In April 30, 2000, the Nalle Clinic, Charlotte?s venerable medical clinic, closed its doors after nearly 80 years of serving the community. Plagued in recent years by financial difficulties and unable to find a financial savior, the clinic had no choice but to cease operations. Its closure left 175,000 Charlotte-area patients wrought with anxiety about their future care, the security of their medical records and the possibility of having to look for a new physician. But on May 1, Nalle doctors saw patients as scheduled. In fact, aside from a few minor inconveniences, it was business as usual. How? Novant Health/Presbyterian Healthcare ? in the midst of its own troubles ? aggressively stepped in and negotiated deals with physicians, obtained patient records and absorbed the bulk of Nalle?s physicians? practices. How Nalle failed and why Novant rescued its patients paint a dramatic portrait of the state of health care today.
Anatomy of a Decline
The Nalle Clinic once boasted 140 doctors, 11 satellite offices and an eight-story tower on Randolph Road. But its growth took a toll on the clinic?s finances. High overhead and sizeable investments in satellite operations cut into doctor pay, resulting in many physicians taking flight. The money crunch was exacerbated by an error-ridden billing and collections system that couldn?t handle the growing complexities of managed care. These internal difficulties, combined with cuts in reimbursements from Medicare and managed care companies. finally brought the weakened practice to its knees. In 1990, Nalle had turned to PhyCor, Inc. for financial management expertise. Nashville, Tenn.-based PhyCor, one of the nation?s largest and most successful physician practice management companies, agreed to step in for 12 percent of net profits. PhyCor purchased clinic assets, poured cash into satellite offices and beefed up medical equipment purchases. But as the rules of health care continued to change and evolve, profits shrank and even PhyCor could not find a way to stem the tide. Pricing pressures in the healthcare industry continued to chip away at doctor compensation. Physicians were paid only after expenses ? including PhyCor?s 12 percent management fee, overhead, and salaries for other staff ? were met. To make matters worse, the clinic?s financial system didn?t incentivize doctors to perform. As more physicians continued to depart, there were fewer professionals to shoulder the enormous overhead. Bill Michalak, a former health care analyst and currently CEO of Georgia-based Meridian Medical Group, says, ?Cuts in managed care pricing made it harder to manage medical practices and reap the benefits of consolidation. PhyCor was a great consolidator, but just couldn?t efficiently manage the clinic?s operations in that environment.?
Last year, Nalle Clinic management turned to Presbyterian Healthcare for a way out. Paul Wiles, CEO of Novant Health, Presbyterian?s parent company, recalls, ?We looked at a joint venture arrangement with PhyCor. We also considered buying 100 percent of the clinic.
But the economics didn?t work for us.? By January, Presbyterian had completed the due diligence process and decided not to buy the clinic. But Wiles was still willing to help the physicians purchase the clinic themselves from PhyCor. In the interim, he assembled a team of Presbyterian professionals to address the ongoing crisis. Led by Steven Burke, senior vice president of physician enterprise services, officials stayed in close contact with the clinic?s leadership and physicians, monitoring their negotiations with PhyCor. Burke remembers, ?As the negotiations kept going longer and longer, we began to have some concern. Maybe things weren?t working as well as we had thought. So we developed a contingency plan for the different scenarios that might play out. We all wanted the Nalle Clinic to continue in some shape or form.? Burke spearheaded planning sessions with key managers throughout the Presbyterian organization: Carl Armato, vice president of finance for Novant Health; Sandra Williams, chief operating officer of Presbyterian Healthcare; and Dr. Dan Hagler, medical director of Presbyterian Regional Healthcare Associates. By early March, when it became apparent that the clinic would not survive, Presbyterian?s team was galvanized into action. Burke launched a series of meetings with physicians, often as early as 6 A.M. and after hours late into the evening, gathering information and opening the lines of communication to better respond to the doctors? needs. Armato and his staff painstakingly ran projections, creating scenarios for private practice and other options. They helped doctors determine what they could afford for staffing, salaries and other costs. ?We took the information shared with us by PhyCor and put it into financial reports so the doctors could do some what-if scenarios. They could have some idea of what to expect in order to make decisions that would be good for them and for their patients. As doctors changed assumptions, we re-ran the models.? Hagler oversaw primary care specialties ? pediatrics, obstetrics, family practice and internal medicine. Williams worked closely with the hospital-based specialists ? surgeons, orthopedists, gastroenterologists, plastic surgeons and pulmonologists. ?Our guiding principle was to make sure the continuity of care was there for patients and the physicians would be able to stay here to practice,? she relates. ?We just worked through all the issues.? Within a few short weeks, their exhaustive efforts paid off. By May 1, the plan was in place.
Why Presbyterian launched its rescue plan
Over the years Presbyterian Healthcare had developed an informal relationship with the Nalle Clinic. While the clinic was independent, most Nalle doctors traditionally referred patients to Presbyterian. Presbyterian also owned the $33 million, 8-floor tower occupied by the clinic. And Presbyterian ran the Nalle lab and jointly owned the clinic?s MRI facility. Certainly, Presbyterian had a lot at stake regarding the future of Nalle?s physicians and its 175,000 patients. It couldn?t take the chance they would move to Carolinas HealthCare System, the hospital?s chief competitor. Carolinas spokesperson Alan Taylor agrees, ?Presbyterian had more to lose. Nalle doctors not only sent more patients to Presbyterian, but leased space in their building.? So Presbyterian fashioned a plan that offered Nalle doctors the option of working at other hospitals. According to Steven Burke, this surprising measure of goodwill goes beyond the bounds of self-interest. ?One of the reasons we exist as a healthcare organization is for the community?s benefit. We valued the physicians and the physician-patient relationship. It was important to us that the community win.? Whether or not Presbyterian?s philanthropic effort will pay off in the long run remains to be seen.
Presbyterian provided three alternatives to Nalle physicians seeking to remain in the Charlotte area. Burke explains, ?We tried to give the doctors a tremendous range of flexibility, recognizing that there isn?t a one-size-fits-all type arrangement.? He points out that some Nalle doctors declined assistance and went into private practice on their own. Presbyterian focused its attention on three main options.
1. Private Practice Model To assist physician groups in returning to private practice, Presbyterian offered back office functions and cash flow loans. Presbyterian also acted as a liaison between Nalle doctors and local banks for other financial tools. The Presbyterian loans were completely free of restrictive covenants, allowing doctors the flexibility of selecting hospital services at will. Dr. Hagler elaborates, ?We set up the management organization to allow doctors to purchase the services to run their own practices. We negotiated on their behalf with PhyCor, eliminated their non-compete agreements and allowed them the option of staying in their current various locations. We guaranteed loans to allow them to borrow the money to start up.?
2. Affiliated Practice Under this alternative, physicians became employees of Presbyterian Healthcare, albeit with autonomy in operating their practices. Dr. Hagler adds, ?The practice gets to control itself. Doctors choose their partners and decide on a compensation plan. We would help them with the business, but it is their practice to run. We did offer them some guarantees to get started because we knew there would be some dislocations in terms of compensation.? Three major Nalle family practice groups chose to come under this affiliation: Randolph Family Practice, Matthews Family Practice and Medical Plaza Family Physicians.
3. Presbyterian Healthcare Associates In a select few cases, specialists joined existing specialty groups already a part of Presbyterian Healthcare Associates. Dr. Hagler explains, ?We made an employee offer to a small number of specialists where we had a need in an current office.? Presbyterian also:
- Released PhyCor from its lease agreement for the tower
- Bought clinic assets (to be sold or leased back to physicians)
- Began operating Nalle?s Urgent Care (as Randolph Urgent Care) and the radiology department in addition to the lab and MRI
- Worked with real estate consultants to ensure that Nalle doctors could remain in their locations
- Assumed responsibility for maintenance, information technology, phone, copier and other services
- Provided capital to Mike Zucker, former Nalle financial officer, to establish MedMetrics, a billing, collections and accounting organization for the newly evolved practices
- Assumed custody of Nalle?s 300,000 medical records
? In March, Dr. John Tracy, a Nalle family practice physician, wondered what would become of his partners, nurses, 25 member staff and nearly 5,000 patients. He remembers, ?We talked to other hospitals, but Presbyterian offered us the best arrangement without a non-compete contract.? His office now operates under the name Randolph Family Practice, with Presbyterian?s tax ID and benefits structure. Tracy is pleased by the outcome, ?We got to stay where we were, keep our equipment and maintain our staff. We even have the option of leaving the system [Presbyterian Healthcare] without penalty. We couldn?t get that anywhere else.? Dr. Carol Rupe, of the newly named Medical Plaza Family Physicians, concurs, ?They [Presbyterian] made it so much easier for us. They sent people out immediately to explain compensation plans and worked with us through the paperwork. They?ve given us a grace period to work our way through the red, until we?re in the black.
We?ve received a lot of support. Presbyterian greased the skids and made sure our employees didn?t go without pay.? Alan Taylor of Carolinas HealthCare System, concedes, ?Presbyterian actually came up with a financial plan to assist the doctors; we chose not do that.? ?But if a physician was interested in coming to work for us, we were happy to talk to them,? he offers. ?Some of them have come under our employment. Others are in private practice but have privileges here.? Steven Burke sums up Presbyterian?s leadership role this way, ?We wanted to do everything in our power to keep the Nalle doctors in town. It was the right thing to do.?