The Emergence of a New Medical Group in St. Louis, Missouri

During the decades of the 1980’s and 1990s, several St. Louis-area physicians made strategic decisions to leave independent medical practice and enter into employment agreements with one of the large health care organizations in the St. Louis area. At the time, these large organizations were attempting to form “integrated delivery networks” (IDNs) in anticipation of expected changes that were forecast in the health insurance industry, especially the managed health care sector.

In doing so, the IDNs hoped to:

1. Improve managed care negotiation capabilities and leverage,

2. Retain relationships with physicians who collectively represented a strategic advantage in the health systems target market, and

3. Create entities that could survive whatever marketplace forces might materialize.

4. Improve care quality and access to services.

As the IDNs evolved, it became apparent that compensation formulas contained within some of the physician employment agreements were flawed, or became outdated as market dynamics changed. In some cases, physician incomes and practice expenses were not supported by the corresponding revenues. Many groups generated unacceptable operating losses that had to be remedied through contract re-negotiations or non-renewals.

By the mid 1990s, it became apparent that managed care models would not evolve as expected in the St. Louis market. Also, there were several reports of physician dissatisfaction within the health system employment model. Furthermore, various regulatory pressures emanating from “Stark II” legislation, the Health Care Financing Administration (k/n/a Centers for Medicare and Medicaid Services) and Office of Inspector General called into question the legal efficacy of various physician-hospital relationships. Consequently, by the year 2000, some IDNs began dismantling some or all of their structure, especially the physician employment component. Other organizations made changes as well.

In 2001, several health system-employed physicians began returning to private, independent practice. Some physicians found they were ill prepared to take on the administrative responsibilities associated with private practice. Those who maintained their own professional corporations prior to employment discovered, in some cases, that their experience fell short of that required into today’s more complex business and regulatory environments. Others who are capable of managing all aspects of private practice decided not to invest the personal time necessary for daily administrative oversight of their private practice. Younger physicians who had no previous experience whatsoever as independent practitioners soon realized they lacked the skill, training and expertise required to create and to manage a private practice corporation. Additionally, most physicians recognized there are significant capital and operational costs associated with creating (or re-creating) their administrative infrastructures. Lastly, and perhaps most importantly, individual physicians found they have little negotiation leverage with payers to enhance revenues or with vendors to reduce expenses.

Recently, insurers have been able to take advantage of the growing fragmentation in the physician community. As groups dissolved or declined in size, payers began replacing better paying group contracts with lesser paying individual contracts. In fact, some payers have been able to leverage individual physicians into “take it or leave it” agreements with contract language and fee schedules that are unfavorable, ambiguous or both. Physicians who wish to have ongoing access to their panel of patients are forced to accept those agreements because the only alternative is exclusion from a payer’s network.

Meanwhile, practice expenses continue to climb. Physicians are experiencing double digit increases in malpractice premiums. The cost of health insurance and other benefits for physicians and their employees also is growing at double-digit rates. Regulatory requirements imposed by the Health Insurance Portability and Accountability Act (HIPAA) and other laws have added new costs, and new risks, to the practice. In fiscal year 2002, Medicare reduced payments to physicians, and additional reductions may occur unless Congress continues to intervene with corrective measures.

This challenging health care environment has produced the need for a business model that physicians can embrace as a replacement to health system employment or as an alternative to solo or small practice.

A New Medical Group Model

A new medical group, Midwest Medical Associates, Inc. (“MMA”), a C corporation with physician shareholders, has been created to fill this niche and become a solution for physicians who wish to return to private practice while retaining the benefits of large physician group participation. MMA is a multi-specialty, multi-site, group practice, with physician owners who wish to accomplish a number of goals. Those goals include, but are not limited to the following:

· Retain the identity and camaraderie contained within individual practice locations.

· Allow physicians to choose the degree of managerial and administrative activity they wish to engage in.

· Improve the group’s negotiating effectiveness with managed care organizations and other insurers.

· Maximize individual physician revenue through effective billing and collection.

· Minimize medical practice expenses through efficient staffing, group purchasing and careful sharing of resources.

· Reduce the per-physician cost of acquiring new technologies, information systems and equipment.

· Create additional revenue streams by way of a profitable, entrepreneurial organization that is compliant with all regulatory policies and laws.

Chart A depicts the model adopted by MMA for its corporation of St. Louis area physicians.

Chart A

Each physician has an employment agreement with MMA, and each physician’s compensation is directly linked with his or her individual practice performance. MMA will establish outpatient facilities, such as imaging centers, to supplement the professional and ancillary revenues generated at the medical practices, and profits from those facilities will be returned in the form of dividend payments to MMA shareholders.

MMA employs all physician staff. The MSO employs non-physician staff and those staff that provide certain business and financial services from a centralized office. This centralized office is known owned by KASS-MSO, Inc. (“KASS”), and is separately incorporated, having both physician and non-physician shareholders. KASS oversees the implementation and operations of shared services such as accounting, payroll, billing and collections software, information systems, accounts receivable management and managed care contracting.

MMA assists area health systems and similar organizations in transitioning employed physicians back to a private practice setting using its corporate structure and MSO relationship. Physicians will gain comfort in knowing they can maintain their practices in their same locations, select the office personnel who support them, and continue to work with their physician colleagues. KASS has responsibility for making capital improvements in the medical practices based on physician needs and their willingness to pay for those improvements.

In order to maximize the benefits of large group participation, physicians will assign their managed care contracting rights to MMA, and will be required to purchase most core services under a management services agreement (MSA) with KASS. Direct expenses of a physician’s medical practice such as payroll, rent and supplies, will be the physician’s responsibility.

It is possible that a third, related company will be formed to provide leased facilities and equipment to MMA. This leasing company will be owned by both physician and non-physician shareholders and may serve as a source of capital for new project development.

Chart B summarizes the aforementioned responsibilities.

Chart B
KASS	MMA	Leasing Company
· Accounts Receivable Management	· Medical Practice Revenues and Expenses	· Capital purchases for lease MMA
· Non-physician Employees	· Physician Employees
· Billing and Collections Software	· Ancillary Services Development
· Managed Care Contracting	· Physician Leadership and Governance
· Accounting and Financial Services	· Capital Expenditures
· Payroll Services
· Information Systems

Financial Considerations

Physicians purchase shares in MMA at a price set annually by MMA shareholders. MMA does not purchase medical practice assets.

MMA also is responsible for obtaining a line of credit to assure it can meet its monthly expense obligations, although management intends to operate with minimal borrowings.

TO LEARN MORE ABOUT MIDWEST MEDICAL ASSOCIATES, Inc., click here.