by Pax Beale

of Beale Research

The train is leaving the station. Who will be on it, and who will be left behind? That doesn’t mean every doctor must start self-promoting like a used car salesman. What it means is that an astute medical doctor should analyze the medical retail landscape and then make professionally polished decisions on how and when – or if – to proceed.

Beale Research Center has analyzed the various options for doctors to consider, and has developed a host of opportunities for a doctor who does not want to be left behind.

Comprehending the evolution of medicine makes sense, because where medicine has been affects where medicine will be in the future.

Organized medicine was a scattered bunch of doctor’s offices in yesteryear. It was unethical to even share a receptionist. Any form of self-aggrandizement was a “no-no.” The idea of medicine going retail bordered on being preposterous; then Fate played its hand.

Kaiser, a Health Maintenance Organization (HMO), lost their virginity in the medical arena more by luck than strategic planning. Originally, Kaiser Engineering Corp., Kaiser Aluminum Corp., Kaiser Steel Corp., etc. got the contract to build the Boulder (then Hoover) Dam. Henry J. Kaiser’s son-in-law was luckily Dr. Sid Garfield, so logic followed that Sid set up the necessary medical coverage for the large number of workers on the Boulder Dam.

Organized medicine paid no attention, because how could Kaiser affect them with a different type of payment system, called a “capitation” system of pay, in the remote Boulder Dam area?

The capitation system involved the insured paying a flat monthly fee per patient, whether they saw a doctor or not. Coverage was for unlimited medical services.

Organized medicine was committed to only what they thought was legal; it was called a feefor- service method. As the name implies, fee-for-service means each patient’s visit to a doctor is billed and paid for individually.

When the dam was built, Dr. Garfield had his team in place, and they came back to Kaiser’s world headquarters in Oakland, California with the intention of signing up unions for their healthcare.

Dr. Garfield’s team sought privileges at Merritt Hospital in Oakland, but the hospital’s organized medicine staff revolted. Henry J. Kaiser and his son-in-law had no hospital. No problem. Henry J. Kaiser bought the Fabiola Hospital on the corner of Broadway & MacArthur, more or less at the foot of the hill, where on top of the hill was the mighty Merritt Hospital.

Moral of the story: you didn’t mess with Henry J. Kaiser, because if you knocked him down, he got up.

A side note of interest: the first capitation system wasn’t Kaiser, as so many think. The first was Southern Pacific Railroad, who built a beautiful hospital on the Panhandle of Golden Gate Park, San Francisco, and inpatients from all over the West came to the hospital free via train. Southern Pacific thought they had a winner, which used the capitation system to pay the doctors, and not organized medicine’s fee-for-service method. Guess what? From nowhere, commercial airlines became a reality, and Southern Pacific’s employees refused to take the slow moving trains to SF. The hospital occupancy dropped, as Southern Pacific could not afford airline tickets for employees. The hospital went out of business.

Various HMOs began to flourish and were also designated as “nonprofit foundations”; but regardless of the name, the HMO/Foundations were contracting with physicians to be able to deliver medical services to companies and/or unions using the capitation system of doctor payment.

Those blanket capitation contracts with doctors were more readily obtained when so many of the doctors were suddenly wooed to lease space in a hospital-owned medical building. The doctors may have thought they were moving to more upscale facilities, but little did they realize they were also subjecting themselves gradually to more control by the HMO/Foundations.

Chalk up a victory for HMO/Foundation medical centers. Now doctors who had never dreamed of being reimbursed on the capitation system were suddenly falling prey to “their” hospital medical center, which began creating their own HMO/Foundations to prepare to go retail and compete with Kaiser.

No hospital would even think of advertising! Then control of medicine subtly evolved, shifting even more control from the doctors to the HMO/Foundations and their hospital-based medical centers.

HMO/Foundations had little effect on the practice of cosmetic plastic surgery at the time, but today, all medicine is at the crossroads of “going retail.”

The hospitals built office buildings and wooed doctors. Hospitals became medical centers. Medical centers became a host of hospitals under one umbrella. Some hospitals, like Davies in San Francisco, became a “campus.” The doctors who had moved into the hospital office buildings began to have their independence erode away in favor of more gradual hospital control. Much of the foregoing came under the overall control of the newly-created HMO/Foundations.

Early on, organized medicine sued Kaiser, claiming that Kaiser’s capitation pricing format was illegal, and only organized medicine’s fee-for-service method of patient payment was legal. Organized medicine lost in San Diego courts.

The court also allowed what was the maximum percent a foundation like a Kaiser HMO could take out of doctor’s fees for their management fees, which was 55% of the doctor’s gross fee.

Uniquely, Kaiser was including maternity benefits, when organized medicine and insurance companies using the fee-for-service payment system refused to do so, because after all, a pregnant woman was not “sick.” Then the “Blues” (Shield and Cross) and conventional insurance companies were forced to follow, and also cover maternity.

Kaiser finished building the Boulder Dam, but in the process, mastered the art of the capitation system.

Keep in mind, doctors who migrated to the capitation system lost some of their independence. For the record, the doctors came back from their involvement with the Boulder Dam, and no hospital would have anything to do with them. Kaiser buying its first hospital, the Fabiola Hospital at the corner of MacArthur and Broadway streets in Oakland, was a pivotal point in the evolution of medicine.

Naturally, the efforts to have free-standing huge medical doctor complexes unrelated to a hospital, like 450 Sutter in San Francisco and 390 Post in downtown San Francisco, failed. Those locations became dental havens, except for a few doctors in specialties like cosmetic plastic surgery and psychiatry who didn’t routinely need an acute general hospital.

Organized medicine doctors then lost again. The general practitioner, the internist, and the family practitioner lost complete control of his/her patients when admitted to a hospital, as a new specialty was born, called a “hospitalist.” The hospitalist replaced the original attending physician while the patient was in the hospital. The net effect was more hospital control, and less by the independent practicing physician.

HMO/Foundations were being formed by the medical centers to enlist the doctors in the hospitals’ office buildings. The net effect was to have the medical centers, not the doctors, in control. The capitation system was off and running as the thriving medical centers commenced to establish various versions of Kaiser-type HMO/Foundations.

Even the insurance companies are now dictating select medical protocol that a doctor is to use if a service is to be reimbursed by the insurance company.

The new HMO/Foundations are destined to control patients with companies and unions, just like Kaiser does.

Next step by organized medicine: to hell with self-aggrandizement restrictions, which had been engraved in medicine’s code of ethics since the beginning of time. Let’s look at change in the making.

Newsflash: the medical retail free-for-all has begun. Some examples:

  1. Stanford Hospital runs a full page ad in the University of California Alumni magazine, seeking patients for one of their clinics. Yeah, Stanford pays for an ad in the University of California magazine! Who says things never change?
  2. UC Hospital runs an ad seeking radial keratotomy patients (laser eye surgery) for nearsightedness.
  3. Next, California Pacific Medical Center has all their vehicles painted with big billboardlike signs that say words to the effect of “CPMC for hands-on medicine.”
  4. Even religion has entered the scene with St. Francis Hospital, St. Mary’s Hospital, and others who were squeaky clean fee-for-service operators, are now self-promoting entities with full page ads in the San Francisco Examiner under the new name: Dignity Health!
  5. Seton Medical Center in Daly City, formerly Mary’s Help Hospital from the Mission District in San Francisco and which had become owned by the Sisters of Charity, is in the throes of being bailed out of going bankrupt, along with O’Connor Hospital in San Jose, and six others. All are to have their nonprofit status converted to a profit corporation. The Sisters of Charity say they will be bankrupt in a few weeks without a sale.

Excluded from all of the above is cosmetic surgery by plastic surgeons in San Francisco; but it’s next for going retail big time, as it has already started in other areas of the U.S.

Organized medicine changes will ultimately affect cosmetic surgery.

Emphasis is put on San Francisco because patients will come to San Francisco from outlying areas, while San Francisco residents are highly unlikely to go to Modesto or Petaluma or Concord for their cosmetic plastic surgery. San Francisco is the “Mecca” of medicine in Northern California.

Like it or not, this summary could easily be called “Medicine is going retail.” The question is which player in the game decides medicine’s destiny: the doctor, hospitals, a medical group of doctors, insurance companies, health maintenance organizations, a medical foundation, or maybe Uncle Sam. Everyone involved needs to review the impact of medicine’s going retail on how their role will be affected.

Medicine is going retail.