California hospital systems are so intent on gaining a foothold in managed care that they're practically lining up to apply for modified-HMO licenses that allow them to mimic HMOs in key respects.
Although many California hospitals and medical groups take on some financial risk for the care of health plan enrollees through various payment methods, the modified-HMO licenses allow systems to contract as a whole.
Thus, according to Patrick Aberle, senior vice president of managed care at Sutter Health: "(A limited license) will eliminate some of the hassle of managed care. We might have one capitated arrangement at one hospital, and it is different at a neighboring facility in a different county. (The license) will allow us to bring all the entities together and improve customer service."
Sutter, a 20-hospital system based in Sacramento, Calif., is one of the first hospital chains to file an application for the license, which the Department of Corporations began granting in 1996. The limited license allows recipients to accept global capitation, but unlike a full-HMO license it doesn't let them underwrite lives or market themselves as an HMO.
The initial rush for the limited licenses was led by physician practice management companies and large physician groups. To date, six limited licenses have been granted, including to PPM giant MedPartners.
Among the half-dozen hospital systems awaiting word on their applications are Cedars-Sinai Medical Center in Los Angeles and UniHealth in Burbank.
Despite the appeal of the licenses, including the possibility of significant additional revenues through expanded capitation, executives are concerned about the potential risks.
For example, some observers worry that not-for-profit systems will spend tens of millions of dollars to unsuccessfully recast themselves as quasi-HMOs.
"Once an organization commits itself to this strategy, only then will it discover that an enormous amount of resources are required to follow through and implement," said Peter Boland, president of Boland Healthcare, a Berkeley, Calif.-based consulting firm. "The network development and management business . . . becomes very difficult for these hospital systems, particularly the larger they are."
Boland estimated that the investments necessary to take advantage of the limited license, such as setting up an appropriate management information system, would range from $5 million to $50 million, depending on a system's size.
Frank Matricardi, a principal at Phoenix Healthcare Consulting in Manhattan Beach, Calif., agreed with Boland's estimate.
Healthcare executives, however, question that amount. They insist that what will happen to costs isn't clear, especially since systems already are continually upgrading their information systems capabilities and other infrastructures.
In some instances, costs might even be cut, argued Bill Caswell, chief executive officer and president of SCHS Medical Value Plan, the managed-care subsidiary of Pasadena-based Southern California Healthcare System, a network of five hospitals in the suburbs east of Los Angeles. Caswell said SCHS would combine its physician and hospital claims departments in anticipation of receiving a license this spring.
But there are still significant questions about the value of the licenses, Caswell said. Among them: How receptive will health plans be to assigning global capitation contracts and at what rates and terms? Will plans view licensees as competitors or a new element in the market?
"No one can decide," Caswell said. "It's too early to say."
Added Sutter's Aberle: "We're hoping it just doesn't add another duplicate layer of administration and expense. If it does, we'll stop using it."
Many observers believe HMOs will be happy to concede some of the work they perform to hospitals.
"The HMOs would retain the administrative and marketing functions, but they'd get to punt the medical-cost component," said Steve Valentine, president of the Camden Group, an El Segundo, Calif.-based consulting firm. "That isn't bad, given the environment of unfunded mandates and President Clinton's proposal to expand Medicare coverage."
Still, Valentine said he believes the licenses will prove most useful in smaller or medium-sized cities, such as Sacramento or Bakersfield, where systems can more easily obtain the geographic distribution needed to serve the market. "You can get your arms around markets like those," Valentine said.
"Doctors and hospitals have had friction in the past," he added. "They consider the HMO the enemy, and now they have to prepare for PPMs. This is an attempt to try to get doctors and hospitals to integrate."