.  This is due in large part to three factors:  enhanced visibility, the opportunity to pool resources for the purposes of PR and advertising, and the ability to leverage reputation.  Larger groups, whether at single or multiple locations, attract more attention because of their increased visibility.  While this is advantageous to any specialty, greater visibility is especially advantageous to podiatric groups due to the fact that the majority of potential new podiatric patients attempt to self-treat.  They often do so because they are unaware of what specialist it is that treats the lower extremity.  In addition to visibility, pooling advertising dollars offers a significant advantage.  For example, a solo practitioner might invest $15,000 a year in phone book and newspaper ads – which accomplish very little.  Investing this same amount, per doctor, provides a ten-doctor group with a $150,000 budget – one which can produce wide exposure through radio or television spots.  Generally, too, if some of the doctors in a group are well known and enjoy good reputations in the community, their reputations are “transferred” to the other doctors in their groups – a particular advantage for new practitioners. 

 

Managing Partner

Many doctors are either unskilled at business management or do not enjoy it.  They prefer to practice medicine exclusively but are “forced” into business management.  Of necessity, solo practitioners must be competent business managers in order for their practices to survive.  Group practices, on the other hand, often have at least one member doctor who has a specific interest in management and is accomplished at it.  This benefits all doctors in the group.  Larger practices can even afford to support the efforts of a managing partner by reducing his/her patient care hours, assisting him/her by hiring a fulltime manager, and utilizing the services of consultants and advisors at times when specific types of expertise are needed (such as expertise in HR, compliance, coding, electronic medical record technology, or process improvement). 

 

Ancillary Income

Groups are better able to absorb the financial risks involved in developing sources of ancillary income (such as ambulatory surgery centers or physical therapy services) or in purchasing income producing diagnostic equipment (such as MRI or ultrasound).  Groups typically have sufficient volume to reduce the financial risk associated with such ventures.  Ancillary services can also be provided more efficiently by a group, making them more cost effective.  A multitude of ancillary opportunities exist in podiatric medicine, but because of their cost and patient volume requirements, it is difficult for one or two-doctor practices to participate in these opportunities.

 

“Corporate” Benefits

One significant reason many doctors choose to be part of a group is that they want benefits similar to those a corporation can provide, benefits which enable them to have personal lives.  These include: regular hours, paid vacations, call coverage, sick leave, health insurance, and retirement plans.  As stated above, many doctors dislike the headaches and responsibility associated with management duties, and a group can have a managing partner who handles these.  A group practice can provide doctors with many of the same benefits that the large corporation provides its employees, while allowing them to still maintain more control over their future than the typical corporate employee.

 

Exit Strategy

Another advantage of the group structure is that it provides an exit strategy when a doctor is ready to retire.  Because doctors in a group have the option of ownership, they can sell their partnership interest at retirement – something which is typically more difficult for doctors in smaller practices to accomplish.  For doctors in a two or three doctor practice, it is often a financial hardship to buy-out the ownership interest of a retiring partner; however, in a large group where a buy-out is spread over ten or twenty doctors, the hardship for each member is greatly reduced.  Also, even though the group may have a pension plan, it is an advantage for the retiring partner to be able to retain some of the equity s/he has built in practice over a long career.

 

The ten advantages of belonging to a group discussed above can all be employed in various degrees by podiatric groups.  Established groups are gaining significant revenue advantages and are well positioned to develop systems capable of achieving the full cost efficiencies and quality advantages that merging can offer.  Podiatric groups are already up and on the “group learning curve,” evolving towards the “ultimate group model” – one capable of maximizing quality and revenue and minimizing expense. 

 

There are a multitude of good reasons for practitioners to form or join groups, and the incentives for doing so will become even more compelling in the future.  Given that the majority of podiatric physicians are currently in solo or two-to-three doctor practices, the starting point for group formation offers a challenge.  This process can be slow and arduous, requiring the resolution of business, technical, and “human” issues.  One of the most challenging “human” issues is group decision making.  To better understand the dynamics of this process and, thereby, avoid a few potential pitfalls, please refer to my article on the last page of this issue entitled, “Avoiding the Pitfalls of Group Decision Making.”