EP440: What Is the Optimal Size for a Medical Practice? With David Muhlestein, PhD, JD

Well, I reached out to David Muhlestein, PhD, JD, the other day to find out what he was up to since he left Leavitt Partners, which had been acquired by HMA, Health Management Associates. Answer: He’s building his own company in stealth mode. Stay tuned.

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But during the ensuing conversation, David said something, and I immediately shanghaied him to come back on Relentless Health Value and discuss. David said the optimal size for a physician practice is 10 to 20 docs with obviously a team surrounding them.

This is big enough to get some economies of scale: 10 to 20 docs plus team can afford back-office functions and technology and other things that you can afford when you scale up. But this size is small enough that the practice can be of the local community, the practice team can be collegial and collaborative, and the practice’s actions can reflect the values and the ethics of said team who works there.

Now, it might be possible for this 10- to 20-doc practice team to be under a bigger tent within a larger organization but only insofar as they are autonomous to the level that what I just said still holds true—that their values can and do dictate their actions.

If the organization is big, structured, and acculturated in such a way that corporate policy is a steamroller, then yeah, this organization might be one that’s become probably too big to succeed—I mean, succeed when defining success as having anything to do with improving patient care, population, or community health.

David Muhlestein and I dig into this optimally-sized practice concept for the first part of the conversation that follows. Then things get even more interesting. We turn our attention from theoretical to the real world, and another problem surfaces.

The other problem we are taking up in this healthcare podcast as it relates to healthcare delivery organizations who have rolled up or consolidated and are led with centralized control is the Diversification Discount. The Diversification Discount is actually a Wall Street word, and it means that companies doing a whole bunch of different things might wind up with a lower stock price than companies who do one thing really well or only do things that have the same business model.

The Diversification Discount of non-healthcare businesses on the stock market is probably the child’s play of Diversification Discounts, though when you compare it to the diversification challenges plaguing big health systems who are fiduciarily responsible for both primary care and also specialists and not fiduciarily responsible for patients, which shouldn’t remain unsaid, so let me just say it.

But think about this. Primary care cannibalizes specialty care. We know this already. Good primary care reduces the need for specialty care. But if our healthcare system pays a lot for specialty care, which it does, thanks to the RUC (Relative Value Scale Update Committee) etc—listen to episode 437 with Brian Klepper, PhD—and if we’re thinking that the answer to funding primary care is to take money from specialty care to pay for primary care, which is how big health systems fund primary care, then we’re reducing the amount of revenue earned by specialty care with said primary care.

What we’re literally doing is asking the golden specialty care egg to make less money and also fund the making of the less money effort. How can a health system leader giveth and taketh and be a true leader for all in the face of these bare-knuckle facts?

I like how David Muhlestein puts it in the episode that follows. David said, it may very well be that some organizations really need to clarify their values that do not align with primary care or a value-based focus for treating patients.

I think that you could have a specialty-focused practice that is phenomenal because they are all about efficiency and optimizing specific procedures. That doesn’t align itself very well or very effectively with managing a population across the continuum of care. And I think, this is what David thinks, that where the board of directors or senior leadership really have to grapple and say, what are our values here?

You get the gist of this paradox of primary care, as I’m starting to call it. I could go off on a tangent right now about the decisions so many healthcare systems make to not prevent preventable heart failure readmissions right now, which is going on across the country; but I won’t. I would say, though, check the post by Stacy Mays reposted by Peter Hayes for more on that front.

But now let’s talk about a plan forward for when the delta gets big enough between what the big kahuna organization is doing and what those 10 to 20 docs would be doing if those 10 to 20 docs had the autonomy to do what they wanted to be doing and/or when things start to get really twisted and inefficient due to too much diversification discount contortioning, which, again, is going to result when the organization gets way bigger than the 10 to 20 docs and different business models start intersecting. Here are three ideas that David Muhlestein and I discuss in the show that follows.

Idea 1: You split up or organize into business units that all have aligned business models. Bifurcate primary care and population health–type, value-based stuff from specialty care.

Idea 2 (and these aren’t mutually exclusive): You restructure toward a more collaborative organizational model that is decentralized so that those 10 to 20 docs and their teams actually would have sufficient autonomy to align their actions to their values. David Muhlestein calls this phase of organizational evolution delegation, by the way.

Idea 3: Boards, especially boards of nonprofits. (Are you kidding me that we even need to say this out loud?) Boards of nonprofits could and really should take a cold hard look at exactly what their values are and how their organization’s value—in the real world, not in the marketing copy—align with those values and, if they don’t align, to reorganize. See Idea 1 or 2 accordingly.

Boards may want to consider the Diversification Discount impact if the organization includes primary care and specialty care. This probably warrants deep contemplation—like, go-up-to-a-cave-on-a-hill-level contemplation—to determine if Idea 1 or Idea 2 is in play here.

But also, and this is me talking now, here’s another non-rhetorical question to contemplate while up in the cave. Is organizational value derived mainly from market and political power? Or is organizational value a function of an ability to improve patient and community health?

How many hospital boards have engaged in any of these contemplations? I don’t know. Maybe some public hospitals actually, which turn out to be the only ones using 340B money to support community health needs in underserved patient populations. Oh, by the way, when I say public hospitals, I don’t mean just nonprofits in general, which is truly disappointing.

This conversation with David Muhlestein digs into all of this with far greater granularity, and he is much more eloquent than me.

Considering that the plurality of board members at big nonprofits tend to have backgrounds in finance, not medicine or public health, listen to the show with Suhas Gondi, MD, MBA (EP404) on hospital boards. Chris Deacon was talking recently about the “existing dumpster fire of unethical practices” and … yeah.

I like how Robert Sundelius, FACHE, put it in response to a post by Preston Alexander, MBA, and also “when we … maximize profit at the expense of public health, we are treading a fine line between business and ethics. There is only one critical outcome in healthcare: keeping people from becoming patients. There is only one essential vision: human flourishing. If we’re not pursuing these, we’re all still losing.”

Listen to the show with Scott Conard, MD (EP391) for a hard-core lesson on how definitions of a “flourishing community” may vary.

Also mentioned in this episode are Brian Klepper, PhD; Stacy Mays, MBA; Peter Hayes; Robert Pearl, MD; John Lee, MD; Kate Wolin, ScD; Jodilyn Owen; Hoangmai (Mai) Pham, MD; Ann Kempski; Kara Swisher; and Scott Galloway, MBA.

You can learn more by following David on LinkedIn.

David Muhlestein, PhD, JD, is a healthcare researcher and entrepreneur, committed to transforming healthcare payment and delivery systems. A self-identified data and policy nerd, he regularly speaks and publishes on value-based care, price transparency, and healthcare system evolution.

Additionally, David is a visiting policy fellow at the Margolis Institute for Health Policy at Duke University and adjunct assistant professor at The Ohio State University College of Public Health.

Previously, he was chief research and innovation officer for Health Management Associates and chief strategy and chief research officer for Leavitt Partners. He also served as adjunct assistant professor of The Dartmouth Institute (TDI) at Dartmouth College.

David earned his PhD in health services management and policy; JD, MHA, and MS from The Ohio State University; and a BA from Brigham Young University.

08:12 From a business and patient/better outcomes standpoint, what does an optimal provider practice look like?

11:48 EP412 with Robert Pearl, MD.

13:06 Why isn’t the current landscape what David considers optimal?

14:53 What leads to the “crisis of autonomy”?

15:13 How do medical practices get to the phase of delegation?

17:39 EP438 with John Lee, MD.

18:55 EP437 with Brian Klepper, PhD.

20:53 EP432 with Kate Wolin, ScD.

20:55 EP421 with Jodilyn Owen.

23:48 Medicare Meet-Up podcast with Mai Pham, MD.

24:45 What metrics should boards of directors also be held accountable for?

28:48 Why is an efficiency-focused business not necessarily the best at managing population care?

31:13 What is the “diversification discount”?

32:49 Pivot podcast with Kara Swisher and Scott Galloway, MBA.

35:53 What can primary care doctors do to optimize their practices?

36:48 Why do we need to shift the mindset from “bigger” and “more”?

You can learn more by following David on LinkedIn. 

Recent past interviews:

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Luke Slindee, Dr John Lee, Brian Klepper, Elizabeth Mitchell, David Scheinker (Encore! EP363), Dan Mendelson, Dr Benjamin Schwartz, Justin Leader, Dr Scott Conard (Encore! EP391), Jerry Durham (Encore! EP297)