California physicians have been through a grim struggle against a cost squeeze that everyone says is likely to continue.
But while it's tempting to read the California experience as a failure of capitation and integration, that's not quite the case. In fact, physicians in the Golden State have gained new tools that should help them better address the continuing high healthcare costs that are expected. Two tactics considered particularly promising by California physician executives are disease management programs and Web-enabled information systems.
The California Medical Association is working to convince state lawmakers of the need for legislative reform.
In its public comments, the CMA contends the state's healthcare system is an outright disaster, especially for doctors. It says about one-third of California physician groups declared bankruptcy or disbanded from 1996 to mid-1999. Last fall the CMA was predicting up to 34 additional failures by year's end, but it hasn't researched what actually happened.
In a study for the CMA, PricewaterhouseCoopers said professional capitation rates in California plunged 35% in the 1990s. Anecdotally, some physicians' pay has dropped 20% to 50% in the past five years, the accounting firm said.
From the CMA's perspective, nothing has changed to improve doctors' lot, says spokesman Hobart Swan.
Others, however, take a more optimistic view and cite evidence that the market is repairing itself, at least a bit. They say medical groups have learned many valuable lessons, among them that information is the crucial ingredient to good medical management. And savvy medical executives have grown careful about building capitated market share, lest they underestimate their costs (see chart on page 68).
In fact, these days, physician groups are more willing to give up market share when contracts aren't profitable, says Michael Abel, M.D., director and senior advisor at Brown and Toland Medical Group, a San Francisco-based IPA with 1,300 physicians.
"The crisis in California," Abel says, "was created by a drastic reduction in premiums in a foolishly competitive market, where everyone was buying volume without paying much attention."
As evidence that it's beginning to benefit from tough lessons learned, Brown and Toland broke even last year after a 1998 loss of $9.8 million that triggered speculation about its future. The IPA negotiated significant increases in its capitation rates through 2001 and is passing those on to physicians, Abel says.
For large medical groups, double-digit percentage increases in capitation rates were a common result of 1999 negotiations, Abel says. The majority of smaller groups probably didn't make out as well, he says.
Physician incomes have fallen to such low levels, it's imperative rate hikes benefit the doctors, Abel says. Yet, reports of medical group failures exaggerate how bad things are, Abel says. While physician organizations face tough times, many groups could have survived if their physicians had stuck it out at lower pay, he says.
Executives at the state's largest integrated system and HMO, Oakland, Calif.-based Kaiser Permanente, also think the days ahead look somewhat brighter. "The evidence I have is that the cost of healthcare is rising in California, so there will be more funds in 2000," says Robert Pearl, M.D., executive director and CEO of the Permanente Medical Group, Kaiser's physician arm. "Most programs recognize that they need to fund medical groups and hospitals better."
Aided by 10% to 20% rate hikes, the Kaiser organization as a whole cut its net loss to $6 million in 1999, after reporting net deficits totaling $554 million in the previous two years. In fact, Kaiser's core California division chalked up an operating surplus of $280 million in 1999, a significant improvement over 1998's operating loss of $354 million. The unit met capital goals and is proceeding with plans to rebuild nine of its 11 hospitals, Pearl says.
According to health plan executives, premium increases across the state generally hit middle to high-single digits.
The fact of the matter is, the California healthcare system is likely to struggle as long as it's funded at 77 cents for every dollar spent in the rest of the nation, Pearl says. But Pearl says Kaiser proves the value of integrated delivery systems. He says he believes the Kaiser model provides higher quality care than other organizations in California and elsewhere despite the challenges. That's because full vertical integration and not-for-profit status allow it to devote a greater share of premiums to actual medical care, he says.
The reason some healthcare systems have come apart is they never achieved real integration, Pearl says. In some markets outside California, where Kaiser has not been successful at full integration, the organization has suffered more, Pearl says. Kaiser recently divested money-losing operations in the Northeast and Northern California, and its mid-Atlantic unit continued to record losses in 1999.
Like Abel, David Druker, M.D., president and CEO of the Palo Alto (Calif.) Medical Foundation, says medical groups in California are getting smarter about their contracts. To him, a top lesson from the California experience is that in healthcare, volume doesn't always result in economies of scale and negotiating leverage. In fact, market share gains can be deadly to groups that don't project medical costs accurately.
"I don't think everything that has happened here is going to happen across the country," Druker says. "I would urge people to be cautious and thoughtful."
The 185-physician Palo Alto group has benefited from being selective in accepting contracts, he says. But Druker says he saw other groups get in trouble by bargaining too aggressively for market share. "You can't consider market share in a vacuum," he says. "You have to understand your costs. Hand in hand with understanding your costs is understanding how to lower your costs."
California providers have achieved great efficiency in hospital care, but they don't have a grip on outpatient costs. There's hope for further cost reductions in disease management programs, Druker says.
Under a disease management program of the Palo Alto group, a nurse keeps in regular contact with the group's most seriously ill congestive heart failure patients. The nurse tracks measures of patients' health, such as weight gains, and alerts doctors to potentially dangerous changes.
By ensuring patients are assessed and treated at the first sign their conditions are worsening, the program has averted hospitalizations. None of the 30 patients enrolled has been hospitalized in the past year, while nationally, almost one-fifth of CHF patients are readmitted within 30 days of discharge.
At Santa Ana, Calif.-based PacifiCare Health Systems, disease management programs can be directly linked to improvement in the delivery of preventive care, says Sam Ho, M.D., the HMO's vice president and corporate medical director. Organized medical groups have been crucial to the programs' success, as typically half of their components are implemented by physicians, Ho says.
In fact, results in PacifiCare's 2.5 million-enrollee California operations are slightly better than elsewhere, probably because integrated groups are prevalent, Ho says. For example, in a 3-year-old program, 90% of California members with CHF are taking ACE inhibitors, compared with 86% in the entire PacifiCare membership and national averages of 20% to 40%. Similarly, 90% of heart attack victims in PacifiCare's California plans and 86% in its entire membership receive beta blockers, compared with a national average of 34%.
At the same time, PacifiCare is increasing its efforts to help providers run their organizations better. The health plan has been providing consultations to its contracted providers on business strategy and processes since 1993 and now regularly assesses its physician groups' clinical and administrative capabilities. As part of those services, PacifiCare experts will help groups refine billing and other administrative systems. In an effort to improve patient satisfaction, the plan offers classes for physicians and staff members on being empathetic listeners.
PacifiCare sends to commercial consumers a clinical quality report card twice a year. It has seen statistically significant increases in retention rates and new membership at the better-performing medical groups, Ho says. The program began in California and will go national this year. "We think there is great hope," Ho says. "This is the first time we've had a report card that has been useful to consumers."
While PacifiCare has no plans to narrow its provider panel, Ho says he hopes the fact that consumers respond to report cards will mean that the panel will shrink naturally as low-volume providers drop out.
"You can't just capitate and run," Ho says. "You have to capitate and collaborate. I don't mean to misrepresent the fact that there are challenges in California, but the challenges are stimulating further creativity."
He isn't alone in his views.
Brown and Toland's Abel says he has great hopes that Internet-based information processing and communications will make healthcare more efficient. Lowering administrative costs, which consume as much as 25% of the healthcare dollar, is the only way healthcare organizations can thrive over time, Abel says.
In one effort to do so, Brown and Toland expects to extend an Internet-based information system for claims processing, eligibility checks and referrals to virtually all its 1,300 physicians by midyear. The system supplier, Healtheon/WebMD, is connecting the physicians as part of a pilot program.
An outside consultant estimates Brown and Toland should see a 10% reduction in its administrative costs when the system is fully deployed, Abel says.
Physicians could save three times that amount, he says.
Increased automation should help physicians handle capitation.
Although there's some disenchantment with capitation, having providers deliver care under a budget is a firmly entrenched practice in California, Abel says.
But he predicts the forms of capitation might change to include more point-of-service contracts and a more equal division of pharmacy risk between providers and health plans.
Charles Crispin, president of Evergreen Re, a Stuart, Fla., reinsurance provider and capitation consultant, says providers need to spend more money on actuarial analyses and hire firms with deep data bases. Meanwhile, health plans should make their actuarial data available to providers if contracts are to be true partnerships.
Inadequate cost analysis is an error that providers have made nationally in negotiating capitated contracts, Crispin says. "There has been a lack of knowledge and a lack of understanding, especially by providers," he says. "It's not how many capitated deals you sign; it's what is the potential profitability of the contract. I would deeply hope a lesson learned from California is that you need better data. Your own is not enough."
That said, Crispin says he believes with premiums increasing, the environment is good for providers to make a profit under capitation. A recent Evergreen Re survey of 50 healthcare organizations showed capitation is growing nationally, with providers averaging almost one more capitated contract in 1999 than in 1998. He says he expects it to continue to grow.
A few California plans never embraced capitation. One is Minneapolis-based UnitedHealthcare. Just one in five of its 750,000 California enrollees is in a capitated product with the rest in discounted fee-for-service plans.
United says from its perspective, a fee-for-service environment actually enables better care management. Under fee-for-service, United gets information on the health status and care of its members in the form of claims as part of the regular course of business. Information flow isn't as assured under capitation.
"We can use that data to support physicians," says Art Small, M.D., vice president for clinical services at UniPrise, United's subsidiary for national employers. Small was formerly vice president and medical director of United Healthcare of California.
Druker of the Palo Alto group says the success of the group's CHF program explains why he remains a supporter of capitation. Without being put at financial risk for patient care, the medical group wouldn't have had the incentive to implement the program, he says.
"I'm convinced capitation and managed care is the better way, but I'm sure if you polled California physicians, I'd be in the minority," Druker says.
He believes, in the end, the California healthcare system will rebound. "I am an optimistic sort," he says. "But there are a number of challenges."
Six lessons from the California market
- Information, not the alignment of incentives, is the crucial ingredient in good medical management.
- Capitation doesn't necessarily produce the information required for good medical management.
- Successful operations in a tight-money market require true partnerships among providers and between providers and payers. Wasteful administrative overlap is one danger of a capitated system in which organizations aren't sharing resources well.
- For providers, volume gains don't always equal increased market influence and can be deadly if costs aren't accurately projected.
- Consumers respond to quality differences in providers if information is provided in an understandable format.
- Organized medicine has the opportunity to provide better coordinated care through disease management programs that reduce medical complications.
Lisa Scott is a Chicago-based freelance writer.