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Eight Fallacies of Managed Care

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A Startling iMBA Inc., Report on Small Medical Practices


[By Dr. David Edward Marcinko; MBA, CMP™]

[By Hope Rachel Hetico; RN, MHA, CMP™]

[By Ann Miller; RN, MHA]

Webster defines a visionary as: “one who is able to see into the future”. Unlike some pundits, prescience is not a quality we claim to possess. To the purveyors of small medical practice gloom however, the future for physicians is a bleak “fate’ accompli”. If you are of this philosophical Ilk – we politely but firmly disagree. In fact, during a recent brainstorming session at the Institute of Medical Business Advisors www.MedicalBusinessAdvisors.com we arrived at some startling conclusions that challenge contemporary information. Therefore, “ceretas paribus” – all things being equal – these findings impute conventional wisdom and are called: The Eight Myths of Managed Medical Care.

MYTH 1: “Solo and Smaller Private Practitioners Will Die”

Economies of scale and prevailing Health Information Technology (HIT) systems may indeed force some smaller allopathic, podiatric or osteopathic practices, as well as some “surgical” specialists, into group or non-equity based practices.  New “one-stop medical malls” are desirable to HMO’s because of their urgent or emergent care availability, myriad of provider types and quality assurance mechanisms. This will even happen in non-procedure based family practices, with internists and in currently spared rural areas as Integrated Systems Digital Networks (ISDN), Regional Health Information Organizations [RHIOs] and related computer transmission technology becomes more available and less expensive. But, routine medicine is ideally suited for the repetitive task orientation philosophy of many of HMO’s.

MGMT. TIP: If you want to remain a private or solo practitioner, re-engineering one’s office activities (cost drivers) to reduce steps that do not add value to your services is perhaps all that is needed to increase efficiency and net margins. Strive to reduce duplicated activities and redundant data transmissions and people tasks. Delegate responsibility and lower the decision making threshold to a need-to-know basis. Empower appropriate employees and make them accountable for their decisions, but do not give them responsibility without authority. As time progresses, steps to reduce variable and then fixed costs, can be implemented to further increase profit. Additionally, solo office practice is very amenable to out-sourcing onerous chores such as human resource management and accounting needs.

MYTH 2: “All Small Medical Practices Will be Purchased by Larger Companies”

This may be true for some aspects of comprehensive medical care. Fortunately, primary care has never totally been given its due and esteem by the medical community or AMA, and smaller practices do not appear to be corporate “takeover” targets. While this may happen in some exceptionally large practices, equity control or financial compensation should more than remunerate the owner-managers of such behemoth practices. Unfortunately, servitude to Wall Street is another matter to consider. Make no mistake however mere size does not encourage acquisition, just as solo practice does not entice appropriation by all management associations.

MGMT TIP: Use the engineering concept of Project Management (PM) and the Critical Path Method (CPM) to determine pivotal or slack steps in the flow of your office. Then modify your processes accordingly. GANNT charts, PERT graphs and Paretto diagrams are helpful visual and practical aides in this regard.

MYTH 3: “You Must Run Your Practice By the Financial Numbers”

Many so-called business experts preach the concept of financial “number -crunching”. In other words, how much revenue is derived, from how many patients per month, week and day, according to some estimated utilization rate?  With this method, physicians are reduced to hourly “employees” and patients to “encounters”. Actuarial firms may even be hired to legitimize the numbers and suggest care standards. While it is important to consider financial tangibles, we must not forget that “numbers can lie”, and that the information from a computer spreadsheet is only as good as its input (GIGO = “garbage in-garbage out”). This is especially evident when one realizes that such firms are only thinly disguised benefits consultants, with a built in bias to cost reductions and rationed care. Therefore, be aware of the potential negative intangibles of a strict business output mentality and recognize that medicine is an intensively personal experience. Lowering the economic “per unit cost” of a widget may be desirable to a manufacturer, but price is only one aspect of good medical care. Other tangible or intangible concepts are often far more important and the negotiating side that first realizes what constitutes these trigger-points, instantly occupies the stronger competitive bargaining position.

For example, doctors should know the answer to many vital questions before entering into any contract negotiations. These include, but are certainly not limited to the following:

  • Doctor control and expectations
  • Contract exclusivity and inclusively
  • Utilization review, “carve-outs”, gag orders and termination clauses
  • And our personal pet peeve; NPI numbers and organizational fiscal data sharing.

Recall the often used example of selling airplane seats is a good way to illustrate the concept of intangibles. Let’s assume a plane has a capacity of 100 seats, 90 of which are sold at the normal ticket price of one hundred dollars; for a total revenue of $9,000. If total costs represent a break-even point of eight thousand dollars, a one thousand dollar profit is realized. Therefore, if any single remaining seat can be sold at a discount; more profit is generated since the plane will fly anyway.

Now, suppose there was a chance that one of the discounted seats will be bought by a terrorist bomber; would the additional marginal profit still be worthwhile?  Of course not! Extending our analogy to the typical small medical office, some management guru’s might argue that a discounted HMO patient is better than no patient at all. But as a doctor, suppose your empty treatment room was filled by a noncompliant capitated diabetic patient with a foot infection, or a litigious prone patient? Tangible considerations aside, don’t the potential medical, legal and emotional entanglements of these situations exceed their marginal benefits? Of course they do!  Philosophically, one could argue that these possibilities still exist in a fee-for-service environment and be quite correct.

Therefore, rest assured that we are not advocating the wholesale non-treatment or abandonment of patients in need. We are simply noting the capitalistic and very demoralizing human feelings of, “why bother”. Or, shall we accept the Socialistic epistemology of laborers who “pretend to work while the government pretends to pay?” Fortunately, primary care seldom presents with many significant moral challenges. Nevertheless, this tawdry rationing type scenario can, and does happen, in the hallowed halls of medicine; daily.

Need proof?  An anonymous Medical Outcomes Study, a few years ago, from the New England Medical Center claimed that of specialists surveyed, one third believed that they provided worst care to HMO members than fee-for-service patients, not just because of any moral deficiency, but because the HMO reduced their access to medical resources. Now we ask; is anyone surprised?

MGMT. TIP: Running your practice solely by the numbers is insane and the rat race will lead you to an early grave as you try to do more, with less, and in less time. Rather, select your insurance contracts carefully and negotiate aggressively for the best deals, and limit your liability with exclusions and stop-lose parameters. Besides, there is no need to join every panel; be selective in your own favor. Recall, mutual contract concessions should benefit both parties, and a contract so negotiated should be mutually advantageous; but not equally advantageous. Aggressive business consultants do not incorporate the conventional wisdom of a “win-win” negotiated settlement. We negotiate to win for our clients and champion their success.

MYTH 4: “Capitation will Kill Fee-for Service Medicine”

All primary doctors do not have to practice deeply discounted capitated medicine. We estimate that only half of all internists will have to become low cost providers and many, either by design or happenstance already are. The remainder will successfully and profitably provide the specialty or value-added services that much of the public demands. HMO’s that do not offer these quality services will perish. The “cost shifting” to private insurance companies currently prevalent will not accelerate, because the population that chooses to retain traditional indemnity insurance will no longer allow it. Such health and quality conscious patients will revolt against high insurance premiums and refuse to be penalized for desiring comprehensive care and for pursuing a healthy life-style. Similarly, physicians who now bear “financial risk” for providing care to noncompliant patients will decide that the incentive to do so is not enough. Patients will be forced to bear their own financial risk as they become compelled to pay higher premiums, co-pays, surcharges or other penalties for unhealthy habits such as smoking, obesity or inactivity. Health care will come full circle by putting the financial burden back on patients.

A survey in Medical Interface a few years ago, revealed that overall, 21% of all capitated patients in a studied cohort rated their HMO as fair to poor, compared with 14% in traditional indemnity systems. Additionally, allow us to quote from Dr. Alain Einthoven, medical economist and author of the original Jackson Hole Managed Care Assemblage:

“Permutations of managed care will produce a dizzying array of benefit levels at varying price structures. HMO’s however will try to mislead the public, through intense advertising campaigns, into believing that all arrangements provide equal benefits at reduced costs.  Medicine’s job is to prove the contrary to the middle class, since the well educated and affluent are becoming aware of the distinction and the poor have no choice”.

Myth 5: “Managed Care Will Socialize Medicine”

The Nixon administration advocated a type of socialized medicine back in the seventies. Obviously, the concept did not take root.  In the nineties, the Clinton administration’s attempt to establish a national standard in its health reform package ended with similar disastrous results. In fact, about 80% of that reform package consisted of bureaucratic rules and regulations to force equality on a capitalistic system. Now, the Obama Administration may pursue a national healthcare agenda, although others argue that the marketplace has achieved the managed care socialism that politicians could not, thus far. As we see it however, the average American is fiercely competitive and not at all egalitarian. There will always be the “have and have not’s” in our society and strictly socialized medicine is not in our future. In fact, we believe that multilayered care will develop, which is just a little different than contemporary traditional insurance plans.

There will always be a basic level of marginal HMO care for the elderly and indigent sponsored by various local, state, national and charitable foundations. The blue collared working middle class will receive better care through PPO’s, MCO’s and PO’s physician managed plans. The bulk of activity for providers, payers and recipients will take place at this level. Note the caveat, “physician-managed”, since doctors will take back their place as maestro of the medical care symphony. The doctor-manager dichotomy will blur as physicians control their professional and economic lives and obviate the need for broker-middlemen-agents sucking huge profits out of the system at the expense of patient and provider.

MGMT. TIP: Notice how aggressively HMO’s are marketing their services to welfare recipients and aged Medicare patients. Likewise, notice how few managers, professionals, corporate executives, unions and politicians join these same HMO’s. Decide immediately your target market, and act accordingly. Remember, the affluent will always pay top dollar for truly quality care and assume independent personal financial risk for their health. The form of care rendered may be in the guise of a cafeteria benefits plan, FSA, HSA, MSA or some other similar arrangement; but it will undoubtedly occur as long as our tax structure favors the top economic tier through the business deductibility of medical fringe benefits. Therefore, medicine will not become socialized anytime soon.

MYTH 6: “Medicine is an Oversupplied Commodity”

Certain medical specialists are now in slight abundance but this situation will not last for more than the next five-ten years. Medical school admissions are currently up, but will decrease as administration information, and the socialism specter is filtered down to prospective students and the domestic economy improves. Additionally, the population will age and increase utilization rates for the remaining physicians but not reimbursement. More specifically, nurse practitioners, physical therapists and physician’ assistants will not negatively impact us in the long term. These extended care providers do not give the same level of care, nor do they provide the same knowledge and expertise that physicians provide. But, they have been used for more than two decades with positive results that will grow going forward. Moreover, do not confuse physician supply with the “commoditization of medicine”, since no product or service ever need become, or remain, a commodity.

For example, automobile tires have been branded (GoodYear), sneakers have been branded (Nike), microchips and potato chips (Intel-Lays) have all been branded. Water, a classic marketing example, as been re-branded many times in the form of Perrier, Evian, Poland Springs and Calistoga.

Thus, if the marginal benefits of junk food can be branded, the eternal human desire for health and its resulting happiness should not be a hard sell. As doctors and medical professionals, we must strive to promote health, longevity and life as a precious benefit to the public; not simply price.

MGMT. TIP: Either work hard to cultivate fewer, but more lucrative fee-for service patients with true value or service directed activities, or become a discount supplier; but do not attempt to be all things to all people. This mix has never been achieved in corporate America and you will not be the first to achieve it. Rather, chose your niche, be true to your self, and maintain your business strategy. A service mix of 2:1:1 (Discount-Value-Service) among the nation’s primary care providers will not only provide maximum profits for everyone, it will renew a lost sense of personal self-esteem.

“Doctors must create a market driven business strategy. This means to serve and assist the patient in whatever manner possible. HMO’s are absolutely wrong to think of medical care as a commodity–that a doctor is a doctor is a doctor. Patients want a successful treatment outcome, assurance and compassion–and this triad is not provided by commodity suppliers”

Myth 7: “Doctors Will No Longer Keep Patients Waiting”

This is the first true statement in our discussion. The perception that patients have about their medical care is becoming increasingly important. Patient-clients, benefits managers and payers all want prompt service for their employees. If you are not timely now, you are likely inefficient as well as rude. Therefore, scheduling promptness is an important, albeit incorrect, measure of medical quality.

On the other hand, one can hardly argue with any provider who chooses not to wait for habitually late patients who are tardy, impolite, condescending or otherwise inhospitable. A poor demeanor should just not be tolerated by any practitioner. In business verbiage, “the marginal benefit of such patients – do not justify their marginal cost”.

For example, would you rather miss your young son’s theatrical debut awaiting a new fee-for-service patient, or a capitated – or socialized – patient? Again, the prudent human being would choose the former without any real moral dilemma. Bilateral collaborative human respect will always prevail.

MGMT. TIP: Schedule like-patient activities in blocks of time to increase efficiency. Do not be too rigid, but by scheduling similar conditions/procedures together, assembly-line efficiency is achieved without assembly line mentality. Time is then emancipated for more revenue enhancing efforts; or leisure activities. Bundling ‘activity-drivers’ is one of the most efficient methods any organization can use to reduce production time.  It is a concept embraced by producer organizations and deficient in most service organizations.

MYTH 8: HMO’s are the Future of Medical Care in the US?

Highly structured, capitated or full risk HMO’s are already becoming passe’. Their demise will be further accelerated by such growing entities as: Preferred Provider Organizations (PPO’s), personal Medical or Health Savings Accounts (MSA’s and HSAs) and true Medical Provider Service Networks (MPSN’s). By a true MPSN, we mean a medical care organization, run by physician-managers who contract directly with employers, rather than through an intermediary or middleman who take a percentage of the fee for business services.

Need testimony?  In Minneapolis, a bastion of HMO care, there is an employer initiated drive to contract directly with physician groups, since HMO’s there seem no longer very interested in managing either for patient care or company welfare, but only for their own bottom line dollar.

MGMT TIP: First, get out of medical school, get through your residency and get Board certified as soon as possible. Take advantage of technology to achieve these goals. Then, enroll in law school, business school or take management and computer instruction courses to re-educate, re-engineer and retrain yourself with the needed organizational tools of the future. You will not survive without them because the bar to a new level of medical care has been raised in this decade.

“In the very near future, physicians will learn about business, accept its material risks, regain influence and take back their rightful control of the Healthcare complex.”

Although we still need actuarial and accounting data, working capital, organizational skill, marketing techniques and correct product pricing, we believe physicians, employers and patients of the future will look back on 2010 and recognize it as the turning point in the current healthcare imbroglio. Therefore, be forewarned and forearmed.


As medical practitioners and healthcare consultants, we face the same managed are issues as you do. And, although we may have a particular economics acumen and business management expertise, we should never loose sight of the facts that, above all, medical care should be delivered in a personal and humane manner, with patient interest rather than self interest, as our guiding standard.

“Fools ignore complexity. Pragmatists suffer it. Geniuses remove it.”
-Alan Perlis
[Creator of ALGOL, an early software programming language].


Your thoughts and comments on this ME-P are appreciated. Feel free to review our top-left column, and top-right sidebar materials, links, URLs and related websites, too. Then, subscribe to the ME-P. It is fast, free and secure.

Speaker: If you need a moderator or speaker for an upcoming event, Dr. David E. Marcinko; MBA – Publisher-in-Chief of the Medical Executive-Post – is available for seminar or speaking engagements. Contact: MarcinkoAdvisors@msn.com



2 Responses

  1. Laugh or Cry?

    Did you know that investigators are looking into allegations that Kaiser Permanente allowed unlicensed staffers to make medical decisions?

    Managed care, National healthcare, Hillary care, Kaiser care; ya gotta love em’ all?



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