Are there actually economics of scale in a physician practice?

[FutureDoc]

Hey folks, been reading a lot of research from the past 10 years about physician groups and expanding, from what I'm seeing the optimal size of phyisician group is something nobody can really agree on because the field is too varied and particular overhead is too high for most solo practicioners, but then at a certain point (say 50+ physicians) bureaucracy increases and you lose efficiency again.  Anyone have any personal experience with this?

 

I've often seen lots of place consolidating in the name of "economies of scale", but if that doesn't actually exist why do large practices keep buying everyone out?

 

Thanks!

[Zaphod]

FutureDoc wrote:

Hey folks, been reading a lot of research from the past 10 years about physician groups and expanding, from what I’m seeing the optimal size of phyisician group is something nobody can really agree on because the field is too varied and particular overhead is too high for most solo practicioners, but then at a certain point (say 50+ physicians) bureaucracy increases and you lose efficiency again.  Anyone have any personal experience with this?

 

I’ve often seen lots of place consolidating in the name of “economies of scale”, but if that doesn’t actually exist why do large practices keep buying everyone out?

 

Thanks!

Click to expand...

They keep buying people out because they then can take a cut from that practice. Hopefully its one theyve identified that they can add their special recipe to and increase efficiency in some way.

I think given the varied types of practices, it is going to be extremely specific by specialty and then type within that specialty. Also will depend on what the doctor is looking for. Then you will have the best efficiency vs. larger overall pie to grapple with, ie, do you want to make 90% of 1M or 60% of 5M.

For example there are specialties that can run an efficient single practitioner office without too much overhead and likely make a high margin return. However, that is obviously going to be capped by time and desire. Adding people may add some overhead but will increase collections, etc...

Then you have specialties with an insane amount of very high fixed costs and overhead which will struggle as solo, and need a group. Then of course everywhere in between as well.

[q-school]

Bureaucracy increases way before fifty physicians. Ha ha.

There are always economies of scale that can be achieved on the cost side. Negotiating power, hr, administrative, billing, etc. for most smaller practices.

I think it's hard to grasp all the nuances. The real money is not made by practicing medicine. Technical fees and insurance are where the real dollars change hands. So mergers and acquisitions may reflect a larger business plan of which practice profitability is only a tiny part.

In private practice, addition of another physician means you are willing to at least forego income and possibly reduce income for some time in exchange for call or patient needs or whatever. Two physician partnerships may not even agree on what the optimal size is. Optimal physician group size is an economic theory.

[StarTrekDoc]

Yes.  Many physicians are not efficient.  As a whole, the cottage industry of medicine is being 'walmarted' to squeeze out inefficiencies.  The 'burnout' phenomena on EHR fatigue largely comes from an amplification of these inefficiencies.

One can find and recruit efficient physicians and they will thrive in any model -- concierge, large group, multispecialty.   It's how one gets the inefficient physician to support, train and hopefully adapt to the necessary environment.

As far as the economics side, things like staffing, call centers, infrastructure -- all benefit in scaling and low hanging fruit for efficiency modeling and reproducing in cycles to scale.   It's also a lot easier to recruit, train and deploy worker bees than highly efficient individual swiss knife physicians.

 

[Donnie]

Yes. Almost any business has fixed costs that can be leveraged with scale, and a physician practice is no different. Back office, rent, untilities, etc. are all things that don't scale linearly with size of group and revenue. For example, you are not going to pay twice as much rent going from a 1 to 2 person practice.

[FutureDoc]

Thanks for all the replies.  I've been reading up on the topic as part of a research project, but the literature is very mixed, and lot of the economic and business folks that have commented and written on the topic seem to have a.... poor understanding of the field.  I get the increased efficiency with staffing and training going from solo to group, and I see Zaphod's point that you find a group, bring in your value add, and then take a cut but leave it as is.

It's just hard to conceptualize things sometimes, since residency really doesn't exposure you to any of this stuff.

[Zaphod]

FutureDoc wrote:

Thanks for all the replies.  I’ve been reading up on the topic as part of a research project, but the literature is very mixed, and lot of the economic and business folks that have commented and written on the topic seem to have a…. poor understanding of the field.  I get the increased efficiency with staffing and training going from solo to group, and I see Zaphod’s point that you find a group, bring in your value add, and then take a cut but leave it as is.

It’s just hard to conceptualize things sometimes, since residency really doesn’t exposure you to any of this stuff.

Click to expand...

Its really just so varied and really depends on the specialty. Some need groups absolutely, some can do fine alone depending on goals. As people have mentioned there are certainly obvious things that scale without increasing costs (rent, utilities, marketing, etc...), and some things that dont.

I dont think you're going to find any equation that fits each specialty or is simple.

[FutureDoc]

I'm looking at things in the context of differences between employed and partner/owner practices and it's stunning to see the change in trends over the past 10-15 years.  I'm pretty sure that folks in private practice are over-represented on this board.

[Jaqen Haghar MD]

FutureDoc wrote:

I’ve often seen lots of place consolidating in the name of “economies of scale”, but if that doesn’t actually exist why do large practices keep buying everyone out?

Click to expand...

It is an interesting question. There are national ER staffing groups that tout "scales of efficiency" in their purchases of smaller regional private groups. From those that I have seen, and been involved with, the working physicians take a sizable pay cut, or are replaced by new grads for less, benefits and bureaucracy are made cheaper, and the savings and original profits are channeled to private equity groups and the CEO and about four other "partners" of these massive entities.

This is the real reason for the buyouts... Older partners of smaller groups, nearing the end of their careers, are cashing out for one last chance at big profits. The corporate megagroups are happy to acquire practices, gut what they can, then channel the profits to a very select few. Some even market all this nonsense about "being an owner (through tiny non-transparent, illiquid stock shares)", and "physician run" (being that the mega-group CEO has an MD).

It truely is the Walmartization of medicine.

[StarTrekDoc]

I'm sure that folk like Kaiser have analytics and specifics on pro/cons and optimal sizes depending on location, specialty and mission--but they probably won't share with you.

Since this appears to be a resident research project, what's the thesis?  You may want to focus it a bit tighter like:  primary care: concierge vs medical home practice  cost comparisons.  Or surgical center practice vs hospital based practice comparisons.

[Donnie]

Jaqen Haghar, MD wrote:

FutureDoc wrote:

I’ve often seen lots of place consolidating in the name of “economies of scale”, but if that doesn’t actually exist why do large practices keep buying everyone out?

Click to expand…

It is an interesting question. There are national ER staffing groups that tout “scales of efficiency” in their purchases of smaller regional private groups. From those that I have seen, and been involved with, the working physicians take a sizable pay cut, or are replaced by new grads for less, benefits and bureaucracy are made cheaper, and the savings and original profits are channeled to private equity groups and the CEO and about four other “partners” of these massive entities.

This is the real reason for the buyouts… Older partners of smaller groups, nearing the end of their careers, are cashing out for one last chance at big profits. The corporate megagroups are happy to acquire practices, gut what they can, then channel the profits to a very select few. Some even market all this nonsense about “being an owner (through tiny non-transparent, illiquid stock shares)”, and “physician run” (being that the mega-group CEO has an MD).

It truely is the Walmartization of medicine.

Click to expand...

This is a non sequitur.  You can expand your practice and leverage fixed costs without any of the negatives you mention above.

FutureDoc wrote:

Thanks for all the replies.  I’ve been reading up on the topic as part of a research project, but the literature is very mixed, and lot of the economic and business folks that have commented and written on the topic seem to have a…. poor understanding of the field.  I get the increased efficiency with staffing and training going from solo to group, and I see Zaphod’s point that you find a group, bring in your value add, and then take a cut but leave it as is.

It’s just hard to conceptualize things sometimes, since residency really doesn’t exposure you to any of this stuff.

Click to expand...

Fortunately it is not something you need to conceptualize.  Before hiring a person, you should figure out the unit economics of the hire to determine whether the person will be additive to the bottom line.  If the person is not immediately additive, you can quantify how much business the person needs to bring in before he/she is additive and judge whether what the person needs to add is realistic.  You can use the numbers from whatever your practice is currently generating to provide a framework for this analysis.  While this type of analysis isn't most docs area of expertise, you really should do the math before hiring another person.

[Jaqen Haghar MD]

This is a non sequitur.  You can expand your practice and leverage fixed costs without any of the negatives you mention above.

FutureDoc wrote:

I'm not using the cuts as a hypothetical example.  It is what was done when one of the corporate groups (6-million annual visits) bought out a regional group I was involved with.  Every physician took a cut in pay and benefits, partners took large lump sum buyouts and signed non-disclosure agreements.  Profits and savings are now channneled to the mothership.  They hire new grads and low hourly employee docs now.  It's become so common in ER that I now have a bunch of friends who have been through similar scenarios.

Can you stop working altogether or cut way back, take a huge lump sum, and still expand?

[FutureDoc]

StarTrekDoc wrote:

I’m sure that folk like Kaiser have analytics and specifics on pro/cons and optimal sizes depending on location, specialty and mission–but they probably won’t share with you.

Since this appears to be a resident research project, what’s the thesis?  You may want to focus it a bit tighter like:  primary care: concierge vs medical home practice  cost comparisons.  Or surgical center practice vs hospital based practice comparisons.

Click to expand...

Looking specifically at employed vs. private practice trends in primary care.  I had an idea in my head that docs who are in PP are more productive and wondered about different types of models, ended up doing a lot of reading on the topic and finding these discussions about economics of scale and larger and larger physician groups.

[G]

FutureDoc wrote:

Thanks for all the replies.  I’ve been reading up on the topic as part of a research project, but the literature is very mixed, and lot of the economic and business folks that have commented and written on the topic seem to have a…. poor understanding of the field.  I get the increased efficiency with staffing and training going from solo to group, and I see Zaphod’s point that you find a group, bring in your value add, and then take a cut but leave it as is.

It’s just hard to conceptualize things sometimes, since residency really doesn’t exposure you to any of this stuff.

Click to expand...

I think you'll get different opinions from different specialties.  I suspect Jaqen is talking about EM, because that is what I've seen.  Donnie, perhaps it is non sequitur for the purposes of altruism, research project or thought experiment, but reality is a bummer.

I think residency is actually a good spot to look at the pros/cons of more residents, at least from a few perspectives.  Think about what would be better or worse if you had more folks in your program...not that it is apples to apples, but I suspect you can see first hand some areas of friction or grease where more bodies would change things

[Donnie]

Jaqen Haghar, MD wrote:

This is a non sequitur.  You can expand your practice and leverage fixed costs without any of the negatives you mention above.

FutureDoc wrote:

I’m not using the cuts as a hypothetical example.  It is what was done when one of the corporate groups (6-million annual visits) bought out a regional group I was involved with.  Every physician took a cut in pay and benefits, partners took large lump sum buyouts and signed non-disclosure agreements.  Profits and savings are now channneled to the mothership.  They hire new grads and low hourly employee docs now.  It’s become so common in ER that I now have a bunch of friends who have been through similar scenarios.

Can you stop working altogether or cut way back, take a huge lump sum, and still expand?

Click to expand...

I was a bit hasty in my response.  In general cost savings, synergies, etc. accrue to the equity owners.  If you sell your equity interests or you are an employee, you won't receive much of the benefits of economies of scale.  If you own the practice, you will.