Physician practice management companies (PPMCs) are one of the most visible entrants into the industry of managing physician practices, and anywhere from 100-150 are already in operation. Although PPMCs and hospital-based integrated delivery systems (IDSs) differ from each other in many ways, they share a number of common features, including the pursuit of capitation contracts from payors. As a result, PPMCs pose a growing, direct threat to hospital systems in competing for managed care contracts that cover physician service. PPMCs also provide an alternative to hospital-based IDSs at the local market level for physician group consolidation. This article looks at the structure, operation, and strategy of PPMCs and examines what implications their growth will have for hospital-based IDSs.
Physician practice management has become a growth industry in the last five years because of several supply and demand factors. On the supply side, the market for physician services is fragmented. There are 720,000 physicians in the United States, 580,000 of whom provide services to patients. Of these, roughly one-third practice in solo settings while another one-third practice in group settings. Among group physicians, nearly half are in groups with 15 or fewer practitioners (Havlicek 1996). On the demand side, national health expenditures in 1995 on physician services grew to $200 billion, and national expenditures on other services controlled directly or indirectly by physicians le.g., hospitalization, drug prescriptions) grew to $448 billion. Thus, there is a large amount of spending to be managed and a lot of money to be made managing it.
Several types of firms have entered the physician practice management market. Hospital-based IDSs have developed a menu of integrative vehicles to seek managed care contracts and provide administrative services to physicians. These options include management services organizations (MSOs) and integrated salary models (ISMs). The MSO is a corporation, owned by the hospital or a physician-hospital joint venture, that provides management services to medical practices, purchases the tangible assets of the practices and leases them back as part of a full-service management agreement, employs the nonphysician staff, and/or provides supplies/administrative systems for a fee. In the ISM, physicians are salaried by the hospital or another entity of the health system to provide medical services for primary/specialty care. Some hospital-based group purchasing organizations (GPOs) such as Premier have initiated practice management divisions to offer their administrative services to physicians. Health maintenance organizations have in past years used staff models to manage the delivery of physician services. Insurers such as CIGNA and Aetna have purchased the practices of primary care physicians in various markets to develop local delivery systems but are now selling these units. Pharmaceutical firms have also invested in physician practice management as a means to develop their diseasemanagement programs.
The most visible development, however, has been the emergence of PPMCs financed by venture capitalists or by stock publicly traded on Wall Street. "PPMCs are organizations which manage the nonclinical (and in some cases a few clinical) aspects of care for either a portion le.g., managed care) or all of the physician's patients . . . The PPMC acts as a corporate partner that provides physicians with management services, expertise, and/or capital. The PPMC also organizes practitioners to collectively negotiate with managed care organizations while maintaining some measure of their professional autonomy" (Burns, forthcoming. The obvious contrast between PPMCs and other potential organizers of physician practices is that PPMCs are neither hospital controlled nor insurer controlled. Physicians in PPMCs are not partners in hospital-based IDSs; nor are they salaried employees of hospitals or HMOs. …