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Dr.
Caroline Reay says she and other HealthFirst physicians
were victims of their own business naiveté.
Patients
wondering what's happening to their HealthFirst doctors
can call 256-6825, fax 219-1411, e-mail info@your
healthfirst
or visit www.your
healthfirst.com.
The
mood among physicians nationally is so grim that
delegates to the American Medical Association voted in June
to form a union.
HealthFirst
officials estimate that the group holds some 500,000 medical
records, altogether representing 13 million linear feet.
The dream is dead: Dr. Leigh Dolin, former president of
the Oregon Medical Association, says physicians have lost
the clout they once enjoyed.
In 1999,
Oregon's average adjusted per-capita cost (or AAPCC) rates,
a measure of Medicare reimbursement, stands at $388 per
member per month, far below the national average of $484.
According
to a survey by Medical Economics, the median income
for doctors on the West Coast is $150,000, compared with
$164,000 for the nation's doctors as a whole. Practicing
medicine is stressful, especially for older doctors.
The
suicide rate among Oregon physicians aged between 45 and
64 years old is two-and-a-half times the rate of their peers,
according to the state Health Division. (Dentists rank higher,
lawyers lower.)
In 1997,
Americans spent $1.1 trillion on health care, or $3,925
per capita. The health-care industry represents 13.5 percent
of the U.S. economy. More figures are available at www.hcfa.gov/
stats/nhe-oact/
nhe.htm.
Tim
Dupell now works for a California
youth-services
company.
PPI
has become unpopular with its other partners as well. Doctors
at
the Medford and Corvallis clinics
are also seeking
a divorce from the company, throwing open the question of
how PPI will pay off its $12 million debts to U.S. Bank
and First Union.
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At night, the majestic, brick-faced edifice of the HealthFirst
clinic on Northeast Glisan Street is an impressive sight.
Looming above the traffic, the building radiates an aura of
millennial confidence, a place where aches and pains and sufferings
melt before the might of American medicine.
So much for architecture.
On Aug. 31, HealthFirst Medical Group will fold its stethescope,
hang up its gown and close its doors. It is, in many ways,
the end of an era. Medical groups are to doctors what law
firms are to lawyers--hallowed institutions with their own
traditions, cultures and quirks. HealthFirst, with a pedigree
that stretches back to 1906, is one of the biggest, oldest
and most prestigious medical groups in the Northwest, and
its collapse is sending shock waves through the profession,
as 140 doctors and 600 employees at nine clinics scramble
to find new jobs.
"It's phenomenally humiliating," says Dr. Caroline Reay,
a HealthFirst internist who joined the group in 1993.
For its 125,000 patients, HealthFirst's untimely death
signals confusion and anxiety. They will have to endure
such headaches as disappearing charts, wrong numbers, new
hours and red tape. Many will have to adjust to a new location;
some will have to find new doctors. "It's a logistical nightmare,"
says Steve Lynch, an executive at Pacificare, a health maintenance
organization that has 24,000 patients at HealthFirst.
But the disruption to patients is hardly the only consequence.
The implosion of HealthFirst has triggered a seismic realignment
in the local health-care industry, with big systems such
as Providence and Legacy taking ever more dominant positions.
More than that, it is a testament to the waning influence
of the medical profession. Doctors, once the undisputed
rulers of the health-care industry, now find their workloads
rising, their incomes stagnant and their decisions increasingly
subjected to scrutiny.
"The physicians have lost everything here," says HealthFirst
medical director Dr. John Santa. "They lost their company.
They lost their medical group. Hundreds of doctors and thousands
of patients have been disrupted. You've got to ask how the
system is working."
The irony is that HealthFirst's collapse is due in part
to an ill-fated deal--a deal that was supposed to guarantee
its doctors' independence.
A few days after Christmas 1996, Dr. Nora Kirschner got
a phone call. A graduate of Georgetown University School
of Medicine, Dr. Kirschner had been working at HealthFirst's
Northeast 47th Avenue clinic for three years. She liked
her job and enjoyed working with her patients. She weathered
the 12-hour work days with the comforting thought that her
annual bonus was just around the corner.
But when she picked up the phone, Dr. Kirschner learned
that HealthFirst was in financial trouble. Not only would
there be no bonus, but doctors would actually have to refund
part of their salaries to keep HealthFirst in the black.
She owed the group $4,000. "Things were very, very bad,"
she says.
Dr. Caroline Reay also got The Call. She had been planning
to use her bonus to pay down her medical-school loans and
buy a new car to replace her beat-up old 1983 Honda Civic.
Now, she learned, she owed HealthFirst $700.
Kirschner and Reay were hardly the only doctors with a
case of the blues. Other doctors owed as much as $20,000.
Across the nation, physicians were getting less money and
seeing more patients. Things were especially difficult in
Portland, where doctors say their incomes are among the
lowest in any major city in the nation.
1996 was a particularly turbulent year for HealthFirst.
Formerly known as the Metropolitan Clinic, the group had
merged with the Suburban Clinic to form a sort of "super
group." With 11 clinic locations and 159 doctors and nurse
practitioners, HealthFirst became a major player in the
local health-care scene, boasting annual revenues of more
than $60 million.
But the merger was protracted and expensive. As HealthFirst
administrators scrambled to consolidate computer systems,
billing operations, equipment and services, they also had
to confront entrenched fiefdoms and petty jealousies. It
was the medical equivalent of merging the Beatles with the
Rolling Stones.
Compounding the gloom, HealthFirst was struggling with
a new reality known as managed care.
Long ago, in a galaxy far, far away, patients who needed
to see a doctor simply went to a clinic and paid for their
own care. As medicine grew more complicated--and expensive--patients
relied increasingly on health insurance. Although this shielded
individuals from financial catastrophe, it also disconnected
both doctor and patient from the cost of health care. The
result? Soaring medical inflation.
Managed care turned this system on its head. The idea is
actually quite simple. Patients sign up with health maintenance
organizations (the dreaded HMOs) and pay a monthly premium.
The HMOs in turn negotiate contracts with medical groups
such as HealthFirst, who agree to take care of all patients'
needs for a set fee. From the group, patients select primary
care physicians who minister to their earaches and skin
rashes, their hypertension and arthritis. The primary care
physician acts as a "gatekeeper" to the rest of the system,
controlling hospital admissions, ER visits, lab tests and
access to expensive specialists.
In essence, the patients pay the HMOs for insurance, and
the HMOs in turn pay the doctors to provide care. If the
doctors can keep a lid on their costs, carefully watching
every prescription, every lab test, every X-ray, they can
make money. But if the HMO payments sink too low--or the
doctors spend too much--they take a bath.
It is difficult to overstate the changes managed care has
inflicted on the medical industry. First to feel the pinch
were hospitals, as patient stays shortened and more procedures
were shifted to outpatient clinics. Next hit were the specialists,
who now relied on primary care physicians for patient referrals.
But by the middle of this decade, the pressure had shifted
to the primary care physicians. Alarmed by media horror
stories, patients became more aggressive about pestering
their doctors for access to specialists and expensive prescription
drugs. But HMOs refused to fork over more cash. As a result,
doctors were forced into a position where the more money
they spent on their patients the less they kept for themselves.
With a high proportion of primary care physicians, HealthFirst
was particularly vulnerable to the HMO squeeze. As a result
of low Medicare reimbursements, flat insurance premiums
and high merger costs, the group posted a stunning loss
of $4.1 million in 1996.
While HealthFirst struggled to survive, a white knight
emerged from the shadows. Its name was Physician Partners
Inc., and it made the doctors an offer that was too good
to pass up.
Physician Partners Inc. was born of an accountant's frustration.
As the chief dollars-and-sense man of the Corvallis Clinic,
Tim Dupell was young, idealistic and perplexed by the way
doctors did business. Year after year, when the clinic made
money, the doctors simply divided up the profits. But whenever
they needed to buy new equipment, they borrowed money and
paid interest. For a guy who gets excited about cash vs.
accrual-based financing, this was exasperating. Why not
set aside some of the profits, then use that money to finance
future expansion?
One day, wincing over balance sheets, Dupell had a brainstorm.
He knew that most doctors would rather practice the art
of medicine than sully their hands with the business
of medicine. So why not farm out the business stuff to a
completely separate company? "I wanted to address the lack
of financial discipline," he says.
After thinking about it, he realized there was nothing
to prevent such a management company from providing services
for several groups. Indeed, the more groups it represented,
the more it would reap from economies of scale--and the
more power it would have to bargain on behalf of its groups
for better rates from hospitals and HMOs.
Dupell realized something else, too. If that company was
run properly, it could make a lot of money.
For assistance, Dupell turned to David Goldberg, an affable
49-year-old health-care consultant from Florence, Ore.,
who cut his teeth managing clinics in the deserts of New
Mexico. (Goldberg refused to speak with WW.)
Together, they formed Physician Partners Inc., which represented
a brand-new business model known as a physician-practice
management company. In 1996, PPMs were the darlings of Wall
Street. Publicly traded PPMs such as Medpartners Inc. and
PhyCor Inc. had seen their stocks soar to dizzying heights
on the big board. "The multiples were huge," says one HealthFirst
insider. "A lot of people just had dollar signs in their
eyes."
PPI's first order of business was to sign up three big
Oregon groups: HealthFirst, the Corvallis Clinic and the
Medford Clinic. The pitch was simple: Let us worry about
the business deals, the leasing arrangements, the employee
headaches, the 401(k) plans. You'll be in charge of the
medicine. "The idea was to have a doctor-run group where
the medical ethic was the bottom line," says Dr. Leigh Dolin,
an internist at HealthFirst. "And we'd be big enough that
we couldn't get pushed around by the hospitals and the HMOs."
In return, PPI would charge a whopping fee: 16 percent
of the clinics' profits.
In the fall of 1996, Goldberg and Dupell wooed the HealthFirst
doctors in a series of meetings at the Lloyd Center Red
Lion hotel. There were formal presentations, in which the
impeccably dressed Goldberg dazzled the doctors with charts
and graphs. There were also informal weekend sessions, in
which Goldberg dressed down and reassured the doctors that
they would retain control of the new venture.
"It was a mesmerizing performance," says Dr. Eugene Kazmierski,
a HealthFirst internist. "It was like the second coming
of Christ."
PPI's 16 percent take seemed steep, but given their recent
troubles, the doctors at HealthFirst were feeling vulnerable.
In one sense, the venture was a gallant effort on the part
of doctors to maintain their independence. On the other,
it was also about making money. Doctors hoped PPI would
be able to negotiate better deals with hospitals and HMOs,
which would translate into more care for patients and heftier
salaries for doctors.
Privately, many doctors felt anxious at the prospect of
selling out to a management company. But they were consoled
by the knowledge that they would own 98 percent of the company's
stock--stock that might one day be worth a fortune.
So, in January 1997, HealthFirst teamed up with the Corvallis
and Medford clinics and signed a 40-year management contract
with PPI. The clinics would remain separate business entities,
but all their assets would be transferred to PPI. Goldberg
became PPI's president and chief executive officer, drawing
salary and perks worth $243,000. Dupell became chief financial
officer, pulling down $212,000. And Dr. Michael Bonazzola,
formerly of the Medford Clinic, became chief medical officer,
earning $222,000.
When the doctors donned their bridal veils and whispered,
"I do," to the pinstriped dealmakers of PPI, there was a
palpable sense of excitement, even euphoria, in the air.
The move was hailed by the local press. "This is one of
the most significant announcements that's occurred in Oregon
in the last 10 years," Providence executive John Lee told
The Business Journal. "It's a big deal."
As befits a dashing young groom, PPI leased 5,000 square
feet of Class A office space on the seventh floor of the
sleek Columbia Square building in downtown Portland. It
installed a beautiful cherry-wood table in the conference
room. Just down the hall lay a delightful rooftop garden
offering lush grass, pine trees and a spectacular view of
the Hawthorne Bridge, with Mount Hood presiding in the distance.
Three years later, the garden, the bridge and the mountain
are all still as impressive as ever. But PPI is nowhere
to be seen. Two months ago, in an effort to slash costs,
it relocated to an office in Lake Oswego.
There were some notable early successes. Acting on behalf
of the three medical groups, PPI demanded more money from
the HMOs. "They leveraged every dollar they could," comments
one local insurance executive. "They extracted every ounce
of flesh."
HealthFirst also scored a coup by recruiting Dr. Santa,
a respected physician-administrator, to be its medical director.
The euphoria didn't last long, however. PPI's business
plan called for rapid expansion as a way to attract investors.
But in February 1997, after a long flirtation with PPI,
the Vancouver Clinic changed its mind and signed up with
a rival. PPI also struck out with groups in Eugene, Bend
and Elko, Nevada. The clinics were wary of PPI's short track
record and its big fees.
Meanwhile, PPI struggled with a chronic shortage of cash.
In July 1997, it got a $15 million infusion from First Union
Capital Partners of Charlotte, N.C., to subsidize the clinics'
operations. In return, First Union acquired a 7.5 percent
stake in the venture.
The money gave PPI some breathing space, but it came at
a heavy price. If PPI failed to go public within two years,
the bank's share would swell to 10 percent. If it failed
to go public within four years, the bank would own 17 percent.
For the doctors, the First Union deal came as a shock.
"I remember thinking, how did this happen?" says Dr. Helen
Henry.
The doctors also wondered when they would see the goodies
they had been waiting for, such as a computerized medical-records
system. They began to grumble about PPI's 16 percent management
fee. What, exactly, were they getting for their money?
While PPI grappled with the doctors' disillusion, disaster
struck--3,000 miles away.
For several years, physician practice management companies
had been rising stars on Wall Street, because of their enormous
potential for growth. In the fall of 1997, Medpartners and
PhyCor, two of the nation's biggest PPMs, announced an impending
merger, only to call off the deal a few months later when
investigations revealed that the companies' financial picture
was worse than expected.
Overnight, the bottom dropped out of the industry. Medpartners
saw its stock tumble from $25 a share to $7. PhyCor fell
from $28 to $19. The party was over--and with it, PPI's
hopes for going public.
The news couldn't have come at a worse time. Although PPI
managed to post a small profit of $134,000 for the year,
the doctors were making less money than ever. According
to documents filed with the Securities Exchange Commission,
HealthFirst doctors' salaries in 1996 averaged $136,000.
In 1997, they averaged $92,000--a drop of more than 30 percent.
For example, Dr. Dolin, a former president of the Oregon
Medical Association with 25 years of experience, made just
$90,000 in 1997--about 30 percent less than the national
average for internists and lower than the starting wage
for a doctor at Kaiser Permanente. "It was intolerable,"
says Dolin.
In truth, doctors' salaries were under attack from several
directions. First, Medicare reimbursement rates in Portland
are among the lowest in the nation. Second, local HMOs,
locked in fierce competition for market share, kept their
premiums low--which meant less money for doctors. And looming
in the background was that 16 percent management fee.
"They just imploded," says a local health-care executive.
Under the direction of newly hired CEO Kerry Barnett, a
former state insurance commissioner and aide to Gov. Neil
Goldschmidt, HealthFirst slashed budgets and cut staff positions.
But the doctors became increasingly restive. "We wanted
a divorce," says Dr. Reay.
Faced with mutiny from the HealthFirst doctors and with
their plans for going public in tatters, Goldberg, Dupell
and Dr. Bonazzola negotiated their departure from PPI in
January 1999. (The exact terms remain unclear, but SEC documents
and conversations with confidential sources suggest that
the three walked away with a total of between $590,000 and
$2,031,000.)
The severance packages for the PPI principals sparked outrage
among the physicians. "This is not money from making widgets,"
says one HealthFirst doctor. "These are health-care dollars,
and they got it by taking advantage of stupid physicians
like us."
Meanwhile, the doctors were looking for a way to bail out
of their contract with PPI. They needed a sugar daddy with
deep pockets. Then, in March, came a stunning breakthrough.
Legacy Health System agreed to lend the HealthFirst doctors
$15 million to buy back their freedom.
But there was a catch.
Legacy negotiators were extremely anxious about one key
point. What if they bailed out HealthFirst, only to find
doctors jumping ship? So the Legacy deal came with a rider:
The HealthFirst doctors would each have to sign a pledge
not to leave the group for four years or else pay a $75,000
penalty.
When she heard about the deal, Dr. Kirschner actually wept.
"It felt like indentured servitude," she says. "This just
was not worth it."
In fact, most of the doctors were willing to sign the commitment.
But key figures--including some big-money specialists--balked.
"We had a majority," says a HealthFirst insider. "But we
needed more rainmakers."
Once a significant number of doctors failed to sign the
pledge, it was clear the deal was doomed--and with it HealthFirst's
last chance for survival. "It was a moment of truth," says
Dr. Santa, HealthFirst's medical director.
The resignations began to trickle in. Then the trickle
became a flood. By May of this year, more than half of HealthFirst's
doctors had resigned from the group. On July 6, its board
of directors voted to dissolve the venerable clinic and
terminate its relationship with PPI. HealthFirst was dead--
all that remained was to dispose of the body.
There followed an undignified scramble. About 20 doctors
signed up with Legacy; another 20 joined Providence; 17
pediatricians have split off and formed their own group.
Some doctors will stay put, and the only change will be
the sign on the door. Others are joining the Portland Clinic,
Kaiser Permanente and Mullikin Medical Centers; some are
leaving town; some are getting out of medicine altogether.
Wherever they're going, many HealthFirst docs feel like
they got burned. "None of us was really smart about business,"
says Dr. Reay. "It was a huge mistake."
"Our relationships with our patients have been turned upside-down,"
says Dr. Henry, who has retired from practice.
For his part, Dupell disputes the idea that PPI killed
HealthFirst, instead blaming low HMO payments. "I think
PPI has become a convenient scapegoat," he says.
Whatever the ultimate cause, the collapse of HealthFirst
reveals how vulnerable the medical profession has become
in the era of managed care.
"The dream of HealthFirst was to have a high-quality, independent
medical group serving a wide spectrum of patients," says
Dr. Dolin. "The reality was, it didn't work. We don't have
enough cards to be successful on our own. We don't have
the leeway to do this anymore."
"We're pretty much finished off as a profession," says
Dr. Kazmierski, who is retiring from medicine.
"Physicians had ultimate power and control for decades,"
says a former HealthFirst doctor. "Now they're faced with
the erosion of that influence."
Perhaps this is not a bad thing. Despite their training,
doctors are just as fallible as anyone else. Whatever its
merits, HealthFirst represented a heroic effort by doctors
to fight for their independence. Ironically, its collapse
seems likely to lead them further into servitude.
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Willamette Week | originally
published August 11,
1999
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