Enhancing the Physician Enterprise in Maryland 11 17-08
Enhancing the Physician
Enterprise in Maryland:
An Analysis of the Practice Environment and
Economic Impacts of Maryland’s Physicians
Sage Growth Partners, LLC
The Maryland State Medical Society
Table of Contents
List of Tables and Figures ................................
I. Executive Summary................................
The Economic Power of Physicians .........................................................4
Building the Great Physician Enterprise ...................................................4
II. Introduction ................................
III. The Physician Practice Climate in Maryland ....................................................6
Maryland’s Medical Insurance Liability Environment .............................9
Maryland’s Cost of Living ......................................................................10
Tax Impact ................................
After Tax Income ................................
The Health Insurance Market in Maryland .............................................15 1
VI. Physicians as Economic Drivers ......................................................................18
Why is Healthcare Such a Key Driver of Our Economy? ......................20
Physicians as Economic Engines ............................................................20
V. Recommendations and Potential Solutions .......................................................22
What We Agree On ................................
Desired Outcome ................................
Recommendations to Form and Enhance Physician Enterprises ............25 2
Supply Recommendations ......................................................................25 2
Infrastructure Recommendations ............................................................26 2
Enhancing the Physician Enterprise in Maryland 1
List of Tables and Figures
Exhibit I-1. Economic Impacts ................................
Exhibit III-1. Non-Physician Labor Costs:
Hourly Mean Wage, Physician’s Office ..................................................................7
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 ..................................................8
Exhibit III-5. Cost of Living ................................
Exhibit III-6. State Business Climate Tax Index ..................................................11
Exhibit III-7. Maryland Business Formations ......................................................12
Exhibit III-8. Major State and Local Tax Burden for a
Family of Three: $150,000 Income Level .............................................................12
Exhibit III-9. Graduating Medical Student Debt ..................................................13
Exhibit III-10. Educational Debt Service as a Percentage
Of After Tax Income: 25 Year Repayment Program .............................................14
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, 204-2006 ..................................15
Exhibit IV-2. Risk-Based Capital Analysis ..........................................................16
Exhibit IV-3. Underwriting Performance in Maryland
Exhibit V-1. Maryland Nonfarm Employment by Industry
Sector Groups, July 2007 v. July 2008 Absolute Change .....................................19
Exhibit V-2. Select Industries as a Portion of Total
Maryland Employment, Annual 2007, NSA NSA..........................................................20
Exhibit V-3. Economic Impacts................................
Exhibit V-4. Establishment Data ..........................................................................21
Enhancing the Physician Enterprise in Maryland 2
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 knows, the reputation of a
jurisdiction’s health markets affects its ability to attract business leaders to one area. Physicians
are the lynchpin to the state’s healthcare and scientific prominence. However, 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
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 non-physician
labor 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 most expensive state in
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
In addition to higher costs, Maryland is an increasingly risky place to practice medicine. While
malpractice premiums have somewhat stabilized, they are stabilizing at prices that are at an all-
time high. In absence of more substantial tort reform, Maryland’s malpractice reputation will
continue to influence physicians 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
selecting a geographic area.
Finally, and not to be understated, the health insurance market in Maryland is highly concentrate
aggregating the power of two of the most s significant brands in healthcare: United Healthcare and
BlueCross/BlueShield (Carefirst). As these two payers cover over 80 percent of the commercial
health insurance market, they 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
represents a “virtual” single-payer – a monolith that pays, on aggregate, less than 100 percent of
what Medicare 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
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?
Enhancing the Physician Enterprise in Maryland 3
The Economic Power of Physicians
According to the Centers for Medicare and Medicaid Services (CMS), spending on physicians in
America accounts 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
percentage of total health expenditures: they direct admissions to hospitals and post-acute
facilities; control the length of stay while in those facilities; prescribe prescription drugs, medical
devices, and other medical equipment 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.
One approach to capture the scope of the economic activity of physicians in Maryland is to
perform 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,
described in terms of jobs created aggregate compensation, and aggregate revenue. The second
component of the model is the indire 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
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 service vendors, gas stations,
etc that are positively influenced by the medical industrial complex. Based on this economic
analysis for physicians practicing in Maryland, physician enterprises are contributing over $8
billion in economic 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
generating over 71,000 jobs, representing some $4 billion in employee compensation.
Exhibit I-1: Economic Impacts
Direct (1,2) Indirect (2) Induced (2) Total
Jobs (3) 41,694 9,287 20,556 71,537
Compensation (millions) $2,754 $455 $830 $4,040
Revenue (millions) $4,576 $1,170 $2,476 $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
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
Enhancing the Physician Enterprise in Maryland 4
ability to recruit the best and brightest physicians is central to maintaining its status as a
progressive bellwether state.
Therefore, it seems appropriate to direct public policy to physician entrepreneurs in the same way
the state views bio-technology and life science entrepreneurs. Namely, the state ought to focus on
attracting the best physicians available, and on enhancing infrastructure supports for physician
entrepreneurs 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
I. To explore loan repayment assistance programs,
II. To develop a sustainable practice enhancement financing program, and
III. To achieve substantive tort reform.
These programs are tiered to provide support and relief to practice in the varied stages of their
practice life; a targeted loan repayment program will attract physicians to Maryland; the practic
enhancement program will target rising entrepreneurial practices that want to inv in their
businesses and communities, and build the needed chronic care model of the future; tort reform
will reduce supply dislocations in key specialties and allow physicians to reinvest premium saving
in their businesses.
Relative to enhancing physicians’ access to infrastructure supports, we believe the state ought to
focus on two recommendations:
IV. Develop a physician
physician-enterprise incubator, and
V. Develop a physician qual 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
ones targeted at the physician-enterprise. This should be done with a recognition that each
physician in practice in America has proven to be a bona fide jobs creator. Therefore, this kind of
investment in physicians will actually drive economic development in Maryland. Also, we know
that larger 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
somewhat limited, despite many adoption incentives we believe the state ought to create a
Quality 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 start up for developing a medical home to
be between $25,000 and $100,000 per FTE physician; start-up for a small group of 3 physicians
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 of purchasing information
technology. This creates a major barrier of care coordination and health status improvement
which ultimately costs all Marylanders.
Enhancing the Physician Enterprise in Maryland 5
Report Objective and Brief Background
MedChi, The Maryland State Medical Society engaged Sage Growth Partners, LLC (SGP) to
study the business and economic environment for physicians practicing medicine in Maryland and
to identify the significant economic impacts of Maryland’s practicing physicians. This analysis is
in response to the work of the Governor of Maryland’s Task Force on Physician Access and
Reimbursement. 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 component of
the system. The study attempts to objectively evaluate the impacts of the macro economic
environment on physicians and physician entities. Additionally, the analysis will ascertain how
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 analyzes medical
practice trends in Maryland and 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
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 input output econometric model to calculate job, wage,
output and 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
attractive and hospitable place for physician
physician-entrepreneurs to locate.
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 efforts.
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 III-1
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 non non-physician labor is anywhere from 6 percent
to 17.5 percent higher than Delaware and Pennsylvania respectively.
Enhancing the Physician Enterprise in Maryland 6
Exhibit III-1: Non-Physician Labor Costs: Hourly Mean Wage, Physician’s Office
0 5 10 15 20 25
Source: Bureau of Labor Statistics: May, 2007
Exhibit III-2 provides a snapshot of select positions and their hourly rate for non-physician labor.
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
Revenue 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 enterprises in Maryland compared to other states.
Exhibit III-2: Selected Positions
Medical Medical Records
RN LPN Receptionist
Assistant & HIT
National $30.04 $18.72 $13.59 $11.82 $15.12
Maryland $33.89 $22.48 $14.27 $12.41 $17.91
Delaware $31.51 $21.69 $14.84 $12.17 $14.85
Virginia $28.54 $17.60 $13.42 $11.87 $15.74
Pennsylvania $28.50 $18.99 $12.92 $11.40 $14.93
Source: Bureau of Labor Statistics: May, 2007
Medical office space is another significant business expense for physician practices. Similar to
non-physician labor costs, medical office space in Maryland is more costly than in other states.
Exhibit III-3 depicts the three year average for Class A and Class B medical space in Maryland,
Enhancing the Physician Enterprise in Maryland 7
Virginia, and Pennsylvania.1 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
Exhibit III-3: Class A and Class B Medical Space: Average Price Per Square Foot 2005-2008
Maryland Virginia Pennsylvania
Price per Ft2
Class A Class B
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 and Annual Rental Expense
Single Specialty, Price Per Square Percentage Discount
Primary Care Foot: Class A From Maryland
Maryland $28.54 $116,000 N/A
Pennsylvania $23.92 $97,000 19.5
Virginia $23.14 94,000 23.4
Note: Median square footage of a single specialty, primary care office is 4,056 per 2007 MGMA data
Class A space defined: excellent location and access, attract high quality tenants, and is managed professionally.
Usually steel framed and tall. Class B space defined: good (versus excellent) locations, management, and
construction. High tenant standards and l
. little functional deterioration.
Cost Survey for Single-Specialty Practices: 2007 Report based on 2006 Data. Medical Group Management
Enhancing the Physician Enterprise in Maryland 8
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 an non-
and -physician labor.
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
2001-2004, Maryland physicians’ medical
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,
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 2007, the number of
suits filed and then closed, increased by 229 percent . Even if the cases fail to materialize, the
costs to defend against dropped or dismissed cases average $18,887 . The Maryland Insurance
Administration notes in their 2008 professional liability report that “the combination of increases
in closed claims and the number of suits filed ov 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.
While the purpose of this analysis is not to debate the merits of non economic caps or other
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 generate a comparable supply
response to the response generated by the passage of a cap on non economic damages.6
Studies show physician supply would increase, ranging from 2 6 percent, with a host of
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.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.
American Medical Association.
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), 2618-2625
Enhancing the Physician Enterprise in Maryland 9
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. Nationally, states retain 39 percent of the residents training
at schools in state, but Maryland only retained 26 percent10. While this is not solely
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 7th. At the heart of the high
cost of living is housing. Other factors contributing to the high cost of living include utilities,
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 system, education system, arts and recreation etc. While
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 business in
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
Pennsylvania. As one can see, Maryland’s regional
competition is ranked lower in cost of living.
Exhibit III-5: Cost of Living
Rank State Rank State
1 Hawaii 8 Alaska
2 California 9 Massachusetts
3 Washington DC 10 Rhode Island
4 Connecticut 19 Delaware
5 New York 21 Virginia
6 New Jersey 22 Pennsylvania
Source: ACCRA Cost of Living Index
Effects of a Professional Liability Crisis on Residents’ Practice Decisions. American College of Obstetricians and
Gynecologists. Mello and Kelly, 2005.
Key Physician Data by State. Association of American Medical Colleges, Center for Workforce Studies. 2006.
Enhancing the Physician Enterprise in Maryland 10
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, property tax, and
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 differing views as to the impact that taxes have on
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. Exhibit III-6 highlights the results of the 2008 index for
Maryland and its regional neighbors: Delaware, Virginia, and Pennsylvania. This index ranks
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 Corporate Tax Individual Income Tax
Delaware 9 17 32
Virginia 14 4 21
Maryland 24 7 37
Pennsylvania 27 42 11
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 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
entities), thus they will feel the impact of the higher individual income tax rate. As physicians
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 compete with their bottom line.
Enhancing the Physician Enterprise in Maryland 11
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 highest state and
local 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 assesses the tax rates
and tax burdens of the District and its surroundin 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
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 Fairfax Arlington
George’s DC Alexandria
County County County
$16,551 $16,455 $15,027 $13,317 $13,302 $13,117
Rank 1 2 3 4 5 6
Source: Tax Rates and Tax Burdens, Washington DC Metropolitan Area. Issued November 2007 by the Government
of the District of Columbia. Note: Tax burden includes income tax, real estate tax, sales and use Tax, and
Enhancing the Physician Enterprise in Maryland 12
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 student debt bills upon graduation. The Association of
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 III-9 shows the aggressive increases in tuition, fees, and debt.
Exhibit III-9: Graduating Medical Student Debt
Public: Annual Private: Annual
Year Total Debt Total Debt
Tuition and Fees Tuition and Fees
2001 $12,411 $86,000 $31,296 $120,000
2002 $13,873 $92,000 $32,649 $127,000
2003 $16,332 $100,000 $34,247 $135,000
2004 $19,043 $105,000 $37,269 $140,000
2005 $23,370 $115,000 $39,024 $150,000
2006 $20,978 $120,000 $39,413 $160,000
Annual Rate 11.1% 6.9% 4.7% 5.9%
Source: Association of American Medical Colleges
As a result of the large sums of medical debt, physicians must maximize their after tax income to
reduce 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 8-10 percent for public schools and 12-14
percent for private schools for 2006. As medical education costs continue to mount, the amount of
after tax income needed to satisfy these loans is projected to dramatically increase. Take the
graduating class of 2033. For example, i physician incomes only grow 2 percent and tuition and
fees continued their current growth, education debt service will consume nearly 40 percent of after
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
point to an
average income growth closer to 3 percent).
Enhancing the Physician Enterprise in Maryland 13
Exhibit III-10: Educational Debt Service as a Percentage of After Tax Income: 25 Year
2006 2% Income 3% Income 5% Income
Graduates Growth Growth Growth
8.8%-10.3% 33.1%-38.8% 25.4%-29.8% 15.1%-
11.9%-14.0% 34.8%-40.8% 26.7%-31.4% 15.9%-
Source: Medical School Tuition and Young Physician Indebtedness. Association of American Medical Colleges.
After tax income 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
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 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
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
Delaware Pennsylvania Virginia
Source: ACCRA Cost of Living Index: Based on the first quarter of 2008
Enhancing the Physician Enterprise in Maryland 14
The Health Insurance Market in Maryland
The commercial health insurance environment in Maryland might best be described as a “virtual
single payer” 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
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 power, these payers exert a tremendous level of control over
premiums and physician payments. As a result, the market has hardened, competition has been
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 2004-2006
14% 2004 2005 2006
Aetna WellPoint UnitedHealth Cigna Humana
Source: Hoovers. 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.
Enhancing the Physician Enterprise in Maryland 15
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 IV-2, through
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
Exhibit IV-2: Risk-Based Capital Analysis
Total Authorized Capital (TAC) in Billions
TAC per authorized control level risk
1999 2000 2001 2002 2003
Percent Control Level
Capital in Billions
Source: Mathematica Policy Research, Inc.
Enhancing the Physician Enterprise in Maryland 16
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 lower costs (Exhibit IV-3). This
chart shows the plans dramatically improving underwriting results, while lowering administrative
load to 15 percent.
Exhibit IV-3: Underwriting Performance in Maryland
Average Underwriting Gain
Administrative Cost Trend
1999 2000 2001 2002 2003
Source: Mathematica Policy Research, Inc.
Enhancing the Physician Enterprise in Maryland 17
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. 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
economic cycles include:
• Healthcare is labor-intensive 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
healthcare span from entry
n 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.
• 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 physician-entity. While there
are on-going attempts to move certain labor
going labor-intensive functions off-shore (such as reading
radiology 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 hea healthcare
provider 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 wi 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
physicians 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
Enhancing the Physician Enterprise in Maryland 18
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 20th century
life 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 - nearly an 80 percent increase.”12 As people grow
older, demand for health services increases dramatically. Specifically, long
long-term care is
projected to grow very rapidly; a recent study by VHA suggests that between 2020 an and
2030, expenditures on long 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 thr through 7/08, and
as 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 July 2007 v. July 2008
Educational & Health Services 11,000
Professional & Business Services 10,000
Leisure & Hospitality 5,300
Other Services 2,000
Trade, Transportation & Utilities -300 MD Total:
Financial Activities -1,500
US Total: -174K;
Construction -2,100 -0.1%
7,000 -4,000 -1,000 2,000 5,000 8,000 11,000
Source: Bureau of Labor Statistics
Healthcare 2005, A Strategic Assessment of the Health Care Environment in the United States. 1st ed. 2005.
"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.
Enhancing the Physician Enterprise in Maryland 19
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 – with less than 60 employers in this category.
Additionally, offices of physicians represent some 1.7 percent of total employment in the State.
Exhibit V-2: Select Industries as Portion of Total Maryland Employment, Annual 2007, NSA
Financial Activities 6.0%
State Government 3.9%
Education Services 2.6%
Construction of Buildings 1.7%
Office of Physicians 1.7%
Insurance Carriers 1.4%
Legal Services 0.8%
0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0%
Percentage of Total Maryland Employment
Source: Bureau of Labor Statistics
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, admission activity to both
acute 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 available economic data. The IMPLAN approach classifies the
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, real estate firms, accounting, legal
and other professional services firms, etc. Again, in this category, we attempt to capture
aggregate firm revenue, compensation, and jobs. Finally, the third component, induced economic
Enhancing the Physician Enterprise in Maryland 20
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 either directly by physicians or by the
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 of direct effects, almost $1.2 billion of indirect effects
and almost $2.5 billion of induced effects. This data is represented in the table, below.
Exhibit V-3: Economic Impacts
Direct (1,2) Indirect (2) Induced (2) Total
Jobs (3) 41,694 9,287 20,556 71,537
Compensation (millions) $2,754 $455 $830 $4,040
Revenue (millions) $4,576 $1,170 $2,476 $8,222
Further, if one views employment within and among health care entities, as represented below,
physician offices represent some 37 percent of all health care establishments and account for
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 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%
Offices of dentists 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%
Source: Bureau of Labor Statistics
Enhancing the Physician Enterprise in Maryland 21
RECOMMENDATIONS AND P
ECOMMENDATIONS POTENTIAL SOLUTIONS
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 environment in Maryland is increasingly costly and risky, and
physicians are operating in a challenging reimbursement environment exacerbated b by
excessive payer concentration.
Physician real incomes have declined since 1995.
In Maryland, commercial fee
fee-for-service reimbursement currently rests at 98 percent of
Medicare 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.
Competition for physicians is national in scope, and Maryland is forced to be a net
importer of physicians.
Despite 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
marketplace in Maryland is crucial t the State’s long-term economic viability.
Based 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 to
Maryland, facilitates the formation of larger medical groups, and encourages physician
entrepreneurship, innovation, and 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
physician dynamic in Maryland. The Center for Studying Health Systems Change reports that
“physicians are not moving to large multispecialty practices, the organizational model that may be
Enhancing the Physician Enterprise in Maryland 22
best able to support care coordination, quality improvement and reporting activities and
investments in health information technology.14
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, and drive innovation.
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 coming onslaught of older Americans with greater co- co
morbidities and more chronic conditions. These chronic diseases are prevalent and costly, with
some 133 million people suffering from at least one in 2005 – projected to grow to 177 million by
2030. Further, patients with chronic diseases account for a disproportionate share of health risk
and expenditures – 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 physicians,
multiple medications, a higher risk of service and diagnostic test duplication, avoidable
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 – primary care physician, appropriate medical specialists,
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 impending chronic illness crush, it seems that preparing
physician groups to be fully prepared to manage complex, multiple chronic patients is a wise
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; a culture and accountability system that promotes high-
quality outcomes; treatment based on best evidence and decision support technology to ensure
integration of primary and specialty care; clinical information systems to provide timely access to
patient information; support for patient self
ort self-management; and community relationships to
mobilize resources in support of patients’ needs.15
Results from the Community Tracking Study, Number 18. August 2007
Source: Center for Studying Health System Change, Research Brief No. 6, June 2008
Enhancing the Physician Enterprise in Maryland 23
The concept of the medical home has been advanced as one that i physician-driven, multi-
e is driven, multi
disciplinary, and structured to deal with chronic care patients. While still a developing model, it is
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-up costs.
These costs include additional staffing and infrastructure build out and the purchase and
deployment of an electronic medical record, and on-going operating costs of between $90,000 and
$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. Additionally, as the formation of integrated
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. Further, small,
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, with an eye toward the advanced medical home
model of physician practice, the desired outcomes of any public policy that enhances physician
Afford practicing physicians economies of scale relative to operating expenses and capital
Afford physician groups of all size 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
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 – including telemedicine, remote
telemetry and monitoring models.
Enhancing the Physician Enterprise in Maryland 24
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 task Force recommendations that focused on three key areas,
namely improving physician supply, improving physician infrastructure including increasing the
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
dealing with reimbursement shortfalls by physicians. The focus of these recommendations
therefore, will be on the supply and in
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
reimbursement as the larger, more sophisticated groups have better success negotiating with
payers. Therefore, the recommendations include:
Maryland needs to attract the best and the brightest physicians, and will do so by developing and
implementing three critical recommendations.
I. Dramatically 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 at best.
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.
II. Develop 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. This
program should be modeled after the mezzanine level funding market and could include a small
business investment company (SBIC) component. Mezzanine investments focus on placements in
firms that are net cash-flow positive, and have positive financial outlooks, with the State of
Maryland providing a loan-guarantee. By their nature, physician practices are cash
guarantee. cash-flow and net
income positive, and physicians are among the lowest credit risks of any professional
classification. Finally, further research should explore opportunities for equity participation by
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 reform: There is fairly substantial evidence of the linkage
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
Enhancing the Physician Enterprise in Maryland 25
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
investment in mission-critical areas such
as improved patient safety, enhanced investment in clinical information technology, expanded
coverage to the uninsured, etc.
To fully understand the infrastructure recommendations, one has to understand why larger
physician entities are better positioned to deliver higher quality services and compete more
effectively in the marketplace. Larger, more integrated physician organizations are better able to
competitively respond to payer cons
consolidation, and to market to and negotiate with the variety of
health care purchasers. They can more easily invest in information technology infrastructure
which can help to enhance quality of care They are also better positioned to make strategic
acquisitions, 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 l costly to contract with–both administratively and from an
evaluative perspective, 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 makers should
develop and implement the following infrastructure recommendations.
IV. Create a Physician-Enterprise Incubator The State of Maryland is home to more
than 20 business incubators located throughout the state. These incubators are supported b the
Maryland 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 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,
these kinds of services are not available to physicians. From a policy perspective, no industry
sector seems a surer bet at creating jobs than a new hea care physician organization. Based on
national analysis, for every full-time equivalent physician in private practice in the United
States, that physician creates more than 4 full time equivalent staff positions. Therefore, a
physician practice-focused incubator would clearly generate the type of workforce growth that
policy makers may desire.
Enhancing the Physician Enterprise in Maryland 26
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 infrastru ture. For example, the model
could include a public incubator targeted for physician groups and physician led enterprises. This
incubator could be affiliated with the Maryland Department of Business and Economic
Development. There could also be incentives to promote private incubation activities. At a
minimum, the menu of support services would include professional management, marketing and
business development, operations management and information technology support.
perations management, nformation support
V. Develop a Physician Quality Innovation Fund A fund should be created to support
clinical integration among independent physicians principally through the deployment of
tion physicians, he
information technology. The information technology would support the development of medical
home 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
true population-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 hea information technology, there are
significant barriers to fuller deployment. These include c cost, complexity of systems (lack of
standards), privacy, confidentiality and security issues, legal issues, and finally, a lack of financial
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 end-goal of
true clinical interoperability.
Enhancing the Physician Enterprise in Maryland 27