Economics and the Future of Physician Practice Models

Today’s Economics 101

Two related economic factors will force the rapid transformation of healthcare in America with everlasting impact on the practice of medicine. The first of these is America’s “healthcare cost bubble.” We know statistics indicate our country is now spending 18 percent of our economy (GDP) on healthcare. That compares to the next most expensive developed country, Germany, at 11.5 percent. The average of all developed countries is around 10 percent. So, what really does this mean?

Compared to the rest of the developed world, we are “overspending” for healthcare more than $1.2 trillion a year. We pay much more for drugs, for hospital services, for administrative overhead and for nearly every major input of care. For reference, the $1.2 trillion overspending is as much as we spend on ALL public education in our country, and is nearly double the entire U.S. defense budget. In a truly global economy, can America afford to spend this much money on healthcare at the expense of other vital components of our society?

Combine that with the fact that the nation finally understands that the federal deficit must be reduced. However, with little likelihood of a comprehensive, bipartisan Congressional resolution, Medicare and Medicaid (particularly Medicaid) will likely be victims of isolated reductions. Hospitals and health systems are already facing significant reimbursement cuts over the next three years, negotiated as part of the Affordable Care Act (ACA), and additional cuts could be very painful for many.

The bottom-line to all of this is that payments for all healthcare components must and will go down. Physicians and health systems will be forced to do more with significantly less. The most efficient systems with the greatest economies of scale will be most successful. There will be no looking back.

ACA, ACO’s and New Payment Models

The new models of healthcare presented in the Affordable Care Act – ACO’s, bundled payments and medical homes, all overlaid with electronic health records, are an attempt to instill some “system” efficiencies and incentives in our non-system of healthcare. Certainly organizations that have already developed continuums of patient care with aligned incentives for providers and support infrastructure will likely do very well with these models. The early participants in the Medicare Pioneer ACO program are nearly all organizations that had already been on a path to a patient centered care continuum.

However, many other organizations will attempt to jump in with monetary or market share objectives, but lack shared vision, aligned incentives, patient focus, or adequate support infrastructure, such as information technology. All of these will be necessary for success, as will greatly enhanced efficiencies. There will be numerous organizations that attempt to build the complete ACO continuum and fail. They will be absorbed by other successful and expanding organizations.

It also must be remembered that even the most currently successful health systems will take a major financial hit with the implementation of ACA.

Implications for Physician Practices

While more U.S. citizens will have insurance coverage in the future, we are predicting that reimbursements per Medicare and Medicaid patient will go down significantly over the next five years. Many health systems already lose money on both of those patient groups – with more cuts, their “fiscal cliff” just got significantly worse. Physicians who have entered into employment contracts with these health systems must be aware that these new financial pressures on health systems may force them into contract renegotiations in the not too distant future.

If lower reimbursements and market aggregation into ACOs does take place, are there real opportunities for physicians to remain independent? Let’s be realistic. Without significant new efficiencies or economies of scale independent physicians will see incomes decline. However, there are three independent practice models we believe can be successful. They are:

• Large multi-specialty practices with convenient location(s) that negotiate proactively with ACOs and managed care to be a cornerstone of both.

• Medium to large single specialty groups that can demonstrate high quality, superior service and convenience and the most cost effective business model. An example here is a comprehensive orthopedic group, in good locations with low cost and full services.

• Medium to large primary care groups with highly streamlined and leveraged midlevel provider model. This also requires refined I.T. support for medical decision process and supervision.

It is expected that effective health systems and ACO’s will do “make versus buy” decisions and can be convinced through proactive negotiation that there is merit in contracting with a high quality, cost effective, independent group who will work positively with the system or ACO as a key part of the care continuum.


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