Enhancing the Physician Enterprise in Maryland 11 17-08

Enhancing the PhysicianEnterprise in Maryland:

An Analysis of the Practice Environment and

Economic Impacts of Maryland’s Physicians

Sage Growth Partners, LLC

The Maryland State Medical Society

Enhancing the PhysicianEnterprise in Maryland:



Submitted by: Sage Growth Partners, LLC

Commissioned by: MedChi,

The Maryland State Medical Society

November 2008

Enhancing the Physician Enterprise in Maryland:



Table of Contents List of Tables and Figures ................................ I. Executive Summary ................................ The Economic Power of Physicians Building the Great Physician Enterprise II. Introduction ................................ III. The Physician Practice Climate in Maryland Maryland’s Medical Insurance Liability Environment Maryland’s Cost of Living Tax Impact ................................ After Tax Income ................................ The Health Insurance Market in VI. Physicians as Economic Drivers Why is Healthcare Such a Key Driver of Our Economy? Physicians as Economic Engines V. Recommendations and Potential Solutions What We Agree On ................................ Desired Outcome ................................ Recommendations to Form and Enhance Physician Enterprises Supply Recommendations Infrastructure Recommendations

Enhancing the Physician Enterprise in Maryland

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The Economic Power of Physicians .........................................................he Great Physician Enterprise ...................................................

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The Physician Practice Climate in Maryland ....................................................

Maryland’s Medical Insurance Liability Environment .............................’s Cost of Living ...................................................................... 10

.............................................................................................. 11.................................................................................... 1

The Health Insurance Market in Maryland ............................................. 1

Physicians as Economic Drivers ...................................................................... 1

Why is Healthcare Such a Key Driver of Our Economy? ...................... 20Physicians as Economic Engines ............................................................ 20

Recommendations and Potential Solutions ....................................................... 2

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Recommendations to Form and Enhance Physician Enterprises ............ 2Supply Recommendations ...................................................................... 2Infrastructure Recommendations ............................................................ 2

Enhancing the Physician Enterprise in Maryland � 1

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List of Tables and Figures Exhibit I-1. Economic Impacts ................................

Exhibit III-1. Non-Physician Labor Costs: Hourly Mean Wage, Physician’s Office

Exhibit III-2. Selected Positions ................................

Exhibit III-3. Class A and Class B Medical Space:Average Price Per Square Foot 2005

Exhibit III-4. Price Per Square Foot:Class A and B Space and Annual Rental Expense

Exhibit III-5. Cost of Living ................................

Exhibit III-6. State Business Climate Tax Index

Exhibit III-7. Maryland Business Formations

Exhibit III-8. Major State and Local Tax Burden for a Family of Three: $150,000 Income Level

Exhibit III-9. Graduating Medical Student Debt

Exhibit III-10. Educational Debt Service as a PercentageOf After Tax Income: 25 Year Repayment Program

Exhibit III-11. Percentage Increase in After Tax Income Needed To Maintain a Lifestyle After a Move from Delaware, Pennsylvania, or Virginia to Maryland

Exhibit IV-1. Operating Margins, Top Insurers,

Exhibit IV-2. Risk-Based Capital Analysis

Exhibit IV-3. Underwriting Performance in Maryland

Exhibit V-1. Maryland Nonfarm Employment by IndustrySector Groups, July 2007 v. July 2008 Absolute Change

Exhibit V-2. Select Industries as a Portion of Total Maryland Employment, Annual 2007, NSA

Exhibit V-3. Economic Impacts ................................

Exhibit V-4. Establishment Data


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Physician Labor Costs: Hourly Mean Wage, Physician’s Office ..................................................................

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Class A and Class B Medical Space: Average Price Per Square Foot 2005-2008 ..............................................................

ce Per Square Foot: and B Space and Annual Rental Expense ..................................................

................................................................................. 10

State Business Climate Tax Index .................................................. 11

Maryland Business Formations ...................................................... 12

Major State and Local Tax Burden for a $150,000 Income Level ............................................................. 12

9. Graduating Medical Student Debt .................................................. 1

10. Educational Debt Service as a Percentage Of After Tax Income: 25 Year Repayment Program ............................................. 1

Percentage Increase in After Tax Income aintain a Lifestyle After a Move from

Delaware, Pennsylvania, or Virginia to Maryland................................................. 1

Operating Margins, Top Insurers, 204-2006 .................................. 1

Based Capital Analysis .......................................................... 1

3. Underwriting Performance in Maryland......................................... 1

1. Maryland Nonfarm Employment by Industry Sector Groups, July 2007 v. July 2008 Absolute Change ..................................... 1

2. Select Industries as a Portion of Total Employment, Annual 2007, NSA.......................................................... 20

............................................................................ 21

Establishment Data .......................................................................... 21


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EXECUTIVE SUMMARY Maryland is very reliant on a strong physician population to secure its role as a progressive, desirable place to live and work. The state has a long reputation as a national leader in health services, policy, and health care delivery. And, as everyone knojurisdiction’s health markets affectsare the lynchpin to the state’s healthcare and scientific prominence.that Maryland is at risk for becoming a less attractive place for physicians to locate and build a business. In particular, in many ways, Maryland is more expensive than many of the other states proximal to Maryland. First, major in Maryland than Virginia or Pennsylvania. These include the cost of medical office space, some 20 percent higher in Maryland than in neighboring Virginia or Pennsylvania, and nonlabor costs which are some 12 percent higher than wage rates nationally. Additionally, Maryland is one of the most expensive states in America in which to live, ranked seventh in the annual ACCRA Cost of Living Index. In other words, Maryland is the seventh the United States. The drivers of cost of living include housing, utilities, groceries, transportation,etc. Finally, Maryland is one of the highest tax states in the country, offering the fourth highest state and local tax burdens in the US. Therefore, Maryland is an expensive proposition for a physician practice. In addition to higher costs, Maryland is an increasingly risky plamalpractice premiums have somewhat stabilized, they are time high. In absence of more substcontinue to influence physicians considering Maryland as a destination. A recent American College of Obstetricians and Gynecologist27 percent of those surveyed cited malpractice insurance as one of the top twoselecting a geographic area. Finally, and not to be understated, the health insurance market in Maryland is highly concentrateaggregating the power of two of the most sBlueCross/BlueShield (Carefirst). Ashealth insurance market, they exertservice. This is particularly true for independentfewer than 5 physicians. When combined(both of which offer no material negotiation flexibility)represents a “virtual” single-payer what Medicare pays physicians in Marylandcontinue market dominance in Maryland, they are able to fend off competition because of the tremendous reserves they have aggregated. The combined effect of all of these factors makes Maryland an increasingly less attractive state for physicians to practice in or locate to; the question is why should citizens of Maryland be concerned about this?


Maryland is very reliant on a strong physician population to secure its role as a progressive, desirable place to live and work. The state has a long reputation as a national leader in health

and health care delivery. And, as everyone knows, the reputationaffects its ability to attract business leaders to one area. Physicians

are the lynchpin to the state’s healthcare and scientific prominence. However, evidencethat Maryland is at risk for becoming a less attractive place for physicians to locate and build a business. In particular, in many ways, Maryland is more expensive than many of the other states proximal to Maryland. First, major cost categories within a medical practice are more expensive in Maryland than Virginia or Pennsylvania. These include the cost of medical office space, some 20 percent higher in Maryland than in neighboring Virginia or Pennsylvania, and non

r costs which are some 12 percent higher than wage rates nationally. Additionally, Maryland is one of the most expensive states in America in which to live, ranked seventh in the annual

n other words, Maryland is the seventh most expensive state in . The drivers of cost of living include housing, utilities, groceries, transportation,

Maryland is one of the highest tax states in the country, offering the fourth highest in the US. Therefore, Maryland is an expensive proposition for a

In addition to higher costs, Maryland is an increasingly risky place to practice medicine. Whilemalpractice premiums have somewhat stabilized, they are stabilizing at prices that are at an alltime high. In absence of more substantial tort reform, Maryland’s malpractice reputation will

considering Maryland as a destination. A recent American College of Obstetricians and Gynecologists survey of residents in Pennsylvania found that almost 27 percent of those surveyed cited malpractice insurance as one of the top two reasons for

to be understated, the health insurance market in Maryland is highly concentrateaggregating the power of two of the most significant brands in healthcare: United Healthcare and

(Carefirst). As these two payers cover over 80 percent of the commthey exert tremendous control over physicians and their contracts for

service. This is particularly true for independent, solo-practicing physicians, and small groups of fewer than 5 physicians. When combined with the major public payers, Medicare and Medicaid (both of which offer no material negotiation flexibility), the payer environment in Maryland

payer – a monolith that pays, on aggregate, less than 100 percent of re pays physicians in Maryland. Further as the two largest commercial insurers

continue market dominance in Maryland, they are able to fend off competition because of the ve aggregated.

The combined effect of all of these factors makes Maryland an increasingly less attractive state for physicians to practice in or locate to; the question is why should citizens of Maryland be


Maryland is very reliant on a strong physician population to secure its role as a progressive, desirable place to live and work. The state has a long reputation as a national leader in health

ws, the reputation of a its ability to attract business leaders to one area. Physicians

evidence suggests that Maryland is at risk for becoming a less attractive place for physicians to locate and build a business. In particular, in many ways, Maryland is more expensive than many of the other states

cost categories within a medical practice are more expensive in Maryland than Virginia or Pennsylvania. These include the cost of medical office space, some 20 percent higher in Maryland than in neighboring Virginia or Pennsylvania, and non-physician

r costs which are some 12 percent higher than wage rates nationally. Additionally, Maryland is one of the most expensive states in America in which to live, ranked seventh in the annual

most expensive state in . The drivers of cost of living include housing, utilities, groceries, transportation,

Maryland is one of the highest tax states in the country, offering the fourth highest in the US. Therefore, Maryland is an expensive proposition for a

ce to practice medicine. While at prices that are at an all-

antial tort reform, Maryland’s malpractice reputation will considering Maryland as a destination. A recent American

s survey of residents in Pennsylvania found that almost reasons for

to be understated, the health insurance market in Maryland is highly concentrated, ited Healthcare and

nt of the commercial tremendous control over physicians and their contracts for

and small groups of rs, Medicare and Medicaid

r environment in Maryland a monolith that pays, on aggregate, less than 100 percent of

. Further as the two largest commercial insurers continue market dominance in Maryland, they are able to fend off competition because of the

The combined effect of all of these factors makes Maryland an increasingly less attractive state for physicians to practice in or locate to; the question is why should citizens of Maryland be

The Economic Power of Physicians According to the Centers for Medicare and Medicaid ServicesAmerica accounts for approximately 21 percentpercentage, this statistic only tells a small part of the story. percentage of total health expenditures: facilities; control the length of stay while in those facilities;devices, and other medical equipmentservices. As such, physicians are at the center of the creation of significant economic activity. One approach to capture the scope of the economic activity of physicians in Maryland isperform economic significance analysis. In theavailable economic and demographic data proxy for economic activity related to physician activities. This First, the model measures the direct economic activity of physicians and physician groups, described in terms of jobs createdcomponent of the model is the indirebusiness to support physician groups.firms, commercial real estate firms, etc. Finally, the third component of the model measures induced economic activity; aggregate economic product produced by firms that build around populations of consumers employed by the healthcare industry. Therefore, this metric attempts to capture the economic activity of restaurants, retail shops, consumer setc that are positively influenced by the medicalanalysis for physicians practicing in Maryland, physician enterprises are contributing over $8 billion in economic impacts includingimpacts, and $2.5 billion in induced impacts. In addition, the physicians have had a hand in generating over 71,000 jobs, representing some $4 billion Exhibit I-1: Economic Impacts

Direct (1,2)

Jobs (3)

Compensation (millions)

Revenue (millions)

Source: IMPLAN

Nationally, the economic impact of physician practice has been similar to that in Maryland. Within the healthcare industry, offices of physicians represent 37 percent of all firms in health care, and some 15.5 percent of all healthcare employment. Building the Great Physician Enterprise Most educated observers agree that physicians are a critical driver of our economy, in their varied roles as care physicians, scientists, entrepreneurs, etc. However, based on many factors, it seems that Maryland runs the risk of being perceived as a state not attractive to physician entrepreneurs. This risk should concern policy makers and state economic development leaders, as the state’s


The Economic Power of Physicians

Centers for Medicare and Medicaid Services (CMS), spending on physicians in for approximately 21 percent of all healthcare services. While a significant

percentage, this statistic only tells a small part of the story. Physicians control a much higher e of total health expenditures: they direct admissions to hospitals and post

stay while in those facilities; prescribe prescription drequipment; and they direct a bevy of diagnostic and other ancillary

services. As such, physicians are at the center of the creation of significant economic activity.

capture the scope of the economic activity of physicians in Maryland isperform economic significance analysis. In the case of this report, the authors have used publicly available economic and demographic data and an IMPLAN input-output economic model as proxy for economic activity related to physician activities. This methodology describes the parts. First, the model measures the direct economic activity of physicians and physician groups,

scribed in terms of jobs created, aggregate compensation, and aggregate revenue. The second e model is the indirect effects, that is the economic vibrancy created by entities in

business to support physician groups. These might include medical supply firms, office supply firms, commercial real estate firms, etc. Finally, the third component of the model measures

duced economic activity; aggregate economic product produced by firms that build around populations of consumers employed by the healthcare industry. Therefore, this metric attempts to capture the economic activity of restaurants, retail shops, consumer service vendors, gas stations, etc that are positively influenced by the medical-industrial complex. Based on this economic

practicing in Maryland, physician enterprises are contributing over $8 nomic impacts including over $4.5 billion in direct impacts, $1.2 billion in indirect

impacts, and $2.5 billion in induced impacts. In addition, the physicians have had a hand in , representing some $4 billion in employee compensation.

Direct (1,2) Indirect (2) Induced (2)

41,694 9,287 20,556

$2,754 $455 $830

$4,576 $1,170 $2,476

Nationally, the economic impact of physician practice has been similar to that in Maryland. Within the healthcare industry, offices of physicians represent 37 percent of all firms in health care, and some 15.5 percent of all healthcare employment.

ng the Great Physician Enterprise

Most educated observers agree that physicians are a critical driver of our economy, in their varied s, scientists, entrepreneurs, etc. However, based on many factors, it seems

e risk of being perceived as a state not attractive to physician entrepreneurs. This risk should concern policy makers and state economic development leaders, as the state’s


(CMS), spending on physicians in care services. While a significant Physicians control a much higher

direct admissions to hospitals and post-acute prescribe prescription drugs, medical

direct a bevy of diagnostic and other ancillary services. As such, physicians are at the center of the creation of significant economic activity.

capture the scope of the economic activity of physicians in Maryland is to case of this report, the authors have used publicly

output economic model as methodology describes the parts.

First, the model measures the direct economic activity of physicians and physician groups, and aggregate revenue. The second

that is the economic vibrancy created by entities in These might include medical supply firms, office supply

firms, commercial real estate firms, etc. Finally, the third component of the model measures duced economic activity; aggregate economic product produced by firms that build around

populations of consumers employed by the healthcare industry. Therefore, this metric attempts to ervice vendors, gas stations,

industrial complex. Based on this economic practicing in Maryland, physician enterprises are contributing over $8

5 billion in direct impacts, $1.2 billion in indirect impacts, and $2.5 billion in induced impacts. In addition, the physicians have had a hand in

in employee compensation.

Total

71,537

$4,040

$8,222

Nationally, the economic impact of physician practice has been similar to that in Maryland. Within the healthcare industry, offices of physicians represent 37 percent of all firms in health

Most educated observers agree that physicians are a critical driver of our economy, in their varied s, scientists, entrepreneurs, etc. However, based on many factors, it seems

e risk of being perceived as a state not attractive to physician entrepreneurs. This risk should concern policy makers and state economic development leaders, as the state’s

ability to recruit the best and brightest physicians is central to maintaining itprogressive bellwether state. Therefore, it seems appropriate to direct public policy to physician entrepreneurs in the same way the state views bio-technology and life attracting the best physicians available, and on enhancing infrastructure supports for physicianentrepreneurs that wish to build the forwardbe required to deal with Maryland’s demographic tsunami a Pursuant to enhancing physician supply, we believe that state needs to focus on three specific recommendations, namely:

I. To explore loan repayment assistance programs,II. To develop a sustainable practice enhancement III. To achieve substantive tort reform.

These programs are tiered to provide support and relief to practicepractice life; a targeted loan repayment program will attract physicians to Maryland; the practicenhancement program will target rising entrepreneurial practices that want to invbusinesses and communities, and will reduce supply dislocations in key specialties and allow in their businesses. Relative to enhancing physicians’focus on two recommendations:

IV. Develop a physicianV. Develop a physician qual

As the state has already signaled its belief in providing business formation and support services to other key industries, we believe they ones targeted at the physician-enterprphysician in practice in America has proven to be a bonainvestment in physicians will actually drive economic development in Maryland. that larger physician entities are better positioned to negotiate with the large Finally, with an eye toward the promise that information technology holds for health care quality, and recognizing that adoption of clinical information technsomewhat limited, despite many adoption incentivesQuality Innovation Fund (QIF.) The QIF would provide funding for health information technology to support the development of comprehensive chronic care medical systems. For example, Deloite Consulting has estimated the cost of startbe between $25,000 and $100,000 per could be as much as $300,000: well beyond what most physicians have retained in their practices. A sizable chunk of that investment is undeniably tied to the cost oftechnology. This creates a major barrier of care coordination and health status improvement which ultimately costs all Marylanders.


ability to recruit the best and brightest physicians is central to maintaining its status as a

Therefore, it seems appropriate to direct public policy to physician entrepreneurs in the same way technology and life science entrepreneurs. Namely, the state ought

attracting the best physicians available, and on enhancing infrastructure supports for physicianentrepreneurs that wish to build the forward-thinking care delivery entities of the future that will be required to deal with Maryland’s demographic tsunami and pending chronic care crisis.

Pursuant to enhancing physician supply, we believe that state needs to focus on three specific

To explore loan repayment assistance programs, To develop a sustainable practice enhancement financing program, andTo achieve substantive tort reform.

These programs are tiered to provide support and relief to practices in the varied stagepractice life; a targeted loan repayment program will attract physicians to Maryland; the practicenhancement program will target rising entrepreneurial practices that want to invbusinesses and communities, and build the needed chronic care model of the future;

dislocations in key specialties and allow physicians to reinvest premium saving

’ access to infrastructure supports, we believe the state ought to

Develop a physician-enterprise incubator, and Develop a physician quality innovation fund.

As the state has already signaled its belief in providing business formation and support services to other key industries, we believe they should leverage existing incubator programs or build new

enterprise. This should be done with a recognition that each physician in practice in America has proven to be a bona fide jobs creator. Thereforeinvestment in physicians will actually drive economic development in Maryland.

arger physician entities are better positioned to negotiate with the large, concentrated payers.

Finally, with an eye toward the promise that information technology holds for health care quality, and recognizing that adoption of clinical information technology in small medical practices is still

despite many adoption incentives, we believe the state ought to create a und (QIF.) The QIF would provide funding for health information

technology to support the development of comprehensive chronic care medical systems. For example, Deloite Consulting has estimated the cost of start-up for developing a medical home to

tween $25,000 and $100,000 per FTE physician; start-up for a small group of 3 physicians well beyond what most physicians have retained in their practices.

A sizable chunk of that investment is undeniably tied to the cost of purchasing information technology. This creates a major barrier of care coordination and health status improvement

costs all Marylanders.


s status as a

Therefore, it seems appropriate to direct public policy to physician entrepreneurs in the same way ought to focus on

attracting the best physicians available, and on enhancing infrastructure supports for physician-thinking care delivery entities of the future that will

nd pending chronic care crisis.

Pursuant to enhancing physician supply, we believe that state needs to focus on three specific

financing program, and

varied stages of their practice life; a targeted loan repayment program will attract physicians to Maryland; the practice enhancement program will target rising entrepreneurial practices that want to invest in their

needed chronic care model of the future; tort reform to reinvest premium saving

we believe the state ought to

As the state has already signaled its belief in providing business formation and support services to leverage existing incubator programs or build new

ise. This should be done with a recognition that each fide jobs creator. Therefore, this kind of

investment in physicians will actually drive economic development in Maryland. Also, we know concentrated payers.

Finally, with an eye toward the promise that information technology holds for health care quality, ology in small medical practices is still

we believe the state ought to create a und (QIF.) The QIF would provide funding for health information

technology to support the development of comprehensive chronic care medical systems. For up for developing a medical home to up for a small group of 3 physicians

well beyond what most physicians have retained in their practices. purchasing information

technology. This creates a major barrier of care coordination and health status improvement

INTRODUCTION Report Objective and Brief Background MedChi, The Maryland State Medical Society enstudy the business and economic environment for physicians practicing medicine in Marylandto identify the significant economic impacts of Marin response to the work of the Governor of Maryland’s Task Force on PhyReimbursement. This environment is defined not only by the laws and regulations that govern medical practice, but it also incorporates the routine practices and behavior of key componentthe system. The study attempts to objectively evaluate the impacts of the environment on physicians and physician entities. Additionally, the analysis will the climate for physician enterprises in Maryland might affect tphysicians, either coming out of training or moving from a different market. Typically, economic impact analyses are static in nature and focus upon the economic impacts of an activity under current conditions. practice trends in Maryland and then report also compares Maryland’s practice environment to that of Virginia, Delaware, and Pennsylvania, especially as it relates to the cost of establishing and maintaining medical practice. The report begins with an overview of the physician practice environment in Maryland, including costs, risks, and other obstacles facing physician entrepreneurs. The discussion then focuses on the economic impacts of Maryland’s physician community, and where possible, quantifies these impacts by use of a standard IMPLAN inputoutput and fiscal impacts. The report concludes with improve the operating environment for physicians in Maryland, while making Maryland a more attractive and hospitable place for physician The Study Team The study team included Don McDaniel and Dan D’Orazio from Sage Growth Partners, LLC, and Anirban Basu and Josh Lowery from Sage Policy Group, Inc. Finally, we were counseled by John Duberg of the Nearing Group, who supported our IMPLAN modelin PHYSICIAN PRACTICE CLIMATE IN MARYLAND Practicing medicine in Maryland is expensive, especially when compared to other states in the region. Two of the primary drivers of operating a practice include labor and rent. Exhibit highlights the hourly rate of non-physician labor in 2007. When compared to national averages, the hourly rate for non-physician labor in Maryland is 12.5 percent greater than the rest of the country. When examined regionally, Maryland’s nonto 17.5 percent higher than Delaware and Pennsylvania respectively.


Report Objective and Brief Background

edical Society engaged Sage Growth Partners, LLC (SGP) to study the business and economic environment for physicians practicing medicine in Marylandto identify the significant economic impacts of Maryland’s practicing physicians. This analysis is

ork of the Governor of Maryland’s Task Force on Physician Access and This environment is defined not only by the laws and regulations that govern

also incorporates the routine practices and behavior of key componentthe system. The study attempts to objectively evaluate the impacts of the macro economic

sicians and physician entities. Additionally, the analysis will the climate for physician enterprises in Maryland might affect the State’s ability to attract new physicians, either coming out of training or moving from a different market.

Typically, economic impact analyses are static in nature and focus upon the economic impacts of an activity under current conditions. This report, however, is dynamic and analyz

then maps them forward. To allow for a healthier analysis, this report also compares Maryland’s practice environment to that of other states in the regions such as

Pennsylvania, especially as it relates to the cost of establishing and

The report begins with an overview of the physician practice environment in Maryland, including facing physician entrepreneurs. The discussion then focuses on

the economic impacts of Maryland’s physician community, and where possible, quantifies these impacts by use of a standard IMPLAN input-output econometric model to calculate job, wage,

nd fiscal impacts. The report concludes with a broad set of recommendations that might improve the operating environment for physicians in Maryland, while making Maryland a more

hospitable place for physician-entrepreneurs to locate.

The study team included Don McDaniel and Dan D’Orazio from Sage Growth Partners, LLC, and from Sage Policy Group, Inc. Finally, we were counseled by John

Duberg of the Nearing Group, who supported our IMPLAN modeling efforts.

LIMATE IN MARYLAND

Practicing medicine in Maryland is expensive, especially when compared to other states in the region. Two of the primary drivers of operating a practice include labor and rent. Exhibit

physician labor in 2007. When compared to national averages, physician labor in Maryland is 12.5 percent greater than the rest of the

country. When examined regionally, Maryland’s non-physician labor is anywhere from 6 percent to 17.5 percent higher than Delaware and Pennsylvania respectively.


gaged Sage Growth Partners, LLC (SGP) to study the business and economic environment for physicians practicing medicine in Maryland and

yland’s practicing physicians. This analysis is sician Access and

This environment is defined not only by the laws and regulations that govern also incorporates the routine practices and behavior of key components of

macro economic sicians and physician entities. Additionally, the analysis will ascertain how

he State’s ability to attract new

Typically, economic impact analyses are static in nature and focus upon the economic impacts of analyzes medical

allow for a healthier analysis, this other states in the regions such as

Pennsylvania, especially as it relates to the cost of establishing and

The report begins with an overview of the physician practice environment in Maryland, including facing physician entrepreneurs. The discussion then focuses on

the economic impacts of Maryland’s physician community, and where possible, quantifies these output econometric model to calculate job, wage,

broad set of recommendations that might improve the operating environment for physicians in Maryland, while making Maryland a more

The study team included Don McDaniel and Dan D’Orazio from Sage Growth Partners, LLC, and from Sage Policy Group, Inc. Finally, we were counseled by John

Practicing medicine in Maryland is expensive, especially when compared to other states in the region. Two of the primary drivers of operating a practice include labor and rent. Exhibit III-1

physician labor in 2007. When compared to national averages, physician labor in Maryland is 12.5 percent greater than the rest of the

ywhere from 6 percent

Exhibit III-1: Non-Physician Labor Costs: Hourly Mean Wage, Physician’s Office

0 5

Pennsylvania

National

Virginia

Delaware

Maryland

Source: Bureau of Labor Statistics: May, 2007

Exhibit III-2 provides a snapshot of select positions and their hourly rate for nonMaryland is highlighted in red, and with the exception of “Medial Assistant in Delaware,” these positions demonstrate the higher hourly labor costs in MRevenue and Cost Module, non-physician labor operating costs account for up to 47 percent of total medical revenue. To the extent that labor costs in Maryland are greater, these costs disproportionally impact physician e Exhibit III-2: Selected Positions

RN LPN

National $30.04 $18.72

Maryland $33.89 $22.48

Delaware $31.51 $21.69

Virginia $28.54 $17.60

Pennsylvania $28.50 $18.99


Medical office space is another significant non-physician labor costs, medical office space in MarylandExhibit III-3 depicts the three year average for Class A and Class B


Physician Labor Costs: Hourly Mean Wage, Physician’s Office

$18.73

$19.56

$20.61

10 15 20


provides a snapshot of select positions and their hourly rate for non-Maryland is highlighted in red, and with the exception of “Medial Assistant in Delaware,” these positions demonstrate the higher hourly labor costs in Maryland. According to MGMA’s 2008

physician labor operating costs account for up to 47 percent of total medical revenue. To the extent that labor costs in Maryland are greater, these costs disproportionally impact physician enterprises in Maryland compared to other states.

Selected Positions

LPN Medical Assistant

Receptionist Medical Records

$18.72 $13.59 $11.82

$22.48 $14.27 $12.41

$21.69 $14.84 $12.17

$17.60 $13.42 $11.87

$18.99 $12.92 $11.40


Medical office space is another significant business expense for physician practices. Similar to physician labor costs, medical office space in Maryland is more costly than in other states.

depicts the three year average for Class A and Class B medical space


Physician Labor Costs: Hourly Mean Wage, Physician’s Office

$18.73

$19.56

$20.61

$20.69

$22.01

25

-physician labor. Maryland is highlighted in red, and with the exception of “Medial Assistant in Delaware,” these

aryland. According to MGMA’s 2008 physician labor operating costs account for up to 47 percent of

total medical revenue. To the extent that labor costs in Maryland are greater, these costs nterprises in Maryland compared to other states.

Medical Records & HIT

$15.12

$17.91

$14.85

$15.74

$14.93

for physician practices. Similar to is more costly than in other states.

medical space in Maryland,

Virginia, and Pennsylvania.1 Per square foot of Class A space, Maryland is 19 percent than Pennsylvania and 23 percent more expensive than Virginia: similar ratios exist for Class B Space. Exhibit III-3: Class A and Class B Medical Space: Average Price Per Square Foot

Source: CB Richard Ellis

Maryland’s higher rental expenses can directly impact the financial standing of a physician practice. According to the Medical Group Management Association, the average single specialty primary care physician office, with under three full time equivalent physicians, is 4,056 square feet.2 The following table highlights the fiscal impacts of higher rental fees on operating expenses across the region.

Exhibit III-4: Price Per Square Foot, Class A and B Space

Single Specialty, Primary Care

Price Per Square Foot: Class A

Maryland $28.54

Pennsylvania $23.92

Virginia $23.14

Note: Median square footage of a single specialty, primary care office is 4,056 per 2007 MGMA data

1 Class A space defined: excellent location and access, attract

Usually steel framed and tall. Class B space defined: good (versus excellent) locations, management, construction. High tenant standards and l2 Cost Survey for Single-Specialty Practices: 2007 RAssociation.

$28.54

$23.14

$0.00

$10.00

$20.00

$30.00

Class A

Pri

ce p

er F

t2


Per square foot of Class A space, Maryland is 19 percent than Pennsylvania and 23 percent more expensive than Virginia: similar ratios exist for Class B

ass A and Class B Medical Space: Average Price Per Square Foot

Maryland’s higher rental expenses can directly impact the financial standing of a physician practice. According to the Medical Group Management Association, the average single specialty

with under three full time equivalent physicians, is 4,056 square The following table highlights the fiscal impacts of higher rental fees on operating expenses

er Square Foot, Class A and B Space and Annual Rental Expense

Price Per Square Foot: Class A

Annual Expense Percentage Discount

From Maryland

$28.54 $116,000 N/A

$23.92 $97,000 19.5

$23.14 94,000 23.4

single specialty, primary care office is 4,056 per 2007 MGMA data

Class A space defined: excellent location and access, attracts high quality tenants, and is managed professionally.

Usually steel framed and tall. Class B space defined: good (versus excellent) locations, management, . High tenant standards and little functional deterioration.

Specialty Practices: 2007 Report based on 2006 Data. Medical Group Management

$24.90$23.14

$21.72

$23.92

$19.32

Class A Class B

Maryland Virginia Pennsylvania


Per square foot of Class A space, Maryland is 19 percent greater than Pennsylvania and 23 percent more expensive than Virginia: similar ratios exist for Class B

ass A and Class B Medical Space: Average Price Per Square Foot 2005-2008

Maryland’s higher rental expenses can directly impact the financial standing of a physician practice. According to the Medical Group Management Association, the average single specialty

with under three full time equivalent physicians, is 4,056 square The following table highlights the fiscal impacts of higher rental fees on operating expenses

al Rental Expense

Percentage Discount From Maryland

single specialty, primary care office is 4,056 per 2007 MGMA data

managed professionally.

Usually steel framed and tall. Class B space defined: good (versus excellent) locations, management, and

eport based on 2006 Data. Medical Group Management

$19.32

By opening doors for business in Maryland, physician practices, under these assumptions, will pay $19,000 more for rent than in Pennsylvania and $22,000 more than Virginiahigher fixed compete with other physician expenses such as malpractice an

Maryland’s Medical Liability Insurance Environment

In 2004, Maryland’s General Assembly enacted emergency legislation to offset skyrock

malpractice rates for Maryland’s physicians. From 2001

liability insurance increased by 71 percent

increase of 39 percent in their premiums. Since then, the malp

and Maryland’s largest carrier, Medical Mutual has decreased rates by 15 percent. Other carriers

in Maryland, however, have either increased or kept their rates stable. While some carriers such

as Medical Mutual are modestly stabilizing rates, it is important to note that rates are stabilizing at

all time high levels, and Maryland’s market remains volatile. From 2005

suits filed and then closed, increased by 229 percent

costs to defend against dropped or dismissed cases average $18,887

Administration notes in their 2008 professional liability report that “the combination of increases

in closed claims and the number of suits filed ov

continued volatility of this line of business.”

An area of debate in malpractice reform, in Maryland

economic damages. Some states have imposed caps on non

Maryland, however, awards or verdicts under non

While the purpose of this analysis is not to debate the merits of non

malpractice statutes, it is instructive examine how some reforms may benefit the physician

enterprise. Here are some key points:

� It would take a 22 percent increase in doctor’s wages to generat

response to the response generated by the passage of a cap on non

� Studies show physician supply would increase, ranging from 2

reforms including caps on non

� Impact on Residents: 26.5% of residents in a Pennsylvania study cited malpractice

insurance as one of the top two reasons for selecting a geographic area.

3 American College of Emergency Physicians. The National Report Card on the State of Emergency Medicine. 4 Maryland Insurance Administration. 2008 Report on the Availability and AffordabilitProfessional Liability Insurance in Maryland. 5 American Medical Association. 6 Medical Malpractice and Physicians in High Risk Specialties. Klick and Strattman, 20077 Ibid. 8 Impact of Malpractice Reforms on the Supply of Physi


By opening doors for business in Maryland, physician practices, under these assumptions, will pay $19,000 more for rent than in Pennsylvania and $22,000 more than Virginia (annually). These higher fixed compete with other physician expenses such as malpractice and non-

Maryland’s Medical Liability Insurance Environment

In 2004, Maryland’s General Assembly enacted emergency legislation to offset skyrock

malpractice rates for Maryland’s physicians. From 2001-2004, Maryland physician

liability insurance increased by 71 percent3. During the same time, specialists experienced an

increase of 39 percent in their premiums. Since then, the malpractice environment has calmed,



ly stabilizing rates, it is important to note that rates are stabilizing at

all time high levels, and Maryland’s market remains volatile. From 2005-2007, the number of

suits filed and then closed, increased by 229 percent4. Even if the cases fail to mate

costs to defend against dropped or dismissed cases average $18,8875. The Maryland Insurance


in closed claims and the number of suits filed over the period of 2003-2007 underscores the

continued volatility of this line of business.”

An area of debate in malpractice reform, in Maryland and other states, is the limitation on non

economic damages. Some states have imposed caps on non-economic damages at $250,000. In

Maryland, however, awards or verdicts under non-economic caps can go as high as $650,000.

s is not to debate the merits of non-economic caps or other


enterprise. Here are some key points:

It would take a 22 percent increase in doctor’s wages to generate a comparable supply

response to the response generated by the passage of a cap on non-economic damages.

Studies show physician supply would increase, ranging from 2-6 percent, with a host of

reforms including caps on non-economic damages.78

Residents: 26.5% of residents in a Pennsylvania study cited malpractice

insurance as one of the top two reasons for selecting a geographic area.9 This is troubling

American College of Emergency Physicians. The National Report Card on the State of Emergency Medicine. Maryland Insurance Administration. 2008 Report on the Availability and Affordability of Health Care Medical

Professional Liability Insurance in Maryland.

Medical Malpractice and Physicians in High Risk Specialties. Klick and Strattman, 2007

Impact of Malpractice Reforms on the Supply of Physician Services. JAMA 2005;293 (21), 2618


By opening doors for business in Maryland, physician practices, under these assumptions, will (annually). These -physician labor.

In 2004, Maryland’s General Assembly enacted emergency legislation to offset skyrocketing

physicians’ medical

During the same time, specialists experienced an

ractice environment has calmed,



ly stabilizing rates, it is important to note that rates are stabilizing at

2007, the number of

. Even if the cases fail to materialize, the

. The Maryland Insurance


2007 underscores the

and other states, is the limitation on non-

economic damages at $250,000. In

economic caps can go as high as $650,000.

economic caps or other


e a comparable supply

economic damages.6

6 percent, with a host of

Residents: 26.5% of residents in a Pennsylvania study cited malpractice

This is troubling

American College of Emergency Physicians. The National Report Card on the State of Emergency Medicine. y of Health Care Medical

cian Services. JAMA 2005;293 (21), 2618-2625

since the Maryland lags behind the national average for retaining medical students who

trained in Maryland. As of 2006, Maryland ranked 38 out of the 50 states for retaining

residents trained in Maryland.

at schools in state, but Maryland only retained

attributable to malpractice, it certainly influences their decisions.

Maryland’s Cost of Living

Maryland’s cost of living is among the highest in the nation, ranking 7

cost of living is housing. Other factors

groceries, and transportation. When physicians make a decision on where to practice, many

factors are at play: family, geographic surroundings, reimbursement, malpractice insurance,

patient population, healthcare eco

Maryland is an attractive state with many of the above mentioned attributes, it remains as one of

the most expensive places to live. When coupled with the high cost of doing bu

Maryland (labor, rent, malpractice), Maryland’s high cost of living adds another layer of expense.

Here is a list of the top 10 most expensive states to live in addition to the rankings for neighboring

states such as Virginia, Delaware and Penns

competition is ranked lower in cost of living.

Exhibit III-5: Cost of Living

Rank State

1 Hawaii

2 California

3 Washington DC

4 Connecticut

5 New York

6 New Jersey

7 Maryland

Source: ACCRA Cost of Living Index

9 Effects of a Professional Liability Crisis on Residents’ Practice Decisions. American College of Obstetricians and Gynecologists. Mello and Kelly, 2005. 10 Key Physician Data by State. Association of American



ed in Maryland. As of 2006, Maryland ranked 38 out of the 50 states for retaining

residents trained in Maryland. Nationally, states retain 39 percent of the residents training

te, but Maryland only retained 26 percent10. While this is not s

attributable to malpractice, it certainly influences their decisions.

Maryland’s cost of living is among the highest in the nation, ranking 7th. At the heart of the high

cost of living is housing. Other factors contributing to the high cost of living include utilities,

and transportation. When physicians make a decision on where to practice, many


ion, healthcare eco-system, education system, arts and recreation etc.


the most expensive places to live. When coupled with the high cost of doing business in



states such as Virginia, Delaware and Pennsylvania. As one can see, Maryland’s regional

competition is ranked lower in cost of living.

Rank State

8 Alaska

9 Massachusetts

10 Rhode Island

19 Delaware

21 Virginia

22 Pennsylvania

Effects of a Professional Liability Crisis on Residents’ Practice Decisions. American College of Obstetricians and

Key Physician Data by State. Association of American Medical Colleges, Center for Workforce Studies. 2006.



ed in Maryland. As of 2006, Maryland ranked 38 out of the 50 states for retaining

Nationally, states retain 39 percent of the residents training

While this is not solely

At the heart of the high

contributing to the high cost of living include utilities,

and transportation. When physicians make a decision on where to practice, many


system, education system, arts and recreation etc. While


siness in



As one can see, Maryland’s regional

Effects of a Professional Liability Crisis on Residents’ Practice Decisions. American College of Obstetricians and

Medical Colleges, Center for Workforce Studies. 2006.

Tax Impact

The Tax Foundation presents an annual “State Business Climate Tax Climate Index” that

compares state business climates relative to the other fifty states. The report studies the impact of

five tax measures: individual income tax, sales tax, corporate tax

unemployment insurance. Each of these areas is assigned a different weight: individual income

tax is weighted the greatest, followed, in order, by sales tax, corporate tax, property tax, and

unemployment insurance. Economists have diff

individuals and businesses, and literature reviews of this subject area will point observers in a

number of directions. Generally speaking, however, taxes impact business which in turn impact

individuals through wages and prices.

When comparing the Overall Rank for the 2008 Tax Climate Index, which is inclusive of all five

tax indexes, Maryland ranked 24th

Maryland and its regional neighbors:

Maryland ahead of Pennsylvania, but behind Virginia and Delaware respectively. Taking a closer

look at the index, one will see a disparity between Maryland’s corporate tax rate and the

individual income tax rate. While Maryland’s corporate tax rate is competitive nationally and

regionally, Maryland’s individual income tax rate ranking is among the highest in the nation.

Exhibit III-6: State Business Climate Tax Index

State Overall Rank

Delaware 9

Virginia 14

Maryland 24

Pennsylvania 27

Note: these rankings were calculated prior to Maryland raising its Corporate Income tax from 7 to 8.25%.

Source: The Tax Foundation.

The high ranking for individual income tax rate is significant because many businesses, i.e. sole

proprietorships, partnerships, and S Corporations report income through individual tax incomes

known as “flow through entities.” Therefore, these businesses

high individual income taxes. As demonstrated in

percent of Maryland businesses were structured as a Partnership or S Corp

entities), thus they will feel the impact of the higher individual income tax rate.

think about where to practice medicine, taxes may play an important role in causing physicians to

think twice as other expenses such as rent and malpractice




five tax measures: individual income tax, sales tax, corporate tax, property tax, and



unemployment insurance. Economists have differing views as to the impact that taxes have on



ough wages and prices.

When comparing the Overall Rank for the 2008 Tax Climate Index, which is inclusive of all five th. Exhibit III-6 highlights the results of the 2008 index for

Maryland and its regional neighbors: Delaware, Virginia, and Pennsylvania. This index ranks



ome tax rate. While Maryland’s corporate tax rate is competitive nationally and


State Business Climate Tax Index

Overall Rank Corporate Tax Individual Income Tax

17 32

4 21

7 37

42 11




known as “flow through entities.” Therefore, these businesses will feel the impact of Maryland’s

high individual income taxes. As demonstrated in Exhibit III-7, in 2007, the IRS reported that 71

percent of Maryland businesses were structured as a Partnership or S Corporation (flow through

eel the impact of the higher individual income tax rate. As physicians


think twice as other expenses such as rent and malpractice compete with their bottom l




, property tax, and



ering views as to the impact that taxes have on



When comparing the Overall Rank for the 2008 Tax Climate Index, which is inclusive of all five

highlights the results of the 2008 index for

Delaware, Virginia, and Pennsylvania. This index ranks



ome tax rate. While Maryland’s corporate tax rate is competitive nationally and


Tax




will feel the impact of Maryland’s

n 2007, the IRS reported that 71

oration (flow through

As physicians


their bottom line.

Exhibit III-7: Maryland Business Formations

Source: IRS Data Book 2007

Contributing to Maryland’s high income taxes are municipal and county level income taxes. The combined effect of state and local income tax, estimated at 10.8% of income, has ranked among the highest in the nation over the last 30 years. In 1977, Maryland had the eighth highestlocal income tax burden. In 2008, Maryland’s ranking deteriorated as Maryland had the fourth highest state and local income tax rates. Each year, the District of Columbia and tax burdens of the District and its surroundinMaryland’s unfavorable position. Families earning $150,000 in 2006 in Montgomery County and Prince George’s County had the highest tax burden when compared to neighboring communities in the District of Columbia and Northern Virginia.

Exhibit III-8: Major State and Local Tax Burden for a Family of Three: $150,000 Income Level

Montgomery

County

PrinceGeorge’sCounty

Tax Burden

$16,551 $16,455

Rank 1

Source: Tax Rates and Tax Burdens, Washington DC Metropolitan Area.

of the District of Columbia. Note: Tax burden includes income tax, real estate tax, sales and use Tax, and

Automobile.

Partnership & S-Corporation

(71%)


Maryland Business Formations

’s high income taxes are municipal and county level income taxes. The combined effect of state and local income tax, estimated at 10.8% of income, has ranked among the highest in the nation over the last 30 years. In 1977, Maryland had the eighth highestlocal income tax burden. In 2008, Maryland’s ranking deteriorated as Maryland had the fourth highest state and local income tax rates. Each year, the District of Columbia assessesand tax burdens of the District and its surrounding communities. Exhibit III-8 illustrates Maryland’s unfavorable position. Families earning $150,000 in 2006 in Montgomery County and Prince George’s County had the highest tax burden when compared to neighboring communities

Northern Virginia.

Major State and Local Tax Burden for a Family of Three: $150,000 Income Level

Prince George’s County

DC Fairfax County

Arlington County

Alexandria

$16,455 $15,027 $13,317 $13,302

2 3 4 5

Tax Rates and Tax Burdens, Washington DC Metropolitan Area. Issued November 2007 by the Government

Tax burden includes income tax, real estate tax, sales and use Tax, and

Corporations(29%)

Partnership & Corporation


’s high income taxes are municipal and county level income taxes. The combined effect of state and local income tax, estimated at 10.8% of income, has ranked among the highest in the nation over the last 30 years. In 1977, Maryland had the eighth highest state and local income tax burden. In 2008, Maryland’s ranking deteriorated as Maryland had the fourth

assesses the tax rates illustrates

Maryland’s unfavorable position. Families earning $150,000 in 2006 in Montgomery County and Prince George’s County had the highest tax burden when compared to neighboring communities

Major State and Local Tax Burden for a Family of Three: $150,000 Income Level

Alexandria

$13,117

6

Issued November 2007 by the Government

Tax burden includes income tax, real estate tax, sales and use Tax, and

After Tax Income

If practicing medicine has become more expensive, so too has becoming a physician. Tuition and

fees are rising at rates faster than physician incomes, and students, from both public and private

institutions, must contend with large

American Medical Colleges reports that the public medical school graduate debt grew at a

compounded annual rate of 6.9 percent while private medical school debt was slightly slower at

5.9 percent. All tolled, physicians from public and private schools are facing debts of between

$120,000 and $160,000. Exhibit

Exhibit III-9: Graduating Medical Student Debt

Year Public: Annual

Tuition and Fees

2001 $12,411

2002 $13,873

2003 $16,332

2004 $19,043

2005 $23,370

2006 $20,978

Annual Rate 11.1%

Source: Association of American Medical Colleges

As a result of the large sums of medical debt, physicians must maximize their after tax

reduce their debt burden. As Exhibit

debt service from public medical schools ranged from 8

percent for private schools for 2006. As medical educat

after tax income needed to satisfy these loans is projected to dramatically increase. Take the

graduating class of 2033. For example, i

fees continued their current growth,

tax income. Even if incomes rise by 5 percent annually, the percentage of after tax income for

satisfying educational debt is projected to outpace the 2006 figures (recent data p

average income growth closer to 3 percent).




institutions, must contend with large student debt bills upon graduation. The Association of



tolled, physicians from public and private schools are facing debts of between

Exhibit III-9 shows the aggressive increases in tuition, fees, and debt.

Graduating Medical Student Debt

Public: Annual and Fees

Total Debt Private: Annual Tuition and Fees

$12,411 $86,000 $31,296

$13,873 $92,000 $32,649

$16,332 $100,000 $34,247

$19,043 $105,000 $37,269

$23,370 $115,000 $39,024

$20,978 $120,000 $39,413

6.9% 4.7%

Source: Association of American Medical Colleges

As a result of the large sums of medical debt, physicians must maximize their after tax

their debt burden. As Exhibit III-10 shows, the amount of after tax income dedicated for

debt service from public medical schools ranged from 8-10 percent for public schools

percent for private schools for 2006. As medical education costs continue to mount, the amount of


For example, if physician incomes only grow 2 percent and tuition and

urrent growth, education debt service will consume nearly 40 percent of after


satisfying educational debt is projected to outpace the 2006 figures (recent data p

average income growth closer to 3 percent).




student debt bills upon graduation. The Association of



tolled, physicians from public and private schools are facing debts of between

shows the aggressive increases in tuition, fees, and debt.

Total Debt

$120,000

$127,000

$135,000

$140,000

$150,000

$160,000

5.9%

As a result of the large sums of medical debt, physicians must maximize their after tax income to

the amount of after tax income dedicated for

for public schools and 12-14

ion costs continue to mount, the amount of


ian incomes only grow 2 percent and tuition and

education debt service will consume nearly 40 percent of after


satisfying educational debt is projected to outpace the 2006 figures (recent data point to an

Exhibit III-10: Educational Debt Service as a Percentage of After Tax Income: 25 Year

Repayment Program

2033 Graduates

2006 Graduates

Public Schools

8.8%-10.3%

Private Schools

11.9%-14.0%

Source: Medical School Tuition and Young Physician Indebtedness. Association of American Medical Colleges.

October 2007

After tax income is important not only to p

comfortable lifestyle. The ACCRA cost of living scale measure t

tax income needed to maintain a certain lifestyle after a move from one area to another. Because

Maryland is a more expensive state to live in, physicians who located from states such as

Pennsylvania, Delaware, and Virginia

maintain a similar lifestyle in Maryland

becoming increasingly more important to the new generation of physicians. If physician incomes

cannot compensate for the high costs of living and practicing in Maryland, some may consider

practicing elsewhere. As it currently stands, Maryland has a poor ranking of retaining the

physicians and fellows trained in state.

Exhibit III-11: Percentage Increase in After Tax Income Needed to Maintain a Lifestyle after a move from Delaware, Pennsylvania, or Virginia to Maryland

Source: ACCRA Cost of Living Index: Based on the first quarter of 2008

24%

0%

5%

10%

15%

20%

25%

30%

Delaware

Per

cen

t In

crea

se


Educational Debt Service as a Percentage of After Tax Income: 25 Year

2033 Graduates

2% Income Growth

3% Income Growth

5% IncomeGrowth

33.1%-38.8% 25.4%-29.8% 15.1%-

34.8%-40.8% 26.7%-31.4% 15.9%-

Tuition and Young Physician Indebtedness. Association of American Medical Colleges.

ncome is important not only to pay off medical school debt but also to maintain a

comfortable lifestyle. The ACCRA cost of living scale measure the percentage increase in after



Pennsylvania, Delaware, and Virginia would need a 25 percent increase in after tax dollar to

maintain a similar lifestyle in Maryland (Exhibit III-11). Lifestyle issues and quality of life are


nnot compensate for the high costs of living and practicing in Maryland, some may consider


physicians and fellows trained in state.

Percentage Increase in After Tax Income Needed to Maintain a Lifestyle after a move from Delaware, Pennsylvania, or Virginia to Maryland

Source: ACCRA Cost of Living Index: Based on the first quarter of 2008

25% 25%

Pennsylvania Virginia


Educational Debt Service as a Percentage of After Tax Income: 25 Year

5% Income Growth

-17.7%

-19.7%

Tuition and Young Physician Indebtedness. Association of American Medical Colleges.

ay off medical school debt but also to maintain a

he percentage increase in after



would need a 25 percent increase in after tax dollar to

Lifestyle issues and quality of life are


nnot compensate for the high costs of living and practicing in Maryland, some may consider


Percentage Increase in After Tax Income Needed to Maintain a Lifestyle after a

25%

Virginia

The Health Insurance Market in Maryland

The commercial health insurance environment in Maryland might best be descri

single payer” to the extent that the commercial insurance product offerings are increasingly

similar in terms of plan design, product choice,

tremendous market concentration; the top two insurers in the State, CareFirst BlueCross

BlueShield and United Healthcare control over 80% of the market for private health insurance.

Given this level of monopsony po

premiums and physician payments.

stifled, and the dominant insurer’s market position and profitably has increased dramatically.

Exhibit IV-1 depicts industry profitably among some of the largest national health insurers,

showing sustained profitably well above the cost of capital available to its participants.

Exhibit IV-1: Operating Margins, Top Insurers

Source: Hoovers. Data for all years updated as of January 2008. Link:

margin data for WellPoint include both pre

0%

2%

4%

6%

8%

10%

12%

14%

Aetna WellPoint

Op

era

tin

g M

arg

in

2004


The Health Insurance Market in Maryland

commercial health insurance environment in Maryland might best be described as a “virtual

to the extent that the commercial insurance product offerings are increasingly

similar in terms of plan design, product choice, physician networks and prices. Further, there is



Given this level of monopsony power, these payers exert a tremendous level of control over

and physician payments. As a result, the market has hardened, competition has been


industry profitably among some of the largest national health insurers,


Operating Margins, Top Insurers, 2004-2006

. Data for all years updated as of January 2008. Link: www.hoovers.com. (1)

2004 operating

margin data for WellPoint include both pre- and post-merger data for the merger with Anthem in November 2004.

WellPoint UnitedHealth Group

Cigna(1)

2005 2006


bed as a “virtual

to the extent that the commercial insurance product offerings are increasingly

networks and prices. Further, there is



level of control over

he market has hardened, competition has been


industry profitably among some of the largest national health insurers,


2004 operating

merger data for the merger with Anthem in November 2004.

Humana

Further, the largest insurers in Maryland have used

that help them to stave off new competition. As one

2003, health insurers in Maryland had amassed an aggregate of some $1.7 billion in statutory

surplus, amounting to over 6 times the amount of capital required of health insurers by Maryland

regulators.

Exhibit IV-2: Risk-Based Capital

Source: Mathematica Policy Research, Inc.

$0.8$0.7

457%

378%

1999 2000

$0.0

$0.6

$1.2

$1.8

$2.4

$3.0

Ca

pit

al

in B

illi

on

s

Total Authorized Capital (TAC) in Billions

TAC per authorized control level risk


Further, the largest insurers in Maryland have used their market position to amass large surpluses

that help them to stave off new competition. As one sees from a review of Exhibit


to over 6 times the amount of capital required of health insurers by Maryland

apital Analysis


$0.7

$1.1

$1.3

$1.7

378%

467%

508%

654%

2000 2001 2002 2003

Total Authorized Capital (TAC) in Billions

TAC per authorized control level risk-based capital


their market position to amass large surpluses

sees from a review of Exhibit IV-2, through


to over 6 times the amount of capital required of health insurers by Maryland

0%

200%

400%

600%

800%

Percen

t Co

ntro

l Lev

el

Finally, consistent with the theme of steadily improving margins, the top insurers in Maryland

have used their extreme market leverage with purchasers on one hand, and physicians on the other

to generate dramatically better underwriting performance and low

chart shows the plans dramatically improving underwriting results, while lowering administrative

load to 15 percent.

Exhibit IV-3: Underwriting Performance in Maryland


4%

22%

0%

5%

10%

15%

20%

25%

1999

Per

cen

t G

ain




to generate dramatically better underwriting performance and lower costs (Exhibit


Underwriting Performance in Maryland


7%6% 6%

21%

19%

16%

2000 2001 2002

Average Underwriting Gain

Administrative Cost Trend




er costs (Exhibit IV-3). This


12%

15%

2003

PHYSICIANS AS ECONOMIC DRIVERS Why is Healthcare such a key driver of our economy? The health care business is a key component of our domestic economy in the United States, and drives tremendous economic activity even beyond the health care industry. Fuattributes of the health care business, it doesanytime soon. Among the attributes that render health care almost immune to traditional economic cycles include:

• Healthcare is labor-intensiveso because of the industry’s historic under spending on information and other technologies that have enhanced labor productivity in other industries. Labor requirements in healthcare span from entryhighly technical positions that require a high level of formal education and training, making the industry very attractive to workforce development advocates.

• Employment is local. Healthcare is unique in that much of the labor used in healthcare delivery has to be physically proximate to the patient and are on-going attempts to move certain laborradiology films, as well as administrative functions such as data entry and medical claims processing), the bulk of healthcare employment needs to be locally based. Therefore, a higher percentage of each new dollar of revenue generated by physicians and heaprovider organization is kept within the U.S. than is the case with other industries.

• Health care is ubiquitous and not cyclicalindustries because as a basic staple of life, its presence is inescapablAmerica, from the most affluent to the poorest, has some healthcare footprint, and planning for the provision of health services is always a top or nearcommunity resource planners. Additionally, the frequency or intis only weakly correlated with economic cycles or other exogenous factors; when healthcare is needed, it is needed, and the more acute the service, the less price sensitive the consumer.

• New clinical and information technology widevices, prescription drugs, and diagnostic technologies will continue be used and highly valued, and the threat of defensive medicine will ensure that use the latest technology even in circbenefit. Also, the deployment of clinical decision support systems promises to arm physicians with tools to ensure better patient compliance with appropriately indicated treatments, which may swell utilizatio

• Advancements in medical science will acceleratehas resulted in enormous financial and qualitative return on investment. Health care has enabled Americans to enjoaccess to the best that healthcare can offer. However, the most significant return on healthcare investment has been the eradication or management of crippling and disabling


IC DRIVERS

Why is Healthcare such a key driver of our economy?

The health care business is a key component of our domestic economy in the United States, and drives tremendous economic activity even beyond the health care industry. Further, based on key attributes of the health care business, it does not seem that the economic drivers will change anytime soon. Among the attributes that render health care almost immune to traditional

sive. The healthcare industry is highly labor-intensive, especially so because of the industry’s historic under spending on information and other technologies that have enhanced labor productivity in other industries. Labor requirements in

n from entry-level, low-paid positions that require little formal education to highly technical positions that require a high level of formal education and training, making the industry very attractive to workforce development advocates.

. Healthcare is unique in that much of the labor used in healthcare delivery has to be physically proximate to the patient and physician-entity. While there

going attempts to move certain labor-intensive functions off-shore (such as reading diology films, as well as administrative functions such as data entry and medical claims

processing), the bulk of healthcare employment needs to be locally based. Therefore, a higher percentage of each new dollar of revenue generated by physicians and heaprovider organization is kept within the U.S. than is the case with other industries.

Health care is ubiquitous and not cyclical. Health care has a broader impact than other industries because as a basic staple of life, its presence is inescapable; every community in America, from the most affluent to the poorest, has some healthcare footprint, and planning for the provision of health services is always a top or near-top priority for community resource planners. Additionally, the frequency or intensity of health services is only weakly correlated with economic cycles or other exogenous factors; when healthcare is needed, it is needed, and the more acute the service, the less price sensitive

New clinical and information technology will always be introduced. New medical devices, prescription drugs, and diagnostic technologies will continue be used and highly valued, and the threat of defensive medicine will ensure that physicians will continue to use the latest technology even in circumstances where there is questionable marginal benefit. Also, the deployment of clinical decision support systems promises to arm

s with tools to ensure better patient compliance with appropriately indicated treatments, which may swell utilization of certain services for underserved populations.

Advancements in medical science will accelerate. Medical spending over the past century has resulted in enormous financial and qualitative return on investment. Health care has enabled Americans to enjoy and sustain a very high quality of life with relatively open access to the best that healthcare can offer. However, the most significant return on healthcare investment has been the eradication or management of crippling and disabling


The health care business is a key component of our domestic economy in the United States, and rther, based on key

seem that the economic drivers will change anytime soon. Among the attributes that render health care almost immune to traditional

intensive, especially so because of the industry’s historic under spending on information and other technologies that have enhanced labor productivity in other industries. Labor requirements in

paid positions that require little formal education to highly technical positions that require a high level of formal education and training, making the industry very attractive to workforce development advocates.

. Healthcare is unique in that much of the labor used in healthcare entity. While there shore (such as reading

diology films, as well as administrative functions such as data entry and medical claims processing), the bulk of healthcare employment needs to be locally based. Therefore, a higher percentage of each new dollar of revenue generated by physicians and healthcare provider organization is kept within the U.S. than is the case with other industries.

. Health care has a broader impact than other e; every community in

America, from the most affluent to the poorest, has some healthcare footprint, and top priority for

ensity of health services is only weakly correlated with economic cycles or other exogenous factors; when healthcare is needed, it is needed, and the more acute the service, the less price sensitive

. New medical devices, prescription drugs, and diagnostic technologies will continue be used and highly

will continue to umstances where there is questionable marginal

benefit. Also, the deployment of clinical decision support systems promises to arm s with tools to ensure better patient compliance with appropriately indicated

n of certain services for underserved populations.

. Medical spending over the past century has resulted in enormous financial and qualitative return on investment. Health care has

y and sustain a very high quality of life with relatively open access to the best that healthcare can offer. However, the most significant return on healthcare investment has been the eradication or management of crippling and disabling

illnesses (e.g., the discovery of insulin in 1922, or the discovery of the polio vaccine in 1954). More recently, there have been significant advancements in the sequencing of human genes to identify predispositions to chronic diseases. These have all had a significant impact of the life expectancy of Americans; at the beginning of the 20life expectancy was 47 years, and by the year 2004, life expectancy had climbed to 78 years.11 However, regardless of the discovery, there is one common theme historically; advancements in technology and science have almost always driven new or enhanced demand for a series of clinical treatments, driving overall costs in the system.

• Demographic pressures. Demographics in the United States will change dramatically during the next 20 years as more people reach their 60s, 70s, and beyond. The U.S. Census Bureau projects that the “number of Americans age 65 or older will swell from 35 million today to more than 62 million by 2025 older, demand for health services increases dramatically. Specifically, longprojected to grow very rapidly; a recent study by VHA suggests that between 2020 an2030, expenditures on long

Relative to Maryland’s economy specifically, Maryland relies on health care. The chartpresents the change in Maryland Nonfarm Employment by industry from 7/07 thras one can see, educational and health services was the leading new jobs creator, adding a net change of 11,000 new jobs to Maryland’s economy.

Exhibit V-1: Maryland Nonfarm Employment by Industry Sector Groups

Absolute Change

Source: Bureau of Labor Statistics

11 Healthcare 2005, A Strategic Assessment of the Health Care Environment in the United States.12 "Aging Americans: Stranded Without Options." <http://www.transact.org/library/reports_html/seniors/Aging_exec_summ.pdf>. Accessed 24 May 2007.13 Healthcare 2000, A Strategic Assessment of the Health Care Environment in the United States

-7,000

Manufacturing

Construction

Financial Activities

Trade, Transportation & Utilities

Information

Other Services

Leisure & Hospitality

Government

Professional & Business Services

Educational & Health Services


he discovery of insulin in 1922, or the discovery of the polio vaccine in 1954). More recently, there have been significant advancements in the sequencing of human genes to identify predispositions to chronic diseases. These have all had a

pact of the life expectancy of Americans; at the beginning of the 20life expectancy was 47 years, and by the year 2004, life expectancy had climbed to 78

However, regardless of the discovery, there is one common theme historically; advancements in technology and science have almost always driven new or enhanced demand for a series of clinical treatments, driving overall costs in the system.

. Demographics in the United States will change dramatically during the next 20 years as more people reach their 60s, 70s, and beyond. The U.S. Census Bureau projects that the “number of Americans age 65 or older will swell from 35 million

o more than 62 million by 2025 - nearly an 80 percent increase.”12 older, demand for health services increases dramatically. Specifically, longprojected to grow very rapidly; a recent study by VHA suggests that between 2020 an2030, expenditures on long-term care services will grow by more than 42 percent.

Relative to Maryland’s economy specifically, Maryland relies on health care. The chartpresents the change in Maryland Nonfarm Employment by industry from 7/07 thras one can see, educational and health services was the leading new jobs creator, adding a net change of 11,000 new jobs to Maryland’s economy.

Maryland Nonfarm Employment by Industry Sector Groups, July 2007 v. July 2008

Healthcare 2005, A Strategic Assessment of the Health Care Environment in the United States.

"Aging Americans: Stranded Without Options." Transact.org. Surface Transportation Policy Partnership. <http://www.transact.org/library/reports_html/seniors/Aging_exec_summ.pdf>. Accessed 24 May 2007.

Healthcare 2000, A Strategic Assessment of the Health Care Environment in the United States. 1st ed. 2000.

-4,400

-2,100

-1,500

-300

0

2,000

5,300

5,400

7,000 -4,000 -1,000 2,000 5,000 8,000

Employment

MD Total: +25.4K; +1.0%

US Total: -174K; -0.1%


he discovery of insulin in 1922, or the discovery of the polio vaccine in 1954). More recently, there have been significant advancements in the sequencing of human genes to identify predispositions to chronic diseases. These have all had a

pact of the life expectancy of Americans; at the beginning of the 20th century life expectancy was 47 years, and by the year 2004, life expectancy had climbed to 78

However, regardless of the discovery, there is one common theme historically; advancements in technology and science have almost always driven new or enhanced demand for a series of clinical treatments, driving overall costs in the system.

. Demographics in the United States will change dramatically during the next 20 years as more people reach their 60s, 70s, and beyond. The U.S. Census Bureau projects that the “number of Americans age 65 or older will swell from 35 million

As people grow older, demand for health services increases dramatically. Specifically, long-term care is projected to grow very rapidly; a recent study by VHA suggests that between 2020 and

term care services will grow by more than 42 percent.13

Relative to Maryland’s economy specifically, Maryland relies on health care. The chart below presents the change in Maryland Nonfarm Employment by industry from 7/07 through 7/08, and as one can see, educational and health services was the leading new jobs creator, adding a net

July 2007 v. July 2008

Healthcare 2005, A Strategic Assessment of the Health Care Environment in the United States. 1st ed. 2005. Partnership.

<http://www.transact.org/library/reports_html/seniors/Aging_exec_summ.pdf>. Accessed 24 May 2007. . 1st ed. 2000.

10,000

11,000

11,000

+25.4K; +1.0%

174K;

Further, the next exhibit represents industry sector’s percentage of total Maryland employment

during 2007. As expected, hospitals, a huge local employer in many communities, represents 3.9

percent of total Maryland employment

Additionally, offices of physicians represent some 1.7 percent

Exhibit V-2: Select Industries as Portion of Total Maryland Employment, Annual


So, while the health care business is a key component of our domestic economy in the United States, physicians are at the center of that economic activity. While physicians account for some 21 percent of all U.S. health expenditures, according to the Center for Medicare and Medicaid Services (CMS), they actually control a great deal more spending activity through their leadership in ordering diagnostic tests and ancillary services, referral activity, aacute and post-acute facilities and utilization of drugs.

Physicians as Economic Engines

In an attempt to characterize the extent of economic activity generated by physicians in Maryland,

we utilize IMPLAN modeling and avai

breadth of economic activity in three categories. The first category is that of direct economic

activity, that is, the revenue, compensation and jobs created by physicians and physician practices

in Maryland. The second component is that of indirect economic activity, that is the economic

activity of individuals and firms that are directly servicing the physician practice marketplace.

These firms include suppliers, providers of ancillary services,

and other professional services firms, etc. Again, in this category, we attempt to capture

aggregate firm revenue, compensation,

0.0%

Accounting

Legal Services

Insurance Carriers

Office of Physicians

Construction of Buildings

Information

Education Services

Hospitals

State Government

Manufacturing

Financial Activities




of total Maryland employment – with less than 60 employers in this category.

f physicians represent some 1.7 percent of total employment in the State.

Select Industries as Portion of Total Maryland Employment, Annual

So, while the health care business is a key component of our domestic economy in the United States, physicians are at the center of that economic activity. While physicians account for some

of all U.S. health expenditures, according to the Center for Medicare and Medicaid Services (CMS), they actually control a great deal more spending activity through their leadership in ordering diagnostic tests and ancillary services, referral activity, admission activity to both

acute facilities and utilization of drugs.

Physicians as Economic Engines


we utilize IMPLAN modeling and available economic data. The IMPLAN approach classifies the



Maryland. The second component is that of indirect economic activity, that is the economic


These firms include suppliers, providers of ancillary services, real estate firms, accounting, legal


gate firm revenue, compensation, and jobs. Finally, the third component, induced economic

0.7%

0.8%

1.4%

1.7%

1.7%

2.0%

2.6%

3.9%

3.9%

1.0% 2.0% 3.0% 4.0% 5.0%

Percentage of Total Maryland Employment




with less than 60 employers in this category.

of total employment in the State.

Select Industries as Portion of Total Maryland Employment, Annual 2007, NSA

So, while the health care business is a key component of our domestic economy in the United States, physicians are at the center of that economic activity. While physicians account for some

of all U.S. health expenditures, according to the Center for Medicare and Medicaid Services (CMS), they actually control a great deal more spending activity through their leadership

dmission activity to both


lable economic data. The IMPLAN approach classifies the



Maryland. The second component is that of indirect economic activity, that is the economic


real estate firms, accounting, legal


and jobs. Finally, the third component, induced economic

5.1%

6.0%

5.0% 6.0%

activity is a description of the firms and markets created around the activities of daily living of all

the individual consumers fueled by their employment

organizations that support physicians. These firms may include restaurants, retail establ

car dealerships, etc.

Using data from the U.S. Census Bureau, our modeling of private physician group activity in

Maryland suggests that physician enterprises generate over $8 billion of economic activity,

comprised of approximately $4.5 billion

and almost $2.5 billion of induced effects. This data is represented in the table, below.

Exhibit V-3: Economic Impacts

Direct (1,2)

Jobs (3)

Compensation (millions)

Revenue (millions)

Source: IMPLAN

Further, if one views employment within and among health care entities, as represented below,

physician offices represent some

approximately 15.5 percent of all jobs in health care.

Exhibit: V-4: Percentage Distribution of Establishments and Employment in Health Care, 2004

Establishment Type

Hospitals, public and private

Nursing and residential care facilities

Offices of physicians

Offices of dentists

Home health care services

Offices of other health practitioners

Outpatient care centers

Other ambulatory health care services

Medical and diagnostic laboratories



e firms and markets created around the activities of daily living of all

the individual consumers fueled by their employment, either directly by physicians or by the

organizations that support physicians. These firms may include restaurants, retail establ



comprised of approximately $4.5 billion of direct effects, almost $1.2 billion of indirect effects


Direct (1,2) Indirect (2) Induced (2)

41,694 9,287 20,556

$2,754 $455 $830

$4,576 $1,170 $2,476


physician offices represent some 37 percent of all health care establishments and account for

of all jobs in health care.

Percentage Distribution of Establishments and Employment in Health Care, 2004

Establishment Type Establishments Employment

Hospitals, public and private 1.9% 41.3%

Nursing and residential care facilities 11.6% 21.3%

Offices of physicians 37.0% 15.5%

21.0% 5.7%

Home health care services 3.0% 5.8%

Offices of other health practitioners 18.7% 4.0%

Outpatient care centers 3.2% 3.4%

Other ambulatory health care services 1.5% 1.5%

Medical and diagnostic laboratories 2.1% 1.4%


e firms and markets created around the activities of daily living of all

either directly by physicians or by the

organizations that support physicians. These firms may include restaurants, retail establishments,



of direct effects, almost $1.2 billion of indirect effects


Total

71,537

$4,040

$8,222


of all health care establishments and account for

Percentage Distribution of Establishments and Employment in Health Care, 2004

Employment

RECOMMENDATIONS AND P

What We Agree On Based on evidence from this analysis and other work completed and presented to the Task Force on Access and Reimbursement, there are several conclusions that one can draw that are broadly agreed upon. They are as follows:

� The private medical practice enviphysicians are operating in a challenging reimbursement environment exacerbated bexcessive payer concentration.

� Physician real incomes have declined since 1995.

� In Maryland, commercial fee

Medicare vs. payments at 116

� Physicians are working harder to sustain takepractice has increased significantly. This comes atto primary care, emergency medicinein Maryland and that access may be compromised in the future.

� The Maryland medical malpractice environment has been graded

College of Emergency Physicians, an issue that is closely watched by physicians contemplating moving to Maryland.

� Competition for physicians is national in scope, and Maryland is forced to be a net

importer of physicians.

Despite this challenging environment, key drivers of Maryland’s almost emerging life science and biotechnology industries. Most agree that a marketplace in Maryland is crucial t Desired Outcome Based on the critical importance of physicians to Maryland’s economy, decision makers should covet physician migration into Maryland and crMaryland, facilitates the formation of larger medical groups, and encourages physicianentrepreneurship, innovation, and quality improvement. Relative to the key issue of reimbursement, it seems from all groups have greater success negotiating favorable rates with payers, one key component of the physician dynamic in Maryland. The Center for Studying Health System“physicians are not moving to large multispecialty practices, the organizational model that may be


ECOMMENDATIONS AND POTENTIAL SOLUTIONS

ased on evidence from this analysis and other work completed and presented to the Task Force on Access and Reimbursement, there are several conclusions that one can draw that are broadly

They are as follows:

he private medical practice environment in Maryland is increasingly costly and risky, and physicians are operating in a challenging reimbursement environment exacerbated bexcessive payer concentration.

hysician real incomes have declined since 1995.

In Maryland, commercial fee-for-service reimbursement currently rests at 98Medicare vs. payments at 116 percent of Medicare nationally.

Physicians are working harder to sustain take-home incomes, and the hassle factor in practice has increased significantly. This comes at a time when no one denies that access to primary care, emergency medicine, and obstetrics is mission-critical for all communities in Maryland and that access may be compromised in the future.

The Maryland medical malpractice environment has been graded an F by the American College of Emergency Physicians, an issue that is closely watched by physicians contemplating moving to Maryland.

ompetition for physicians is national in scope, and Maryland is forced to be a net

te this challenging environment, physicians and physician entities are an economic force key drivers of Maryland’s almost $19 billion health care economy and Maryland’s prominent and emerging life science and biotechnology industries. Most agree that a vibrant physician

crucial to the State’s long-term economic viability.

ased on the critical importance of physicians to Maryland’s economy, decision makers should covet physician migration into Maryland and create public policy that attracts physicians

the formation of larger medical groups, and encourages physicianand quality improvement. Relative to the key issue of

reimbursement, it seems from all available evidence that physicians that are members of larger groups have greater success negotiating favorable rates with payers, one key component of the

The Center for Studying Health Systems Change reports that s are not moving to large multispecialty practices, the organizational model that may be


ased on evidence from this analysis and other work completed and presented to the Task Force on Access and Reimbursement, there are several conclusions that one can draw that are broadly

ronment in Maryland is increasingly costly and risky, and physicians are operating in a challenging reimbursement environment exacerbated by

service reimbursement currently rests at 98 percent of

home incomes, and the hassle factor in a time when no one denies that access

critical for all communities

an F by the American College of Emergency Physicians, an issue that is closely watched by physicians

ompetition for physicians is national in scope, and Maryland is forced to be a net

and physician entities are an economic force – and Maryland’s prominent and

vibrant physician

ased on the critical importance of physicians to Maryland’s economy, decision makers should eate public policy that attracts physicians to

the formation of larger medical groups, and encourages physician-led and quality improvement. Relative to the key issue of

available evidence that physicians that are members of larger groups have greater success negotiating favorable rates with payers, one key component of the

s Change reports that s are not moving to large multispecialty practices, the organizational model that may be

best able to support care coordination, quality improvement and reporting activities and investments in health information technology.

An innovative approach to accomplishing the outcomes identified above is to view and treat

potential physician-entrepreneurs in much the same way that the State of Maryland views

entrepreneurs from other key industries, as attractive business drivers that deserve some level of

ancillary support from the State. Physicians meet every definition of the classic entrepreneur

they create jobs, drive social utility, drive economic activity, create civic pride, build an

ecosystem of interdependent supply chain partners,

In the current health care system, innovation at the physician group practice level is particularly

critical as it relates to improving quality and patient safety. This critical need is evident as it

relates to preparing systems of care for the

morbidities and more chronic conditions. These chronic diseases are prevalent and costly, with

some 133 million people suffering from at least one in 2005

2030. Further, patients with chronic diseases account for a disproportionate share of health risk

and expenditures – 70 percent of all deaths and 75

Hospital Association study reports that asthma, diabetes

million days of absenteeism with a $30 billion price tag for employers.

The current model of chronic care delivery is fragmented at best, including multiple

multiple medications, a higher risk of service and

hospitalizations, and adverse drug events. Existing systems are structured around acute, episodi

events – resulting in fragmented, inefficient, ineffective and costly care. The optimal care model

would involve a multi-disciplinary team

disease educator, and care coordinator.

In light of the overwhelming requirement for the State of Maryland to become a more attractive

destination for physicians, and the i

physician groups to be fully prepared to manage complex, multiple

investment of time and potentially money. One such potential model is the Group Health Maccoll

Institute for Healthcare Innovation Model. The Maccoll model calls for a chronic care delivery

system with clearly defined staff roles;

quality outcomes; treatment based on best evidence and decision support tec

integration of primary and specialty care;

patient information; support for patient self

mobilize resources in support of patients’ needs.

14 Results from the Community Tracking Study, Number 18. August 200715

Source: Center for Studying Health System Change, Research Brief No. 6, June 2008


best able to support care coordination, quality improvement and reporting activities and investments in health information technology.14

omplishing the outcomes identified above is to view and treat

entrepreneurs in much the same way that the State of Maryland views


ry support from the State. Physicians meet every definition of the classic entrepreneur


dependent supply chain partners, and drive innovation.



relates to preparing systems of care for the coming onslaught of older Americans with greater co


some 133 million people suffering from at least one in 2005 – projected to grow to 177 million by

ther, patients with chronic diseases account for a disproportionate share of health risk

70 percent of all deaths and 75 percent of annual medical costs. An American

Hospital Association study reports that asthma, diabetes, and high-blood pressure result in 164

million days of absenteeism with a $30 billion price tag for employers.

The current model of chronic care delivery is fragmented at best, including multiple

multiple medications, a higher risk of service and diagnostic test duplication, avoidable

and adverse drug events. Existing systems are structured around acute, episodi

in fragmented, inefficient, ineffective and costly care. The optimal care model

disciplinary team – primary care physician, appropriate medical specialists,

and care coordinator.


destination for physicians, and the impending chronic illness crush, it seems that preparing

physician groups to be fully prepared to manage complex, multiple-chronic patients is a wise


or Healthcare Innovation Model. The Maccoll model calls for a chronic care delivery

ith clearly defined staff roles; a culture and accountability system that promotes high

treatment based on best evidence and decision support technology to ensure

n of primary and specialty care; clinical information systems to provide timel

ort for patient self-management; and community relationships to

in support of patients’ needs.15

ng Study, Number 18. August 2007

Source: Center for Studying Health System Change, Research Brief No. 6, June 2008


best able to support care coordination, quality improvement and reporting activities and

omplishing the outcomes identified above is to view and treat

entrepreneurs in much the same way that the State of Maryland views


ry support from the State. Physicians meet every definition of the classic entrepreneur –




coming onslaught of older Americans with greater co-


projected to grow to 177 million by

ther, patients with chronic diseases account for a disproportionate share of health risk

of annual medical costs. An American

od pressure result in 164

The current model of chronic care delivery is fragmented at best, including multiple physicians,

diagnostic test duplication, avoidable

and adverse drug events. Existing systems are structured around acute, episodic

in fragmented, inefficient, ineffective and costly care. The optimal care model

primary care physician, appropriate medical specialists,


mpending chronic illness crush, it seems that preparing

chronic patients is a wise


or Healthcare Innovation Model. The Maccoll model calls for a chronic care delivery

promotes high-

hnology to ensure

clinical information systems to provide timely access to

and community relationships to

The concept of the medical home has been advanced as one that i

disciplinary, and structured to deal with chronic care patients. While still a developing model, it

widely recognized that the costs of developing a medical ho

enterprise are at least in the range of $25,000 to $100,000 per FTE

These costs include additional staffing and infrastructure build

deployment of an electronic medical

$150,000 per year per FTE physician

Most practicing physicians find the formation capital required to build a truly integrated medical

home practice model to be well beyond their means. Add

multispecialty groups is foiled by limited access to capital, the growing physician population

desirous of an employed practice situation has few private practice options, and is forced to

pursue employment with hospitals and health systems that have deep pockets.

independent physician practices that would like to work together are limited in their collaboration

because of Federal anti-trust laws.

Based on the requirements of practice formation,

model of physician practice, the desired outcomes of any public policy that enhances physician

practice should:

� Afford practicing physicians economies of scale relative to operating expenses and capital

costs,

� Afford physician groups of all size

better negotiated rates, and efficiency savings for the payer,

� Provide groups access to capital and business acumen,

� Provide groups the wherewithal to create appropri

including deployment of mission

decision support technology

In addition, larger physician enterprises will have the ability to participate in true population risk

management, either as a direct contractor with purchasers or as a partner with health insurers.

Finally, it is believed that incubator funds will incent entrepreneurial physicians in larger

enterprises to develop innovative care delivery alternatives

telemetry and monitoring models.

16 http://www.deloitte.com/dtt/cda/doc/content/us_chs_MedicalHome_w.pdf


e has been advanced as one that is physician-driven, multi

and structured to deal with chronic care patients. While still a developing model, it

widely recognized that the costs of developing a medical home model in the modern physician

enterprise are at least in the range of $25,000 to $100,000 per FTE physician in start

additional staffing and infrastructure build-out and the purchase and

electronic medical record, and on-going operating costs of between $90,000 and

$150,000 per year per FTE physician16.


home practice model to be well beyond their means. Additionally, as the formation of integrated



spitals and health systems that have deep pockets. Further, small,


trust laws.

Based on the requirements of practice formation, with an eye toward the advanced medical home


Afford practicing physicians economies of scale relative to operating expenses and capital

of all sizes more negotiating leverage with payers, resulting in

better negotiated rates, and efficiency savings for the payer,

Provide groups access to capital and business acumen,

Provide groups the wherewithal to create appropriate quality management infrastructure,

including deployment of mission-critical health information technology and clinical

decision support technology


anagement, either as a direct contractor with purchasers or as a partner with health insurers.


enterprises to develop innovative care delivery alternatives – including telemedicine, remote

telemetry and monitoring models.

http://www.deloitte.com/dtt/cda/doc/content/us_chs_MedicalHome_w.pdf


driven, multi-

and structured to deal with chronic care patients. While still a developing model, it is

me model in the modern physician

in start-up costs.

out and the purchase and

going operating costs of between $90,000 and


itionally, as the formation of integrated



Further, small,


with an eye toward the advanced medical home


Afford practicing physicians economies of scale relative to operating expenses and capital

ore negotiating leverage with payers, resulting in

ate quality management infrastructure,

critical health information technology and clinical


anagement, either as a direct contractor with purchasers or as a partner with health insurers.


luding telemedicine, remote

Recommendations to Form and Enhance Physician E

Early in the Task Force process, the Secretary of Maryland’s Department of Health and Mental

Hygiene identified his desire to craft

namely improving physician supply, improving physician infrastructure including increasing the

deployment of advanced information technology, and finally

reimbursement environment. During the Task Force deliberations

dealing with reimbursement shortfalls by physicians. The focus of these recommendations

therefore, will be on the supply and in

become the home of the “Great Physician Enterprise”.

Relative to these recommendations, they will focus on creating market

assumption that the enhancement of physician pra

reimbursement as the larger, more sophisticated groups have better success negotiating with

payers. Therefore, the recommendations include:

Supply Recommendations

Maryland needs to attract the best and the brightest physicians, and will do so by

implementing three critical recommendations.

I. Dramatically expand the Loan Repayment Assistance Program

would likely see loan repayment or f

areas. While this program is in effect currently, it is little used and marginally

Regional health systems ought to be very willing to participate in the funding of this progra

especially in Western Maryland, Southern Maryland

II. Develop a Working Capital Loan Program

capital facilities enhanced by loan guarantees to the lending institutions making the loans.

program should be modeled after the mezzanine

business investment company (SBIC) component. Mezzanine investments focus on placements in

firms that are net cash-flow positive, and have positive financi

Maryland providing a loan-guarantee. By their nature, physician practices are cash

income positive, and physicians are among the lowest credit risks of any professional

classification. Finally, further research

private investors, who may be interested in investing in diagnostic and procedural ancillary

services, but face obstacles that include legal and regulatory challenges.

III. Undertake substantive to

between meaningful tort reform and economic development in a number of key states, including

Georgia, Texas, and some 25 year plus of positive experience in California. In fact, in California


dations to Form and Enhance Physician Enterprises


Hygiene identified his desire to craft task Force recommendations that focused on three key areas,


deployment of advanced information technology, and finally, enhancements to the physician

reimbursement environment. During the Task Force deliberations, there was a lot of attention on

reimbursement shortfalls by physicians. The focus of these recommendations

therefore, will be on the supply and infrastructure components – as Maryland should strive to

become the home of the “Great Physician Enterprise”.

Relative to these recommendations, they will focus on creating market-oriented solutions, with the

assumption that the enhancement of physician practices will ultimately force increased


Therefore, the recommendations include:

needs to attract the best and the brightest physicians, and will do so by

implementing three critical recommendations.

expand the Loan Repayment Assistance Program. This recommendation

would likely see loan repayment or forgiveness tied to service provision in medically underserved

areas. While this program is in effect currently, it is little used and marginally funded

Regional health systems ought to be very willing to participate in the funding of this progra

especially in Western Maryland, Southern Maryland, and the Eastern Shore.

a Working Capital Loan Program. This program would be similar to working

capital facilities enhanced by loan guarantees to the lending institutions making the loans.

program should be modeled after the mezzanine-level funding market and could include a small


flow positive, and have positive financial outlooks, with the State of

guarantee. By their nature, physician practices are cash


classification. Finally, further research should explore opportunities for equity participation by


services, but face obstacles that include legal and regulatory challenges.

Undertake substantive tort reform: There is fairly substantial evidence of the linkage





task Force recommendations that focused on three key areas,


enhancements to the physician

there was a lot of attention on

reimbursement shortfalls by physicians. The focus of these recommendations

as Maryland should strive to

oriented solutions, with the

ctices will ultimately force increased


needs to attract the best and the brightest physicians, and will do so by developing and

. This recommendation

orgiveness tied to service provision in medically underserved

funded at best.

Regional health systems ought to be very willing to participate in the funding of this program,

similar to working

capital facilities enhanced by loan guarantees to the lending institutions making the loans. This

level funding market and could include a small


al outlooks, with the State of

guarantee. By their nature, physician practices are cash-flow and net


should explore opportunities for equity participation by


fairly substantial evidence of the linkage



over the time that the MICRA reform has been in place, premiums in the greater United States

have risen almost four times as much as those in California. Further, early evidence in Texas is

that premium savings tied to reforms has led to increased invest

as improved patient safety, enhanced investment in clinical information technology, expanded

coverage to the uninsured, etc.

Infrastructure Recommendations

To fully understand the infrastructure recommendations, one h

physician entities are better positioned to deliver higher quality services and compete more

effectively in the marketplace. Larger, more integrated physician organizations

competitively respond to payer cons

health care purchasers. They can

which can help to enhance quality of care

acquisitions, employ newly trained physicians,

developing ancillary services and

better for payers. They prove to be l

evaluative perspective, and in some cases

functions to the more sophisticated groups.

To promote, facilitate, and enhance physician

develop and implement the following infrastructure recommendations.

IV. Create a Physician-Enterprise Incubatorthan 20 business incubators located throughout the state. These incubators are supported bMaryland Technology Development Corporation, and offer strategic advice, business formation and ongoing operational assistance, shared administrative and physical resources, and access to state-of-the-art equipment and facilities. Each has its own adand program objectives, but all in Maryland share a common thread in that they are predominantly technology focused. The goal of the business incubators is to help birth and assist the growth of early stage companiesjobs creation among new business entities in the State.

Physician entrepreneurs are in need of the same scope of incubator services, but at the present, these kinds of services are not available to sector seems a surer bet at creating jobs than a new heanational analysis, for every full-time equivalent physician in private practice in the United States, that physician creates more than 4 fullphysician practice-focused incubator would clearly generate the type of worpolicy makers may desire.




that premium savings tied to reforms has led to increased investment in mission-critical areas such


Infrastructure Recommendations

To fully understand the infrastructure recommendations, one has to understand why larger


effectively in the marketplace. Larger, more integrated physician organizations are better able

to payer consolidation, and to market to and negotiate with the variety of

They can more easily invest in information technology infrastructure

which can help to enhance quality of care. They are also better positioned to make str

itions, employ newly trained physicians, and drive more integrated, coordinated care by

developing ancillary services and integrated medical facilities. Larger medical groups are also

better for payers. They prove to be less costly to contract with–both administratively and from an

, and in some cases, the payers delegate certain key quality and performance

functions to the more sophisticated groups.

To promote, facilitate, and enhance physician entrepreneurial enterprise, policy ma

develop and implement the following infrastructure recommendations.

Enterprise Incubator. The State of Maryland is home to more than 20 business incubators located throughout the state. These incubators are supported bMaryland Technology Development Corporation, and offer strategic advice, business formation and ongoing operational assistance, shared administrative and physical resources, and access to

art equipment and facilities. Each has its own admissions policies, unique facilities, and program objectives, but all in Maryland share a common thread in that they are predominantly technology focused. The goal of the business incubators is to help birth and assist the growth of early stage companies. Specifically, the goal of incubators is to help support jobs creation among new business entities in the State.

Physician entrepreneurs are in need of the same scope of incubator services, but at the present, t available to physicians. From a policy perspective, no industry

sector seems a surer bet at creating jobs than a new health care physician organization. Btime equivalent physician in private practice in the United

t physician creates more than 4 full-time equivalent staff positions. Therefore, a focused incubator would clearly generate the type of workforce growth that




critical areas such


as to understand why larger


are better able to

and negotiate with the variety of

invest in information technology infrastructure

They are also better positioned to make strategic

and drive more integrated, coordinated care by

. Larger medical groups are also

administratively and from an

the payers delegate certain key quality and performance

policy makers should

Maryland is home to more than 20 business incubators located throughout the state. These incubators are supported by the Maryland Technology Development Corporation, and offer strategic advice, business formation and ongoing operational assistance, shared administrative and physical resources, and access to

missions policies, unique facilities, and program objectives, but all in Maryland share a common thread in that they are predominantly technology focused. The goal of the business incubators is to help birth and

Specifically, the goal of incubators is to help support

Physician entrepreneurs are in need of the same scope of incubator services, but at the present, a policy perspective, no industry

organization. Based on time equivalent physician in private practice in the United

time equivalent staff positions. Therefore, a kforce growth that

The model for the incubator has to be developed, an

leverage existing State of Maryland investment in similar infrastru

could include a public incubator targeted for physician groups and physician

incubator could be affiliated with the Maryland Department of Business and Economic

Development. There could also be

minimum, the menu of support services

business development, operations management

V. Develop a Physician Quality Innovation Fund

clinical integration among independent physicians

information technology. The information technology would support the development of

home infrastructure, and promote interoperability by and among physicians. This fund would also

provide risk capital for independent physician ne

true population-based health status improvement

contract and integrating to manage the continuum of care.

As it relates specifically to the implementation of hea

significant barriers to fuller deployment. These include c

standards), privacy, confidentiality and security

incentives for the physician practice to make the investment required. This Quality Innovation

Fund, therefore, could be a catalyst for electronic medical record adoption with an end

true clinical interoperability.


The model for the incubator has to be developed, and could be developed de novo or built to

leverage existing State of Maryland investment in similar infrastructure. For example, the model

incubator targeted for physician groups and physician-led enterprises


Development. There could also be incentives to promote private incubation activities

enu of support services would include professional management, m

perations management, and information technology support

Develop a Physician Quality Innovation Fund: A fund should be created to support

tion among independent physicians, principally through the deployment of

information technology. The information technology would support the development of

infrastructure, and promote interoperability by and among physicians. This fund would also

provide risk capital for independent physician network organizations that desire to participate in

based health status improvement by aggregating physicians under one network

contract and integrating to manage the continuum of care.

As it relates specifically to the implementation of health information technology, there are

significant barriers to fuller deployment. These include cost, complexity of systems (lack of

rivacy, confidentiality and security issues, legal issues, and finally, a lack of financial


Fund, therefore, could be a catalyst for electronic medical record adoption with an end


d could be developed de novo or built to

ture. For example, the model

led enterprises. This


incentives to promote private incubation activities. At a

, marketing and

nformation technology support.

A fund should be created to support

he deployment of

information technology. The information technology would support the development of medical

infrastructure, and promote interoperability by and among physicians. This fund would also

twork organizations that desire to participate in

by aggregating physicians under one network

, there are

omplexity of systems (lack of

a lack of financial


Fund, therefore, could be a catalyst for electronic medical record adoption with an end-goal of

Enhancing the Physician Enterprise in Maryland 11 17-08

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Transcript of Enhancing the Physician Enterprise in Maryland 11 17-08