Can a small practice survive in California?

January 20, 2006

Smaller practices are under siege in the West, but observers think they will endure in some form. Will your area feel the pressure next?

In Howard's case, there was no single straw that broke the camel's back. Some of it was the usual hassles of running a solo practice and trying to collect from insurance companies. He also had an increasingly hard time finding new staffers because of the high cost of living in the area.

But the underlying issue was reimbursement. Back in the 1990s, when Howard belonged to a local IPA that contracted with HMOs, he was making about $150,000 a year. But all of the physician-owned IPAs in the area self-destructed, partly because of competition between primary care doctors and specialists for a shrinking pie. After Howard started contracting directly with the HMOs, his income-like that of many of his colleagues-dropped 30 percent, and it continued sinking 5 percent a year as costs rose without revenue increases.

So even though he didn't want to leave his solo practice, he says, his financial problems "just got to an overwhelming point." When the Palo Alto group approached him and said he could remain in his office, he talked it over with his wife and reluctantly decided to join the group, which was able to pay him much more than he could earn on his own because of its superior bargaining position with health plans.

While small private practice isn't about to disappear in California, it's clearly under siege. If you think this doesn't apply to you because you don't live in a managed care mecca, consider this: One-third of California's primary care physicians and nearly half of its specialists are in solo practice. With capitation down, these soloists and other small practices depend just as much on discounted fee-for-service as you do; and like you, they're not seeing reimbursement keep up with expenses. So while their experience may be more extreme than yours, they could just be further along in the same process you're going through.

"Grim" outlook for small practices

Although the California healthcare business is more stable than it was in the 1990s, things have gotten worse for small private practices. "I'm not sure there's a future for independent private practice, except for going to a concierge model," says FP Joseph E. Scherger, a professor at the University of California, San Diego, who was in a small practice himself for many years. "Unless patients are paying you directly, it's very hard and getting worse."

Jack Lewin, CEO and executive vice president of the California Medical Association, notes that Medicaid and commercial insurance rates in California are among the lowest in the country. Across the state, he says, Medicare is the best payer. These poor reimbursement rates make it difficult for soloists to survive and discourages new physicians from setting up their own practices, he points out.