The myth of economy of scale in outpatient medicine

Bigger is not always better.  Many large medical groups have failed following expansion for reasons that may not obviously be apparent.  After all,larger organizations should benefit in many important areas such as more efficient marketing, lower borrowing cost, and lower purchasing costs for bulk medical supplies.  Consolidated medical groups may also hold varying degrees of a monopoly in certain services, allowing them to charge above market rates (to a small extent) for certain services.

Not all large medical organizations are doomed to fail, but groups that undergo expansion may lose sight of the fact that financial viability is dependent on physician productivity, which under our current system has a definite ceiling.  MOM commenter Allan remarks:

...Everyone else (except the drug companies -- hmm) has the same capacity limit as your barber. While your doctor is paid about an order of magnitude more than your barber, he can only service one client at a time and there are only so many hours in a day. So don't look for doctors to be cruising the halls of Congress lobbying to protect their rent seeking value transfer...

This means that I can only see so many patients during office hours.  Given our very rigid fee for service system, there is a maximal amount of income that I can bring in, regardless of my efforts.  Quality improvement is largely wasted in generating extra revenue, as I can only charge the same as my mediocre competitors.  More so the opposite, given that extra quality will likely translate into extra time, reducing my revenue further.

Really, this is a prescription for substandard medical care, though that is a topic for another post.

Relating to expansion, as the numbers of physicians in a group goes up, the ratio of employee to physicians will increase at a greater rate.  The number of patients seen remains the same, given that many fields (especially primary care) have an under supply of physicians and there are enough patients for them to remain full even without the added value of one stop multispecialty care.  Your least expensive employee will cost a minimum of 40k per year in salary and benefits.  Larger groups will need administrators, mid-level managers, vice president, etc. who are typically reimbursed in much greater figures.  Soon the administrative burden becomes enough to offset the competitive advantages above.  Physicians seeking jobs will often notice that the largest organizations are rarely the best paying ones.

Outpatient groups will often rely on ancillary services (phlebotomy/lab work, radiology) with a captive audience so to speak, but staffing and cost of support may turn that into a double edged sword.  Especially when Medicare changes it's mind on short notice on how those services should be reimbursed.

 

Comments

[dave]

I agree about the diseconomies of scale. I got in some trouble many years ago in a college econ class by pointing that out for other businesses. I do not entirely agree about physician productivity. I work as a lean consultant in the medical area. The majority of a physican's time is NOT spent providing medical service. By focusing on maximizing value added service and process flow, I find we can generally increase productivity as much as 50%.

[DocJim]

Efficiency is always welcome in any "business," but my medical care as an internist has always been about taking "enough time" for the patient. Who decides what is "enough?" About 90% of that is the patient's choice.
I am very "inefficient" and I will retire from medicine, rather than work hard to run people in and out. I see my days as numbered, maybe to the extent of 6 months to 24 months remaining of my professional life.
The MDs who didn't like practicing medicine and took the MBA course are the ones that I blame for this perversion of the profession.
I'm damn glad I am 68 now. I don't think we will recognize medicine in five years and it will be more "available" as the physician's time is spread over many and each gets less.

[internal medicine emr]

I agree that not all large medical organizations are doomed to fail, but groups that undergo expansion may lose sight of the fact that financial viability is dependent on physician productivity.

Kevin