Healthcare providers who have been complaining about the constraints imposed on them by insurers under managed care may have found a solution: If you can't beat 'em, join 'em.
As the nation's proliferating integrated delivery systems take on more risk in the form of capitated payments, they are getting into the insurance business, whether they realize it or not.
In fact, some integrated delivery systems, such as physician-hospital organizations, are bearing more risk-and keeping more of the premium dollar-than the insurers and HMOs with which they contract. That has some regulators and observers worried.
Under so-called "global capitation," where PHOs accept capitation for physician and hospital services, PHOs' share of risk and premiums can be as high as 85%. The HMOs they contract with take the other 15% for administration and marketing.
The percentage of premiums that flows to PHOs can be even higher if they accept more risk, such as out-of-area care. A recent study of seven major HMOs by Healthcare DataBank, a managed-care research firm in Santa Rosa, Calif., showed that providers are assuming as much as 92% of HMOs' premium dollars.
"The issue is, when do you cross the line from being a healthcare provider to being an insurer?" said Peter Kongstvedt, M.D., a partner and healthcare consultant in the Washington office of Ernst & Young. "They don't call it risk for nothing. There will be some failures."
Adding risk.Managed care is increasingly being equated with providers taking on risk.
"That's how we view managed care-as risk-sharing, where you align the incentives in a capitated environment with physicians and a hospital working as an integrated system," said Marc Sandstrom, senior vice president of legal and administrative systems at San Diego-based Sharp HealthCare.
While there is little data on the number of PHOs in operation, Ernst & Young has identified more than 250 integrated delivery systems and is beginning a study of their financial status, said Fred Abbey, the firm's national director for legislative and regulatory affairs. Ernst & Young also will publish a regulatory outlook for PHOs this fall, based on interviews with officials in all 50 states.
Meanwhile, because only a few states have established solvency requirements for PHOs, the National Association of Insurance Commissioners is beginning to develop a model law for regulating these entities, which some regulators have characterized as "stealth HMOs."
Full service. PHOs combine physicians, hospitals and other medical services into a single entity that contracts with third-party payers and/or employers to provide a full spectrum of healthcare services for a capitated fee. While most PHOs assume a portion of the risk for providing the services, some have reached the nirvana of global capitation.
Sharp is one such fully integrated PHO. It contracts with more than 45 HMOs or insurers on a capitated basis, covering about 280,000 people.
"We're taking all the risk," Mr. Sandstrom said. "The only thing the carriers do is the administration and the marketing."
Examples of fully integrated systems abound. The PHO of Park Ridge, Ill.-based Lutheran General HealthSystem bears virtually all physician and hospital risk-and takes most of the premium-while contracting with HMOs, including Humana. The PHO "takes responsibility for paying all (health plan enrollees') claims and for any emergencies in the metropolitan Chicago area. We continue to provide coverage for emergencies out of Chicago, and for transplant and infertility claims," said Barry Averill, a vice president at Humana Health Plan of Illinois in Chicago.
Lutheran also purchases its own reinsurance and conducts its own quality reviews and utilization management, Mr. Averill said.
La Habra, Calif.-based Friendly Hills HealthCare Network, another fully integrated PHO, was getting so many inquiries about its system that it established a for-profit subsidiary, Strategic HealthCare Management, which helps organizations develop integration strategies.
Friendly Hills, which has 27 contracts with insurance companies and HMOs covering 100,000 people, accepts all hospital and physician risk but doesn't perform marketing and administration services, said Thomas Mayer, M.D., president and chief executive officer of Strategic HealthCare.
The ancestor of fully integrated provider systems is Kaiser Permanente, which is viewed as a cost-effective, competitive model for the future. Kaiser, a staff-model HMO, incorporates health insurance, physicians and hospitals in one organization. It has 6.6 million enrollees in its health plans in 12 regions nationwide.
Countless PHOs "are trying to become Kaiser," said David Langness, vice president of the Hospital Council of Southern California. Despite Kaiser's 50-year head start, PHOs "could become competitors to Kaiser" as healthcare reform "plays right into their hands," he said.
"The dynamic that is changing to (PHOs') benefit is the growth of intermediaries like health insurance purchasing cooperatives and purchasing alliances. Groups will find new large and open markets," said analyst Doug Sherlock, owner of Gwynedd, Pa.-based Sherlock Co.
Targeting the middle man.With alliances providing the markets for PHOs, the logical conclusion of providers taking more risk is elimination of the middle man-the insurer or the HMO-that currently provides access to markets, observers said.
That also would eliminate significant administrative costs.
"Eventually, some mechanism has to be found to take the exorbitant administrative costs (borne by HMOs and insurers) and do away with them," Mr. Langness said. Administrative costs represent 23% of U.S. healthcare spending vs. 8% in Canada-almost all of it in the administration and marketing of insurance plans, he said.
A single-payer system like Canada's would eliminate those costs, "but there is another way," namely, fully integrated PHOs, Mr. Langness said.
Does this frighten HMOs? The Group Health Association of America, a managed-care trade group, has no position on PHOs, but it believes all health plans should comply with its uniform standards regarding solvency and quality issues, a spokesman said.
When a GHAA committee deliberated whether to allow PHOs into the organization, members were stumped by the endless permutations of integrated systems. "When you've seen one PHO, you've seen one PHO. They're all a little different," said Humana's Mr. Averill, who was on the committee.
GHAA now permits integrated delivery systems like PHOs, "operating in a significantly similar fashion to an HMO," to obtain affiliate membership.
But despite the differences among integrated systems, the global capitation bug is biting both the new ones and those that have been operating for some time.
When Humana sought to contract with a small hospital recently, Mr. Averill was told the only way Humana could do business with it was by allowing the hospital full risk for both physician and hospital services.
The proposal was that another organization would manage the full-risk contract for the hospital. Neither organization had any experience with full-risk contracting.
"If I were a regulator of that state, I'd be concerned," Mr. Averill said.
While so far no provider groups are saying they intend to take on the administration and marketing functions as well, thereby eliminating HMOs and insurers, Mr. Averill said, "in the same breath they say they're going to contract directly with the state for Medicaid-as though they were an HMO. And what's to prevent them from doing that with Medicare, and what's to prevent them from doing pure commercial business in the future?"
The reason provider groups are keeping their intentions quiet, according to Mr. Averill, is that "they don't want to scare off the insurers. There is certainly a section of the commercial market that the employer is not going to parcel out to individual systems, and (PHOs) want access to that business. So I don't think they want to bite the hand that feeds them right now.
"But who knows-five or 10 years from now, with healthcare reform and with various alliances being discussed? Indeed, they have the capability of quickly becoming HMOs, if that became the right strategy at the right time," Mr. Averill said.
Or it's also possible that PHOs will follow the lead of HMOs and hook up with other integrated systems, he added.
Indeed, last month Lutheran General and EHS Health Care of Oak Brook, Ill., announced a proposed merger that would create a $1.2 billion organization "capable of offering a full continuum of healthcare services to the entire Chicago region, from the Wisconsin to the Indiana borders," said Richard Risk, EHS president and CEO (June 20, p. 17).
Sharp HealthCare also has the infrastructure in place to become an insurance company, Mr. Sandstrom said. "What we don't have right now is the marketing capability to attract membership. But if the government takes on that role through a single-payer system or through alliances and says, `Here are 70,000 members, can you take care of them?' we don't need an insurance company to do that," he said.
In a move to attract more enrollment, Sharp and four other systems in May formed California Health Network "to allow us to jointly contract with other health systems to provide services on a statewide basis," Mr. Sandstrom said. "Our goal is not to cut out the insurance companies; we're prepared to take the members however they come to us."
`Super PHOs.'Michael Anthony, a partner and chairman of the health law department at McDermott Will & Emery in Chicago, noted, "As `super PHOs' move toward the development of regional programs, they have access to greater resources and typically as part of their development consider becoming insurers.
"All of the super PHOs we've worked with have considered the possibility. Some are definitely moving in that direction, but some have decided it's too capital intensive," he said.
Strategic HealthCare's Dr. Mayer said the strategy of replacing insurance companies is very market-specific. "I'm not sure it fits in Southern California, where there are many well-entrenched insurance companies," he said. "The difficulty in becoming an insurance company is that you enter into competition with those who were once your partners."
Indeed, "those organizations still need a way to bring members intothe system," said Cheryl Pope, vice president of Western Group Operations for Prudential in Los Angeles.
Prudential's strategy is to establish an exclusive contract with PHOs under which the insurer owns the facilities and equipment, and providers deliver care under an annual budget.
However, there is ample opportunity for PHOs to become insurers in the Southeast and in other areas where HMO penetration is less than 15%. What will slow the process is "where you have a market that is ripe, you rarely have a system that is as integrated as Friendly Hills," Dr. Mayer said.
Some PHOs want to become insurers before they are well integrated as provider entities, Dr. Mayer said. "What we usually do is say, `That's an option if it fits your market, but first you must make sure you have your own house in order.'*"
Another consideration, he said, is that in many markets, insurers are not willing to give more risk away in order to give providers global capitation.
Insurance regulators also are wary of the migration of risk from insurance companies to PHOs.
"These docs don't have a clue what kind of risk they're taking on," said Dixon Larkin, Utah's deputy insurance commissioner. "They say, `People self-fund all the time. We're just self-funding.' But when providers take on that kind of risk for a capitation fee, they're selling insurance to third parties," he said.
Realizing this, Utah regulators plan to recast their insurance laws to link licensing and reserve requirements to the type of risk assumed, rather than to what an organization is called.
Meanwhile, the NAIC's Health Organization Risk-Based Capital Working Group is developing solvency standards for PHOs and similar non-HMO entities.
Some states already have established minimum capitalization requirements for PHOs. For example:
The MinnesotaCare bill signed by Gov. Arne Carlson on May 10, 1994, requires "community integrated service networks" that provide prepaid health services to 50,000 or fewer enrollees to maintain a minimum net worth of at least $1 million.
Under Washington state's Health Services Act, PHOs must have at least $1.5 million in capital.
California's Department of Corporations is considering whether it should permit providers to enter into full-risk contracts without insurer links. In 1987, the department adopted a policy that prohibits all health plans from entering into contracts transferring the full financial risk associated with patient care to a contracting provider entity.
Insurance companies are scrambling to adjust to the changing risk scenarios.
Some, like Prudential, are building their own PHOs, while others, like Aetna Healthplans, are hiring providers to create Kaiser-like staff-model HMOs.
Kevin Hickey, vice president at Aetna Healthplans in Chicago, concedes that provider groups that can get the capital and operational systems together could offer products to compete with Aetna.
"Then they'll be what we are. They might as well be us, or we might as well work with them and do what each party does best," he said.
With the existence of full-risk-bearing provider groups authorized by legislation in Minnesota, "it's impossible for us to do business as we are accustomed to" in Minneapolis, Mr. Hickey said. "So we changed our role. We provide the back-room services, such as enrollment, eligibility, billing and claims payment" for the freestanding integrated networks, he said.
Other insurers, such as Cigna, have been buying up provider groups in order to own the delivery systems and stave off potential competition from them.
Greater stability.Some observers suggest that healthcare purchasers will view these insurer-owned systems as more stable because their parent companies are already being regulated.
Other insurers view the PHO phenomenon as a market ripe for the picking.
"It's ballooned into a very competitive market," said Scott Walker, assistant vice president for Southeastern Risk Specialists in Atlanta, which underwrites provider stop-loss insurance on behalf of AIG's Lexington Insurance Co.
Stop-loss insurance provides health plans a cushion for catastrophic losses above a specific level.
"Since January I've heard of 30 companies (selling) specific stop-loss. That's more than double from a year ago," he said.