By Bruce D. Armon, Esq.& Howard A. Miller, M.D.
An Independent Practice Association (IPA), structured properly, may be an effective mechanism for physicians to achieve economies of scale and competitive advantages without practice mergers. What is an IPA? Generally, an IPA consists of a network of physicians in a region or community—solo practitioners and groups of physicians—who agree to participate in an association to contract with health maintenance organizations, other managed care plans, and also vendors for the benefit of the each of the physicians in the IPA. The IPA physicians do not combine their individual practices. Instead, the IPA physicians retain their practices and work out of their own offices. The original premise underlying the formation of IPAs in the late 1980s was for physicians to retain control over medical decision-making and to negotiate better fees and contract terms from the HMOs which were, at that time, changing the face of medicine and the role of the physician.
According to a 2000 report from The Managed Care Information Center, the average IPA includes approximately 460 physicians. The same report noted that approximately 75 percent of the nation’s IPAs had fewer than 400 physicians. Other findings of interest from the report are that over 87 percent of the IPAs are owned entirely by physicians; IPAs offer 17 types of specialty physician services with pediatrics being the most frequently offered specialty; and, approximately 60 percent of the IPAs are for-profit entities.
There are two distinct options an IPA may take with regard to its managed care operations: assume financial risk for its physician members; or, allow the third-party payors with which the IPA contracts to continue to act as the insurer, and, therefore ultimately the insurer remains financially accountable for the deals they strike with the IPA.
As you have probably noticed in the trade journals, the list of IPAs which have failed over the past few years is staggering and widespread. According to the California-based health care consulting firm of Cattaneo & Stroud, 27 California IPAs have failed since 1998. Other reports claim that as many as one-third of California’s approximately 350 IPAs declared bankruptcy between 1997 and 2000. In Houston, Texas, an IPA with approximately 500 physicians, recently closed down its operations.
Despite the high-profile collapse of IPAs in California, Texas and other states across the nation, IPAs are not all doomed to an inevitable failure. In fact, if the complement of physicians is structured appropriately and the right combination of financial stability, physician leadership and management skills are present, an IPA can be an effective model for physicians and physician practices to better serve their patients and successfully work with the third-party payors in their community, and with vendors.
Under the first of the two IPA managed care approaches described above (which actually represented the second generation of the IPA model) an IPA executes risk contracts with insurers and the IPA agrees to pay all physician, hospital, laboratory and other bills for a fixed monthly fee from the insurer. The rationale is that the IPAs, through their physician members, can take better care of their patients by having the physicians, not a third-party payor, decide how to spend health care dollars. Under this model, the IPA retains any surplus and is liable for any shortfalls.
In California, many second generation IPAs went bankrupt because of decreased payments from third-party payors, inadequate Medicare rates from the federal government, and the demand from employers to keep premiums low. Because of these factors, many HMOs in California have unilaterally decided they will not execute a risk-contract with an IPA unless the IPA has sufficient capital and a strong balance sheet demonstrating the IPA will be able to pay its bills in a timely manner without any of the HMO’s beneficiaries feeling adverse repercussions if something in the relationship goes awry. This has created the classic “cat chasing its tail scenario.” An IPA assuming financial risk is unlikely to have sufficient cash on hand to a be a viable contracting partner with a wary HMO, yet the IPA will most likely be unable to raise sufficient cash from its physician-members or “neutral” third parties so the IPA can become an attractive partner. In many communities across the nation, this phenomenon is precisely why second generation IPAs have failed.
According to the National Conference of State Legislatures, at least twenty states are reviewing how they monitor medical practices and IPAs that accept financial risk. Responding to the financial difficulties of many risk-assuming IPAs, politicians and regulators are considering establishing fiscal solvency standards which an IPA must maintain to remain in operation. These fiscal standards are often similar to the state rules in place for an HMO or other insurer.
Because of the numerous IPA failures and increased legislative and regulatory scrutiny, the second version of the IPA financial model described above, i.e., the insurer retains the financial risk and contracts with the IPA for its physicians to provide services, has come back in vogue and is an attractive option that should be considered by the physician community. Under this model, the IPA acts as a broker between independent physicians and third-party payors, but does not assume financial risk.
One of the principal advantages of this “back to the basics” IPA model is that health plans view it as a competitive advantage to negotiate one contract with an IPA and have the terms bind all of the IPA participating physicians who elect to accept the third-party payor contract. This dramatically simplifies the process of negotiating hundreds of separate contracts for the IPA physician population. Depending upon the IPA structure, physicians may or may not be bound to accept the IPA-negotiated version of the third-party payor agreement.
There are several key elements which can help ensure that a “first generation” IPA which does not assume financial risk can be effective and useful for its physician constituents and an attractive partner to the third-party payor community.
Strong management structure. The IPA president can make or break an IPA. With physicians’ time increasingly being squeezed by their own practice’s patient commitment and administrative obligations, an IPA President must be focused enough and have the time and energy to steer the IPA’s Board of Directors and Executive Committee in a clear direction to advance the IPA’s goals and objectives, but be accommodating enough to not offend the parochial interests of the various primary care and specialty physicians which comprise the IPAs constituency. This is a fine balancing act, particularly in an IPA which has several hundred physicians who do not all practice in the same discreet community or have privileges at the same hospital. An IPA should give careful consideration to who it selects as president, the term of office, and the range of responsibilities for that individual.
Excellent support staff. In the ideal setting, the IPA support staff should coordinate and manage the day-to-day activities of the IPA. This includes provider relations outreach activities, gathering of physician documentation for credentialing purposes, negotiating third-party payor contracts, and handling the finances of the IPA. While only select physicians on the IPA Board of Directors should have the ability to write checks on the IPA’s behalf, the IPA staff should be able to track the day-to-day expenses of the IPA and ensure the IPA is sticking to its budget constraints. The budget should be conservative and leave sufficient cash set aside for the unexpected expenditure.
Creativity counts. There is no unique formula to guarantee an IPA’s success. Encouraging broad physician participation from all parts of the IPA constituency —hospital-based, private practice, urban, suburban, rural, solo practitioner and group practice physicians, to name a few—should be used to enrich the direction the IPA chooses to take to be an effective force in their community. An IPA which chooses not to take on risk contracts should nonetheless consider all options to retain a cash flow for the IPA. Initial application fees will likely not be enough to sustain the expenses of the IPA. Possible options to sustain cash flow include delegated credentialing activities, administrative fee arrangements with third-party payors or other suppliers, developing partnerships with other players in the health care industry within the community, and arranging vendor contracts.
Be aware of and beware anti-trust law. Antitrust law was created to protect consumers by keeping competitors (e.g., individual physicians or physician practices) from conspiring to fix prices, or from growing so large that they can raise prices with impunity. Consequently, it’s illegal for physicians who compete with one another to collude on fees in order to ward off third party payors or to make more money from them. Make sure your IPA is structured properly and the physicians are careful regarding any fee discussions with third-party payors. The “messenger model” may be an attractive option for an IPA because of its flexibility.
Second generation IPAs which assume financial risk face increased scrutiny from state governments in light of the recent bankruptcies of several large IPAs and extensive media coverage of these debacles. The first generation IPA model which relies upon the IPA to act as a broker for its physician members with the third-party payor community is a simpler, yet effective method to benefit physicians, third-party payors, and the general public which they both serve. In the uncertain era of managed care consolidation and stagnant or declining revenue for many physicians, going “back to the basics” and establishing a first generation IPA may be an effective technique for you and your physician colleagues.
Bruce D. Armon, Esq., is a member of the health care practice group of Saul Ewing LLP in its Philadelphia office and is general counsel of Delaware Valley IPA, a 600-member physician IPA. Howard A. Miller, M.D. is an internist in private practice in Philadelphia, a clinical Professor of Medicine at MCP-Hahnemann University, and President of Delaware Valley IPA.
