How Physician Practices Can Prepare for a Health Care Marketplace

Brian Klepper

Posted 4/21/13 on Medscape Connect’s Care and Cost Blog

BK 711What 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.

6 thoughts on “How Physician Practices Can Prepare for a Health Care Marketplace

  1. I find it funny that when third parties such as insurers, government, and other organizations got a foothold in healthcare, costs exploded. Prior to third party involvement costs were contained in a freer market. I did not say free, but freer.

    My point is that the more third party involvement in the doctor-patient relationship, the higher the cost, regardless of whether the patient or a third party pays. The corporatization of healthcare is the primary cause of healthcare inflation, with the blessing of the government.

    Third party bureaucracies, corporations, insurers and govt all have their hand in the healthcare pie. That pie has now become enormous. It’s time to shrink the pie. Healthcare must go on a diet. First to go should be the third parties.

    Mr. Klepper. You may have an organization that saves money for the present healthcare system. But 30 years ago you would have been saving money for other corporate clients in an entirely different industry. Your work and ideas are valid, but the healthcare system would be better served with the insurance system of 40 years ago, coupled with HSA’s and assistance for those that need it by government HSA’s and charity care from local communities, hospitals, physicians and religious organizations.

    Just my two cents, or perhaps a quarters worth ; )

  2. DoctorSH: You get no argument from me about everyone in health care driving up cost. That said, it is not only disingenuous but a distortion of history to assert that other interests are responsible while physicians stood by innocently. As I’ve documented in great detail on this blog over time, physicians have been in the greed line and are culpable just like everyone else. Look at the AMA’s RUC. Look at wild overutilization numbers for stenting, complex spinal surgeries and other procedures.

    There is no point in romanticizing different approaches. Your explanation of history is pretty deluded and doesn’t account for much of what has transpired.

  3. Mr. Klepper

    Nowhere in my comment did I say that physicians were not culpable. I agree with you that physicians opened the door to third parties. Once in physicians now find it hard to disengage. Many have profited, others not so much. Many physicians are addicted to third parties. As addictions progress, it usually does not end well.

    The AMA 40 years ago represented physicians. Now they are a shadow corporate organization with less than 16% of docs belonging, with most of their members being academics and political wonks. They represent their corporate interests which are tied in with government interests. The super super majority of their revenues are from coding manuals/cpt as you mentioned. The AMA ceased being a physician organization many years ago.

    You are also correct with over utilization. Physicians are people just like everyone else and they will try to maximize income. It is easier to do that when a third party is paying, not the patient.

    The third parties must be removed from the financial transaction. All fees must be transparent. There can and should be organizations such as yours to keep everyone honest and promote competition. But they should not be involved in the transaction. To keep costs down the transaction must be simple. Patient pays doctor or health professional. Patient gets payment submitted to third party for reimbursement. Individuals watch budgets much better than third parties when prices are transparent.

    I want to shrink the pie that is healthcare costs, not stabilize it or increase it. I want docs like myself to compete on quality and costs and service, not quantity. These things can not be measured by any third party. It has been tried by government, insurers, and numerous other third party organizations for the past 40 years. Where has it taken us??

    History teaches us many things. Maybe we should learn from history and instead of doubling and tripling down on what is not working, admit where things went wrong, and go back to the way it was when it functioned well.


  4. The economic model you propose is basically to let those who purchase healthcare use the leverage of the market to improve health care. Having lived through several cycles of the same idea I am skeptical — because medical practice can escape from the economic clamp in so many ways — not the least of which is to opt out. Besides, drug costs are such a big driver of overall cost — even Walmart can not change the price of chemotherapy or most brand name drugs. OK perhaps I am missing the trend you talk about — do you have a hospital referral area map of the US (like the Dartmouth Atlas) to show the impact of employers’ efforts on population health and cost?

  5. qualityhealthcareplease,

    You oversimplify the approach that I’ve described. There are several issues here. The first is your comment that “the economic model you propose is basically to let those who purchase healthcare use the leverage of the market to improve health care.” True, but I think its also clear that there is no alternative. As I’ve described (ad nauseum) elsewhere, the health care industry has effectively rigged the game in policy and the marketplace until now.

    As it happens, there really aren’t a lot of ways that practices, and particularly specialty practices, can “opt out.” There aren’t enough wealthy people to go around to make it financially viable to only serve patients on a concierge basis. And Direct Primary Care practices run the risk of being outside all health plan networks.

    There is a great deal that most physicians can do to manage cost, but it takes adjustments to the conventional practice. (On drug costs, using step therapy is one approach.) Larger practices can develop the programmatic flexibility to offer more services, deliver measurably better care at lower cost, and so attract more market share at competitor expense. I speak from experience here.

    I don’t believe there’s adequate premium data at this point to show regional impact. But there is strong anecdotal evidence that these trends are being realized. I mentioned the Savannah Business Group, and the work of Business Health Care Group in Milwaukee is another example that is generating much lower costs by translating performance data into contractual arrangements. My guess is that a range of consulting surveys will soon show a marked increase in the percent of large employers who are using these kinds of mechanisms in their plan structure, and you’ll even see the major plans – CIGNA, AETNA, BCBS, Humana and United – offering narrow networks to selected clients. You can also talk with venture capital groups to get a sense of the new enterprises that are focused on exploiting health care market vacuums and the reduction of health care clinical and financial risk.

    Hope this is helpful.

    1. Thanks for the comments. There is a huge trend in health care for vertical integration (e.g. 75% of Cardiologists are now affiliated with hospitals)– this could be good if it reduces cost and increases quality . It seems to give providers more leverage in negotiations. Is this making problems for employers to keep costs down? Also, what is your take on Accountable Care Organizations? The Affordable Care Act promotes ACOs for Medicare but there are several big organizations doing something similar in conjunction with insurance companies. (

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