The impact of managed care on podiatrists and patients: Understanding and reacting to healthcare challenges

The impact of managed care on podiatrists and patients: Understanding and reacting to healthcare challenges – Managed Care

David Edward Marcinko

As a podiatric physician, your patients and family trust that you will survive the managed care economic debacle of the next decade. To be successful, you not only have to be a good podiatrist; you must also apply managerial principles to your office, and financial planning fundamental to your personal life. In short, absent a total re-engineering of your future practice plans, you must tune-up your economic and business skills to avoid becoming a mere healthcare merchant.


The current healthcare reimbursement climate has caused much pain and tumult. Both sides of the equation are affected as intermediaries are placed between patient and doctor. Older practitioners are retiring prematurely, mature providers are frustrated and in despair, and young physicians have no concept of the economic servitude to which they are about to be subjected. Patients are confused, scared and angry.

Even the US Inspector General has declared healthcare providers to be public enemy #2, behind drug and narco-traffickers, for their federal fraud and abuse initiatives. And, there is no question that real fraud exists. In 1999, the government reported 326 convictions of all types of Medicare fraud among all providers and HCFA estimates that its tactics are working because the level of payments estimated as “improper” has fallen 45% in the past two years, to $12.6 billion in 1998, from $23.2 billion, in 1996. But these numbers may not be accurate since Medicare cannot separate honest mistakes from fraud and abuse.

Moreover, the Department of Health and Human Service began a new “Incentive Program for Fraud and Abuse Information”, in January 1999. Under the program, HHS pays Medicare recipients $100-1,000 to report abuses of the program. Obviously, physicians and other providers have criticized the program for failing to educate patients about what Medicare does, and does not cover, and for fostering negative perceptions of physicians. According to Dr. Nancy Dickey, past president of the AMA, and family physician in Texas, this may be the governmental equivalent of “telling grandpa to rat out your doctor”.

Consequently, the fear, uncertainty and doubt of this change, as well as a general lack of management and financial acumen, afford a unique opportunity for the re-education of contemporaneous physicians.

Desperate Doctors

Managed care is a prospective payment method where medical care is delivered regardless of the quantity or frequency of service, for a fixed payment, in the aggregate. It is not the individual personal care of the past, but is essentially utilitarian in nature and collective in intent.

There are many reasons why doctors are professionally and financially unhappy, some might even say desperate, because of managed care:

* A staggering medical student loan debt burden of $100,000-$250,000 is not unusual for new practitioners. For example, the federal Health Education Assistance Loan (HEAL) program reported that for the Year 2000, it squeezed significant repayment settlements from its Top 5 list of deadbeat doctor debtors. This included a $303,000 settlement from a New York dentist, $186,000 from a Florida osteopath, $158,000 from a New Jersey podiatrist, $128,000 from a Virginia podiatrist, and $120,000 from a Virginia dentist. The agency also excluded 303 practitioners from Medicare, Medicaid and other federal healthcare programs and had their cases referred for non-payment of debt.

* Despite a booming economy, medical school applications nationwide are also on the decline (down 4.7 % between 1997-1998), with minority applicants such as Native Americans suffering even bigger declines (10.1%). According to John Parker, of the Association of American Medical Colleges, “(Today) there are a lot of different opportunities out there for young bright people”. Remarkably, the Cornell University School of Continuing Education has designed a program to give prospective medical school students a real-world peak, both good and bad, at life as a physician since many people who are currently making a great effort and investment to become doctors may be heading for a role and a way of life that are fundamentally different from what they expect and desire”, according to Stephen Scheidt, MD, director of the $1,000 fee program.

* Fewer fee-for-service patients and more discounted patients.

* More paperwork and scrutiny of medical decisions with lost independence and morale.

* Reputation equivalency (i.e., all doctors in the plan must be good), or commoditization (i.e., a doctor, is a doctor, is a doctor).

* The provider is at risk for: (a) utilization and acuity, (b) actuarial accuracy, (c) cost of delivering medical care, and (d) adverse patient selection.

* Practice costs are increasing beyond the core rate of inflation.

* Doctors and other healthcare providers are making less money, particularly in California, where the very future of medical care is in question. More than 126 medical groups and IPAs have gone bankrupt, been sold or closed there since 1996, according to the California Medical Association.

* Regardless of location, the profession of medicine is no longer ego enhancing or satisfying.

To compound the situation, it is well known that doctors are notoriously poor investors and do not attend to their own personal financial well being, as they expertly minister to their patients’ physical illnesses.

Desperate Patients

A recent HMO cost cutting measure, known as the Drop in Group Medical Appointment (DRGMA) is particularly onerous to some patients. In this still voluntary model, group visits of 10-15 patients take place simultaneously. During each visit, patients are examined in the group or privately, charts are reviewed, vital signs are taken, medications adjusted, tests are ordered and results discussed.

Virtual e-health visits took a step forward in 2001 as the First Health Group became the first managed care organization to establish another voluntary cost cutting program that eventually will pay doctors about $25 for online consultations with patients conducted via their web site.

In a most unusual court case, a physician and six patients covered by Kaiser Permanente filed suit last year, accusing it of endangering patients’ lives by forcing them to accept double size pills. The plaintiffs alleged that the HMO forced them to buy medication at a higher dose and then split the pills in half. Some pharmaceutical and medical experts opine that the practice is harmful to patients.

According to Charles S. Lauer, publisher of the Modern Physician, through a study conducted by ARA Marketing and HBOC McKesson, which appeared in the Harris Interactive Healthcare News, pressing patient concerns include:

60%: “forgetting to ask all my questions when I am with my doctor”

29%: “not having enough time with my doctor”, since the amount of face time between patient and doctors is now about three minutes.

Is it no wonder that patients, along with their healthcare providers, are also increasingly becoming despondent over the domestic healthcare imbroglio?

For example, a recent study by Harvard University reported that more than half of US physicians believe their ability to deliver quality healthcare has deteriorated in the past five years. In another example, according to the most recent survey of the Employee Benefits Research Institute (EBRI):

* Only 23% of employees considered themselves familiar with managed care.

* Fewer than 27% said that healthcare has gotten better in the last five years.

* Only 43% of those who received care expressed high satisfaction with its quality.

* Almost 40% said they were not pleased with healthcare costs, despite MCOs.

The Paradigm Shift

Until several years ago, most doctors were probably more concerned with acquiring, maintaining or improving their medical acumen, than worrying about practice management or personal financial planning. And this was a good strategy until now. In the Year 2002 and beyond, however, medical professionals will not only work harder to earn a living, but that living will not be as lucrative as it once was. Doctors will have to work longer hours; diagnose and treat patients faster; augment their fear of malpractice with the fear of compliance audits; and literally risk their lives as they treat an increasing number of HIV, herpes and hepatitis C infected patients. What will they get for all their trouble? Most likely, a lifestyle lower than most of the middle class patients they treat.

This is a dramatic change from the way things used to be in medicine. Some pundits even use the expression, health insurance payment paradigm shift, because the way doctors practice medicine, and the manner in which they get paid, has drastically changed.

For example, under a full-risk medical capitation payment plan, the successful doctor may be the one with an empty waiting room, rather than a full one. Some experts argue that this is a better deal for patients, while others document that there are more un-insured or underinsured patients that ever before. A recent review revealed that almost 45% of all physicians are now corporate employees, and that private doctors do 40% less pro-bono charity work than they did in the fee-for-service reimbursement system, because they can no longer afford to work for free.

Regardless of philosophy, one thing is certain: medical professionals have lost their financial clout and social standing. Medical school enrollments have begun to decline, residency programs are shutting down, and hospitals are being paid by the US government not to train certain physicians. About twenty percent of medical schools are affiliated with business schools and practitioners are experiencing profound depression because of the managed care insurance crisis. It is a professional crisis of conscience, a personal crisis of economics, and a very real problem that hurts everyone, doctor and patient alike.

How and why this all happened is very complex, but there are three main factors involved: (1) demand and supply side inequalities, (2) healthcare cost escalation and (3) socio-political timing.

Demand and Supply in Medical Care

Medical care is defined as the finite examination and treatment of patients, for monetary compensation. Among other reasons, changes in patient demand occur as a result of the absence or presence of health insurance plans or the encouragement of additional treatments by profit maximizing providers. Changes in supply occur as a result of physician shortages or surpluses and a host of other factors. Currently, the glut of physicians has caused them to become “price takers”, selling a homogenous service. How else could aggregate HMO fee schedules drop to some percentage below prevailing Medicare or Medicaid rates, in some instances? Or, how else could otherwise qualified physicians be de-selected from managed healthcare plans because of large (successful equates with expensive) practices?

A graphical representation of this economic relationship produces the classic downward sloping demand curve and the upward sloping supply curve. At some point in time, however, the treatment plan is completed, the patient is satisfied, and additional services are not needed. This is known as market equilibrium. When an industry becomes more competitive, either by too much supply, too little demand, or both, market equilibrium fees tend to become more elastic and patient volume becomes very sensitive to even small changes in price. In a managed care environment, every covered service has a low price ceiling and every “non-covered” service has its own price elasticity. Traditionally, medical services were inelastic to price changes and considered a growth industry since a fee increase would also increase revenues.

Now, the marketplace has become resistant to pricing pressure by physician oversupply and managed care. Generally, a pricing coefficient greater than one is considered elastic, while a coefficient less than one is inelastic. Interestingly, exact unity prevails when elasticity of supply is exactly equal to one. In the golden days of medicine, the price elasticity of medical care was greater than 1, now it is about .35.

Financially, all this means is that many doctors are “taking what they’re given (by HMOs), because they’re working for a living”. Younger doctors, under 40 years old, are especially inclined to work for less since they have had little exposure to fee-for-service compensation. Additionally, physicians have an increasingly smaller share of the medical marketplace because of so-called medical care extenders, such as PA’s and nurse practitioners. Many health plans have even done away with many true allied healthcare professionals, such as RN’s or CRNA’s, in favor of trained, not educated, and less costly technicians. Patients are hurt as well, as the economic cost of medical re-intervention is often much more than the cost of the proposed initial professional care. And, a study by Deloitte & Touche (The Employer Survey on Managed Care-1999) reported employee satisfaction was decreasing about 10% per year, as healthcare coverage represented a fiscal and economic time bomb on corporate books.

Rising Healthcare Costs

Traditional organizations, except for the military, provided indemnity (fee-for-service) insurance, which gave patients great freedom, and offered M.D.’s or other medical providers great incentive to supply care. But insurers had little control over the care that was rendered and its associated costs. Healthcare costs skyrocketed to more than 900 billion dollars, or 15% of GNP, by 2002, crippling US productivity.

According to the Kaiser Family Foundation (KFF) and Health Research and Educational Trust (HRET), premiums for employer-provided health insurance rose 8.3% last year, almost doubling the average 4.8% hike of the previous year.

Further, consider that Medicare in 2001 cost $250 billion dollars and is projected to be fiscally insolvent by the Year 2008, when health care spending will have reached 2 trillion dollars or 17-18 percent of US GDP. Currently, it has enough to “pay” medical benefits for about ten months, but in reality it cannot pay anything. This creates a rising burden on the young, who subsidized treatment for the old and middle-aged. Workers under 65 pay most taxes and even among workers there are generational subsidies. In 1999, workers 45-64 years old with employer paid insurance had health costs twice those of workers 18-44 since the young have wages reduced because of elder insurance costs.

Additionally, Medicare C+ programs have fared even worse, as evidenced by the recent wave of plan dropouts and continued MCO concerns about burdensome requirements and inadequate payment rates.

Realize that since 1963 in the Medicare system alone, the following happened:

* Workers contributing to the system decreased from 6:1 to 2:1 since 1963.

* Enrollees increased from 22 million to 45 million currently.

* The elderly population increased from 10% to 15% of the US population.

* The average life span increased from 71 to 79 years.

* The Medicare Trust Fund increased from 3 billion to 140 billion dollars (not really a trust fund but actually an accounting fiction since technically the fund holds interest earning US government bonds, representing an accounting surplus of payroll taxes collected minus benefits paid. The bonds are essentially IOUs the government has written to itself).

* The Balanced Budget Act (BBA), of 1997, reduced Medicare payments to providers and eliminated DME fee schedule updates.

* The Balanced Budget Refinement Act (BBRA), of 1999, restored $16 billion over five years to hospitals, skilled nursing facilities, home healthcare and managed care organizations, although the physician community was not dramatically affected.

* HHS for FY 2001 provided about $35 billion for the State Children’s Health Insurance Programs (SCHIP’s), $12 billion for hospitals, $11 billion for HMOs and $2 billion for home health agencies and Medicare C+ programs, over the next five years.

* The Gramm-Leach-Bliley Financial Modernization Act was enacted.

* APCs and HIPAA were to be enacted on or about February 28, 2003.

Furthermore, the rising cost of healthcare can also be blamed upon wide variability in treatment patterns that could be ascribed more to style than to patient differences. For example, studies by John (Jack) Wennberg, MD, in the early 1970’s at Dartmouth Medical School, shocked the health care community when he discovered that differences in hysterectomy, tonsillectomy and prostatectomy rates in one county were 30-50% higher than rates in adjacent counties. By the early 1980’s Wennberg’s studies concluded that new physician incentives were needed if doctors were to provide appropriate care at acceptable costs. Nevertheless, iatrogenic factors contributing to healthcare cost escalation continued into the 1990’s, despite rising physician incomes.

For example, it is now estimated that:

* 53 % of all surgeries may be unnecessary.

* 36% of all medical office visits may not be needed.

* 35% of all hospital admissions may be iatrogenic.

* Doctor induced (iatrogenic) medication errors abound

* Healthcare costs will likely rise about 8% in 2002, as they rose 7.5% in 2001 and 7.3 % in 2000.

* This represents an annual per capita increase from $4,340 in 2000, to a projected climb to $7,171, by 2008.

Other causes of spiraling costs included: voracious consumer appetite, lifestyle drugs with direct-to-patient advertising, inflation, cost shifting, and the relative insulation of consumers to the true cost of medical care due to the business deductibility of health insurance premiums (Starting in 1999, self employed workers were able to deduct 60% of health insurance premiums, and this figure is projected to rise to 70% in 2002 and 100% by 2003). Not coincidentally, corporate America looked for methods to contain costs and provide pro-active, rather than retroactive-active medical care. Managed care, not national healthcare, was the private result. Moreover, malpractice phobia, misinformed patients, hungry trial lawyers and class action lawsuits have all contributed to escalating healthcare costs.

For example, the periodical Jury Verdict Research estimated statistics for Year 2000 jury awards for medical malpractice claims. The median award for all medical negligence claims increased by 14-15% over 1995, and in childbirth cases was about $1.3-1.4 million, more than double the median for any other type of medical malpractice verdict. Other median awards were about:

* $689,000 for medication errors.

* $563,000 for misdiagnosis cases.

* $277,000 for surgical negligence.

* $280,000 for non-surgical treatment cases

* $284,000 for cases involving doctor/patient relations.

* $630,000 median award for all medical malpractice cases.

Socio-Political Timing

Cultural and socio-political timing (i.e., medical care is a right, not a privilege or a responsibility) induces some patients, and employers, to be unwilling to pay the price for good medical care. According to Steven Wetzell, of St. Paul, MN, employer-initiated Buyers Healthcare Action Group (BHCAG), even seemingly small healthcare premium amounts matter. For example, the difference between his group’s high and lost cost health care plan is only about $19 per member / per month; yet every one of his low cost provider groups gained enrollment last year, while all high cost providers lost enrollment, up to 18%. It was the BHCAG experience that price is now the driver of most health plan enrollment, even more than real healthcare quality or perceived patient satisfaction.

More Bad News for Physicians

Medical professionals of all types have accused both their national and state societies of being slow to respond to their changing needs. In 1962, for example, 82% of physicians belonged to the American Medical Association. Today, the figure is about 36%. Since almost one half of all physicians are employees, they are no longer as dependent upon traditional medical societies. Going forward, it has been estimated that more than 70% of all medical school graduates in the first year of the next millennium will be an employee, rather than a small practice (business) owner and employer.

The strength of medical societies is diminishing, and, as practitioners move into employment positions, the enhanced role of unionization has arisen. Although the AMA has removed barriers to collective bargaining, it is still adamantly opposed to strikes. Traditional constraints under the National Labor Relations Act and other anti-trust laws are being litigated, and prominent unionization campaigns are occurring across the country, as the more than 50,000 physician union members unite, despite a simultaneous diminution of union clout in almost all other industry sectors.

For example, the Physicians for Responsible Negotiations (PRN) initially looked to the Teamsters, food workers and meat cutters to bargain on their behalf, as the Committee of Interns and Residents (CIR) recently won the right to organize 430 residents at the Boston Medical Center. In fact, the younger, and more aggressive, medical professionals of the CIR do not recognize a “no strike” pledge, as the older and less assertive PRN group does.

Regardless, how sad it is to tempt formerly proud and independent practitioners and student doctors to join labor unions, and become just another “medical degree with a pulse.”

The Managed Care “Backlash”.

Some doctors believe that the public will revolt against HMOs and produce a managed care backlash. Unfortunately, they are in denial about the severity of the HMO dilemma. Since passage of the HMO Act in 1973, the growth of HMOs and other Managed Care Organizations (MCO’s) has increased to more than 72 million enrollees. This represents an increase of 14% within the past year, with a 19 percent commercial growth rate in the prior year. Medicaid is one of the fastest growing HMO products as enrollment in this field increased 34% in 1998-99. Medicare enrollment is also growing slowly and is expected to accelerate in the future, although not the managed care (Medicare +) segments. Some sponsors of late, however, have temporarily left the sector due to diminished profit margins, or actual losses.

Do not believe that HMO’s will be unresponsive if just such a managed care backlash occurs. In 1999-2000, managed care companies and their allies fought against restrictive new proposed anti-HMO regulations and spent $112,000 per lawmaker to lobby Congress. This 60 million dollar outlay was four times the $14 million plus spent by medical organizations, trial lawyers ($1 million), unions ($1.4 million) and consumer groups ($8 million) to press for passage of the so-called Patient Bill of Rights. The $60 million dollar lobbying tab is 50 percent higher than the $40 million dollars that tobacco interests spent to kill legislature to raise cigarette taxes to curb teenage smoking!

Keep Practicing

In a study from the New England Journal of Medicine, in 1997, a survey of 12,107 doctors found that 24 percent of primary care physicians believed that the scope of care they were expected to provide, by HMO’s, was too pervasive. Among specialists, 38% believed patients’ conditions were too complex by the time they were referred for further treatment, since HMO gatekeepers limit access to specialists.

According to a 1998 survey of physicians, widespread dissatisfaction was confirmed by the MedStat Group, of Ann Arbor, who reported that 46% of the respondents indicated frequent thoughts about leaving practice. The survey was sent to 30,000 doctors, in 22 US markets, of which 6,500 responded. Dissatisfaction was high, primarily because of managed care, opined Kent Bottles, MD, author of the study, who lectures physicians about pursuing alternative medical careers. Doctors were fed up with the loss of financial security, prestige, independent decision-making, physician collegiality and strong physician-patient relationships. Other physicians simply admitted they made the wrong career choice, and stuck it out until the aggravation level was too high.

Gigi Hirsch, MD, a former ER physician and instructor at Harvard Medical School grew so disenchanted with clinical medicine, that she ditched her career and started her own business, MD IntelliNet, in Brookline, Mass. The company places doctors in non-traditional jobs by pairing them with venture capitalists and other businesses seeking physicians. Her new book, Strategic Career Management for the 21st Century Physician, was published by the AMA in October, 1999.

In the same light, Michael Burry, MD, a promising young neurologist from Stanford and Vanderbuilt, rejected his medical career to become a private portfolio manager for Scion Capital Management, as did Harvard trained radiologist, Faraz Naqvi, MD, the fund manager for Dresdner RCM Biotechnology Fund.

It is no wonder, then, that, according to Dr. Regina E. Herzlinger, the Nancy R. McPherson professor of business administration chair at the Harvard Business School and author of the books Creating New Healthcare Ventures and Market Term in Healthcare, many medical professionals become depressed and want to give up their careers entirely. But, she implores in her most recent book, Market Driven Healthcare, “don’t give up practice, yet”.

As an example of a potential recent change for the better, Aetna/US Healthcare dropped its “all products” managed care clause last year in Connecticut, Georgia and California, and may pay what the California Medical Association (CMA) calls actuarially sound capitation rates.

Similarly, United Healthcare eliminated much of its pre-authorization requirements but replaced it with a retrospective analysis of physician treatment plans that may lead to more physician profiling. Still, according to Archelle Georgiou, MD, Chief Medical Officer, the company’s new policy for 2001-2002 was to purse the triad of hassle elimination for doctors, enhanced access to care for patients, and to keep both cohorts from falling through the cracks of bureaucracy.

The Future?

Pragmatically, the future healthcare industrial complex will offer great opportunities to change medicine for the better, to those who have the foresight to undergo the serious process of re-education and re-engineering.

As an example of this re-engineering, Joseph Orlando, vice president of Health Marketing Inc., in Chicago, opined that if healthcare becomes too expensive, “some companies are not even going to bother with group (medical) coverage anymore. They may just give each employee $200 to spend each month, and then send them into the private healthcare market place,” even though this model would be difficult to implement under the current Health Insurance Portability and Accountability Act (HIPAA).

In another example of an out-of-the-box mentality, individuals may ultimately own their own transferable health insurance policies, just as they do IRA’s. The Coalition on Health, in Washington, DC, has even postulated the concept of “defined contribution health coverage” that is similar to contemporary defined contribution retirement plans. Under this plan, an employer deposits a defined financial healthcare contribution into an employee’s account. The employee has control over the funds and can select a level of healthcare coverage that best meets his or her individual needs from a “menu” that generally includes various selections among medical, dental, vision, and pharmacy benefit plans. A leader in this revolution is Oregon-based that announced the statewide rollout of its Internet-based defined-contribution health benefit administration service, in 2001-2002, through its partnership with Regence BlueCross BlueShield of Oregon.

According to CEO Dave Sanders, since the company is Internet-based, employees can get online access to their benefits information 24 hours a day, seven days a week. Randy Cline, senior VP for Regence BCBSO, feels that a defined-contribution approach also “raises the employees’, and their families’, awareness of the costs associated with healthcare.” Theoretically, as cost-conscious consumers, employees could put a lid on rising healthcare costs for an employer. However, if healthcare costs escalate, employers could freeze, or decrease, their contribution levels. Employees would then lose purchasing power and control.

In this model, according to Uwe Reinhardt Ph.D., of Princeton University, HMO’s will have to change their marketing and recruiting tactics from corporate America, back toward the individual patient. The new challenge of managed care will become providing consumers with the specific healthcare and health information they demand.

In a third example of innovative thinking, the Medical Savings Account (MSA) concept of tax deductibility, ignored a few years ago, may re-emerge to cut employee costs, allow for a return to fee-for-service medicine, expand patient choice, and provide many of the options both doctors and patients profess to desire.

Finally, Physician Practice Management Corporations (PPMC), left for dead by the year 2000, may even make a comeback, as they evolve from first generation multi-specialty national concerns, to second generation regional single specialty groups, and finally to third generation Internet-based Web enabled service companies, providing both business-to-business solutions to affiliated medical practices, as well as business-to-consumer health solutions to plan members.


Therefore, one way to help achieve success is to run your practice like a business and integrate management concepts with personal financial planning techniques, using a trusted team of advisors. It is only in this fashion that patients will regain confidence in their podiatrists, who in turn will regain their rightful place as independent conductors of our nation’s foot health care symphony.


Herzlinger, R.: Market Driven Health Care. Perseus Book, New York, 1999.

Johnson, Shelly: Defined contribution is coming. Managed Care, December, 2000.

Lauer, CS. Modern Physician, January 2001

Marcinko, DE and Hetico, RN: HealthCare Economics in the United States: Evolution or Revolution? In, Marcinko, DE (editor): The Business of Medical Practice. Springer Publications, New York, 2000.

McGinley, L and Cloud, DJ: US takes aim at HMO fraud in Medicare and Medicaid. Wall Street Journal, October 19, 1998.

Relant, JD.: Managed care reform foes spend $60 million. AJC, November 28, 1998.

Wechlser, Jill. Americans confused about managed care. Managed Care, December, 2000.

Dr. Marcinko is Managed Care Editor of Podiatry Tracks Journal and author of seven podiatric textbooks. The author is CEO of Marcinko Associates and Medical Business Advisors, Inc, a practice management and financial planning firm for healthcare professionals. He can be reached at (770-448-0769) or email: His two new books: “The Business of Medical Practice”, and “2001 Financial Planning for Physicians and Healthcare Professionals”, are available from the firms’ website:

COPYRIGHT 2002 Kane Communications, Inc.

COPYRIGHT 2002 Gale Group