With Pressure Mounting From Hospitals, Doctors and Patients, Is Managed Care Still Viable?
Fueled by a bubbling stock market, business executives are the culture’s new folk heroes. That idolatry, however, seems to have passed by officials of health maintenance organizations, along with those of Big Tobacco and deregulated utility companies.
HMOs once were seen as the savior of employer-provided healthcare in the U.S. But these days, the HMO model has become the poster child for frustration and anger with the healthcare system.
Horror stories about patients dying or being injured because of HMO business practices have become media staples. Politicians have picked up on the resentment, proposing and in some cases passing “patients’ bills of rights” legislation. Doctors, too, have taken up the cause. HMOs often pay them via a mechanism known as capitation, which provides a flat fee per member, per month. Locally, the doctor-HMO split has played out in the continuing drama with KPC Medical Management, the Anaheim-based group that emerged from the ashes of MedPartners. Dr. Kali Chaudhuri, KPC’s founder, has said his group practice needs higher payments from HMOs in order to stay in business. Hospitals also are demanding more money from HMOs. St. Joseph Health System said in late June it would stop accepting new HMO patients and was considering cutting ties with all 17 HMOs it contracted with because of multi-million dollar losses. Then last week PacifiCare Health Systems Inc. said it would raise the payments it makes to hospitals. In light of the troubles besetting HMOs, the Orange County Business Journal’s Vita Reed asked several healthcare industry players in Orange County and throughout California whether the HMO model is viable.
Brad Bowlus
President and Chief executive, PacifiCare Health Plans
Despite the criticism from some regarding the managed care industry, HMOs continue to be the most popular choice among employers and consumers. HMOs not only offer affordable health care coverage but also provide the same or in some cases higher quality than traditional fee-for-service plans. We’ve seen numerous surveys show that the majority of HMO members are satisfied with their health plan. For example, PacifiCare/Secure Horizons currently reports that 90% of PacifiCare members and 95% of Secure Horizons members are “satisfied” or “very satisfied” overall with PacifiCare. In addition to high member satisfaction, PacifiCare also receives high marks from physicians and hospitals. For most of the 1990s, HMOs did a great job containing medical costs and annual health plan premiums rose less than 2%. However, in the past few years, medical and pharmacy costs began skyrocketing,as they had in the 1970s and 1980s. Current medical inflation is running at about 8% and prescription drug costs are averaging greater than 15% per year. For more than 20 years, PacifiCare has balanced these costs while maintaining our commitment to the success of our providers. Collaborating with physicians and hospitals is nothing new for PacifiCare. We are determined to bring about continued improvements in our health care delivery system, as we have an obligation to keep the cost of health care in synch with the demand for expensive new drugs and new medical treatments. We know that in California, a 1% increase in health insurance premiums may result in 40,000 more people added to the uninsured in our state. That’s why we are committed to keeping our costs down and have continually reduced our general and administrative expenses. At the same time we are passing more of the health care dollar back to physicians and hospitals. Has the HMO model evolved over time? Of course it has and we expect that in today’s rapidly changing health care environment and with the growing use of technology, HMOs will continue to evolve to better serve health care consumers. HMOs have clearly put more emphasis on preventive care. Mammograms, pap smears, colon screenings, both pediatric and adult immunizations,all of these are emphasized by HMOs. Today’s health care consumers are much more informed about their health care options and are demanding more choice and flexibility. Although managed care is going through an evolution, HMOs will continue to play a significant role in meeting the needs of the marketplace by providing affordable quality health care with more choices.
Robert T. Langston
Principal KPMG’s Costa Mesa office
The HMO model will most likely continue to be a force in the healthcare industry, despite the irritation of various affected constituencies. Each group,consumers, physicians, and hospitals,has its own beef with managed care, ranging from healthcare rationing and quality concerns to personal incomes. Nonetheless, managed care enrollment in HMOs reached a peak of 79.3 million members in 1999, according to Managed Care Online. When preferred provider organizations and employer-sponsored plans are included, the number of managed care enrollees jumps to more than 181 million. The Western region of the country, with slightly more than 41% of the population enrolled in HMOs, is second only to the heavily penetrated New England area, where nearly half of employees are in managed care plans. Despite all of the complaining going on, this form of healthcare coverage remains pervasive. What are its chances of survival? First, we must credit managed care’s role in downsizing the healthcare industry, in driving out outrageously inefficient and expensive providers, hospitals and physicians alike. Federal and state governments, employers, and the general public became quite concerned about the rapidly escalating costs of healthcare in the late 1980s and turned to managed care as a panacea. No party got exactly what they were looking for as the managed care industry migrated from its early model of managing care to its new role of managing costs. Certainly, each benefited from reduced medical expenditures, but at the cost of reduced access for beneficiaries and potentially lower quality of care. Physicians found that managed care could mean an invasion into the traditional autonomy they enjoyed in professional and clinical decision-making. The HMO model has demonstrated that it can be effective at reducing healthcare expenditures and downsizing the healthcare industry, but some wonder if it is truly as good at managing healthcare costs as it is at demonstrating its marketing acumen. The promise of managed care, and the HMOs are betting on this, is that there is money to be saved in better patient education. The HMOs will trade higher levels of patient education, giving them greater participatory power in clinical decision-making, for increased levels of patient accountability for the various aspects of that decision-making. Patients want a larger say in clinical decision-making and with more patient education, they will be better able to discern among healthcare practitioners. The trade-off, of course, will be higher costs (premiums) in recognition of the greater choice. It is likely that the HMO model will survive for the foreseeable future. However, the HMO of the future will operate differently. HMOs must replace the current blunt payment tools with far more sophisticated techniques linking outcome and quality measures to payment. The level of accountability as measured by quality outcomes must be increased with the National Commission for Quality Assurance playing a central role. It will be necessary for managed care organizations to deploy multiple market strategies by rethinking staff models, establishing a greater mix of group and staff models, and reconstituting networks. Lastly, HMOs will survive by providing substantially increased levels of patient education enabling them to gain public acceptance of the increased premium costs required to fund the high costs of managing care.
Susan Rayburn
Vice president for external affairs, UCI Medical Center
Health maintenance organizations were developed in an effort to control rising healthcare costs and at the same time promote good health through preventive care, wellness education, and medical management. It was thought that if patients were evaluated and treated before they were in a critical state of ill health, the costs would be substantially mitigated. In order for the insurance companies to control employer premium costs and still maintain a profit margin, the HMOs decided to place the risk of managing patients’ healthcare needs, as well as the costs, on the providers of service,the physicians and the hospitals,through a fixed per member per month reimbursement amount known as capitation. Capitation only works when the amount a provider is paid exceeds the cost of care of its patients. This premise is predicated on a given number of well patients in addition to those that require significant medical care.
We have proved at UCI Medical Center that capitation does not work in an academic medical center environment due to what is known as “adverse selection.” This means that, as compared to well patients, the sickest patients, those requiring services usually found only at academic institutions, disproportionately select UCI Medical Center and its physicians for their health management. Therefore, we are adversely affected by the high cost of care of our patients as compared to a normal patient distribution. This “adverse selection” phenomenon has created significant losses for UCI, which has caused us to make the difficult decision to cancel several HMO agreements. Contributing to the high cost of medical care are the new advances in medicine being developed. New cancer treatments, and other very costly drugs are being discovered, in addition to new technologies for the treatment of diseases, including organ transplantation. Currently, HMOs pay all providers the same regardless of the care they provide. Until they agree to pay on an acuity-based scale or until they go back to a fee-for-service type payment mechanism, academic centers and other tertiary care providers will continue to drop out of the HMO provider networks.
As evidenced by the bankruptcy of MedPartners last year and the extremely poor financial condition of KPC GlobalCare this year, provider networks are becoming more and more fragile. UCI Medical Center has maintained specialty care referral contracts with medical groups in the county, who have received capitated payments from the healthplans insufficient to cover the cost of medical care to their patients. This financial shortfall that the medical groups are experiencing has caused them to be unable to pay for specialty referral services, causing UCI to provide care without being paid. UCI Medical Center and its physicians are self-supporting and as such must be paid for services rendered or no longer remain a vital life-saving healthcare resource to Orange County.
Elliot Sternberg
Chief medical officer, St. Joseph Health System
The HMO model could potentially continue, but not as it exists today. Some key features of an improved model would include:
Health plans and providers becoming true partners instead of adversaries
Investment (partnership) towards wellness including education, screening, prevention, chronic disease management, information systems, telephone advice nurses and best practice pathways
Division of risk between plans and providers so that risk assumption is reflective of the participants, true ability to manage the risk and thrive or suffer financially based on outcomes
n Emphasis on simplification of the processes and systems that would facilitate patient satisfaction
Ensuring an appropriate medical loss ratio so that dollars go where the care is being provided, not to Wall Street. That is not to say profitability is bad, but there needs to be ongoing investment in technology and information systems to constantly improve care
David L. Mauss
Regional director, business development, Tenet Health System
One of the guiding tenets of business is “if you don’t care for your customer, someone else will.” In my opinion, this tenet will ultimately determine the fate of HMOs. HMOs have many customers: employers who buy their products as employee healthcare benefits; the federal government for senior healthcare benefits; enrollees/employees and individuals who have selected HMOs as their benefit plan and providers, hospitals, physicians and ancillary providers who ultimately provide the healthcare services to enrollees. All of these customers are bound together by various financial and administrative arrangements such as premiums, co-pays and deductibles, capitation, utilization review, authorizations, risk pools, referrals and payments rates which are all part of the complexity of managed care. In my opinion, HMOs must adhere and adapt to the changing needs of their customers. Failure to do so will have very serious consequences that may result in the death of a business model. And although some changes have been made, much more needs to happen. The current HMO model of healthcare delivery may survive well into the future, but it will take on an entirely different look.
Keith Wilson
President and CEO, Talbert Medical Group
Talbert Medical Group is very interested in the future and value of the HMO model. Talbert acknowledges each of our patients as unique, with varying physical, emotional and financial circumstances. In our effort to identify and meet those needs, we recognize the HMO model as a viable choice for many of our patients. We believe that the key is for a medical group to offer their patients a full range of products, i.e., PPO, POS and Medicare self-pay, in which HMO is a popular choice at this time. Thus, the key to stability is a balance of products and sources of revenues that help insure viability and ability to provide quality healthcare. Further, I do believe that the HMO or prepaid healthcare is a feasible healthcare delivery option. One has only to look at Kaiser as one example of a sustainable successful model. Health maintenance organizations have come under great fire primarily because they were not well understood. With patients having a better understanding of the product, I think many will continue to choose it, but from the position of an informed choice. I do not believe that HMOs were intended to eliminate inflation or negate the need for premium increases. Advancing technology, pharmaceutical and therapeutic advances necessitate an increase in healthcare cost. HMOs have taken much of the blame for doing what our economy asked of them. Premiums in California are 30% to 40% lower than they are in the rest of the country, primarily due to the effectiveness of the HMO model.
Daniel Zingale
Executive director, California Department of Managed Healthcare
A healthy future for managed healthcare is dependent on a commitment from government, the healthcare industry, healthcare providers and individuals to ensure that patients are put first and the faith is restored in the managed healthcare system. The fundamental questions around fiscal solvency in the managed healthcare system in California can be traced to the need for improved preventive care, screenings and other interventions that keep people healthy, avoid disease and preserve scarce healthcare resources for those who become sick. According to the American Cancer Society, at least one-third of the half-million cancer deaths each year could be prevented with minimal cost to the healthcare system. The Centers for Disease Control and Prevention says that the 40,000 preventable new HIV infections each year not only result in death or a lower quality of life, but also they sap $6.2 billion of our healthcare dollars in lifetime treatment costs. From its inception, managed healthcare was conceived to be about better prevention. Unfortunately, short-term financial pressures caused health plans to abandon the necessary up-front investments needed for high-quality aggressive prevention that provides long-term health and financial benefits. A new age of managed healthcare can be the successful model for making good on the promise of managed healthcare: providing more people with quality coverage by promoting preventive care. Like so many of our great challenges, we share responsibility for ensuring healthier Californians. Health plans should ensure quality care and access to treatment and preventive screenings. Physicians and nurses should provide the best individual attention and care and at the same time avoid unnecessary treatments. And government has to oversee this system to ensure it’s working right.
Fixing the managed care system is not about re-slicing the pie, taking from one player and giving to another. It’s about making the system stronger, more solvent and viable by ensuring healthier Californians.
Rose Ann DeMoro
Executive director, California Nurses Association
A more telling question than the future of HMOs might be is our current healthcare system viable. In all three areas that managed care promised to deliver,access, affordability, and quality,the system has failed. More than 44 million people are uninsured, another 100 million are under-insured. Millions more with adequate coverage are routinely denied appropriate care. Medical errors reportedly kill up to 98,000 patients a year. Staffing conditions are so poor that California has required minimum nurse-to-patient ratios in hospitals and the federal government is calling for national staffing ratios for nursing homes. Nurses and doctors alike are joining unions to regain some control over their practice. Despite our nation’s abundant resources, we have fallen far behind other industrial nations in such important health barometers as life expectancy and infant mortality rates. Yet, the U.S. spends more per capita on healthcare than any other industrialized nation, much of it consumed by executive compensation and stock wealth, profits, excessive bureaucracy, fraud and waste. Large healthcare companies, badly advised and abetted by corporate consultants, have created these conditions through deliberate policies that were intended to enrich a handful of executives, speculators, and the consultants who advise them. They succeeded, at an enormous cost to our communities and to countless numbers of patients. Hospitals and nursing homes increasingly resemble MASH units or medical factories, and HMOs have embarked on medical redlining chasing wealthier, healthier patients while jettisoning seniors on Medicare. Now that they have engaged in medical strip-mining,plundered premiums and federal reimbursements, run up massive debts for merger and acquisition binges, and sacrificed our health,they’re dumping patients and designing new corporate medical models to exploit.
Ultimately, we as a society must make a choice. Do we continue to place our trust and the well being of our families in a heartless profit-driven, market-oriented healthcare system? Or is it time to join every other industrialized nation that embraces universal healthcare, with a publicly financed healthcare system where decisions about our health are made by doctors, nurses, and patients.
Keith Rosenbaum
Healthcare attorney with Berger, Kahn, Shafton, Moss, Figler, Simon & Gladstone’s Irvine office
The HMO model is definitely viable, with certain modifications. Keep in mind what the HMO model was initially designed to accomplish: managed care resulting in reduced costs. Unfortunately, the model has been transformed into one of managed cost, with a focus on the financial bottom line of the HMO, with little concern for the financial allocation of resources to doctors. The result of this is that there is little focus on the quality of patient care. What needs to be done is recognize the financial realities, learn the lessons of historical data and focus on the delivery of quality healthcare. Managed care and HMOs have been around long enough now that there is ample evidence as to the economics. HMOs can make a profit, and do, so long as they charge the right amount in premiums. The consumer public will have to acknowledge that rates must increase, but in response, there must be a discernible increase in the quality of healthcare.
The various parties must work together, something that has not occurred in the past. The HMOs must charge appropriate rates, and cut their overhead and red tape. Doctors must be empowered to control medical decisions and determine their financial future and well-being. This will be accomplished through physician ownership of their practices, and direct contracting with specialists. A better rate must also be paid to the doctors by the HMOs to ensure that physicians have the incentive to work. HMOs argue that the capitation rate paid to physicians is adequate; it is not. Many of the contracts are outdated, with outdated formulas. Also, the HMOs must live by their own set of rules. Isn’t it interesting that at a time when the HMOs argue that the doctors don’t need to be paid more, that they drop nearly 1 million people from their plans by withdrawing from Medicare programs? Why? Because they claim the reimbursement they receive from the government is inadequate.
Take a local example. KPC Global Care is a local owner of medical clinics and operates a practice management company. It took over the Southern California MedPartners network, which by all accounts was a mess. KPC has done a great job cleaning it up, but is now suffering the consequences of having to live with the old HMO contracts signed by MedPartners. When KPC asks for an increase in the cap amount, the HMOs threaten to pull all the contracts and patients and absolutely vilify KPC in the press. Some HMOs even reassign patients to other clinics. Interesting, though, that some of these other clinics are also KPC clinics, and the HMOs do not cancel their contract with KPC. It is not about patient care; it is about economics and nothing else. KPC has taken the heat to draw attention to a problem that must be addressed. What is the solution? Well, we could embrace Hillary Clinton’s proposal and have socialized medicine. That doesn’t work; not in this country, or even in socialist countries. We could go the route of everyone being covered by a Kaiser-like plan. Talk about increasing the distance between the “haves” and the “have-nots.” The solution is the HMO model, with realistic premium payments, efficient management, physician ownership, economic incentives for all involved parties, and a renewed focus on quality healthcare. That’s very easy to say but very difficult to employ.
Walter Zelman
President and chief executive, California Association of Health Plans
Managed care health plans continue to grow. Member satisfaction rates remain strong at 80-plus percent. And most plans continue to seek and achieve the goals of improved quality of care, with an emphasis on prevention, and keeping premiums affordable. But the industry cannot and must not deny that consumers are skeptical and concerned that they may not be getting what they feel they need from their health plan. The managed care industry must directly address these concerns. But as we do so, all of us,plans, providers, consumers, government,need to face some hard realities and consider whether or not we expect too much for too little. The fact is that managed care today is caught between the proverbial rock and a hard place. The rock may be seen as the consumer/patient who wants a great deal from our healthcare system, but only pays a modest portion of the overall bill. The hard place is employers and government that don’t want to pay any more than they have to. Managed care must serve both masters, and it may be almost impossible to satisfy both.
Providers offer a mantra of not enough pay from health plans. Consumers demand unrestricted access to new, and often experimental, medical technology and to each new drug. Consumers also want more flexibility in choice of and access to providers. Legislators, sensing the political demand, are quick to respond. Health plans are more than willing to provide it all; but at what price, and who will pay for it? Many try to duck this hard question. It is easier to point fingers,if only those CEO salaries weren’t so high.
Admittedly, managed care is far from perfect. The system needs to be simpler and more consumer-friendly. Consumers need more assurances that they will always get the care they need. (The new external review process may help considerably in addressing this concern.) But we also need, as a society, to achieve a higher level and a more realistic dialogue regarding what we want from our healthcare system and what we are willing to pay for it. So long as demand exceeds willingness to pay, discussions relating to managed care will be more focused on rhetoric than problem solving.
J. Brennan Cassidy
Former president, Orange County Medical Association; family practice, emergency medicine, Newport Beach
HMO patients generally receive their care from physicians organized through medical groups and independent physician associations with which the health plans contract to provide these services on a contracted capitation basis. This means that, for a set monthly fee, the health plans act as a pass-through agent and transfer the burden of the insurance risk to the medical groups and IPAs. The reimbursement rates to the physicians are unconscionably low and are frequently inadequate to cover even the cost of the services that the insurer promises to the insured. This is so because the health plans claim that the capitation rates are “market driven.” Unfortunately, they are driven down to a level that drives physicians out of business after being forced to accept unreasonable rates. The current capitation rates are not sound. There is, and can be, no reasonably sound actuarial projection to justify the current rates. To protect themselves against unexpected and unpredictable utilization of services, the physician groups must become, in effect, the de facto “insurers.” They are even being forced to purchase coverage from ‘re-insurance’ companies to pay for high cost procedures such as organ transplants. Without the re-insurance coverage, the physician groups would have gone bankrupt sooner than is already happening throughout California.
This design of provision of healthcare in California is referred to as the ‘delegated model’ because the insurance risk is ‘delegated’ to the physician groups by contract. It is failing. In its lawsuit, filed in May against the for-profit health plans,Blue Cross/Wellpoint, Foundation/Healthnet and PacifiCare,the California Medical Association is attempting to demonstrate that it is not tenable to expect that the current HMO healthcare delivery system in California is viable, principally due to under-funding and a willingness of the health plans to market a product which cannot be delivered at the current rates. It is tantamount to self-destruction for physician groups to accept current capitation rates as they are pressured to accept in some areas of the state.
Because of this and other paperwork nightmares associated with managed care; physicians groups, individual physicians and hospital organizations are having no choice but to say that they can’t take it any longer. Healthcare provider incomes have dropped so significantly that it is to the point that quality individuals choose other careers, leave practice early, limit their practice styles to lower-risk procedures, and limit the number and kinds of patients they care for. The questions to be asked now include who will be available to care for us all in 10 or 20 years and what can we do to change this situation? We are in the process of destroying the best healthcare delivery system in the world.
There are no short answers. First, physicians should have the right to negotiate fair capitation rates with HMOs. The patients should benefit, not the stockholder. Second, the responsibility for health insurance may need to be shared more equitably between employers and employees. It may even be necessary to go back to individual responsibility and caveat emptor. With individual tax deductions for healthcare expenditures, maybe patients will do their own due diligence research into quality, legitimacy and costs. Certainly with Internet availability there is new free flow of information.
It may also help if healthcare dollars were spent on healthcare. As in the recent example of the majority of the Orange County Board of Supervisors’ refusal, despite more than a year of effort to persuade by the healthcare community, to spend the National Tobacco Settlement dollars on healthcare. The healthcare community was forced to go through the process of gathering 115,000 signatures to qualify an initiative for the ballot in November to force the Board to spend the settlement dollars on healthcare. It’s not a cure-all, but it will go a long way to providing more access to healthcare and cost-sharing between government, which is legally responsible and community physicians and hospitals, who are currently burdened with huge costs for uncompensated care never before seen. This November, the voters will certainly have an opportunity to make a statement to the board that healthcare is a priority.
Kenneth Bell
Medical director, Permanente Medical Group, Orange County
Janice Head
Senior vice president, service area manager, Kaiser Foundation Health Plan
and Hospitals, Orange County
Kaiser Permanente is proud that the term health maintenance organization was originally coined to describe what we have been doing for more than 50 years,providing healthcare services as determined by healthcare professionals, in an integrated system which includes a pre-paid comprehensive health benefits plan, hospital services and primary and specialty physician services.
Unfortunately, this model has been so completely modified, that the HMOs of today and Kaiser Permanente hold very little in common. The current system has devolved into a network of adversaries, each operating in separate silos and competing for scarce dollars. We now have physicians, hospitals and health plans, each operating in isolation, pointing fingers at each other for the failures in the healthcare delivery system. These non-integrated systems must support three separate profit margins. As long as this adversarial relationship predominates, disruptions will continue and the patient ultimately is the loser. Our challenge at Kaiser Permanente is that while acknowledging that we are an HMO, we also are different. In our integrated system we feed on synergy. No one part, not the Permanente Medical Group, nor the Kaiser Foundation Health Plan nor hospitals can survive without the others. This creates a very different environment for discussion, decision-making and negotiations. As a not-for-profit plan, 97% of premium dollars go into the provision of healthcare services. The current fragmented model of HMOs operating in isolation will continue to struggle. What is needed is a return to the promise and reality of the original integrated care model practiced here at Kaiser Permanente: Where health maintenance and a focus on the patient are at the heart of the system; where doctors and other healthcare professionals make decisions about patient care; and where the plan, the physicians and the hospitals are truly partners.
Don Goldmann
Former president, Orange County Association of Health Underwriters
While the rest of the country continued to have rising premium costs throughout the last decade, California’s average premiums held steady and in some cases retrenched during that time period. The appearance of increasing rates in today’s market is indicative that the tide is now changing and higher rates are returning. However, even these increases are much more moderate than in other areas of the country. At least in part, the increased rates are directly related to the medical community’s unwillingness to continue accepting what they view as inadequate rates of payment for services. Independent studies suggest that the market has been so efficient in cutting fat out of the system that provider payments may have gotten too close to the bone. With reduced payments, the providers who are both available and capable of surviving financially are shrinking. This places more bargaining power in the hands of fewer providers. It is conceivable that enhanced payments could quiet some of the discontent in the medical community, but that would increase premiums leading to employer unrest and possible cutbacks in the number of people insured. At the heart of managed care is the fact that there is a tremendous balancing act taking place. If benefits are increased and the system is made more flexible, premiums will rise. If medical providers are made happier with higher payments and looser medical care guidelines, premiums will rise. If premiums go up, the employer will be unhappy or pass more of the costs on to the employees, which may make them unhappy despite better benefits and flexibility. HMOs and managed care will survive in California simply because no matter how well or how poorly people think it works, it is ingrained into the system and is the only foreseeable system of balancing out the different elements. However, government regulations, political pressure and increasing cost of provider contracts could create an HMO product tomorrow that will have a high enough price to encourage other, non-managed care products to return to the market.
If higher deductible indemnity plans with a lower price than tomorrow’s HMO begin to show up, some dissatisfied employees will willingly accept the higher costs of their own medical care out of their own pockets. Interestingly enough, when the high-deductible indemnity plans return, it is the youngest and healthiest of the population that is most likely to take advantage of the lower premiums that will be offered for they fear not the prospect of ever having to actually use their plan.
