Consolidation of Medical Groups Into Physician Practice Management Organizations

Abstract

CONTEXT: Medical groups are growing and merging to improve efficiency and bargaining leverage in the competitive managed care environment. An increasing number are affiliating with physician practice management (PPM) firms that offer capital financing, expertise in utilization management, and global capitation contracts with health insurance entities. These physician organizations provide an alternative to affiliation with a hospital system and to individual physician contracting with health plans. OBJECTIVE: To describe the growth, structure, and strategy of PPM organizations that coordinate medical groups in multiple markets and contract with health maintenance organizations (HMOs). DESIGN: Case studies, including interviews with administrative and clinical leaders, review of company documents, and analysis of documents from investment bankers, the Securities and Exchange Commission, and industry observers. SETTING: Medical groups and independent practice associations (IPAs) in California and New Jersey affiliated with MedPartners, FPA Medical Management, and UniMed. OUTCOME MEASURES: Growth in number of primary care and specialty care physicians employed by and contracting with affiliated medical groups; growth in patient enrollment from commercial, Medicare, and Medicaid HMOs; growth in capitation and noncapitation revenues; structure and governance of affiliated management service organizations and professional corporations; and contracting strategies with HMOs. RESULTS: Between 1994 and 1996, medical groups and IPAs affiliated with 3 PPMs grew from 3787 to 25763 physicians; 65% of employed physicians provide primary care, while the majority of contracting physicians provide specialty care. Patient enrollment in HMOs grew from 285503 to 3028881. Annual capitation revenues grew from $190 million to $2.1 billion. Medical groups affiliated with PPMs are capitated for most professional, hospital, and ancillary clinical services and are increasingly delegated responsibility by HMOs for utilization management and quality assurance. COMMENT: Physician practice management organizations and their affiliated medical groups face the challenge of continuing rapid growth, sustaining stock values, and improving practice efficiencies while maintaining the loyalty of physicians and patients.

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