Group Practice Economics

After playing with fire, this group went down in flames

Founded on a dream in the 1930's, the Burns Clinic collapsedin a nightmare of the '90s, as the cozy collegiality of its physicians gaveway to managed care anxiety and the me-first attitude.

When general surgeon Dean Burns started the Burns Clinic in his hometownof Petoskey, MI, he envisioned a mini-Mayo Clinic. It was the Depressionyear of 1931, but scraping up the money wasn't that tough. America's wealthiestfamilies had been escaping the summer heat in this idyllic northern Michigansetting since the turn of the century, and they were only too happy to funda clinic to provide them with the best and most sophisticated medical care.

And for years, the Burns Clinic thrived, providing Petoskey--population7,500--and 23 surrounding rural counties with such specialized servicesas open-heart surgery, neonatal intensive care, and radiation oncology.Top specialists were willing to practice there for a third less pay thanthey might get elsewhere, because of the easy lifestyle, pleasant climate,and stunning scenery. "We had wonderful physicians, a very low divorcerate, kids on the ski team. This was almost Camelot," says Dave Thomas,the clinic's former executive director.

But just as Camelot crumbled because of a betrayal of trust and an inabilityto bridle base desires, so too did the Burns Clinic. Disputes over money,a failed partnership with PhyCor, and an every-doctor-for-himself attitudedestroyed the clinic after 68 years. And now the battle-weary physicians,splintered into 30 single-specialty groups, are left to rebuild their professionallives.

Perhaps because the group was ensconced in a resort community on LakeMichigan, it developed a take-it-easy culture that tolerated doctors whoseemed more inclined to go fishing for steelhead than prospecting for patients."Socialism," some doctors derisively refer to it now. Productivityamong the 125 physicians ranged wildly, from the 90th all the way down tothe 10th percentile when compared with the Medical Group Management Association'sfigures. A convoluted compensation formula disguised the rewards of workinghard--so many physicians simply didn't.

Urologist John Hall, the clinic's former medical director and CEO, oncefired a doctor for sexual harass-ment, but admits he turned a blind eyeto the less productive doctors in the group. "When you're family, it'shard to let someone go for low productivity, which was a lifestyle issuein our group," says Hall, a 30-year Burns veteran.

In retrospect, however, that was a mistake. "Low producers dragthe group down, and you can't live with that kind of diversity," Hallsays. "Groups should aim for the 70th percentile in productivity."

Although not all doctors pulled their weight, the group generated enoughrevenue to keep the high producers from grumbling. The specialist-heavyclinic enjoyed a near monopoly in the region, so patients flowed in.

Problems began, however, when the Blues, the only significant privatepayer in the area, reduced reimbursement. For some procedures, they paidless than Medicare's rate.

"We were part of the problem, because every time the Blues loweredreimbursement rates, we continued to accept them, and that kept other indemnitypayers out of the market," says Hall. Blue Cross Blue Shield of Michigansays it pays the same amount to doctors in Detroit, Lansing, and Grand Rapids,and that nine out of 10 doctors accept its reimbursement.

A few years later, an even greater threat rattled the clinic. All overthe country, physicians' anxiety rose as Hillary Clinton and Ira Magazinertalked up a brave new world of managed competition. "There were thosesecret meetings and talk of building health insurance purchasing cooperativeswith 300,000 covered lives," remembers Dave Thomas. "It seemsnaive now, but we really believed that legislators would force managed caredown our throats."

And with absolutely no managed care experience, the Burns doctors panicked.Their only thought: how to get money quickly enough to buy the practicesof referring primary care physicians before someone else snapped them up.

Northern Michigan Hospital, where Burns doctors composed 95 percent ofthe medical staff, was the logical capital partner. Indeed, the hospitaland the Burns Clinic were physically attached. But distrust lingered overa partnership that had been proposed and aborted a few years earlier. Still,the physicians were willing to consider another deal with the 299-bed hospital,until "a stupid thing happened," says Thomas.

The group had just added two floors to its clinic, an expansion thatalso benefited the hospital. So the doctors expected the hospital to extendits elevator shaft. "They said No to a $75,000 issue," says Thomas."Our board was furious, and we wouldn't consider a partnership withthem. It was dumb thinking on the hospital's part--and an overreaction onours."

Burns and PhyCor: A marriage not made in heaven

The fallout sent the doctors looking elsewhere. Old money may have builtthe Burns Clinic, but in 1994 the group turned to new money to help it navigatethe managed care frontier. It accepted a deal with PhyCor, the practicemanagement giant that today encompasses 3,359 doctors in 52 practices.

Specifically, PhyCor and the clinic would:

Merge the assets of 50 to 75 primary care physicians working within an80-mile radius of the Burns Clinic. Patient referrals to the clinic wouldthen be guaranteed, and lab and X-ray revenues from the satellite officeswould add to the group's coffers.

Add more diagnostic ancillaries to the main clinic, to boost revenueby $1 million a year.

Introduce new payers to the area so that competition would force theBlues to raise reimbursement levels.

Form an IPA of Burns doctors and other physicians to increase negotiatingstrength with the Blues.

PhyCor spent "in the high-teen millions" to purchase the BurnsClinic's assets, says Joseph Hutts, PhyCor's chairman and CEO. "Itwas not a big price, because we knew it would never be a very strong market.The group had serious geographical weaknesses. The Blues had a virtual monopolyon commercial payment, and reimbursements were much below what you'd seein other parts of the country. I've never seen that kind of strangleholdbefore. Another problem was the large seasonal fluctuation in patients.And many physicians were unproductive."

Still, PhyCor assumed the venerable clinic would be profitable and thatthe group's problems had solutions--provided the group's culture could bechanged. Along with introducing payer competition, PhyCor planned to parethe number of physicians in the Burns Clinic, recommend a compensation formulato spur productivity, and cut expenses.

Each physician received well over $100,000, spread out over five years."Since a third of our physicians were in their 50s and 60s, we didn'twant to hand it all out in Year One and have doctors retire en masse,"says Thomas. The strategy proved astute. It not only kept most doctors onboard, it produced a financial windfall for the clinic. By holding the proceedsin PhyCor stock instead of dispersing them all at once, the clinic nearlytripled the sale proceeds as the stock increased in value.

The downside, says Hutts, was that the windfall "shielded the groupfrom reality. The physicians didn't face the changes they should have made."The clinic used the money to prop up physician salaries and replenish anunderfunded retirement plan.

A badly managed, ill-timed battle with the Blues

The managed care originally envisioned by the doctors never came to Petoskey,for what now seem to be obvious reasons. The area is rural, the populationshrinks drastically in winter from its summer peak of 120,000, and manyresidents are on Medicare--hardly the picture of a prime managed care market."Why did we think managed care would come to Petoskey?" asks Hall."Looking back, a lot of our reasons don't make sense. We were thinkingnationally instead of locally."

Some former Burns physicians blame PhyCor for not reading the marketcorrectly. "PhyCor is supposed to be the managed care expert,"says cardiovascular surgeon Robert Johnson. "They knew that for managedcare to work, you need a large population, large employers, and multiplepayers. And we had none of those. PhyCor used our fear about Clinton's healthcare reform to sell us a bill of goods."

Others accept responsibility. "I'm not angry at PhyCor," saysgeneral surgeon David Rynbrandt. "We should be angry at ourselves.We chose to sell to them. The vote was 85 percent."

Some blame the doctors' collective greed. An editorial in Modern Physicianstated, "Burns' doctors failed to give PPMs close scrutiny, perhapsbecause they were blinded by prospects of a big payout they hoped wouldput them on easy street."

Competition or no, PhyCor maintains that one of its primary goals allalong was to break the Blues' monopoly--not necessarily to bring managedcare to the area. PhyCor proposed that the physicians play hardball withthe Blues and refuse to accept the insurer's reimbursements as payment infull. Patients with Blues insurance would have to cover the difference betweenthe Blues' payments and the doctors' fees. And to increase their negotiatingstrength, the doctors would form an IPA consisting of 450 doctors from alarge geographic area. The IPA owned an HMO that PhyCor offered as an alternativeto the Blues.

Burns physicians agreed that they needed to challenge the Blues, butthey didn't anticipate their patients' fickleness--or their organization'sshakiness. The showdown with the Blues came in September 1998 and turnedinto a public relations nightmare for the Burns Clinic. The Blues mounteda large advertising campaign, inviting Burns patients to a local hotel andoffering to refer them to non-Burns doctors who did participate. "TheBlues portrayed us as rich doctors sticking it to patients so we could keepour timeshares in the Cayman Islands," says pediatrician Glenn Seagren.

Patients didn't like the portrayal. "We thought they'd rally aroundus and be willing to pay a little extra to keep the clinic going, but wegot a clear No on that," says ob/gyn Timothy Wilcox. "I was surprisedthat patients I'd been treating for 10 years would desert me because ofan extra $6 per visit."

Local employers weren't keen on enrolling their employees in a higher-costHMO simply to receive care from Burns doctors. "When the Blues arecharging lower premiums, why should an employer pay for a plan that costsmore?" says Hutts. "Also, the HMO was introducing risk to employerswho weren't ready to accept it."

That said, Hutts maintains that the combative strategy against the Blueswas the right one. "It was painful, but it had to be done," hesays. "Unfortunately, the Burns Clinic doctors didn't engage the waywe wanted them to, and they didn't stay the course. They had to be moreproductive to overcome the reduction in reimbursement, but that was counterto their culture. We should have been more insistent about implementingour plan."

If the challenge to the Blues had come three years earlier, says formerCEO Hall, the doctors might have been willing to wait out a few lean years.The group was still sufficiently intact. "But by this time we werestarting to implode," he says, "and the board leadership wasn'tstrong enough to withstand it.

"Also, we didn't manage communication with patients well. Retireeswho had supplemental Blue Cross insurance thought we wouldn't see them anymoreand wouldn't accept Medicare. They didn't understand that we did acceptMedicare, and that the hospital still accepted the Blues' reimbursementas payment in full."

A new problem: Internal dissension

Meanwhile, the physician exodus from the Burns Clinic had begun. DaveThomas, the group's executive director of nine years, left in May 1998 andwas replaced with a PhyCor administrator. "I agreed with PhyCor oncutting expenses, but I had already done it twice, and I thought the thirdround would cause revenue to drop more than we were saving in expenses,"says Thomas. "At some point you have to say, 'If you want someone elsein command, okay. This is the best I can do.' "

A few months later, the seven-member radiology department left and contractedwith Northern Michigan Hospital, creating a major cash flow problem forthe group and more unrest among the remaining doctors. By now most of thePhyCor proceeds had been spent, and doctors were feeling the PPM's servicefee of 4.5 percent of net earnings. Rampant productivity problems and lowreimbursement reduced doctors' incomes by 15 to 25 percent. And the specialistswere not happy about subsidizing the 15 additional primary care doctorsthe group had recruited in anticipation of managed care.

The doctors had legitimate beefs about their income. Family physicianswere earning $85,000 to $100,000, neurologists $80,000, general surgeons$150,000, and general internists $110,000 to $130,000. According to MGMAfigures, the low-earning FPs and neurologists were below the 10th percentilefor their specialties, the surgeons were in the 14th percentile, and theinternists were in the 17th to 40th percentile. The Burns doctors were alsobelow the median net incomes reported in the Medical Economics ContinuingSurvey for 1997: $131,780 for general internists, $132,400 for FPs, and$182,930 for general surgeons.

The income average for all the physicians in the 125-doctor group was$140,000. MGMA data for 1997 put the average salary for primary care doctorsin a multispecialty group at $135,791, and for specialists at $199,474.

An emerging problem was that not every doctor was hurting. The group'sboard of directors had cut special deals with discontented doctors--breakson overhead, guaranteed salaries--to keep them from leaving. "Therewere physicians who billed much less than I did and made $100,000 more becausethey had a special deal," says Wilcox.

But then the board made one deal too many. It was December 1998, andall six general surgeons had just announced they would be leaving. The sixcardiologists subsequently demanded that the board reduce their share ofthe overhead and guarantee them $300,000-plus salaries. Instead of sayinggoodbye, the board caved in and accepted the demands.

It was a fatal mistake, says Hall. "Six cardiologists suddenly earningsignificantly more than they would have under the compensation plan wasa tremendous drain. If they weren't going to pay their percentage of expenses,we had to take it from someone else. The midlevel earners were the oneswho really lost out--not the high-earning specialists or the primary caredoctors."

If PhyCor knew the group was hanging itself with its income-distributionmachinations, why didn't it step in to fix things? "We repeatedly pointedout that the compensation formula had to provide more incentive for production,"says Hutts. "But we didn't employ the physicians, nor did we controlhow they practice. Income distribution is an area we had no control over."

Was PhyCor asleep at the wheel?

While acknowledging their own contributions to the clinic's ruinous businesspractices, the doctors nevertheless expected more management help from PhyCor.

"Although there were endemic problems within the group, we thoughtPhyCor would help us with billing procedures, efficiency of operations,and economics, but they didn't," says internist/gerontologist JamesShirilla, a former board member and a Burns doctor for 20 years. "PhyCordidn't provide any extra management at all." Adds cardiovascular surgeonJohnson, "If we had kept the service fee we paid to PhyCor and distributedit to the physicians, we would have kept the clinic intact. We could havemanaged the clinic as well by ourselves."

Dorothea Taylor, a practice management consultant who helped severalphysicians establish private practices when the clinic dissolved, voicesa criticism that has been leveled at PPMs in general. "PhyCor was busybuying doctor practices and devoting too little time to establishing a coreinfrastructure of personnel and resources to manage Burns. They took a practicethat was wobbly and knocked it down with a big bowling ball."

Other Burns physicians are more forgiving of the PPM. "PhyCor didn'tdevote the time and attention it should have, but we were passive as thingswere circling the drain, and we fractured our own solidarity," sayspediatrician Seagren. "It's easy to blame PhyCor, but if you aren'ttrained in business, how do you know whether you're getting good serviceor not?"

General surgeon David Rynbrandt doesn't begrudge PhyCor, either. "Whenthey realized we were in trouble, they made a significant effort to turnthings around. But it was too late. They couldn't change the geography orthe patient mix in this area."

And while PhyCor was able to increase the clinic's ancillary revenueby $1.5 million a year, the company says that physicians all over the countryhave unrealistic expectations about what a PPM can do to improve their incomes.After discounts, physicians are currently reimbursed an average of 65 centson the dollar, according to Howard Jewell, PhyCor's vice president of marketingand communications. Figuring in overhead at 40 percent of billings, physicianstake home only a quarter of every dollar they bill.

"Physicians see their incomes dropping, but they don't realize thatit's caused by lower reimbursement and an inability to adjust fixedoperating costs," says Jewell. "So the physicians look for otherghosts, which creates significant unrest."

The Burns Clinic's board of directors also doesn't escape blame. "Whenthings are going wrong, a group needs a strong board to fire the CEO ordownsize or clean up the organization," says Hall. "But you haveto give them training to go to war." Hall regrets that the clinic didn'tsend its doctors to "boardmanship" classes. "You need trainingto understand your fiduciary responsibility and how to make decisions forthe good of the group rather than individual constituents."

By January 1999, the clinic had lost more than a third of its doctors.Some had left town, others had bought out their restrictive covenants, andfour had set up practice in town without paying the required year's salaryand were sued by PhyCor.

Enter the once-spurned Northern Michigan Hospital. Desperate to keepthe doctors in Petoskey, the hospital bought the Burns Clinic contract,restrictive covenants, and assets from PhyCor for an undisclosed amount."It was much cheaper than rebuilding the entire medical staff,"says Jeffrey Wendling, CEO and president of Northern Michigan Hospital andits parent company, Healthshare Group.

On April 1, 1999, the Burns Clinic ceased to be. And the Blues remainedthe only commercial payer in Petoskey.

The aftermath: Doctors split into single-specialty groups

You have options, the hospital told the remaining 79 Burns doctors. Thosewho wanted to start a new practice were free to do so, but the hospitalasked them to sign an agreement to remain in the area for three years. Orthey could elect to be employed by the hospital for 90 days to two years,with their incomes based strictly on productivity.

"Since many Burns physicians had never practiced independently before,we had to provide a short-term safety net--employment--to keep them in thecommunity," says Wendling. "But after two years, they are on theirown."

Another option was for physicians to buy practice assistance from themanagement services organization the hospital had set up with the BurnsClinic assets it acquired. For a fee of 10 percent of revenue, the hospitalwould run a doctor's back-office operations. Or physicians could buy piecemealfunctions such as billing, collections, phone coverage, and transcriptionservices.

Twenty-one physicians are currently employed by the hospital, 42 wentout on their own with full or partial MSO services, and 16 set up practiceswith no help from the MSO.

For now at least, none of the physicians have resurrected the practicemodel that was so familiar to them. From the ashes of the multispecialtyBurns Clinic have sprung 30 single-specialty groups, with former colleaguesnow competing against one another.

That's hardly surprising, says pediatrician Seagren, who will launchhis practice in October with at least one other colleague. "Everyoneis afraid of getting stung again or being second tier to a larger groupthat determines your future and directs you to a place you don't want togo," he says. "Emotionally, it's very appealing to be out on ourown. Of course, it's only been five months since the demise of the clinic.So, although we're happy to be captains of our own ships, we don't knowwhether those ships are seaworthy."

"The doctors now out on their own think they'll make more moneybeing free from the Burns compensation formula and overhead," saysconsultant Dorothea Taylor. "And I think 90 percent of them will dowell. But there is a learning curve to managing small private practices,and they will make mistakes."

General surgeon Rynbrandt has already learned some lessons. "Whenthe four of us started our practice, we thought we could get by with sixemployees," he says. "But with all the paper-pushing that needsto be done, we realize that we need more staff, although not as many asthe four-plus employees per doctor in the clinic. I have to be a businesspersonand watch every nickel and dime. It's a new challenge, and so far I don'tdislike it. Having direct control over your business is worth the effort."

In practice with another ob/gyn from Burns since March, Wilcox says hehadn't realized what he'd been missing. "I'm working less than halfas much and making more. I never wanted to go into private practice, butI'm liking this more than I thought I would." His only complaint isthe every-other-night call schedule. "I originally joined a big groupbecause I didn't want to be on call more than once every four nights,"he says. But relief is on its way, now that he and his partner have recruiteda third ob/gyn.

The specialists, happy to be free of subsidizing primary care doctors,don't appear to be worried about the source of their referrals. "Conventionalwisdom says you have to employ your primary care base," says cardiovascularsurgeon Johnson. "But my instinct now says that if you provide verygood subspecialty care, treat patients well, and keep primary doctors informedabout their patients, those primaries will refer to you."

Primary care doctors, too, are counting on higher salaries than theygot at Burns. Pediatrician Glenn Seagren says his department was never reimbursedfor certain diagnoses--about 5 percent of office visits--because the BurnsClinic did such a poor job of billing and collecting. "If we teachourselves to bill for maximum reimbursement, we'll be able to offset thelow reimbursement from the Blues better than we did at Burns," he says.

And how do the physicians feel about competing against former colleaguesand friends? "Right now, there isn't much love lost," admits Johnson."There was so much tension within the group that competing againsteach other on the outside doesn't feel so bad." The lingering distrust,however, prevents Johnson from creating a heart-lung institute in the area."It's like pulling teeth to get people to work together," he says."The pulmonologists say, 'We'll never work with those cardiologistsagain.' Eventually the bitterness will fade, but right now the wounds arestill open."

How to make it without the Burns name

The transition to private practice was a bit rocky for both doctors andpatients. Patient files weren't always available, and the hospital's MSOinitially had difficulty transferring the clinic's billing system to individualdoctors' offices. "These are headaches that go with a private practicestart-up, but they were happening all across town," says Steward Sandstrom,CEO of the Petoskey Regional Chamber of Commerce.

One significant loss to patients is that the now-independent doctorsno longer use a common medical record, making continuity of care more difficult."We may miss a few details in taking care of a patient," admitsRynbrandt.

Doctors now out on their own will have to work harder to keep themselveson the map. "With everyone competing for patients, there are too manydoctors for the area," explains practice management consultant AllanBoilore. Adds former administrator Thomas, "Short term, the doctorswill make more money. But as single-specialty groups, they won't draw froma 23-county area, because patients from way out won't travel here, likethey did for the clinic."

Heart specialists have felt the impact of that reality. Two hospitals--one60 miles away, the other 200, both with heart programs--increased theirmarket share during the chaos that reigned at Burns. The Petoskey cardiologists--andthe surgeons they refer to--have experienced a 25 percent decline in patientvisits. "The cardiologists have to reach out to regain their marketshare," says cardiovascular surgeon Robert Johnson. "If we don'trecoup those referrals, we and the hospital are in big trouble."

With its census down by 10 percent and its cancer program gutted by retiredand departing Burns doctors, Northern Michigan Hospital is making a bigeffort to advertise the remaining Burns doctors' practices. "We haveto regain the confidence of the community and referring physicians,"says hospital CEO Wendling. "People were wondering whether this medicalcomplex would be here when the dust settled."

"Tragic" has been used repeatedly to describe the demise ofthe Burns Clinic. A group that has stood for 68 years simply isn't supposedto topple. But a long history is no guarantee of an enduring foundation,says Dean Smith, associate professor of finance at the University of Michiganand an author of an upcoming case study on the Burns Clinic.

"Of the original 12 companies that made up the Dow Jones IndustrialAverage, only two or three still exist," Smith points out. "Evenif you have a monopoly, it takes a lot of care to keep it successful. Youcan't put it on autopilot."

Meanwhile, generations of Upjohns and Fords continue to vacation in Petoskey,and the steelhead in Lake Michigan still bite, while the former Burns doctorswork their way back to the good life. "I didn't consider leaving Petoskeywhen the clinic folded," says pediatrician Seagren. "Certainlynot when fishing season was just starting."

By Anita J. Slomski, Group Practice Editor

. After playing with fire, this group went down in flames.

Medical Economics

1999;17:99.