Thomas-Davis Medical Centers, formerly Tucson and Pheonix

Originally published as a Conference Organizational Scenario by the Center for Studying Health System Change (HSC), January 1999. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Thomas-Davis Medical Centers: The Rise and Fall of a Multi-Specialty Practice

Until its dissolution in 1998, Thomas-Davis Medical Centers stood as one of the oldest multi-specialty medical groups in the United States. Founded in 1920 in Tucson, Arizona, the practice expanded from its home base into the Phoenix market during the 1980s. By the mid-1990s, however, financial troubles and successive ownership changes had taken a severe toll. The practice was sold twice in three years, separated from its affiliated physician-run HMO (Intergroup), and watched a quarter of its more than 200 physicians walk out the door. A 1996 acquisition by FPA Medical Management, a national physician practice management corporation based in San Diego, proved to be the final chapter. Management clashes led the Tucson doctors to unionize in 1997, and when FPA went bankrupt the following year, Thomas-Davis ceased to exist -- a loss deeply mourned by its physicians, patients, and the communities it had served for nearly eight decades.

From Founding to Expansion

In 1920, Dr. Charles A. Thomas and Dr. Stirley C. Davis opened a medical practice together in Tucson. Over the next seven decades, their clinic grew into one of the largest and most respected multi-specialty group practices in the Southwest. In 1980, the physician-owners observed that they were losing patients to an early Arizona HMO and responded by joining physicians from a separate practice, the Tucson Clinic, to create a health maintenance organization called Intergroup Health Care. Through an exclusive contracting arrangement, Intergroup fueled Thomas-Davis's growth, and by 1986 the clinic operated 10 locations in Phoenix and five in Pima County.

Financial difficulties in the early 1990s triggered two pivotal events. First, the company sold 40 percent of its stock to the public in 1991, when Intergroup was the largest HMO in Arizona with 379,000 members. Then in November 1994, both Thomas-Davis and Intergroup were sold to Foundation Health Corporation for $720 million. According to the New York Times, the 133 physician-shareholders each received Foundation stock valued at $3.2 million.

Ownership Changes and Decline

While the leadership and board of Thomas-Davis remained intact through the Foundation acquisition, the physicians went from being owners to being employees, losing their personal financial stakes and much of their governance authority. Foundation, a large acquisition-minded HMO, had no reason to preserve the symbiotic relationship between Thomas-Davis and Intergroup. Instead, Intergroup became a tough negotiator on fees. In a paradoxical move, Foundation put the doctors on generous straight salaries with weakened productivity incentives, even though the physicians had previously thrived under a productivity-based compensation system. Some physicians let their caseloads drop by half, patients began complaining about difficulty getting appointments, and more than 50 physicians left the practice -- some retiring early with their proceeds, others departing out of frustration over the loss of influence and equity.

With salaries high and productivity declining, Thomas-Davis was hemorrhaging $2 million a month by 1996, according to news reports. In November of that year -- just two months after Foundation's president had publicly pledged not to sell the practice -- Foundation unilaterally offloaded Thomas-Davis to FPA Medical Management for $220 million while keeping Intergroup. FPA moved quickly to impose the cost cuts Thomas-Davis had long discussed internally. According to former physicians and contemporaneous reporting, FPA released 26 physicians, slashed salaries by as much as 50 percent, imposed unprecedented restrictions on specialist referrals, and implemented coding policies designed to minimize reimbursement even for complex procedures.

Unionization and Collapse

Alarmed by FPA's management approach, Thomas-Davis's Tucson physicians began discussing unionization even before the sale was finalized. Within two months of the acquisition, the Tucson doctors voted 93 to 32 to join the Federation of Physicians and Dentists. About 20 physicians abstained, and the Phoenix doctors were not part of the union effort. FPA challenged the vote's legitimacy, arguing that physicians were supervisory employees. After legal proceedings that consumed most of 1997, the National Labor Relations Board recognized the union and found FPA guilty of unfair labor practices, forcing a settlement that included back pay, improved working conditions, and purging of anti-union warning letters.

In the spring of 1998, FPA signaled that mounting financial problems might lead it to sell some physician practices. By July, Thomas-Davis ceased to exist. Intergroup, the affiliated HMO, underwrote the costs of keeping clinics open for an additional two months while patients and doctors made new arrangements. Intergroup reported that 80 percent of its patient base was able to retain their primary care physicians through the transition.

Aftermath

The collapse left nearly everyone involved dismayed. Particularly galling to the physicians was FPA management's behavior in the company's final months. In March 1998, with its stock plummeting, FPA ousted its president and CEO but paid him a $4.8 million severance package. In May, the company reported a $9 million first-quarter loss and disclosed six class-action suits alleging securities fraud and insider trading. In July, after defaulting on millions in loan payments and announcing the closure of most of its practices, FPA executives voted themselves $3.5 million in pay raises and bonuses. One physician told the Arizona Daily Star: "It's appalling... From a community standpoint, this was a valuable resource for Tucson and Southern Arizona. We did excellent work, and that's all gone now."

Most former Thomas-Davis physicians reestablished themselves in solo or small group practices, taking on new administrative burdens and navigating the inefficiencies that came with practicing outside an integrated setting. Patients could no longer receive all their outpatient services under one roof, while billing and medical management became more complicated and labor-intensive when dealing with multiple payers. Tucson's other major multi-specialty group, Group Health Medical Associates, an arm of Tucson Medical Center, also closed in April 1998 -- another casualty of management's inability to secure better reimbursement or control costs.

Sources and Further Reading

Center for Studying Health System Change, Community Tracking Study site visits, Tucson and Phoenix, 1996-1999. | Arizona Daily Star contemporaneous reporting on Thomas-Davis Medical Centers. | New York Times coverage of the Foundation Health Corporation acquisition, 1994.