To prepare for health reform, HMOs are joining together, acquiring hospitals and provider groups, and developing data to demonstrate quality and cost effectiveness - health maintenance organizations - includes related information on outcomes research and the insurance industry - Special Issue: The State of Health Care In America

The phenomenal growth of managed care is one of the biggest stories in health care in the 1990s. Managed care already has affected every segment of the health care industry. It will likely be at the heart of any new system that emerges as a result of health care reform.

To compete effectively, MCOs are employing a number of strategies. They are merging with or acquiring other HMOs and health plans. They also are vying for the opportunity to become the accountable health plans (AHPs) that would deliver care to most Americans in a system based on managed competition. Therefore, they are forming alliances with hospitals, physician groups, and a variety of specialized provider organizations, and merging all of them into new entities called integrated service networks (ISNs) or integrated delivery systems, or integrated systems of care. ISNs are structured to provide cradle-to-grave health care for entire populations. Most ISNs would receive a capitated, or fixed monthly per-person fee, for providing all necessary health care services for every participant.

MCOs also are struggling to find primary care physicians (PCPs). Moreover, they are working to meet employers demands to demonstrate the quality and cost effectiveness of the care they deliver.

HMO enrollment figures show that before 1980, fewer than 10 million Americans belonged to HMOs. By the end of 1994, an estimated 50 million Americans, or 16% of the population, will be HMO members, according to the Group Health Association of America (GHAA), Washington, an industry trade group that represents more than 350 HMOs.

Particularly impressive has been the increase in the number of point-of-service (POS) plans--hybrid HMOs that permit members to use doctors outside of a network in return for paying a higher fee. By June 1993, membership in POS plans reached 6.8 million, according to SMG Marketing Group Inc., a market research organization in Chicago, and KPMG Peat Marwick, CPAs, in MonWale, N.J.

While enrollment in HMOs and POS plans continues to rise, the prospects for the long-term viability of the nation's roughly 600 PPOs is uncertain. One major reason is that most PPOs are structured on a discounted fee-for-service basis. Doctors are generally paid on the basis of the services they deliver, and therefore, have no incentive to limit either patient visits or the number of procedures they perform. What's more, most PPOs simply require patients to select physicians from the plans' lists of affiliated practitioners. Since there usually is no "gatekeeper" to control access to specialists, eliminate duplication of diagnostic tests, or coordinate care, PPOs have a more difficult time holding the line on costs and ensuring that patients receive only care that is appropriate and necessary. The result is that PPOs must spend more to deliver care to members and therefore, must charge employers premiums that are higher than those of HMOs.

HMOs WIN

Kenneth Abramowitz, senior health care analyst with Sanford C. Bernstein & Co., New York, an investment management and research firm, recently predicted that if managed competition becomes the model for health care reform, HMOs will be the big winners. They will deliver health care to about 80% of all Americans. PPOs will serve a smaller niche--about 10%, and fee-for-service will be the choice of the remaining 10%, Abramowitz said.

In the meantime, HMO premiums have declined for the fifth straight year. The average 1994 HMO premium increase is 5.6%, down from 8.1% in 1993, according to GHAA.

One of the major reasons costs are lower is that HMOs are relying on outcomes data to develop practice guidelines, which, in turn, indicate recommended courses of treatment that result in fewer unnecessary and ineffective treatments.

Outcomes research, finding out what works and what doesn't, is being conducted to varying degrees by HMOs nationwide. A 1993 survey by A. Foster Higgins & Co. Inc., benefits consultants in New York, showed that 87% of HMOs that conduct outcomes studies do so to identify problems pertaining to quality. Roughly 86% share the results with providers. About 61% use outcomes research as the basis for developing practice guidelines.

Another quality improvement effort that ultimately lowers costs is prevention. Because HMOs receive capitated or fixed monthly per-person fees, they have financial incentives to keep members healthy. Consequently, they promote such measures as childhood immunizations, hypertension screening, and mammograms, which improve the overall caliber of medical care.

Many employers and other buyers have come to recognize that improving quality is an effective way to lower costs, says Gordon Sprenger, executive officer of HealthSpan Health Systems Corp., Minneapolis, a health care delivery system. "Ultimately, price will no longer be the major issue. We will be competing on service and quality," he says.

To improve overall quality, streamline operations, increase their ability to collect and analyze data, and expand their ability to compete, HMOs of all types are joining with each other and with other health care businesses.

During 1992, 24 HMO acquisitions, mergers, and consolidations occurred, according to a 1993 analysis by InterStudy, a health policy organization in Excelsior, Minn.

Large insurers and Blue Cross and Blue Shield plans also have moved heavily into managed care. Today, 42% of all HMOs are owned by commercial insurers or Blue Cross and Blue Shield organizations. And though most hospital mergers or hospital alliances with physician groups are designed to help hospitals negotiate or compete with existing MCOs in local areas (see "Hospitals," page 17), some hospitals have embarked on ambitious plans that will catapult them into becoming ISNs in the future.

HOSPITAL INTEGRATION

In New York, for example, the Mount Sinai Medical Center is "evolving from an independent hospital and medical school to a regional integrated delivery system," says Roger C. Nauert, senior vice president.

Mount Sinai currently has 12 hospital affiliates representing more than 6,000 beds and 6,500 physicians. The hospitals log more than 200,000 admissions per year. In November, Mount Sinai announced an affiliation with St. Mary's Hospital, in West Palm Beach, Fla., a 430bed community hospital.

In the future, Mount Sinai plans to have alliances in place with more than 25 hospitals, 50 outpatient facilities-- including women's health centers and other specialty providers--and nursing homes containing roughly 5,000 longterm care beds. "Within five years, we will provide the entire continuum of care within the tri-state area that includes New York, New Jersey, and Connecticut. We will be able to accept 100% capitation," says Nauert, referring to the ability to accept a fixed, monthly prepaid fee for the total care of each member. "We want to be the first in this area to be able to offer rates that are set for five years."

Mount Sinai's expansion plans typify the trend in managed care. MCOs are positioning themselves to become the large ISNs of tomorrow.

Defining the term, Sprenger says, "An ISN is a system of health care providers that offers a coordinated continuum of services to a defined population. The entity is willing and able to be held clinically and financially accountable for the health status of that population through capitation payments, a new generation of medical management protocols, and public reporting of outcomes and costs," he says.

For consumers, ISNs offer a single, identifiable, and accountable organization. "As a provider, you're no longer in an adversarial relationship with, but rather, in partnership with the insurer," says Lee N. Newcomer, M.D., vice president of health service operations of United HealthCare Corp. (UHC), a health care management company in Minneapolis. An ISN also encourages physicians to reduce variations in how health care is delivered, he adds.

Mother advantage of ISNs is that they offer the opportunity to cut costs by sharing resources, notes George C. Halvorson, president and CEO of HealthPartners, the largest HMO in Minnesota. The planned merger between HealthPartners and Ramsey HealthCare Inc., a health care delivery organization, will allow HealthPartners to share the cost of urgent care equipment with Ramsey and to build an outpatient surgery clinic at the St. Paul-Ramsey Medical Center. These measures should reduce the cost of surgery, says Halvorson.

Reduced administrative expenditures and less duplication of services also lower costs for ISNs. Such reductions are expected as a result of the planned merger of HealthSpan with Medica, another HMO in Minneapolis. The new ISN, Allina Health System, expects to keep cost increases well below the 9.2% increase allowed under the terms of Minnesota's recently passed health care reform law. (See "State Governments," page 54.)

ISNs make it easier to manage health care delivery and "to move closer to a health care model based on quality and cost effectiveness rather than on risk selection," says David Strand, senior vice president of Medica.

Regardless of their structures, ISNs must have strong leadership, says Newcomer. "Hospitals and doctors have very different missions. The hospital has a large capital facility to support and wants that facility to be used. But physicians say, "If we are going to develop more efficient care, we need to move more care out of the capital-intensive hospital and into low-cost areas like our offices,'" he explains. "If they are set up as equal partners, it's very difficult to resolve those conflicts. The leadership has to look at the whole picture and be able to make a decision that may hurt one of the entities, but will help the whole organization."

The growth of managed care and the development of ISNs present many challenges for MCOs. One of the most formidable is the task of finding primary care physicians (PCPs).

HMOs have favored a greater number of PCPs than specialists in the provider mix of a physician network, says Pamela Mittelstadt, GHAA medical affairs director. PCPs are at the center of health care delivery in an HMO. They provide routine medical treatment, and coordinate all patient care, including referrals to specialists.

A 1993 GHAA survey showed that 73% of HMOs are having trouble finding PCPs. As a result, 70% have modified their recruitment strategies and 81% devote more staff to recruitment.

Managed care groups also have offered PCPs more money. "More competition for PCPs means that in the future, we will have to pay them more," Newcomer says. "I think you're going to see PCPs' incomes rising and specialists' incomes dropping."

As another inducement to join, HMOs provide fringe benefits such as extended vacation time. Hans also are using improved support services and reduced paperwork as incentives, GHAA survey results show.

INCENTIVES

Some HMOs are trying even more creative tactics. For example, Kaiser Permanente, an HMO in Oakland, Calif., recognizes that more women are going into primary care. Therefore, Kaiser is making flexible hours and limited-hour schedules available to them, says Ian Leverton, M.D., director of the Permanente Medical Groups Interregional Services.

And though not yet a widespread trend, "some HMOs are retraining the specialists within their own plans to meet their need for PCPs," says Mittelstadt.

Moreover, many of the PCPs who are available are ill-equipped to practice effectively in managed care, the GHAA study shows. More than 75% of HMOs reported that internists were poorly prepared for managed care practice. Some 62% believed pediatricians were not prepared to practice managed care, and 51% said the same of family and general practitioners.

Says Mittelstadt, "PCPs must be able to communicate effectively with patients. They must know how to promote and foster health promotion and disease prevention services. They must have the ability to work on a team with other members of the provider community and to use clinical and management information systems to analyze and improve practice."

To ensure that PCPs are trained properly, about 55% of HMOs are now involved in graduate medical education. "We have our own residency program which emphasizes the ambulatory side of medical practice," Leverton says. "We are doing everything we can to introduce medical schools to the real world."

If they find PCPs trained to practice managed care, many HMOs hold them directly accountable for their patients' clinical outcomes or for their cost effectiveness.

UHC is imposing standards both for quality and utilization, and will create incentives for providers to meet or exceed those standards, says Newcomer.

For example, he explains, "Anybody who keeps the health care cost at a certain amount per member per month but who also achieves an 80% rate of immunizations, 70% Pap smears, and 80% mammograms would be eligible for a bonus."

Although two UHC health plans recently started such a bonus system, it's too early to determine how well it is doing, says Newcomer.

In addition, UHC is installing an automated utilization review system to look closely at providers "who are dearly outside the mean or in areas in which there have been a lot of problems," Newcomer says.

Physician profiling is part of doing business at HealthPartners. "We can find cardiologists who have 1.5% mortality rates and others who are at 5.5%. You know you don't want a cardiologist with a 5.5% death rate," says Halvorson.

"Physicians don't want to be outtiers," Sprenger adds. "They want to be within the norms and are positive about learning what works best."

MCOs are learning what works best because they, too, are being held accountable--by employers and other health care buyers.

Employers have become aware that the key to cutting costs over time is to improve quality. Therefore, they have begun demanding details about quality improvement.

In the past year, some MCOs have issued public reports of their performance. Kaiser Permanente's northern California region, for instance, reports on quality of care in seven categories: childhood health, maternal care, cardiovascular disease, cancer, common surgical procedures, other adult health, and mental health and substance abuse.

Whenever possible, performance was compared with benchmark data from another source. For example, the rate of childhood immunization was compared with that of the California Department of Health Services. Kaiser Permanente also measured the satisfaction of members with regard to medical care, treatment, and service.

Like Kaiser Permanente, Medica issued a public report card during 1993. It focused on four areas of accountability: consumer satisfaction, quality of care, administrative efficiencies, and cost reduction.

"We're heading toward developing an annual sort of Consumer Report," says Sprenger.

"Report cards have really improved our credibility with brokers, consultants, and employers," says Peter Brutaleve, group vice president of marketing for Group Health Cooperative (GHC), a consumer-owned HMO in Seattle. Group Health issues report cards to its accounts that have more than 200 enrollees, he says.

Report cards also provide an incentive for self4mprovement. "It's like any business," says Bmmleve. "If your work is visible, you're going to work harder at it."

ACCOUNTABILITY

"Most important, report cards provide the basis for making health care purchasing decisions," Sprenger says. "If the report card doesn't measure up, you're not going to come back to the plan next year."

Shortcomings exist, however. For example, the reports lack consistency between plans and the numbers are generated internally, and are not verified by an impartial observer. Brutaleve notes, "If, as a health care consumer, I see a report card that compares one plan with another, I want to know if they're measuring the same things."

Phil Nudelman, president and CEO of Group Health adds, "There has to be some guideline, whether state or federal, for some commonality of reporting."

One step in that direction is the Health Plan/Employer Data and Information Set (HEDIS), which defines a core set of performance measures for health plans and methodologies for deriving performance measures. The National Commission on Quality Assurance (NCQA), in Washington, an accreditation organization, developed HEDIS with employers and health plan representatives. (For more information on HEDIS, see "Guide Helps Employers Evaluate Health Plans," page 60.)

While HEDIS represents a significant step forward, it's development continues. Says Janet Corrigan, vice president of planning and development of NCQA, "It will take time to get a well-balanced set."

It will also take time to get all MCOs to report their progress. Three to five years will pass before some parts of the United States are ready to generate standardized reports, says NudeNan. At least five years may be needed before any national clearinghouse for quality measures could be operational, Sprenger maintains.

Managed care also faces challenges on other fronts. One is the existence of so-called any willing provider laws. In 1993, the U.S. Supreme Court left intact a lower court ruling that upheld Virginia's right to require MCOs to allow all Virginia doctors to join managed care networks if the doctors agree to meet the requirements of the health plan, unless there is some "reasonable basis" for excluding them.

Most managed care executives view such statutes as detrimental to managed care. "Every enterprise in the U.S. operates on the premise that when it purchases services from an outside vendor, it evaluates those vendors for quality, service, and cost effectiveness," says Channing Wheeler, senior vice president and managed care officer for the Northeast region of CIGNA HealthCare, Bloomfield, Conn. "Any willing provider laws absolutely undermine an HMO's ability to enhance the quality of medical care delivery and service."

"Do we want to water down the credentialing work done by MCOs by requiring every physician to be accepted?" he asks. "It is clearly our goal to identify physicians and providers who do a better job and channel our patients to them."

MCOs are clearly preparing for a more competitive future. Regardless of the outcome of health reform, MCOs recognize that if present enrollment trends continue, they will be caring for millions more Americans in the years ahead.

The Insurance Industry and Managed Care

When it comes to managed care, U.S. insurers are many of the same concerns as HMOs nd other managed care organizations (MCOs). As the indemnity insurance market dwindles and as community rating measures passed by states are limiting their ability to select those they wish to insure, many insurers are embracing managed care whole-heartedly.

Managed care also appeals to many traditional insurance company customers. The Blue Cross Blue Shield Association (BCBSA), in Chicago, for example, reports that enrollment in BCBSA managed care products has increased 400% since 1985.

In addition, virtually every large insurer has become active in managed care. For example, CIGNA Corp., in Philadelphia, The Prudential Insurance Company of America, in Roseland, N.J., and The Travelers, in Hartford, Conn., all have managed care divisions.

As a result of their eagerness to compete with HMOs, and to ensure that they are positioned to become the accountable health plans envisioned in managed competition, insurers are adopting the same performance and quality measures as established MCOs. Soon, such ratings are going to become public, says Channing Wheeler, senior vice president and managed care officer for the Northeast region of CIGNA HealthCare, based in Bloomfield, Conn.

Gathering Data

"We are all moving in the direction of a report card," says Barbara Hill, vice president, health care policy for Prudential. Most large insurers' health care service companies are reprogramming their systems and adjusting measurements to collect the data needed to provide accountability, says Hill. Because many smaller insurance companies can't afford to do the same, she predicts some will merge. '"I think it's a reflection of the amount of capital needed to retool. The investment in data alone is huge," she says.

Though insurers aren't yet building the closely integrated health care delivery systems that typify the collaborative efforts of HMOs, they are trying to secure their relationships with physicians, and particularly with primary care physicians (PCPs). There is a movement toward viewing providers as partners in the effort to cut costs and improve quality, insurers say.

"We operate in approximately 15 HMO markets and currently work with around 30,000 PCPs,'" says Wheeler. "Our dominant strategy is to increase the affiliation and loyalty of PCPs, to build up a strong patient stream with them, and to make our administrative and medical management processes easy for them to work with."

The collaborative spirit is also being felt in the area of utilization review, says Steve Matheson, vice president of Travelers managed care operations. Insurers and providers are now "coming to the table with common objectives,'" he says. If this continues, Matheson envisions a future in which '"we can turn the responsibility for utilization review over to the providers rather than to watchdog firms."

Cooperation is likely to become increasingly common as BCBS plans align more closely with local community hospitals and physicians' groups, says Alissa Fox, executive director for congressional relations of BCBSA. "We used to play all sorts of games. Now we are all trying to work together to control health care costs and improve quality," she says.

COPYRIGHT 1994 A Thomson Healthcare Company
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