Stagnant Margins for Physician Primary Care Medical Groups

By Christina Pope, MGMA senior writer:

No longer able to absorb several years of cost increases and decreasing revenue, primary care medical group practices are watching their margins shrink, according to the new Medical Group Management Association Cost Survey: 2005 Reports Based on 2004 Data.

The Report, which for the first time has been split into two in-depth reports for multispecialty practices and single-specialty practices, found the trend across the board, though with some differences among and between multispecialty and single-specialty practices.

From 2003 to 2004, the margin (median total medical revenue after operating costs) per full-time-equivalent (FTE) physician for primary care medical group practices shrank:

• By 5.5 percent to $201,896 for internal medicine single-specialty practices;
• By 3.9 percent to $217,315 for nonhospital-owned primary-care-only multispecialty practices; and
• By 0.6 percent to $214,377 for family medicine single-specialty practices.

Pediatric single-specialty practices' margins grew just more than 1 percent to $221,883.

Several forces appear to be squeezing primary care groups, including support staff costs and deeper discounts to payers. Single-specialty primary care practices saw their median total support staff cost per FTE physician grow 4.6 percent to $164,649 and median total operating cost per FTE physician grow 5.7 percent to $329,395. Revenue is slipping, or flat at best. Adjustments to fee-for-service charges — essentially the discounts practices give to payers in their contracts — have curtailed primary practices' revenue. Pediatric single-specialty groups, for example, have increased adjustments per FTE physician 81 percent since 2000 (to $204,867).

"You have to be a lean, mean operation, but primary care practices are just trying to stay in business," said Deborah D. Milburn, CMPE, MGMA member and administrator of the eight-physician Dublin Primary Care, Colorado Springs, Colo. "As I've worked on our 2006 budget, I've seen staff costs go up because of salary and benefit increases. The discounts we've given payers eat at our revenue. But we can only absorb these things for so long. Eventually it will hurt physicians' paychecks, and they'll ask why they bother doing this for a living."

Figures for multispecialty practices differ by ownership

Multispecialty practices overall, which MGMA often use as a proxy for the larger industry, were also squeezed by cost increases that exceeded revenue gains. Multispecialty practices' median total operating cost grew 1.3 percent (to $353,503) while total medical revenue dropped 0.7 percent (to $582,307). The margin for multispecialty practices grew only 1.7 percent to $236,021.

Hospital-owned multispecialty practices seemed to do better at controlling costs while nonhospital-owned multispecialty practices seemed to be better revenue generators. Hospital-owned multispecialty practices' total operating costs per FTE physician dropped 9.9 percent (to $283,191) while nonhospital-owned multispecialty practices saw theirs grow 3.5 percent (to $392,108). Hospital-owned multispecialty practices' total medical revenue per FTE physician dropped 5.8 percent (to $439,672) while nonhospital-owned multispecialty practices saw theirs grow 6.3 percent (to $673,258).

Single-specialty professional liability costs continue to increase

Overall, median total medical revenue after operating costs per FTE physician for single-specialty practices grew 5.6 percent to $387,341. Anesthesiology was the exception with a 2.6 percent drop this year. All single-specialty practices' median total operating cost per physician increased a slight 0.9 percent to $374,211, while median total medical revenue dropped 0.8 percent to $739,574.

Professional liability cost continues to increase at a consistent level for all specialties, with obstetrics/gynecology the leader at 5.91 percent of total medical revenue. Since 2003, every specialty except anesthesiology has seen professional liability cost per FTE physician climb from 13 percent to 19 percent. Since 1999, this cost has grown between 67 percent and 120 percent for cardiology, family practice, anesthesiology, OB/GYN, orthopedic surgery and pediatric single-specialty practices.

Purchase the MGMA Cost Survey: 2005 Reports Based on 2004 Data (both Multispecialty and Single-Specialty Practices Reports).