Boston groups choose nonprofit route to growth

Four Boston-area medical groups have joined to become the largest physician-directed medical enterprise in the area, but it has taken a change in financial philosophy for some to make the new organization a reality.

Harvard Vanguard Medical Associates, Dedham Medical Associates, Southboro Medical Group and South Shore Medical Center have affiliated to form the yet-to-be-named parent company, which will have more than 700 physicians. The four groups will remain subsidiaries of the nonprofit parent, the board of which will have control over each local budget and capital expenditure request.

But to enable the parent company to operate smoothly, the three smaller groups had to follow the lead of Harvard Vanguard and convert to a tax-exempt 501(c)(3) financial status. The groups have applied for nonprofit recognition and are awaiting a response from the Internal Revenue Service regarding their status.

The parent company's nonprofit position will let it plow earnings back into the firm tax-free, helping it grow quickly and providing resources for major capital investments, such as an electronic medical records system. The affiliation gives the groups negotiating clout and will let them collaborate on clinical programs, free up resources, and branch off into ancillary services.

"This accomplishes scale and gives everyone the leverage to survive," said Kenneth Paulus, president and CEO of Harvard Vanguard, the largest player in the new organization with about 500 physicians. "We're beginning to see an end to private practice as we know it. There's more pressure on solo practices and small groups to consolidate."

But a consolidation of this nature, including a shift to a tax-exempt status, probably will not become the norm, officials said, because of the size needed to make some capital investments. A pair of 20-physician groups, for example, still would not be large enough to afford an EMR and accomplish the types of goals established by the Boston groups.

Chris Jedrey, a partner in the Boston office of the law firm McDermott, Will & Emery, served as lead counsel on the transaction. "Harvard Vanguard was a big group to begin with, and they concluded they needed to do this to make it work. At the heart of it is the EMR. It's expensive."

Michael Lee, MD, a pediatrician with Dedham Medical and chair of the new organization's board, pointed to technology upgrades as the chief benefit to the affiliation. Harvard Vanguard is the only group with an EMR right now, but the other groups will be on the same platform within two years, he said.

Doctors and administrators also predict better clinical outcomes and a stronger foundation for quality, and some area HMOs have responded by contributing a seven-figure amount to help defray some conversion costs and technology upgrade expenses.

Of course, there was a price to pay to gain the added quality and capital budgeting freedom. The physicians of the three smaller groups had to turn in their respective shares and agree to become salaried employees, although some have become board members of the parent corporation.

Because nonprofit groups have to set salaries according to market value parameters, the new group has a committee of nonphysicians review the salary schedules of each individual group before approving them. But that doesn't necessarily mean the doctors will see a drop in pay. After incomes decreased between 1998 and 2002, physician salaries are back to the 1998 level thanks to the new organization. Recruiting also has been easier as the larger group, he said.

The transition to nonprofit status was easier for some groups. Southboro, for example, already had moved to a taxable nonprofit status, but the other groups had to make a full conversion, including changing accounting practices and filling out all of the necessary paperwork.

"It was really just a change in taxable status," said John Parker, CEO of Dedham Medical. "The day-to-day operations don't change."

Some of the initiatives do, though. The affiliation will let the groups share in a hospitalist program as well as other clinical initiatives that the smaller groups would not have been able to undertake individually.

"Overall, now we have between 800,000 and 900,000 patients," said Joe Nunes, administrator for Southboro Medical Group. "That's a significant number of patients."