Medical Group Formation


As a solo primary care physician, I am being solicited by competing medical groups to join them. Any recommendations?


Everywhere you turn you hear "group, group, group" to succeed at managed care! At the national, state, local, hospital and individual physician levels it is the hot topic of conversation. In addition to existing affiliations, physicians are being presented opportunities to join new Physician Hospital Associations (PHOs), Management Service Organizations (MSOs), Independent Physician Associations (IPAs), Managed Care Organizations (MCOs), Group Practices Without Walls (GPWWs), Foundations for Medical Care (FMCs), Physician Organizations (POs or PSOs), Physician Practice Management Companies (PPMCs), single and multispecialty groups and small single specialty groups. Recruiters are singing the praises of corporate type groups and HMOs, both in and out of state. With this confusing array of opportunities, what should you do?

The first issue to consider is why all this attention is focused on you and how it could affect your decisions.
Anyone watching how the changes in the health care system will effect the delivery of care knows that controlling physicians is crucial, with primary care physicians usually more in demand than specialists. PCPs and certain specialties are in short supply in many areas, and demand will increase until the medical schools or retraining programs respond over the next five to ten years. The result of these factors is that your value is climbing or dropping dependant on your specialty and location. Smart organizations will try to acquire you or your practice as soon as possible if the price is right.

As a strategy for the future, affiliation with some type of group makes sense for a number of reasons for most physicians.
It provides economies of scale, allows for more sophisticated management, allows more delegation of the business tasks that many physicians find unpleasant, usually increases net income, spreads risk in capitation, makes it easier to attract contracts, patients, and associates, provides peer support, etc.. For certain physicians, remaining solo is appropriate, such as those with a demonstrated inability to function in a group setting, those with certain types of non-traditional practices, dedicated over-utilizers or those in certain niche markets such as cosmetic surgery. For some physicians very close to retirement the hassle of change will not be worth the gains.

For the majority of physicians what type of group is appropriate? The answer falls in a few categories with no one answer right for everyone.
One main criteria is predominant in all categories though and that is, if at all possible, to try to preserve equity rather than selling out and becoming an employee. Preserving equity means retaining a form of ownership and control, with that ownership having tangible dollar value that has potential for increase. Remember, many physicians have increasing value. You usually don't want to sell any investment at the bottom of the market, which probably is now in primary care practice and some others. The exception is when you don't have any other choice because of factors in your immediate community.

The first, and most conservative, form of group formation for physicians is single specialty.
Five physicians is an ideal minimum number especially for a single site, with the next logical steps of 10, then 15 or more. A group of five is usually well positioned to ride out the next few years and maintain equity for continued existence or larger group affiliation in the future. It also provides an excellent group dynamic, taking advantage of the benefits of economies of scale without the bureaucratic hassles of larger groups. The drawback is that it is too small to have significant managed care clout in most communities and may be squeezed out by larger competitors.

Single specialty "centers of excellence", either network or staff model, as another form of group are available only to a few physicians, and typically limited to the highest cost tertiary specialties.

Larger group formation offers advantages such as dependable income (usually), expanded benefits packages, freedom from business hassles, more free time for other interests and market dominance. Drawbacks often include loss of control of working environment and individuality, greater risk of loss of job, a clinic atmosphere, political stereotyping in the greater community, and having your clinical competence being assumed by outsiders and naysayers to be equal with that of the weakest member of your group. The difficulty of large group formation is far greater, as is the risk of failure to achieve formation. Many multispecialty groups now being formed are specialist-dominated to protect the status quo and not to change with the market, causing concern for future competitive position. In most multi-specialty groups, PCPs should be in control for future strategic market positioning.

Group Practices Without Walls (GPWW), in either single or multispecialty modes, offer physicians some of the benefits of group practice while maintaining individual practice locations and most of the feel of private practice.
A major drawback, especially in comparison with "staff model" groups, is the often lesser commitment by individual physicians to the success of the group over their own "practice". GPWWs also have certain less efficiencies due to replication of facilities, staffing, etc., and so have higher costs resulting is less profits for the physicians from professional services. A weakness of many GPWWs is that they don't impose enough changes on their members to maximize benefits. A major reason for many GPWWs to form was to be able to integrate ancillary services for additional profit. This profit may be in jeopardy in the future due to HMOs contacting separately for ancillary services, or from adverse legislation.

A common alternative being pushed is the Management Services Organization (MSO).
This includes PPMCs for purposes of discussion. An MSO is a legal entity formed to contract for management and services to physician practices, with varying levels of invasiveness. The identity and motivation of the funding entity must be carefully reviewed as "he who has the gold makes the rules" in many cases. You also need to carefully scrutinize who is doing the management, as there are few existing successful MSOs, and many are failing. Many people and groups represent themselves as MSO managers, including unemployed ex-hospital administrators and others with no experience in the field. The main benefit of MSOs that succeed is that they are often the best option for maintaining the flavor of private practice, while maintaining much control by the individual physician, with eventual involvement into the probable integrated systems of the future.

Though conceptually attractive and theoretically well-grounded, there is increasing evidence that most Physician-Hospital Organizations (PHOs) are not finding a satisfactory level of success in the market.
Especially beware the hospital that wants to manage your practice but can't manage its own affairs. Very few, if any, have been successful to date in bringing significant benefits to their physicians in a stable environment. Few are well run. There is an inherent financial conflict of interest between physicians and hospitals in capitated environments. Most hospitals are losing a lot of money on their physician groups. Physicians should probably avoid most PHO memberships and form their own physician groups which can then contract with hospitals fairly and with their own representation. This does not rule out using hospital financial assistance and having a tight relationship with a hospital, just that it must be done with extreme care and guidance independant from the hospital's consultants. As independant consultants, we have formed some successful groups this way.

The differentiation between IPAs, MSOs, PPOs, HMOs and the newer labels of Physician organizations (PPAs or POs or PSOs), Exclusive Contracting Organizations (ECOs), etc. is becoming blurred.
As a physician considering joining a group a key issue to remember is that "the large print giveth and the small print taketh away". You must read and understand the contracts in detail and get independent professional opinion on those issues in question and negotiate them in your favor, rather than depending on the label applied to an organization.

Unfortunately there is real risk in any decision you choose. Exercising due diligence should protect you from making a disastrous decision. If the decision you make does turn out to be disastrous remember, as a physician, your skills will probably be in demand somewhere.

Group Formation and Valuation Consulting
PMM consultants have been involved in the formation and re-engineering of over 40 medical groups, from 2 to 200 physicians. Proprietary Group-Formation Consulting Packages are available and can often be performed in one day on-site with interested physicians. This consult can, in one day, guide and assist in answering the vast majority or decisions that need to be made in forming a group of any size or type. Medical practice valuations can be performed on the same visit. Seminars are also available and have been provided for many hospitals, MSOs, and state and national medical associations.

To contact a consultant regarding this topic,
contact us
or call 1-707-546-4433, 24 hours.

More Information
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Written by Keith Borglum, Consultant with Professional Management and Marketing, 3468 Piner Road, Santa Rosa California 95401, phone . They are or have been members of: the American Academy of Family Physicians Network of Consultants, the American College of Physicians Managed Care Professional Advisory Network, the American Medical Association's Physician Advisory Network, the National Association of Health Care Consultants, the Society of Medical Dental Management Consultants, the Institute of Business Appraisers, and are an affiliate of the Medical Group Management Association.

Copyright and Reprint Permission
Copyright (C) 2001 Professional Management and Marketing. Reprinted with permission from CALIFORNIA MDs BUSINESS ADVISOR, author Keith Borglum, 3468 Piner Road, Santa Rosa, California 95401, (707)-546-4433. Reprint or quote permission is granted provided proper credit is posted exactly as in the previous sentence and two copies of publication are mailed immediately upon distribution to the author at the above address.