Managed Care: What Type of Market Awaits You?

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Deborah L. Gersh and Ira H. Rosenberg

Ms. Gersh is a partner in the Chicago law firm of Rudnick & Wolfe. Mr. Rosenberg is President of Managed Care Resources, Inc. in Chicago. The authors thank Andrew Rock of the Tampa office of Rudnick & Wolfe, and Jess Boyer, M.D. and CEO of St Jude's Heritage Health Foundation of Fullerton California, with their assistance in preparing this article.

This article was published in the November/December 1996 edition (Volume 12 Number 3) of the "Journal of Medical Practice Management".

Abstract

Each healthcare market has specific issues and concerns which it must face. It is dangerous to assume that one managed care contract or one type of physician group structure will be successful in all markets. Those believing that what works in one managed care market will work in all managed care markets are making a dangerous assumption. When entering into managed care contracts, the provider should consider a variety of factors, including the age, sex and health of the patient population; competition among physicians, hospitals and integrated delivery systems; and other relevant local factors.

Contrary to public perception and despite the urgency to move toward managed care, health care markets have not necessarily followed the trend evidenced in California. Given California's vicarious financial position over the last 15 to 20 years, there has been extreme pressure to reduce, among other things, healthcare costs incurred by the state. In addition, the plethora of physicians and limited corporate adoption of self-funded plans, as well as heavy utilization of the health care system in Carlifornia due to the influx of illegal aliens, a large indigent population and significant HIV-positive population has caused HMOs and other managed care organizations to flourish. These health care entities market cost reduction and are also able to contract with physicians at significantly reduced rates, because many physicians were (and may continue to be) fearful of being excluded from participating in these entities' plans. Private sector purchasers of healthcare, concerned that they would bear the burden of the public shrinking healthcare dollar, also bean to form alliances to negotiate reductions in their healthcare costs. The downward pressure in both markets, and the lack of provider experience in dealing with these demands (since the rest of the country has not experienced these difficulties to the extent experienced by California), resulted in a healthcare market comprised of HMOs, PPOs, and large employer coalitions, with physicians and other healthcare providers being among the last to organize.

Since the delivery of health care has traditionally been localized, the assumption that "one size fits all" does not apply to local, idiosyncratic health care markets. Therefore, each health care market will not follow the development of managed care experienced in California. Health care markets differ from one another based on the population, method of health care delivery, infiltration of managed care entities, proliferation of self-funded plans, and reaction of providers to managed care trends and their willingness to assume risk. A quick overview of some of the more widely analyzed markets illustrates fundamental differences among the healthcare markets, influenced in large part by the different types of purchasers, providers and populations.

Minnesota has long been recognized as a health care market with high managed care penetration and corresponding physician involvement. The prestige and name recognition of the Mayo Clinic and the participation of physicians in its managed care plan has significantly influenced this market. In addition, the relatively homogenous population of Minnesota has also made it more desirable for managed care plans to have a presence in Minnesota. With similar and more predictable use patterns, the risk of dramatic swings in the level of health care provided to that population is reduced. The state legislature has also been active in creating new forms of health maintenance organizations ("HMOs"), and existing HMOs have merged with hospitals to form large vertically integrated health systems. A significant driving force for managed care in Minnesota has also been sophisticated buyers' coalitions. For example, to provide physicians with greater control over the delivery of healthcare. The employers would contract directly with physician groups, and give vouchers to their employees allowing the employees to select the physician. The hope is that this will reduce costs and improve the quality of care. Although a very different market, Boston also maintains a high HMO penetration due in substantial part to an abundance of health care providers and state rate deregulation, which has created incentives for HMOs to develoop alternatives to the rates set by traditional insurance plans. Further, the large number of physicians competing for patients makes it difficult for physicians to maintain a strong negotiating position with managed care entities.

Similar to Boston, Cleveland has also rapidly responded to managed care. However, while Cleveland has also experienced consolidation among hospitals and health networks, and integration of insurers and providers, physicians have been more active in forming physician-hospital organizations and physician networks to negotiate with the various managed care plans. The large number of self-funded employers and unions in Cleveland also continue to have a strong influence in the development of managed care and other employers' decisions regarding health care providers.

The strength of physician organization has been the key factor in Marshfield, Wisconsin. This rural area is dominated by an integrated, physician-owned, multi-specialty clinic, the Marshfield Clinic. The Marshfield Clinic, a nonprofit corporation owned by the 400 physicians which it employs, owns and operates its own HMO, maintains 21 branch offices, establishes joint ventures with other health systems, and manages physicians' practices. This is a clear example of a physician group taking charge of the changing healthcare market.

As exemplified above, various market forces, managed care groups and health care providers, as well as the specific demographics of a particular area, influence the penetration and nature of managed care. In order to understand and evaluate a health care market, the particular market must be examined in detail. The remainder of this article focuses on how HMO penetration, provider reaction and different populations affect three influential and distinct health care markets: California, Chicago and Florida.

Chicago is a city comprised of many small communities. The way in which health care has evolved in Chicago has had much to do with its diverse population. Physicians have been very slow to embrace the concept of group practice, which has limited the ability to convert the medical community to a risk based system. The result has been that no group practice in the Chicago metropolitan area has more than 65,000 fully capitated lives, and while HMO growth is steady, it has not approached the levels seen in other major metropolitan areas such as Los Angeles and Minneapolis. In fact, during the mid 1980s, the number of HMOs in the Chicago area dropped from 30 to 24. In the past year, however, more than six new HMOs have either applied for or received a license to operate an HMO in Illinois. Physicians are also beginning to organize, through the development of their own organizations or through participating in physician organizations affiliated with hospitals or hospital systems. In addition, a small but growing segment of solo or small group physicians are selling their practices to hospitals and become employees of the institution.

All of this activity indicates that there is great concern in the marketplace concerning whether there will be an impending surge of managed care enrollment and from where that enrollment will come. From 1987 to 1993 HMO enrollment in Illinois rose by only 100,000 lives; however, from 1993 to 1995 HMO enrollment grew by 263,000 lives, most of which was in Chicago. Preliminary figures for Chicago market for January 1996 show that there will be a net increase of another 70,000 to 75,000 lives, which would give HMOs a 23.6% market share of the insurable population. Of the estimated 5.3 million individuals commercially insured in the Chicagoland area, 40% are self-insured, and are not likely to convert to managed care in the near future. Based on the January 1996 enrollment statistics, of the over three million people comprising the non-self-insured commercial population in the Chicagoland area, 45% are enrolled in an HMO in Chicago, and many of the traditional indemnity insurers have converted or are converting their insured population to a "managed indemnity" program where providers will be reimbursed under a fixed fee schedule, subject to certain review criteria. These changes along with changes in Medicare reimbursement only heighten the fears of the medical community concerning the future and financial viability of their practices.

Are these fears justified? Will Chicago completely convert to managed care? What will happen with the Medicaid and Medicare population? There are three key factors which may limit the growth in managed care in Chicago in the near term. As mentioned earlier, nearly 40% of the employed population in the Chicagoland area receives health benefits through a self-funded plan. This is a somewhat larger population than in most other metropolitan areas. This is due to the number of large employers in the market, with many of these companies having strong unions which have fought over the years to insure a rich health benefits package while maintaining unlimited access to health care providers. In time, there may be some changes to this population, but it will be a slow process. Second, the Medicare population in Chicago may not convert to a Medicare risk program as quickly as has been predicted in the national media, irrespective of the proposed changes in the federal legislation. It is estimated that it costs the HMOs in Chicago over $1,000 to enroll one Medicare member in a Medicare Risk Plan - twice the U.S. average. When an individual retires and moves to another area of the country, such as Arizona and Florida, he or she must select another physician. In doing so they will also most likely take the opportunity to enroll in an insurance plan which gives them the highest benefit coverage for the lowest price, which is often an HMO. In Chicago, however, an individual who retires and stays in the Chicago area also tends to stay with his or her physician of thirty or forty years, and the physician is likely to be a solo practitioner who plans to retire in five to ten years. These physicians have not embraced managed care and probably have not joined a local IPA or PHO. As such these physicians will not be targeted by the HMOs for a risk contracting agreement and thus those patients seeing those physicians are unlikely to switch to an HMO. As those physicians retire, it is probable that there will be an increase in HMO enrollment; however, as long as Medicare allows choice (no matter the cost) most elderly people will stay with their physician of long standing. Third, Illinois has lagged behind a number of states in establishing a viable plan to reduce the rapidly escalating cost of providing care to Medicaid recipients. After nearly two years, it appears that the federal government will grant the State of Illinois a waiver for its Medicaid program. If implemented it will likely be a slow process as the State waits for Medicaid to convert to block grants which would allow the State to develop a program which would be preferable to the proposed Medicaid plan for which Illinois is seeking a waiver. Under the proposed plan, as currently drafted, 70% of the State's Medicaid budget would continue to remain outside of the capitated managed care plan.

Physicians in Chicago must be prepared to take on risk contracts as a significant portion of their patient populations convert to managed care. Unlike other areas of the country, this transition will take place at a slower pace, but there is no doubt that change is in the offing.

Florida is a diverse state consisting of many different markets, ranging from Miami and Ft. Lauderdale in the southeast, with managed care penetration of 42% and 35% respectively, through the Tampa Bay and Orlando markets in central Florida, with managed care penetration of 26% and 27% respectively, to Jacksonville and Tallahassee in north Florida and the rural counties in between. Jacksonville experienced a 64% gain in HMO enrollment in 1994 with substantial activity in hospital consolidation, purchases of physician group practices and the proliferation of capitated contracts. The Tampa Bay area is projected to be one of the top five large metropolitan areas nationally for increase in managed care penetration in 1996, as is the West Palm Beach - Boca Raton area among medium size markets.

There is tremendous competition among HMOs for market share, resulting in downward pressure on premiums and on compensation to providers. Despite much talk of capitation and assumption of risk, there are few examples of global capitation contracts in Florida markets, although specialty "carve-outs" in areas such as cardiology and orthopedics are becoming comon, especially in South Florida, as HMOs award capitated contracts to specialty IPAs.

While Florida physicians are not organized into large group practices to the extent found in California, publicly owned physician management companies such as Phycor and Caremark are now actively acquiring practices in all Florida markets. Hospitals are also consolidating into regional managed care networks, but do not appear to have solved the problem of integrating physicians as economic partners in such networks (Columbia is an exception, with its stock offerings to staff physicians). Providers have shown more interest in creating their own HMOs, with the Florida Medical Association working on an HMO project in addition to its state-wide IPA, and with public hospitals in Miami and Tampa operating Medicaid HMOs.

Florida is poised for substantially increased activity in Medicaid managed care. The Florida Agency for Health Care Administration has awarded full risk Medicaid capitated contracts to approximately 15 Medicaid HMOs and also operates a primary care gatekeeper system called Medipass. Beginning in the summer of 1996, the state's Medicaid population will be mandatorily assigned among the existing Medicaid HMOs and the Medipass program, substantially swelling the enrollment of Medicaid HMOs and making them very big business indeed.

Finally, the Florida legislature has mandated that by January of 1997, workers' compensation medical care must be provided through managed care arrangements. HMOs such as United Health Care Corporation have begun to create workers' compensation units and provider networks to develop this new market. Considering all of these trends, and despite the potential for radical cuts in Medicare and Medicaid funding, we anticipate that 1996 will be the most dynamic year yet for managed care growth throughout Florida in commercial markets, governmental programs and occupational health.

For years, many other markets have looked toward California as a measuring stick of what is likely to happen in other markets. As we have seen, however, each market has its separate identity. California is still intriguing to many in the managed care industry, not simply because of the high penetration of managed care, but as a state trying many different and unproven methods of addressing the healthcare delivery issues in the United States. The need to address healthcare costs earlier than many other states is one of the primary reasons the California market is more a patchwork of programs and healthcare delivery systems than we would normally expect. For the most part, California is a managed care state with 33% of the commercial population enrolled in HMOs. Pure indemnity programs are virtually obsolete. Interestingly, although three of the ten largest HMOs are based in California, four of the ten largest PPOs are also based in California. This has lead to a wide spectrum of markets in California - from fully capitated HMOs to predominantly discounted fee-for-service arrangements. Surprisingly, in areas such as Orange County and the San Francisco area, these extremes exist in close proximity. Notwithstanding the divergence of healthcare delivery systems in California, more than 38% of the state's beneficiaries participate in one of the 36 HMOs with members in California - greater than any other state in the country. In fact, 33% of Medicare beneficiaries are enrolled in the fifteen or more Medicare risk sharing HMOs in California.

On the payor side of the delivery system, California has been on the cutting edge with respect to the formation by smaller employers of a cooperative to purchase healthcare at reduced costs. California has a state-run plan, known as HIPC (Health Insurance Plan of California). In addition, there is also at least one private plan offering small employers an alternative to the state plan. These and other similar programs, such as the California Public Employees' Retirement System, have placed pressure on HMOs and other plans to reduce rates. While this is good news for enrollees, this downward pressure impacts significantly on the amount HMOs and other managed care plans are willing to pay their healthcare providers.

In response to the pressures placed on healthcare providers to reduce costs, encounters and procedures, physicians and other providers have responded by organizing large physician groups, some of which have even purchased hospitals and taken the leadership role in developing a fully integrated delivery system. Many physicians are concerned that the downward pressure will continue despite the fact that many of the contracts are marginally, if at all, profitable, because of fear by physicians that if they do not accept such negotiated payments, others will. This is one of the major forces driving physicians to form large provider groups, HMOs or other managed care organizations. Recently, physician and other provider groups have won the right in California to form statewide organizations to counter some of the HMOs and other large payors. In fact, one of the major integrated delivery systems in California, Pioneer Provider Network, Inc., a MedPartners/Mullikin subsidiary, has recently been granted the right to accept full risk contracts, and hospitals and physician groups continue to lobby for legislation permitting all providers to accept full-risk contracts. Under current California law (the Knox-Keene Act), only HMOs may enter into full risk contracts. If the Knox-Keene Act is amended, hospitals and physician groups will have the ability to directly contract with HMOs and employers to provide healthcare services on a capitated or similar basis. It is unclear whether these types of arrangements will continue to be challenged by others in the industry, or whether these provider groups will be viable.

The influx of managed care will not affect all physicians the same. A physician's experience, specialty and market area will determine the role managed care will play in his or her practice. A physician from an area without high managed care penetration who plans to retire within the next ten to fifteen years will likely be able to avoid or limit participation in capitated arrangements. While medical students and young physicians must work in the managed care arena, fears of an excess of physicians may not be realized due to efforts to close medical schools, reduce the number of residency slots, and limit the number of international medical graduates, as well as, market-driven reallocation of physicians' specialty and geographic area. Further, medical student fears regarding the impact of reduced utilization may be unrealized due to an increasing population, specifically an increasing elderly population de to the aging baby boomer population. Physicians will have greater negotiating ability under managed care than they may currently anticipate, physicians must assess the options available in the era of managed care. Since managed care limits the ability of physicians to maintain a successful individual practice due to contracting efficiencies and shifting of risk, physicians will likely be faced with one or more of the following options: (1) join a multi-specialty group - This option is more desirable for primary care physicians whose majority presence in a multi-specialty group is essential; (2) form alliances with colleagues and join an existing group on a sub-capitated basis - This option is more desirable for specialists in order to manage their portion of the capitation dollar independently; or (3) sell the practice to a hospital or staff model MHO and become an employee of such hospital or staff model HMO - This option may be more attractive to a physician nearing retirement, or a physician who is not interested in operating her own practice. In order for physicians to determine the best option, physicians must understand their patient population and needs, as well as their unique managed care market.

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