eMJA: Catchlove, The why and the wherefore

GP Corporatisation

The why and the wherefore

Barry R Catchlove

MJA 2001; 175: 68-70
For editorial comment, see Van Der Weyden

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Abstract - What is corporatisation? - Why corporatisation now? - What do GPs think? - What are the consequences of corporatisation? - Alternative models? - References - Authors' Details
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Abstract

Through their clearly defined gatekeeper role, GPs have considerable market power to influence the flow of revenue associated with referrals and prescriptions.
For this reason, and because the whole healthcare industry is going through a transition from a cottage industry to a more commercially sophisticated structure, corporatisation of general practice is on the increase.
If properly and ethically run, corporatised general practices can provide high-quality, efficient primary care.
There are four far-reaching, potential consequences of general practice corporatisation — an increase in healthcare spending; limitation of GPs' choice of practice environment; difficulty justifying GPs' legitimate fee increases; and de-skilling of GPs.

Over the past two years there has been a huge upsurge in corporatisation of Australian general practice. It began in Perth, Western Australia, and is now spreading across metropolitan Australia. An estimated 2500 GPs (about 10% of those in practice) now work in practices owned by large corporations.¹

What is corporatisation?

Definitions of corporatisation vary, but all include the concept of changing the traditional ownership and practice structures to improve the profitability of general practice.² In terms of what is happening now in Australian general practice, a working definition would comprise:

A third party — doctor(s) or non-doctor(s) — acquires an interest in one or more general practices.
Whatever the equity arrangements, GPs enter into a contract whereby they assign a proportion of their gross income in return for management of their practice, provision of support services, and a goodwill payment.
The third party then gains access to the flow-on services of the practice (eg, pathology and radiology) and may benefit financially from the GPs' referrals.
The practices are merged into a single medical centre, which is generally separately owned by the same third party.

In Australia, corporatisation of medical services is not a new phenomenon. Large corporations own many private hospitals and most pathology and radiology services, and third parties, be they entrepreneurial doctors or people from outside healthcare, have been acquiring general practices for years. The current situation is therefore not unique, because:

GPs are being offered previously unheard of goodwill payments.
The rate of practice acquisitions has increased dramatically.
Ownership of diagnostic services by corporate entities is now common.
Specialists are now joining these corporate medical centres.
The new corporate owners are often listed companies and may have "big name" investors, adding further to the high profile of the new structure.
There is a clear intention to capitalise on the GPs' market power (in addition to achieving some economies of scale).

Why corporatisation now?

The interesting question is not why corporatisation is happening, but why it is happening now. After a review of corporatisation commissioned by the Commonwealth Department of Health and Aged Care in 2000,³ the answer to this question is still not entirely clear. As is often the case in the commercial world, there is no obvious trigger. It is worth recalling the 18th-century economist Adam Smith's famous remark about the "invisible hand of the market".⁴

However, two important and relevant issues, external to the medical profession, shed some light on the upsurge of corporatisation.

Firstly, GPs have considerable market power, which, in this context, means the ability, through a clearly defined gatekeeper role, to influence the flow of revenue associated with referrals, prescriptions and suchlike. We know that for each dollar of Medicare revenue earned by a GP, another $1.60 is generated directly in diagnostic and specialist consultations. Based on the flow-on effects of one GP's initial decisions, it is estimated that 20 GPs' decisions could be responsible, directly and indirectly, for as much as $50 million of healthcare expenditure per annum.³ In the past, the cottage industry nature of general practice, with an average of fewer than two doctors per practice, made it difficult to exploit collective market power.
Secondly, the whole healthcare industry is going through a transition from a cottage industry to a more commercially sophisticated structure. Ironically, this started in the public sector — public hospitals were grouped into areas, regions and networks. In the 1990s, it spread to the private sector with the involvement of large third party commercial organisations, the rationalisation of pathology then radiology services, and it is now having an impact on general practice. Even the charity hospitals have been forced into merging and forming corporatised structures. This process appears inevitable and unstoppable.

What do GPs think?

Despite widespread concerns being voiced within the profession and in the media, GPs currently involved in corporate-run practices are not complaining. At this early stage of corporatisation most appear happy. There is no evidence to suggest they are being pressured into overservicing or into directing patients to particular diagnostic services or specialists. GPs who previously owned practices have received a relatively large and unexpected goodwill payment. They are probably earning about the same as they did before corporatisation, but they have been freed from the administrative tasks of running their practice. In a business sense many would agree that GPs from inefficient and grossly undercapitalised practices needed to be dragged into the 21st century. If properly and ethically run, corporatised general practices can provide high quality, efficient primary care. On a more sober note, it must also be remembered that all these new entrants into corporatised general practice have only existed for a short time and therefore can only be judged on short-term performances.

What are the consequences of corporatisation?

At this stage, the real issues of corporatisation are not about the compromise of clinical autonomy (although there is no denying this could be a problem but not necessarily associated with corporatisation alone). I believe that, apart from some of the more obvious issues such as ownership of records and freedom to refer, there are four far-reaching, albeit subtle, consequences of corporatisation. Although corporatisation will get the blame, these four are in reality consequences of the inevitable changes associated with transforming healthcare from a cottage industry to a more rational, market-driven service sector. These include limitation of choice, increases in healthcare spending, difficulty justifying legitimate fee increases, and de-skilling of GPs.

Limitation of choice

There is a real risk that the corporate model will become so dominant that future GPs will have little choice about the sort of practice in which they wish to work. This is already happening to some extent in metropolitan Perth.⁵ For general practice to attract doctors, it needs to offer a range of alternative models from solo general practice right through to large corporate medical centres. The only way is to ensure viable alternatives offering equivalent benefits and advantages. Crucial to this is the creation of saleable goodwill.

Increases in healthcare spending

The real profitability in owning a general practice is not in the direct revenue, but in the "downstream" revenue, which is the product of GPs' gatekeeper role. The corporate groups believe that access is the key (not coercion). If a pathology collection centre or pharmacy is placed within the confines of a medical centre, then about 95% of the referrals can be assumed without any need to adopt overt pressure. The corporate practice benefits from ownership of diagnostic services, but, even if it doesn't (as is often the case for pharmacy and allied health services), it benefits from being able to demand premium rentals for floor space. Specialists who take consulting space in these medical centres may also be prepared to pay excessive rentals to gain access to a large number of GPs. The real concern is the subtle impact on referral rates, diagnostic and pharmaceutical expenditure.

Take as a hypothetical example the presence of a full time dermatologist in a large medical centre (please forgive me for selecting a dermatologist, it could equally apply to other specialists). It is inevitable that many of the patients previously managed, and managed quite effectively, by GPs will now be referred. Again, access is key, with higher patient expectations, convenience, and perhaps even medicolegal concerns about not referring when the service is so readily available. Given the cost differential between GP and specialist consultations, both the referral rate and the cost per patient attendance will inevitably rise. If this situation is extrapolated to other possible diagnostic and specialist referrals, there is a potential for considerable increases in Medicare and Pharmaceutical Benefits Scheme spending.

How will governments react to this? Very simply, they will encourage the already developing move to fund-holding, coordinated care, fund pooling — call it what you will. All these mean a move away from fee-for-service and towards managed-care models and the associated transfer of risk. If GPs control the budget, will government allow corporatised practices to share the savings, and if GPs have a vested interest in reducing referral rates what will be the impact on the downstream revenue? Could this undermine the viability of the corporate players already paying high prices for general practice acquisitions?

Difficulty justifying legitimate fee increases

Being owned by high profile, often publicly listed, successful corporate entities might decrease the ability of the medical profession to argue a case for legitimate fee increases. Imagine the situation — two large publicly listed corporate practices, perhaps partly owned by high profile entrepreneurs, announce record profits at the same time that representatives of general practice organisations are meeting with government to discuss increases in the fee schedule.

De-skilling of GPs

If every conceivable diagnostic test, specialist and ancillary service is available on site, and this results in increased referrals, then there is a likelihood that GPs will become nothing more than a postbox, and there is a real potential for de-skilling of GPs. A GP's clinical judgement will become largely unnecessary. Taking this situation to extremes, someone might eventually ask whether the GP's gatekeeper role is working and mightn't a much cheaper nurse practitioner fill the same role?

Alternative models?

What corporatisation has demonstrated is that there are more efficient ways to deliver primary healthcare. For those who acknowledge this, the challenge is to provide alternative models, drawing on the lessons of corporatisation. The KPMG report to the Commonwealth Department of Health and Aged Care asked some searching questions about the use of GP market power. Properly managed and with due regard to ethics, this market power can be used to improve care, reduce costs and improve the quality of practice. If GPs are prepared to responsibly manage their gatekeeper role, which often requires increased time and effort, they should be rewarded. GPs should be best suited to manage and control their market power. However, it is something of a truism that if you have such power and do not use it or control it then someone else will.

Corporatisation in general practice is merely one aspect of the movement of health services from the cottage industry to a more rational and rationalised model. To argue a return to the good old days and the status quo would be attempting to do what King Canute proved was impossible — holding back the tide.

References

Corporate structure [news review]. Australian Doctor 2001; 27 April: 29-31.
Australian Medical Association. General practice corporatisation. AMA scoping paper. Canberra: AMA, November 2000.
Commonwealth Department of Health and Aged Care. Corporatisation of general practice: scoping paper. KPMG Consulting, May 2000.
Smith A. An inquiry into the nature and causes of the wealth of nations. London: W Strahan, T Cadell, 1776.
Kron J. Risky business. Australian Doctor 2001; 16 Feb; 45.

Authors' Detials

Barry R Catchlove, MB BS, FRACP, Director.

No reprints will be available from the author.
Correspondence: Dr Barry R Catchlove, Director, Padua Consulting Pty Ltd, Health Services Consulting, 11 Burton Street, Mosman, NSW 2088.
bcatchloATbigpond.net.au