The first article I ever wrote for BC Advantage (BCA) Magazine was for the March/April 2017 issue. It was wishfully titled, "An Alternative to Private Practice Extinction." It is hard to believe how much the healthcare industry has changed in those five years-and continues to rapidly change. My observation of the responses by the Independent Physician Owned Practice (IPOP) to these changes and challenges is that the majority of IPOP physicians chose to travel one of the other paths I mentioned in my article instead of remaining on the path as an IPOP like I had recommended. COVID and the responses by our U.S. leaders, the American people, and others in the world in general have definitely had an unprecedented, in my lifetime, dynamic effect on the way medicine is currently practiced in the U.S., as well as everywhere else in the world, and the way medicine will be practiced in the future. These events in the past two plus years certainly affected the small IPOP in the U.S., and probably accelerated the decision for many U.S. IPOP physicians to not continue down the IPOP path. It also probably made many U.S. physicians decide to retire early if they could afford to do so. No matter what your political affiliation or persuasion is, or who you think was responsible for COVID, or what you think about the responses of our leaders and the other world leaders, any rational person will agree that the COVID pandemic has changed our country and the U.S. healthcare delivery system, as well as has changed the world and our lives now and forever.
It was suggested to me that I title this article, "Death of the Independent Practice." I decided not to take that recommendation, because the independent practice didn't die; many physicians gave up and sold out. And in many cases, the physicians just gave their practices away and did not even try to sell them. Physicians lost the IPOP because the physicians refused to accept the reality of corporate medicine, continued to deny the coming healthcare delivery system changes, and tried to hang on to the Marcus Welby, M.D. model. Physicians have been engaged in this self-destructive denial behavior for several decades. This did not happen overnight. The loss of the IPOP could have been prevented. Most of you reading this article are probably too young to remember the television drama series from 1969-1976 about the kindly old family practitioner (Robert Young) and the "practice style" conflicts he had with his younger new colleague (James Brolin) in the Marcus Welby, M.D. series. Both physicians were well-meaning physicians, as most physicians are, but they could not find a common ground on how to structure operations of the practice for patient care and to manage their medical practice from a business perspective. Sound familiar? Before I started working with physicians, I did not realize how on point and prophetic this physician series was in identifying the medical practice business and management issues and predicting the future of the IPOP-and the causes for its demise. Perhaps the IPOP could have been saved if the physicians had been able to overcome their innate (wired) personalities that physicians have that allows them to be physicians. Well-meaning, but in most cases with physicians, they are inflexible in their decision-making and opposed to any change of any type at any time. And, also opposed to doing anything that is not their idea, or not their way. My research and observations tell me that you cannot change a person's innate (wired) personality traits but only find specific triggers for each specific individual that allows you to temporarily change the individual's behavior based on their individual wiring traits and the triggers that affects that individual. This trigger pulling does not change the person's permanently wired personality traits. To quote a medical researcher who studied the effects of genetics on individual behavior (nurture versus nature), "Genetics load the gun, but the environment pulls the trigger" (Dr. Judith Stern). My interpretation of individual behavior based on this theory is that if you pull the environmental trigger and the gun isn't genetically loaded, nothing happens. If you don't pull the environmental trigger and the gun is genetically loaded, still nothing happens. The corollaries also apply to this observation. A discussion of what is motivating versus what is manipulating that wiring is a discussion for another article. See the chart that follows for the differences in the characteristics of the physician versus the manager. Unfortunately, there are too many of "they" out there who understood this behavior game and wanted the physicians to continue in their practice conflicts with each other, and to continue their practice self-destructive behavior because they wanted to take over control of the business of medicine and the IPOP-and they did. We are going to discuss the "they."
Follow the Dollar
I wrote an article for BCA Magazine, for the January/February 2018 issue, titled, "Follow the Dollar." Most physicians I know have always wanted to pursue the dollar for themselves, but not follow the dollar and understand how the dollar flowed into and out of their practices that determined what was left for the physician to have as compensation for physician labor. The physicians certainly didn't have, and most still do not have, any concept of or understanding of practice profit or practice EBITDA. I also wrote an article for BCA, titled, "Do You Have An EBITDA?" Most physicians I know also do not want to share with anyone what they perceive as their dollars. In practices with multiple physicians, whether owner physicians or employee physicians, this is always an issue—many times contentious about who is entitled to what part of the practice dollars. Yes, they are practice dollars and not physician dollars. I have done hundreds of physician compensation plans in my career over the years. The owner physicians just want the maximum dollars to be left in the practice checkbook so the owner physicians can have those dollars that he/she thinks they deserve. Of course, each physician's concept of what he/she deserves is different. The real problem is that most physicians do not make a distinction between physician labor value and the practice organizational value of a practice, which allows all the physicians a place and structure to practice and to use physician labor to earn a living. Therein lies the physician/practice conflict and the opening for us businesspeople to come in and take over. I will not go into any details about that here. Just to say that from a business perspective, where there is conflict, there is opportunity-regardless of the type of business. Also, just because a physician owns a practice does not make the physician a businessperson. The physician assumes that because he/she has the academic aptitude to go through all the training necessary to become a physician, that once they own a practice, the business part is simple, and the physician can become a good businessperson through osmosis. Sorry, it does not work that way-at least not anymore. I recommend you read my two-part article, "Eat What You Kill" in the May/June 2017 and July/August 2017 BCA issues if you want to go more into the "Whose money is it?" debate.
While the owner physicians were following their checkbook balance in their practices, focusing on how much money they could take home instead of focusing on the business of medicine, we businesspeople were following the National Healthcare Expenditure (NHE), i.e., the total healthcare dollar. The U.S. NHE for 2020 was $4.1 trillion. Yes, that is with a "T." That "T" was 19.7% of the U.S. Gross Domestic Product (GDP). For comparison, defense spending in 2020 was only 3.2% of GDP. NHE is projected to grow at 5.4% a year now through 2028. Medicare is 20% of the NHE and Medicaid is 16% of the NHE. In 2020, 62.6 million people were enrolled in the Medicare program, which equates to 18.4 percent of all people in the United States. In 2021, 84.8 million people were enrolled in Medicaid and CHIP in the U.S. This equates to 25% of the people in the Unites States. That is over 43% of the total U.S. population already on Medicare or Medicaid. Some people are on both. Since people are living longer and the number of low-income individuals is increasing, the number of enrolled is going to continue to be explosive in these single-payer healthcare insurance plans. The government regulates and controls these plans and the spending, but private insurers get paid a lot of money to administer these plans without any risks to the private payer for patient healthcare claims. The government (taxpayer) pays the bills. The 907,426 businesses in the Health Care and Social Assistance sector topped all other businesses with 20 million employees and over $1 trillion in annual payroll in 2018. Significantly higher now. Employment in healthcare occupations is projected to grow 16 percent from 2020 to 2030, much faster than the average for all occupations, adding about 2.6 million new jobs. While healthcare occupations are projected to add more jobs than any of the other occupational groups, there is already a shortage of healthcare workers—the shortage is projected to grow rapidly. So, that massive number of new workers in healthcare will not make up for the current and future shortages. More specifically, the physician shortage is projected to be over 70,000 by 2025 and double to 140,000 by 2030. That is probably optimistically low. It will likely be higher because academically capable individuals will seek other, more personally rewarding, lucrative, and less stressful careers rather than becoming physicians. According to reports, tThe average debt of a physician getting out of residency is $250,000. The shortest medical school plus residency program is seven years. Law school is three years. That physician shortage is having, and is going to continue having, a direct disastrous effect on access to care and the quality of care provided to patients. Studies also show that the physicians graduating now are not as skilled at being physicians as the previously graduating physicians were. And it is still trending downward with regards to new graduating physicians in both the numbers and in their skill levels.
Private Health Insurance is 28% of the NHE-and falling. That is because Medicare and Medicaid participants are rising, and employers are providing fewer healthcare benefits to employees. Employers are doing this by changing employees from W-2 employees to 1099 independent contractors. This allows the employer to not have to pay any benefits. The employer is also reducing the number of employees by outsourcing business services to foreign countries. India is a very large resource country for many outsourced healthcare business support services, and other U.S. businesses, as well. Even the U.S. government and U.S. state governments outsource jobs to India. I have been doing business with companies in India for a couple of decades. China and Japan are trying to catch up with India. I am sure many readers and practice patients have experienced this outsourcing experience first-hand. And many have not had positive experiences.
If the employer does not provide private health insurance coverage for its employees, the individual is not going to be able to afford private health insurance for themselves-period. Most Americans cannot afford private health insurance now. Many employers are already requiring the employee to pay a larger portion of the employee's health insurance premium. Many employees cannot afford this additional reduction in their paychecks and simply drop out of the employer's plan and go without health insurance.
Private health insurance has previously paid physicians higher reimbursement rates than Medicare. Most state Medicaid rates pay significantly below Medicare rates, and most are so low in many states that many physicians refuse to see Medicaid patients. Some private insurance companies also pay physicians less than the Medicare rates. There is no question that reimbursement for physician services will continue to drop while overhead to operate a medical practice will continue to rise. That means physician compensation will continue to fall at a steep decline, no matter who owns the medical practice. Physicians forget that they are "overhead" to the healthcare system. Physicians are just very specialized, skilled, high-priced labor in the healthcare system. If a health insurance company or the government pays a physician $75 for a service instead of $100, then the health insurance company just made an additional $25 in profit, and the government reduced its costs by $25. However, the physician just lost $25 in profit, i.e., compensation. The health insurance company and the government get to decide what they pay the physicians for physician services. Given the recent high inflation that is projected to continue upward for everyone in the U.S., the patient is certainly not going to be able to make up the difference to pay the physician for the reduced reimbursement to the physician by third-party payers. One of the major influences on the demise of the IPOP was health insurance, because it became the feeding trough for physicians. The physician no longer had to think business in order to get paid. Getting paid for physician services required no effort on the physician's part, except to fill out an insurance form and send it to the insurance company. If there is an intermediary responsible for paying the bill and that intermediary is between the customer and the seller, regardless of the business, this is always going to create additional business issues and higher costs. The physician feeding trough system was not as large and as available to the Marcus Welby, M.D. model. If gas, food, housing, transportation, and other crucial living expenses continue to rapidly increase in costs as projected, patients are going to have to decide whether to go see the physician at all when they are sick, or instead, feed their families and do self-care. Almost no one is going to go for well check-ups. The healthcare delivery system is going to drastically change. Limited access due to provider shortages and higher costs to the patient are going to be the main causes. There will be more U.S. healthcare rationing. All countries ration healthcare to its people in some way, because there are a limited number of resources and dollars available for healthcare.
How Did They Do It?
According to a study from the Physician Advocacy Institute (PAI), only 30 percent of U.S. physicians were independently practicing medicine at the beginning of 2021, while 70 percent reported being employed by hospital systems or corporate entities. Twenty years ago, I predicted that at least 50%, and probably 80%, of the independent physicians practicing then would be employed by someone else by 2020. I was close. I emphasize corporate entities because that is the IPOP's main enemy/competitor in the IPOP practice survival game. Hospitals hiring physicians were not going to be able to bring down the IPOP. Most physicians are fully aware of hospital systems employing physicians. Many became employed by hospitals and then left to go back into private practice or to work for corporate entities. There are different economic factors at play in those hospital/physician hiring dynamics. The new physician/hospital model is the Physician Services Agreement (PSA). That is a different economic incentive model and a discussion for another article.
Very few physicians I have met have any concept of corporate entities and investors owning medical practices, especially the ownership of U.S. medical practices by foreign corporate entities and foreign investment firms. These foreign investment firms often use money from the foreign government where the foreign investment firm is located, in order to buy the U.S. healthcare companies. I will discuss this and foreign ownership of the U.S. healthcare system later in this article. The growing foreign ownership of U.S. healthcare was my impetus for writing this article and the key take-away point I want you to get from this article. Before discussing foreign ownership of the U.S. healthcare system, it is critical that you have an understanding of the history of corporate medicine and what got us to where we are now.
It was inevitable and easy to predict that physicians were going to eventually fail to be able to continue as an IPOP because of the increasing business complexity of successfully operating a medical practice. Remember, physicians are not businesspeople; they are doctors. Most of the healthcare system is run by trained businesspeople and not by medically trained people-or doctors. Only physicians and other Advanced Practice Providers (APP) are licensed to independently provide medical care directly to patients and to direct the other healthcare services a patient needs and receives. Prescription writing is a good example. The balance of the healthcare system and the people in it just provides labor, facilities, equipment, supplies, and other support services to the providers so that the providers can provide direct medical care to the patients. Just like the railroad thought it was in the train business when it is actually in the transportation business and the train is only its tool, the physician thinks he/she is in the doctoring business when he/she is actually in the healthcare delivery services business and the doctoring is his/her tool. Both the railroad and the physicians had it wrong and both the railroad and the IPOP failed in "independent" business because doing business became more complex and more competitors entered their businesses. I have been trying to explain this concept to physicians for over four decades. Based on the 70% employed physician statistic, obviously I nor anyone else have been successful at convincing physicians to do what is necessary to survive as an IPOP. Maybe most physicians just really did not want to be businesspeople after all.
As previously stated, I have been preaching the IPOP gospel for over four decades. The sermon has been modified and given in many different formats, and slightly updated over the years, but my physician business Bible has been the same because the business Bible is the same. I was rummaging through some of my old materials and found a presentation I gave in 2007. Two of my slides (I used to present with real slides) are a good summary of what is driving the inevitable change in the IPOP, as well as in the entire healthcare industry. I decided it was worth the space to include the contents below.
Where Are We Going?
- There is a finite amount of dollars in the healthcare system.
- Physicians are not going to get what they want.
- Some physicians are going to do better than other physicians.
- Some physicians are going to go out of business.
- Different specialties will be competing for the same medical services.
- Old business strategies will not work.
- It is never going to be the way it used to be.
- Patient - I am entitled to the best healthcare money can buy and someone else should pay for it.
- Physician - I should be able to decide what care patients receive and how much I get paid for the care I provide, and I do not want to have to collect payment from the patients.
- Government - The government has the right to control the costs of healthcare and decide who receives healthcare and what care is delivered.
- Employer - My employees demand that I pay for their health insurance, but the rising healthcare benefit costs reduce my profits, and I need to increase my profits.
- Insurance Company - I am in the business to make a profit; paying out patient claims increases my overhead and reduces my profits.
As mentioned earlier, physicians are "wired" differently than businesspeople. I have included the slide information below, which was created by an M.D. to explain the differences in thinking of a physician versus a manager when it comes to thinking about business and operating a medical practice. I have my own modified version of this chart but wanted you to see the original and how a physician sees the differences between physicians and businesspeople. As Myers & Briggs will explain to you in their sixteen personality type profiles, different personalities pursue and are skilled at different jobs. This is not to say that physicians cannot learn the academics of being a businessperson. Most physicians just do not have the interest or the personality characteristics to be a businessperson. As the majority of physicians I have known over the years have told me, they just want to be a doctor, care for their patients, and then go home and do other things they enjoy doing—and have the money to do those things. They definitely do not want to spend their time and energy running the business side of their medical practice. I have been able to make a good living because of that physician business philosophy. I take care of the practice business and the physician takes care of the practice patients. I have tried to teach physicians how to be business owner decision-makers and not practice administrators/managers. Many physicians (70%) have decided that they do not want to be a business owner at all, just a doctor. I agree with them, as long as while being the doctor, the physician goes back to establishing that old time doctor/patient relationship to become a patient advocate and liaison in this complex healthcare maze.
Physician vs. Manager Characteristics
Below are a couple of additional PowerPoint slides I created for a separate presentation that I gave in 2007. It was given to a large IPOP of family physicians that I helped start and they were my clients for over 20 years. That IPOP is now owned by a management company (corporate medicine). The original IPOP physicians had the right model, at the right time, and were willing to engage the necessary businesspeople to guide them and do the practice trench-work for the practice while the doctors did the doctoring and the owner decision-making. So what happened? The young physicians coming out of residency and joining the practice only wanted large salaries, no call, and nothing to do with the business of medicine. All of those young replacement physicians got their wishes, except the large salary part. They are now just hired help for a large business firm. They are part of the 70% that is still growing.
Who Will Own Medical Practices?
- Health Systems
- Institutions (Hospitals, etc.)
- Retail Chains
- Private Investors
- The future ain't what it used to be and never will be.
- The quality of healthcare providers is declining.
- Healthcare is a $3 trillion a year "industry."
- Healthcare is 14% of the GNP (GDP).
- Everyone wants a piece of the action.
- No one is going to give it to you; fight for it.
- If you don't have a "fighter's heart," become "hired help."
- It is doable!
I told physicians many times over the years that physicians were so worried about socialized medicine that they did not see corporate medicine coming, which would run them over-and it did.
How Does the Investor Make Money?
What are the investors really buying? They are not buying the actual medical practice, the actual treating of patients' part of the practice, or the medical practice legal entity. Some states allow the corporate practice of medicine, but many don't. That's a different discussion. The short version is that in many states, anyone who is not a physician cannot own the patient treatment part of a medical practice. To avoid this issue, the investors (businesspeople) had to create a new business model to accomplish their objectives. In my first article in BCA Magazine that I referenced in the introduction, I explained this separation of the patient care services part of a medical practice from the business support services part of a medical practice. This was and is the business model I have been using and recommending to IPOP physicians as a survival technique since businesspeople started buying medical practices. There is nothing that prevents a physician from using the same business model to survive as an IPOP that the businesspeople are using to take over medical practices. Most physicians (including some of my clients) told me I was crazy and did not know what I was talking about and simply ignored me or terminated my services. I am still an independent businessperson while most of those physicians are not independent physicians anymore. They didn't know how to think like their business competitors.
When I quote, "buying a medical practice," there are actually two separate legal entities created to accomplish this. The patient care services part of the medical practice remains in place while a new legal entity is created to be the new business support services entity. The physicians still own the patient care services part of the medical practice, but there are no assets remaining in the medical practice. The revenue flow from the medical practice patient care services and the patient accounts receivable created by the physicians in the medical practice are processed through the patient care services part of the medical practice but are owned and controlled by the business support services new entity. For brevity going forward, I will use the acronyms, PCS for the patient care services entity, and BSS for the business support services entity. The physicians simply remain employed by the PCS entity and continue to provide and control (mostly) patient care as they had always done. However, the physician compensation within the PCS entity is controlled by the BSS entity. This is either as a fixed salary, "Eat What You Kill" formula, or some combination of both. This is what most physicians said they wanted, and why 70% of physicians are not in an IPOP anymore. There is an old Chinese proverb that says, "Be careful what you wish for; you might get it." All the multi-state physician mega groups I am aware of are structured this way. Many not-for-profit hospitals are also structured this way with a separate legal entity set up to run and own the business part of the hospital operations. Just because the hospital is "not-for-profit" under the IRS tax code does not mean there is not profit being made off the hospital services by an outside for-profit entity. The for-profit entity, if operated effectively, is making a lot of money for someone off the not-for-profit hospital business. Just because a hospital is not-for-profit does not mean it is cheaper for patients or better care for patients. There are for-profit hospitals that provide patients cheaper and better care than some not-for-profit hospitals.
I get asked all the time by physicians, "How can investors make money off my practice, when I am making less money all the time?" I tell them, "You are not a businessperson and you do not understand the business dynamics of your medical practice. You just see money coming into the practice and make no distinction between the monetary value of the practice versus the monetary value of the physician labor." I also ask the owner physicians why they do not pay their employed physicians the same amount that they pay themselves when the employed physician is doing as much or more patient care than the owner physician. Their answer is usually, "Because I own the practice." Their explanation goes no further than that because the owner physician doesn't understand why, from a business perspective, he/she does this. As the owner physicians see it, they simply deserve more money without any specific business reason.
L.E. Shepherd, Jr., BS, MSA, has successfully provided comprehensive business advisory and management services to the healthcare industry and others for over 30 years. With his comprehensive business experiences and extensive speaking engagements, along with his many years of relationship building in the healthcare industry, Mr. Shepherd brings a unique perspective and set of skills to solving the complex business problems facing physicians, businesses, and the healthcare industry today and tomorrow. www.medbizonics.com