Brown & Toland Medical Group is a for-profit Independent Practice Association, that has run in the black since its inception. It owns, but is distinct from, the physician services organization, which has its own board of directors and provides administrative services to BTMG and to other medical groups.

The physician services organization is projecting losses this year and is being forced to restructure its operations. It has chosen to finance those losses by adjusting specialist and primary care reimbursement. Before I go into the details of considerable complexity about how this would work, I would first like to point out the key considerations for UCSF Stanford Health Care and its physicians:

1. Brown & Toland Medical Group is financially secure and has substantial reserves, in accordance with the California Department of Corporations' most recent requirements for organizations holding a limited Knox Keene license.

2. UCSF faculty specialists participating in the medical group will receive their entire withhold for 1998; UCSF primary care physicians will be reimbursed at normal rates in 1999. Reimbursement for newly participating Stanford faculty will not be affected.

3. The group's expansion to San Mateo and inclusion of Stanford faculty is moving ahead as planned.

4. UCSF Stanford Health Care is deeply committed to the leadership of Brown & Toland and to its innovative and successful approach to the market. As testimony to that commitment, we intend to assume all financial responsibility for any decreases in reimbursement that would have been imposed upon UCSF faculty physicians. In return for funding the faculty's share of the shortfall, UCSF Stanford Health Care will receive equity in BTPSO. In the unlikely event that such a situation would arise again, Stanford physicians would be given the same guarantee. Our analysis is that the physician services organization's current financial difficulties are largely attributable to this year's unforeseeable downturn in the equity market for physician services organizations, and to consequent inability to obtain venture funding to finance its growth.

Now, the details. The Board of Brown & Toland Medical Group announced that the physician services organization was projected to end 1998 with a deficit. As part of its business plan last year, the medical group had approved a growth plan for the physician services organization. The plan included an effort to seek an infusion of new venture capital in order to finance various growth activities, including the acquisition of new medical group clients; the development of the group's Medicare Plus Choice product; and the financing of the group's expansion into San Mateo County and Stanford. This summer - as those of you who follow the stock market are well aware - stock values of large practice management companies such as MedPartners Inc. plummeted dramatically, causing venture capital for that market sector to all but dry up. Thus this capital infusion was not available to Brown & Toland PSO.

The medical group's board reviewed the financial situation of its PSO subsidiary and announced the following plan to remedy the situation:

1. Because of the stringent Department of Corporations' requirements regarding maintenance of reserves, the medical group is not able to finance physician services organizations' losses through its own reserves.

Therefore, the Brown & Toland Medical Group board voted to use its accrued 1998 specialist withhold account to pay off immediate debt and to adjust 1999 primary care reimbursement proportionately such that 50 percent of this payment will be contributed by primary care physicians. In this way, the financial burden will be distributed equally between specialists and primaries. Physicians will receive equity in the physician services organization in proportion to the amount they contribute to pay off the shortfall. Methods for retaining the necessary funds are still being assessed and may include reductions in carve-out fees and evaluation of some special services provided to primary care physicians such as after-hours adult triage services.The Brown & Toland Medical Group will provide further information when details are finalized.

UCSF Stanford Health Care has agreed to assume responsibility for UCSF faculty's share of the pay-off in return for equity in the Brown & Toland PSO, and affirmed its intention to treat Stanford faculty in the same way, should the need arise. According to UCSF Stanford CEO Peter Van Etten, "The risk taken by Brown & Toland in attempting to finance the expansion of the physician services organization through venture capital was not unreasonable. At the time of the decision, practice management companies were the darlings of Wall Street and venture capital funding was plentiful. I believe the medical group and the physician services organization are both sound, and that the restructuring program will succeed in putting the group's financial affairs in order.

"Our decision to spare our faculty from having to help fund this shortfall is based on a number of factors. Unlike the community physician members, our faculty are part of an integrated health care delivery system, and the system as a whole is better able to withstand financial turbulence than the individual departments. In addition, UCSF Stanford Health Care will receive an equity position in the physician services organization in return for funding the UCSF faculty's share of the loss."

2. There will be a moratorium on all new growth for the physician services organization's administrative operations until the current financial problems are solved. Any future growth must be accompanied by upfront financing. The medical group board has directed BTPSO to focus on providing quality service to its main client, the Brown & Toland Medical Group.

3. A physician services organization financial oversight committee will be formed, comprised of both medical group board and non-board members.

4. The physician services organization board will be expanded by at least two seats to include members with significant business expertise.

5. The physician services organization will operate in 1999, and thereafter, under a balanced budget. According to medical group president Michael Abel, a department-by-department operations review process has been initiated and was to have begun on Nov. 9. The cost reductions, which will include a number of layoffs, are expected to reduce the 1998 shortfall below the original projection. Abel said, "I believe an operations review process of this kind should be conducted annually so that we can continue to identify opportunities for greater efficiency and deliver the best possible service to our clients."

6. In addition, effective Nov. 3, 1998, Joe O'Hehir has left the physician services organization and will no longer serve as its CEO. Michael Abel will remain president of the PSO and will assume responsibility for its operations.

Brown & Toland Physician Services Organization Restructures in Response to Market Downtown

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