Emergency Care Group

CASE Emergency Care Group 20 It was another good year for Emergency Care Group (ECG). The Midwest - based emergency medicine physician staffing group, which served rural hospitals, had just closed the books on the 2003 calendar year with 37 percent revenue growth. John Woods, ECG s owner, charged Steve Morgan, Assistant Vice President, to develop a sales and marketing plan that would sustain growth over the next several years. Steve had some ideas about how to do this, but a couple of things troubled him. Even though growth had been good the past year, it might have come at the cost of the firm outgrowing its capabilities. That is, finding enough emergency physicians to staff all the new contracts had pushed ECG to its limits. Dr. Woods wanted and expected growth, and he further expected that his staff would find the physicians. This had created tension between Steve, who had the responsibility to generate new staffing contracts, and the operations employees, who had to staff those contracts. Steve was also troubled that although ECG had enjoyed continuous growth over the past seven years, its profits were essentially flat over that period. In fact, the profit margin had shrunk from 13.97 percent in 1997 to 5.7 percent in 2003. What good is growth, Steve wondered, if we have problems honoring our contracts and profits don t also grow? ECG had built its most recent growth with new affiliated facilities in Wisconsin and Illinois. Two other states, Missouri and Nebraska, had only one or two facility contracts each. Originally, the 2003 sales This case was written by Kay M. Palan and Paul Hudson, both of Iowa State University. It is intended as a basis for classroom discussion rather than to illustrate either effective or ineffective handling of an administrative situation. Used with permission. both20.indd 817 11/11/08 12:34:08 PM

818 CASE 20: EMERGENCY CARE GROUP plan called for an emphasis on those two states, but Steve had altered the plan to take advantage of the positive marketing momentum in Wisconsin and Illinois. Competing firms emphasized a combination of services centered on emergency department physician staffing, but also included documentation and reimbursement services tools that helped emergency department staff to record services provided to patients and to automate diagnostic codes for billing purposes. More efficient and effective coding enabled quicker and often higher reimbursement percentages. ECG primarily offered emergency department physician staffing, but had introduced a template documentation product, ECGdoc, in 2002, and planned to introduce coding and billing services in 2004. Each ECG facility represented an opportunity for growth with this new product line, and it could offer potential clients a variety of packaged deals, including any or all of the differentiated product line: staffing, documentation, and reimbursement. Steve, who was solely responsible for ECG s marketing efforts, had to present a three - year sales and marketing plan to Dr. Woods next month. He knew he had to make some decisions, but he still had uncertainties. Should ECG focus on marketing expanded services to existing facility partners? Should ECG focus on affiliating with new emergency department facilities in need of staffing services? ECG s core product had always been staffing services how much could it or should it stray from that product? For that matter, if ECG decided to focus on selling staffing, documentation, and reimbursement services, who was going to do all the selling? Certainly not Steve he had more than he could handle now. Moreover, could ECG grow revenues and profits? For Steve, it boiled down to one question: How should ECG pursue growth? Emergency Medicine Industry Emergency departments (EDs) in hospitals provided immediate care around the clock to critically ill and injured individuals and were a well -established gateway to medical care in the US health care delivery system. Since the 1950s, utilization of emergency departments had steadily increased from 1990 to 2003, the number of emergency department visits had grown approximately 28 percent, from 87 million visits to 111 million visits (see Exhibit 20/1 ). The increase in utilization was attributed to treatment and diagnostic advances that allowed earlier intervention in critical illnesses e.g., heart attacks and traumas but another contributing factor was the use of EDs by those who had inadequate access to routine health care. Even individuals with primary care physicians often sought treatment for common illnesses during evening and weekend hours when primary care clinics were typically closed. Consequently, EDs treated everything from the common cold to life -and-death illnesses or injuries. At the same time that ED visits were increasing (see Exhibit 20/2 for visits per 1,000 persons), the number of actual emergency departments decreased from approximately 5,200 in 1990 to about 4,550 in 2003. In rural areas, this problem was even more pronounced because more individuals relied on emergency both20.indd 818 11/11/08 12:34:09 PM

EMERGENCY MEDICINE INDUSTRY 819 Exhibit 20/1: Emergency Department Visits and Emergency Departments in Community Hospitals 1990 2003 Number of ED Visits (Millions) 115 110 105 100 95 90 85 ED Visits Emergency Departments 5,300 5,100 4,900 4,700 4,500 4,300 4,100 3,900 3,700 Number of Emergency Departments 80 90 91 92 93 94 95 96 97 98 99 00 01 02 03 3,500 Source: The Lewin Group analysis of American Hospital Association Annual Survey data, 1990 2003, for community hospitals. Exhibit 20/2: Hospital Emergency Department Visits per 1,000 Persons 1990 2003 390 370 350 Per Thousand 330 310 290 270 250 90 91 92 93 94 95 96 97 98 99 00 01 02 03 Sources: The Lewin Group analysis of American Hospital Association Annual Survey data, 1990 2003, for community hospitals; and US Census Bureau: State and County QuickFacts, 2003 population estimate data derived from Population Estimates, 2000 Census of Population and Housing. both20.indd 819 11/11/08 12:34:09 PM

820 CASE 20: EMERGENCY CARE GROUP departments (44.2 visits per 100 population in 1998) as shown in Exhibit 20/3. In fact, rural emergency departments declined 11.3 percent from 1990 through 1999, while rural emergency department visits increased 23.8 percent. Compounding this crisis was the decrease in physician availability in rural communities as well as metropolitan areas. The US had fewer physicians per dollar of gross domestic product than most countries, and analysts projected a shortage of 50,000 physicians by 2010. According to the Federal Office of Rural Health Policy, one -fifth of the US population lived in nonmetropolitan areas, but less than 11 percent of the country s physicians practiced medicine in nonmetropolitan areas. The combination of increasing ED utilization and physician shortages fueled the emergence of the emergency medicine physician in the 1950s and 1960s. Previously, hospitals relied on attending physicians for daytime coverage, and unsupervised interns and residents in the evenings and on weekends, to provide 24 - hour physician coverage. However, in time the health care industry recognized that reliance on so many unsupervised interns and residents compromised patient care. In 2003, the Accreditation Council for Graduate Medical Education limited the number of uninterrupted hours interns and residents could work to no more than 80 per week. Moreover, residents had to have one day in seven free from all educational and clinical responsibilities. To address the severe gaps in physician coverage in EDs, a cottage industry of emergency department staffing agencies began in the early 1970s and quickly Exhibit 20/3: Rural vs. Urban Emergency Department Visits per 100 Persons 1997 and 1998 50 45 40 35 30 25 20 15 10 5 Urban Rural 0 1997 1998 Source: TrendWatch, March 2001, vol. 3, no. 1, American Hospital Association. both20.indd 820 11/11/08 12:34:11 PM

EMERGENCY CARE GROUP 821 gained popularity with hospital administrators because they provided emergency physician coverage 24 hours a day. Further expansion ensued in the 1980s, with several of the agencies becoming highly successful and profitable. Staffing agencies typically negotiated multi - year contracts with EDs to provide 24 - hour per day emergency physician coverage. Hospitals generally paid a flat rate per hour of provider coverage that varied, based on market -specific costs and reimbursements. This system dated back to the mid - 1960s when the federal government determined appropriate fees for services provided to Medicare patients based on reasonable costs, as reported by health care providers. Providers with unreasonably high costs (as deemed by the government) did not receive enough compensation in service fees to cover all their costs. Eventually, all third -party insurers adopted the same reimbursement system. In 1983, the reasonable cost basis for services was replaced by a prospective payment system based on an elaborate system of diagnostic codes, known as DRGs (disease - related groups). Emergency room staff assigned a DRG code to every patient according to his or her diagnosis. DRGs signaled not only what the patient was treated for, but also triggered fees for services because they were based on the level of resources needed for treatment. For example, the resources needed for treating a major cardiac arrest were higher than the resources needed for evaluating a common cold. Determining the correct DRG code from over 500 possible codes, was, therefore, critically important with respect to maximizing reimbursement revenues in EDs. Steve knew that when the physician staffing industry began, companies provided only staffing services. However, the combination of increasing health care costs and declining resources, along with increased emergency department demand created an opportunity for staffing agencies to offer contract management services, which included comprehensive documentation, coding, and billing services. Although EDs could purchase documentation and reimbursement services separately from independent providers, EDs in rural areas (ECG s typical target market) tended to obtain these services either as part of a staffing contract or as an add - on to a staffing contract. Steve found a report from the American Academy of Emergency Medicine, indicating that by 2000 the emergency medicine physician industry was very fragmented, consisting of approximately 300 physician groups. Moreover, the report estimated that 50 percent or more of the United States emergency departments were staffed by emergency physician staffing groups, while the remainder managed their own staffing needs. Steve also found a 2002 report by the Center for Health Workforce Studies that estimated that about 20 percent of emergency physicians worked full-time on a contract basis (compared to 4 percent of all physicians), and this was especially true in rural areas; the same report suggested that the number of emergency physicians was increasing. Emergency Care Group Although the major national providers of ED staffing services were successful, they tended to focus on large urban hospitals. Regional providers, because they both20.indd 821 11/11/08 12:34:11 PM

822 CASE 20: EMERGENCY CARE GROUP were small, often were not equipped to provide a full complement of services to hospitals. Dr. John Woods, an emergency physician with experience in small rural hospitals, recognized this opportunity. Dr. Woods began his medical career as an Army physician in the 1970s, during which time he moonlighted as a contract physician with a physician staffing company. In the 1980s, after his tour of duty in the Army, Dr. Woods moved to southern Minnesota, working full-time as an emergency department physician. Not one to sit around with spare time, he started law school on a part - time basis and helped a small rural emergency department by working weekend hours when he was free. It was during these years that he realized the gap between rural ED physician staffing needs and the ability of providers to meet those needs. Dr. Woods believed there was an opportunity to help to match qualified physicians with emergency departments and to do so in a way that would better meet the needs of similar facilities in the Midwest. Thus, working out of their basement, Dr. Woods and his wife established ECG in 1989 with the objective of providing these EDs with outsourcing solutions. Dr. Woods described ECG as a kind of a middleman between emergency departments and emergency physicians. ECG contracted with EDs in small rural hospitals, guaranteeing that ECG would provide the emergency department with 24/7 physician coverage on either a part -time or full- time basis. Most contracts were for a three - year period, but there was a 90 - day out clause that allowed emergency departments to terminate the contract without cause with a 90 -day notice. Emergency departments based contract fees on the number of hours of physician coverage required by the ED. Physician Contracts To fulfill its obligations, ECG contracted with an extensive pool of credentialed emergency physicians. Each full - time ED contract required the equivalent of three to four full - time physicians. There was typically a great deal of employee turnover. However, new physicians continually became available (e.g., third -year residents willing to work in smaller hospitals, new graduates, physicians who wanted to earn extra income by moonlighting, physicians who appreciated being able to practice medicine without incurring overhead office costs). Moreover, the rural EDs served by ECG were close enough to large metropolitan areas to entice physicians for at least part - time coverage. Sometimes ECG was able to keep the emergency physicians already working in the EDs when it took over staffing. ECG s operations staff assured Steve that they expected the physician supply to remain plentiful. Nonetheless, finding physicians and matching them to the continually expanding slate of opportunities was a constant challenge. The ideal physician was one who was board certified in emergency medicine, though these individuals were relatively rare and tended to be drawn to larger hospitals with higher salaries. Dr. Woods found, however, that for rural EDs, family practice physicians were well - suited and more plentiful. ECG also contracted both20.indd 822 11/11/08 12:34:12 PM

EMERGENCY CARE GROUP 823 with doctors trained in internal medicine, pediatrics, and surgery and would consider any doctor who wanted to moonlight. Before physicians could serve at any of ECG s contract facilities, however, they had to have at least 200 hours of independent emergency department practice and current certification in the American Heart Association Advanced Cardiac Life Support course. Moreover, each contracting ED had the legal obligation to approve or deny the credentials of each ECG physician (just as facilities did for any physician), and ECG s professional liability insurance carrier had the right to approve or deny any physician. ECG offered qualified physicians one of three agreements. One -year, renewable full - time agreements were offered to physicians who agreed to work in excess of 144 hours per month. Full - time agreements were tied to a fixed rate and a specific ED, and there was a notification clause (usually 90 to 120 days) requiring doctors who wanted to discontinue their contracts to provide sufficient notice. For those physicians who did not want to commit to full - time hours and whose ability to work regular part - time hours varied, ECG offered a one -year part-time contract. It, too, had a renewal clause, but either party could terminate the agreement with minimal notice. ECG negotiated a per - shift pay rate for part - time physicians, which was always less than the full - time rate. In contrast, some part -time physicians agreed to work regular part - time hours (e.g., every other weekend), and in these cases, ECG offered a regular part - time agreement. These hybrid agreements set the pay rate, contracts, and number of hours for a full year, which provided some security for both the physicians and ECG. Dr. Woods preferred full -time agreements as they made it easier to predict physician costs. Company Growth It quickly became apparent that Dr. Woods had chosen an appropriate niche for the new venture. Focusing on rural Minnesota and Iowa, ECG had added additional contracts each year since 1997, with the number of staffed physician hours increasing 500 percent from 1995 to 2003 (see Exhibit 20/4 ). Moreover, for the past seven years, the compound annual growth rate of revenues was 13.51 percent (see Exhibit 20/5 ). Dr. Woods believed that this growth was the result of recruiting qualified physicians and matching them to emergency departments specific staffing needs. Moreover, he searched for caring and compassionate physicians who wanted to serve in specific identified rural locations, believing this would lead to higher satisfaction for both the physicians and the EDs. Additionally, ECG offered value - added services to EDs, including quality assurance and education. As Woods shepherded the company through several phases of incremental growth, he added personnel with specific expertise related to physician recruitment, credentialing, and scheduling. While no longer actively practicing as an emergency medicine physician, he remained actively involved in managing the company as president and CEO. In the first couple of years, Woods had trusted advisors an attorney and a CPA who provided counsel. However, there never was a board of directors Dr. Woods was the board. With experience and steady progress on both20.indd 823 11/11/08 12:34:12 PM

824 CASE 20: EMERGENCY CARE GROUP Exhibit 20/4: Growth of Staffed Hours in Emergency Departments by ECG 350,000 300,000 250,000 Hours Worked Hours 200,000 150,000 100,000 50,000 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 Year Source: ECG company records. Exhibit 20/5: Emergency Care Group Key Financial Indicators FY 1997 FY 1998 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 Gross Revenue 8,263,329 9,281,610 10,125,994 9,941,436 10,276,867 13,653,595 20,068,550 Professional Expenses Doctor Pay 5,401,100 6,160,293 6,646,360 6,401,270 6,403,454 9,812,653 15,178,876 Physician 246,518 344,767 556,812 926,823 729,139 955,608 1,013,842 Incentives a Malpractice 71,007 75,163 81,279 90,440 190,945 235,580 652,668 Insurance Gross Margin 2,544,704 2,701,387 2,841,543 2,522,903 2,953,329 2,649,754 3,223,164 Operating 1,390,059 1,669,393 1,726,782 1,521,260 1,646,193 1,838,687 2,080,023 Expense b Net Operating Income 1,154,645 1,031,994 1,114,761 1,001,643 1,017,136 811,067 1,143,141 a Oftentimes a financial inducement (a "bonus"), a monetary reward above and beyond the published rate of pay, was necessary to persuade a physician to work a shift. b Does not include taxes and interrest expense. Source: ECG financial records. both20.indd 824 11/11/08 12:34:12 PM

EMERGENCY CARE GROUP 825 Exhibit 20/6: ECG Organizational Chart John Woods, DO, FACEP, FCLM President/CEO Chief Financial Officer Vice-President of Operations Chief Medical Officer Assistant Vice-President Comptroller Assistant Vice-President Regional Operations Steve Morgan Assistant Vice-President Sales and Marketing Performance Improvement Coordinator Communications Coordinator Regional Coordinator East MN, WI Region Regional Coordinator West MN, West IA, NE Region Regional Coordinator Illinois Region Regional Coordinator East IA, MO Region completing his law degree, Dr. Woods believed he did not need a board of directors. As the company grew, he did hire additional staff to help manage the company, although he took care to maintain a lean administrative staff with distributed authority and responsibility (see organizational chart in Exhibit 20/6 ). Recently, ECG had completed a regionalized coordination of services. Four cross - functional regional teams, composed of a recruiter, credentialer (responsible for ensuring that physicians had the necessary education, licensure, and continuing education), and a scheduler, assumed primary responsibility for staffing the contracting emergency departments within a specific region. The company organized the regions to balance both the number of hours (the team obligations ranged from 5,600 to 7,200 hours per month) and the relative difficulty of staffing those hours. Although ECG still had its headquarters in Minnesota, the leadership team had begun to discuss positioning administrative personnel at regional offices. Steve Morgan By 2000, ECG had good market penetration into Minnesota and Iowa, but it served only a handful of facilities in other contiguous states. Consequently, Dr. Woods hired Steve Morgan to serve as an assistant vice president with responsibility both20.indd 825 11/11/08 12:34:14 PM

826 CASE 20: EMERGENCY CARE GROUP for sales and marketing. Armed with a Masters degree in Journalism and Mass Communication and three years experience as a hospital - based public relations professional, Steve had never formally sold a product or service. However, he quickly grew into the role. He supervised the Communication Team, a shared resource of receptionists, office managers, and transcription and executive assistant professionals. Steve was the only dedicated sales professional, although one of the vice presidents assisted him in some of the activities. Steve s task was to increase sales in the states ECG served and expand into new Midwest states where possible. In his three years with the company, ECG entered four states. Steve targeted facilities where large national staffing companies were vulnerable. Often overextended and impersonal in their service to the small, rural hospitals, these firms barely met the clients needs. Steve recognized this, realizing that the hospital administrators thought this was their lot in life the best they could expect was shoddy and indifferent service because of their size and location. ECG based its service on a different model. When the prospective clients learned of reliable staffing, value - added services at no additional costs, and a consistent on - site presence of a senior staff member who listened and responded to their concerns, a great many switched to ECG. Be careful what you wish for... went the saying Steve was pleased that his hard work paid off with so many new contracts but was dismayed at the company s lack of capacity to serve those new clients effectively. In particular, simultaneous entry in 2002 into five new full - time contracts in a new state (Wisconsin) pushed the firm to its limits. Moreover, the increase in revenues created by the new contracts had been offset by increased costs, decreasing profit margins. One of the reasons for higher costs had been sharply rising professional liability insurance (PLI) costs for all physicians. In part, higher costs resulted from a major PLI provider s exit, creating increased demand for PLI coverage from fewer suppliers. But ECG s PLI costs increased even more when ECG entered states with less favorable loss history (higher risk). Increasing physician salaries also increased costs. Beginning in 2002, ECG found itself having to pay physicians more to work on a contract basis, in line with a general industry trend. ECG s Target Market Dr. Woods and Steve had multiple brainstorming sessions about how to approach growth in ECG s target market, which consisted of rural and non -urban hospitals with less than 100 beds. Within its targeted geographic region, ECG s market potential included about 450 hospitals. Of these, ECG already had contracts with 50 facilities, as shown in Exhibit 20/7. ECG had never lost a contract. Steve estimated that another 11 percent of the target market contracted with competitors, while the remainder provided their own staffing needs either through full -time staff physicians or through direct physician contracting. Although there were no national statistics on the total numbers of people served by these hospitals, Steve knew the number of nonmetropolitan counties and the range of populations in these counties in each of the states in which ECG had contracts (Exhibit 20/8 ). both20.indd 826 11/11/08 12:34:14 PM

ECG S TARGET MARKET 827 Exhibit 20/7: Emergency Care Group Market Potential a State b Total Hospitals in ECG s Target Market ( < 100 beds) c Hospitals with ECG Contracts (2003) Illinois 73 9 Iowa 82 18 Minnesota 82 15 Missouri 75 1 Nebraska 64 2 Wisconsin 69 5 Total 452 50 a Though ECG also has one contract in Wyoming and one in Ohio, the strategic plan did not call for active sales in either state. b States are disguised to protect ECG's competitive interests. c Source: American Hospital Association Guide, 2003 Issue. Exhibit 20/8: Nonmetropolitan County Populations for ECG s Target Market State Population in County Number of Counties Illinois 25,000 79,981 8 10,000 24,999 17 5,000 9,999 7 1,000 4,999 28 444 999 14 Iowa 25,000 79,981 14 10,000 24,999 56 5,000 9,999 17 1,000 4,999 1 Minnesota 25,000 79,981 23 10,000 24,999 30 5,000 9,999 13 1,000 4,999 3 Missouri 25,000 79,981 22 10,000 24,999 45 5,000 9,999 21 1,000 4,999 5 Nebraska 25,000 79,981 8 10,000 24,999 13 5,000 9,999 32 1,000 4,999 23 444 999 12 Wisconsin 25,000 79,981 10 10,000 24,999 11 5,000 9,999 10 1,000 4,999 17 444 999 4 Source: US Census Bureau, 2000. both20.indd 827 11/11/08 12:34:15 PM

828 CASE 20: EMERGENCY CARE GROUP ECG had investigated acquisition of one or more rival firms. However, the book of business that comprised the principal asset of a staffing company, while based on three - year contracts, was also tied to strong relationships with the existing management and weakened by the 90 - day out clause in each contract. These factors lessened ECG s desire to acquire competitive firms. However, the industry fragmentation offered ECG a unique opportunity to grow by acquiring additional contractual relationships on the basis of its distinctive competencies: individualized attention to the specific needs of the facilities in the market niche and reducing operating costs by efficiently recruiting, credentialing, and staffing physicians. Competition Steve believed that two regional competitors posed the greatest threat to ECG. Emergency Practice Associates (EPA), based in Waterloo, Iowa, was ECG s principal competition in Iowa. EPA offered ED staffing and a wide selection of documentation, coding, and billing services, casting itself as an emergency department management company. Although ECG had more total hospitals in Iowa, EPA had affiliations with several larger hospitals and, therefore, had more total emergency department hours than ECG. However, EPA had far fewer contracts in the adjoining states, with only one hospital in Illinois, one in Missouri, two in South Dakota, and four in Minnesota. Founded and managed by a charismatic and entrepreneurial emergency medicine physician in 1974, privately held EPA had targeted slightly larger facilities than ECG s typical partner hospitals and had engendered considerable loyalty. Yet, over the last five years, EPA s growth had stagnated. ECG had supplanted EPA in three hospitals and had never lost a single facility to EPA. The second regional competitor, HealthLine Management, Inc. (HMI), established in 1985, was also a privately held company that provided services similar to EPA. In addition, HMI provided continuing education for physicians. However, the hospitals associated with HMI in ECG s market only received ED staffing services. Headquartered in St. Louis, HMI focused on small rural hospitals, serving 11 hospitals in eastern Missouri and southern Illinois. The company had been a finalist with ECG in five competitive bids in southern Illinois, but in each instance ECG prevailed. ECG had recently displaced HMI at another southern Illinois hospital, a facility where it had served for over eight years. In a 1999 news story, HMI reported 20 percent annual growth, generating $15.4 million in annual revenue. Steve was not sure if HMI was still experiencing this kind of growth, but he was aware the company was considering an initial public offering. Steve was also concerned about four major nationally based competitors, though to a lesser extent. These competitors tended to focus on larger and urban (and, therefore, more profitable) facilities, but had the ability to compete in rural markets if they chose to do so. Unlike the regional competitors, the national competitors had well - developed regional structures that created operational efficiencies with respect to sales, client service, and support. both20.indd 828 11/11/08 12:34:15 PM

COMPETITION 829 EmCare was the largest physician practice management company in the US, with 306 contract sites in 37 states, employing more than 4,500 emergency medicine physicians. Based in Florida, but with regional sales specialists, the publicly traded company had an average facility tenure of nine years, a key measure of service satisfaction. EmCare had only four contract facilities in Iowa, but it was a strong competitor in Missouri and Wisconsin. EmCare provided staffing and reimbursement services; and a documentation template was available as an unbundled service offering. Its rural clients, however, rarely participated in more than physician staffing services. From SEC filings, Steve could see that EmCare had approximately 4.9 million patient visits, generating net revenue of about $505.2 million. EmCare s reported retention rate for new contracts was 74 percent in 2001. Team Health was a privately held company founded by emergency physicians in Knoxville, Tennessee, in 1979. Team Health had acquired numerous regional and national physician groups, and was second to EmCare as a provider of emergency department physicians. In early 2004, Team Health had 3,109 contract physicians serving 233 large metropolitan hospitals in 46 states. Team Health had very little market penetration in the Midwest, but it had the most effective regionalized operational structure of all the national competitors and was growing. It was also on the forefront with respect to reimbursement procedures and services, although it did not provide documentation services. PhyAmerica, based in Durham, North Carolina, was a publicly traded company dating back to 1977. In late 2002, PhyAmerica filed for Chapter 11 bankruptcy protection, the outcome of which was still uncertain. Nonetheless, PhyAmerica employed about 3,000 physicians, served over 215 client hospitals in 28 states, and had reported revenues of about $400 million in 2001. PhyAmerica served both rural and urban facilities and had modest penetration in the Midwest, although it had experienced zero growth in ECG s target market for the last five years. Even though ECG had replaced PhyAmerica in one location, Steve still considered the competitor a potential threat. PhyAmerica offered an extensive portfolio of client resources similar to ECG. The National Emergency Services (NES) Healthcare Group dated back to 1975 and consisted of 64 separate and distinct companies, which were privately held and physician - owned. NES had centralized expertise in California, but used a regional management system. At the end of 2002, NES reported a nationwide presence at over 140 hospitals and relationships with more than 1,800 physicians. NES served both large and small hospitals and claimed to be growing an August 2003 newsletter reported that 18 new clients had been added in the past 10 months. The company further stated that its customer satisfaction ratings were better than ever, at 93 percent, employee retention exceeded the industry average, and account attrition was less than 3.8 percent of total revenue. NES offered billing services through one of its companies and was developing a documentation system. The company was also a strong proponent of continuous quality improvement through quality assurance and risk management practices. Steve was aware that NES had contracts with some hospitals in ECG s target area, although none in Iowa. In recent years, NES clients whom Steve had contacted reported feeling both20.indd 829 11/11/08 12:34:16 PM

830 CASE 20: EMERGENCY CARE GROUP abandoned, ill - served, and under appreciated by NES. Taking advantage of this vulnerability had helped ECG to obtain contracts in Minnesota. Documentation and Reimbursement Competitors While ECG s primary competitors were other emergency department staffing companies, Dr. Woods and Steve also recognized that independent providers of documentation, coding, and billing services posed a secondary, if minor, competitive threat. Most staffing companies contracted with independent providers of these services rather than creating new products. But EDs could choose to directly contract with independent providers such as Intutec (ChartER), epowerdoc, Xpress Technologies, or T - System for documentation templates. Similarly, some staffing companies, like Team Health, contracted with reimbursement companies to provide coding and billing services to its clients. There were several national providers of coding and billing services that offered services directly to EDs. However, Dr. Woods knew that most rural EDs did not directly contract with independent providers for these services rather, they obtained the services through ED staffing companies. ECG s Spectrum of Services Steve believed the key to ECG s success was that it consistently provided reliable services at a higher degree of quality and personal touch than did its competitors. C USTOMIZED CONTRACTS ECG s core service was ED physician staffing, and hospitals customized their contractual relationship with ECG to fit their particular needs. The smallest hospitals, where local physicians provided coverage Monday through Friday, tended to contract for weekend physician services so that the local physicians would not have that additional burden. Facilities that were larger or had higher ED demand were more likely to contract for both weekend and weeknight physician coverage. It was typical for the facilities utilizing this model to request coverage for holidays as well. The largest facilities in ECG s niche, still small by national standards, required staffing on a 24 - hour, 7 days a week basis. A large percentage of ECG s recent growth was in this end of the market. Regardless of how much physician coverage a client requested, ECG did all the recruiting, credentialing, and staffing, ensuring that the right physician was at the right facility at the right time, regardless of extenuating circumstances. Each client signed a three - year contract, and each contract included a self -renewal ( evergreen ) provision at the end of the term. The service management fee paid by the ED covered all these services and was competitive with ECG s competitors. both20.indd 830 11/11/08 12:34:16 PM

ECG S SPECTRUM OF SERVICES 831 In ECG s market niche, some of the hospitals employed primary care (Family Practice, Internal Medicine, Pediatrics) and specialty physicians. Having built contacts and relationships with affiliated hospitals administrative and medical staffs, ECG was well positioned to offer this additional outsourced staffing solution, but had not pursued it. V ALUE ADDED SERVICES ECG offered several value added services in conjunction with physician staffing. It did not bill for these services separately, considering them instead to be covered by the service management contract fees. ECG incorporated a Continuous Quality Improvement (CQI) Program in every contract. ECG s Performance Improvement department provided peer review, physician mentoring, and local medical director education and support. Experience showed that a proactive quality improvement plan improved patient satisfaction for all of ECG s affiliated emergency department facilities. Another value added service was free on - site education and training related to emergency medicine. Experienced independent contractor educators and coordinators, as well as selected members of the management team, delivered comprehensive educational support for emergency and primary care physicians, as well as hospital ancillary personnel. ECG was the only private Midwest physician organization to have the distinction of being an accredited provider of Continuing Medical Education (CME). ECG staff assisted hospital partners in the areas of program development and strategic planning to foster optimal utilization of the hospital s emergency department, which could result in cost savings or even additional revenues for the EDs. For example, Steve frequently consulted with EDs on promotional materials specific to the change in emergency department physician service. Many of the EDs that contracted with ECG had negative reputations in their communities, so these efforts helped the emergency departments to communicate that, in essence, It s safe to come back to the ER. Distinct among its competitors, ECG was committed to direct participation in emergency departments committee and medical staff meetings. Rather than conducting business over the telephone, Dr. Woods preferred frequent visits to customer locations, often taking other team members with him. Together, the value added services enhanced the working relationship between affiliated facilities and ECG. In fact, although EDs typically paid more for ECG s services than they would without such a contract, the benefits ECG provided more than made up for the extra cost. D OCUMENTATION AND REIMBURSEMENT ENHANCEMENT ECG s clients faced the challenge of getting paid for their services by the government and private insurance agencies. Medicare and Medicaid insured a disproportionately large segment of the patient population in this market and the payment systems were complex and seemingly biased against the smaller facilities. both20.indd 831 11/11/08 12:34:16 PM

832 CASE 20: EMERGENCY CARE GROUP Research by documentation service providers showed that documentation systems in EDs increased revenues anywhere from 30 to 100 percent and decreased dictation transcription costs. Some EDs reported savings in dictation costs of up to $25,000 per month. ECG initially addressed this issue by providing support and counseling to its contracted facilities with respect to documentation, coding, and billing. ECG staff reviewed partner facilities documentation and coding processes and then created an optimal reimbursement and risk management system for them. These services were of substantial practical and financial value. Dr. Woods, however, believed that ECG needed to do more. Therefore, ECG evaluated documentation products on the market and, in 2002, settled on a system from a Colorado - based company. The ECGdoc product was a template documentation system to record the emergency department patient encounter. Based on the government s guidelines for compliant physician documentation, the system encouraged continuous quality improvement and patient care, proper coding, and enhanced reimbursement. The physician and nurse charting tools connected with DischargeCare, a computer - based set of discharge instructions. This complete system of integrated elements dramatically enhanced quality of care, customer (patient) satisfaction, and the peer -review process. Although the documentation package was a value - added service, ECG realized it was possible to sell these documentation services, treating them as a profit center. However, it had not yet done this. The plan was to price on a per patient basis. The existing project infrastructure could absorb the additional work inherent in accepting other facilities medical records. The current costs for these services, which ECG was absorbing as part of its management services, were as follows: Physician documentation: Nursing documentation: Discharge instructions: $0.50/patient $0.36/patient $0.16/patient Steve anticipated a 75 percent margin on the documentation package if sold separately. Dr. Woods planned to introduce a reimbursement system as part of the value - added services package in 2004. Potentially, ECG could sell this package separately from staffing services. Steve had researched other firms, finding that they charged anywhere from 4 to 8 percent of collected revenues for reimbursement services. Steve calculated that the average cost of a rural emergency department visit in 2000 was $260, based on data in a report published by the South Carolina Rural Health Research Center. He further assumed that this cost increased at the rate of health care cost inflation, which had averaged 10 percent per year since 2000. However, Steve knew that emergency departments did not collect 100 percent of their invoices. A national study published in 2003 by the US Agency for Healthcare Research and Quality reported that the rate of payment for emergency department charges had declined from 60.3 to 53 percent between 1996 and 1998. Consequently, Steve estimated that emergency departments probably collected about 50 percent of their billed services. Steve further estimated a 60 percent margin on reimbursement services. both20.indd 832 11/11/08 12:34:17 PM

SALES AND MARKETING 833 Sales and Marketing Sometimes ECG became aware of a potential client when an ED formally issued a competitive RFP for physician staffing or when a client referred an ED to ECG. Steve also searched competitors websites, specifically looking at their postings for practice opportunities at contracted facilities. When a site listed a large number of opportunities for one facility, Steve knew the competitor was having difficulty meeting its staffing obligation. A telephone call to the hospital administrator of such facilities often yielded an opportunity for a sales presentation. More typically, though, Steve engaged in a variety of promotional efforts to raise awareness of ECG and to identify potential clients. The primary objective of all of Steve s efforts was to gain access to a potential ED s decision makers via a personal visit. One promotional tool Steve used was to attend the annual conventions hosted by state hospital organizations and regional hospital groups in the Midwest (about eight conventions per year). ECG was an exhibitor at these conventions, giving Steve and other ECG administrators an opportunity to meet and visit with many different potential clients. Because of ECG s substantial market penetration in Iowa, it hosted a popular client appreciation event and reception at that state convention. Other states conventions, notably Nebraska, provided very few leads. Steve, in fact, questioned the necessity of attending every available conference. Steve also promoted ECG s staffing services through advertisements in hospital and physician trade journals, hospital association publications, and direct mail. Steve completely revamped the firm s direct mail piece and sent it to every hospital in ECG s market niche, which he identified with the American Hospital Association s annually updated directory, four times a year. The company also maintained a website, which featured a gateway for prospective clients, HTML versions of the new brochure content, and a form - based interactive element. Steve spent about 25 percent of his time on trade shows and promotional efforts. About one -third of ECG s leads came from these efforts; another third came from the RFP process, referrals, or through spotting vulnerable competitors with clients in ECG s target market; and the remainder came from cold calls. When Steve was on the road making scheduled sales calls, he followed the bold blue H hospital signs whenever possible and made cold calls; more often than not, he succeeded in scheduling a meeting with hospital administrators. At least three days a week, Steve traveled, averaging three initial sales calls per week and another three follow - up sales calls. Because Steve covered six states, he planned sales calls in close proximity to each other, but he spent half his time driving. Steve described initial sales calls: My goal is to be able to make a personal contact with someone in a position to make a decision about contracting with us. Sometimes the hospital administrator or CEO takes a direct interest in the emergency department staffing relationship, but sometimes I visit initially with assistant administrators, directors of nursing, both20.indd 833 11/11/08 12:34:17 PM

834 CASE 20: EMERGENCY CARE GROUP or emergency department managers. At these meetings, I inquire about the nature of the hospital s emergency department staffing environment Do they have a provider? With what are they satisfied or dissatisfied? Typically, they will tell me about problems with scheduling physicians or credentialing problems. If they have another provider, sometimes there is a failure to staff a physician for a contracted shift that s a huge problem. Sometimes they are concerned about the quality of physicians that are staffing their EDs. Any mention of these types of situations suggests to me that they re open to exploring a better alternative, and I have an opportunity to introduce ECG as a partner. If the ED has another provider, I try to determine the window of opportunity for replacing that provider. Hospitals can discontinue provider contracts by giving notice, typically 90 days for cause or they can choose not to renew the arrangement when the contract expires. Whether they have a provider or not, the EDs always recite the same list of needs with respect to staffing. They want reliable coverage with competent physicians, a consistent group of physicians providing the coverage, a preference for board - certified emergency physicians, educational programs for physicians, and a provider that will be responsive to their needs. And what s driving all of these needs is a desire for excellent patient satisfaction scores. Sometimes several visits over several months were necessary to develop a relationship with the ED and have the ED recognize that it could benefit from either hiring a staffing provider or changing providers. Once Steve determined that the client was interested in serious discussions with ECG, Dr. Woods developed a proposal for staffing services. Steve provided him with the information he gleaned about the facility regarding the current provider s fee (if there was one) and the expected wages for physicians in the area. The operations team provided Dr. Woods with an estimate of the costs of staffing the facility. Once the proposal was completed and ready for delivery, it was common practice for Steve and the ECG administrative team to arrange a formal presentation for key client stakeholders. According to Steve: Depending on the facility, administrative staff, members of the local staff, and board members attend the formal presentation. The presentations usually take several hours because we want to allow ample time for the ED to get all of their questions answered. We, of course, emphasize our value added services and provide attestations of our quality services from other EDs. When a proposal for services is accepted, we send the facility a draft contract detailing the proposed relationship. I then negotiate with key administrative personnel to finalize the contract. Much of this work is handled by telephone. From start to finish, the entire process can take months or even years. On average, it takes about four sales calls and four telephone contacts during the negotiation process with the potential client before a contract is finalized. Steve thought the process for promoting and selling documentation and reimbursement services would be similar to how ECG sold staffing services. He believed both20.indd 834 11/11/08 12:34:17 PM

SALES AND MARKETING 835 that synergies existed with staffing service s promotion tools, such as the website and hospital conventions and it would take very little additional effort to promote the new products through these avenues. Moreover, it would require no additional effort for Steve to promote the new products during the cold calls he had already made. However, new direct mail pieces detailing the documentation and reimbursement services needed to be developed before direct mail could be utilized as a promotion tool. Steve planned to send direct mail pieces to all EDs in ECG s target market and then follow - up with sales calls, either by telephone or through cold calls. Steve also thought it might be advantageous to have a separate website to promote the new products, but he doubted that trade publication advertising would be fruitful. From Steve s perspective, The major sales points will be that documentation through a template system facilitates immediate and accurate documentation, which makes it easier to identify the right diagnostic code. That will improve reimbursement. Secondly, using ED - specific coding will also maximize reimbursement most EDs have only generalist coders without specific ED knowledge. Once the hospital recognized its need, Steve thought the proposal process would be very similar to what was done for staffing services, including the need for ongoing interactions and responsiveness. Overall, Steve believed that selling the documentation and reimbursement services would follow a pattern similar to selling staffing services, both in terms of the number of sales calls and length of time. However, given the additional workload created by selling the documentation and reimbursement products, Steve believed that ECG had to hire at least one additional salesperson. Steve knew there were competitive documentation and reimbursement products, but his research told him that most rural EDs did not yet contract for these services. Given ECG s positive reputation, Steve thought ECG would have a competitive advantage with the other products, too. Steve also wondered whether or not EDs interested in the documentation and reimbursement services would opt for one or the other, but not both. This had implications for the positioning of those products. Steve thought: We could sell the products separately. Documentation without reimbursement poses no particular problems for either the ED or us. But if an ED just wants reimbursement services, the cost might be dictated by the type of documentation the ED provides, because documentation is a big influence on which diagnostic codes feed into the reimbursement system. My guess is that EDs will automatically choose to purchase both packages they understand how interconnected the services are. But if we run into a problem with this, we might want to consider some sort of better deal for EDs that purchase both documentation and reimbursement. Steve s marketing budget was approximately 8 10 percent of ECG s operating expenses, which was about $15,600 per month on average. About 20 percent both20.indd 835 11/11/08 12:34:18 PM