MCO trends

MCO TRENDS The year 1995 saw everyone running for economic shelter under a managed care umbrella. Although no new evidence showed they really work, American businesses and providers moved toward them. There were more conferences, programs, articles, and lines of print on managed care, MCOs, and managed this and managed that than in any other year. More companies wanted managed care programs. More state governments wanted the Medicaid 1115 waiver to have an option for managed care. More elderly became skeptical of managed care as Congress looked at overhauling Medicare and for ways to shave billions from the federal budget over the next 7 years. More monthly and biweekly newsletters were introduced to add to the stack of required reading for those trying to keep up and to get ahead of competitors. Managed care became the dominant form of health care delivery in 1995. Nearly two out of every three employees in companies with 200 or more employees chose managed care over fee-for-service. How long the MCO frenzy will last is speculative; however, several managed care system structure trends will continue for the next few years. Of special interest is the formation of thousands of physician-hospital organizations (PH0s) and other provider service networks (PSNs). The creation of networks of all types is creating a feeding frenzy for MC0 contracts.

It's Not Over...There Will Be More Mega-Managed Care Systems Merger mania continued in 1995, with hospitals, HMOs, physician groups, and pharmaceutical giants all looking for larger partners and acquisitions. It is not over yet for those for-profit HMOs that are aiming for regional and national dominance. In 1996 there will be more big mergers of HMOs with HMOs, and with insurance companies as well. Much like large telecommunication and multimedia mergers, the goal is to access more employers and households with different insurance policies. As a rule the large for-profit HMOs will become larger through more acquisitions in 1996. As an industry, HMOs will focus on building stronger provider networks and partnerships

36TCM 9 MARCH/APRIL 1996

to deliver their new managed care workers' compensation and 24-hour programs.

"With fewer dollars to operate, HMOs are now being forced to better manage the care and the costs of services and to contract with economically prudent providers willing to take price concessions or risk or both." When will it all end? Will the big HMOs squeeze out the small ones? These are but a few of the questions that are being asked. If all this realignment results in truly integrated care, wherein the MCOs can track patients through their care systems and the care is truly managed, then it is all well and good. In theory, integrated care is good care and quality care. If this is the result of the mergers, acquisitions, and all of the partnering that is going on, then everyone will benefit from the mega-managed care systems being formed.

More And Bigger HMOsTo Come HMOs grew in 1995, but they had to give American businesses either price rollbacks or small increases to do it. As long as HMOs keep prices down, more businesses and people will stay and want to enroll in them throughout 1996. With fewer dollars to operate, HMOs are now being forced to better manage the care and the costs of services and to contract with economically prudent providers willing to take price concessions or risk or both. If HMOs keep their prices level and score high on patient satisfaction and other outcome and performance measures now in use, the massive shifts to HMOs that occurred last year will continue.

In 1995, employers and purchasing coalitions became smarter and stronger buyers and flexed their buying power to get both cost and quality. This will continue for some time and force HMOs (and PPOs as well) to compete more evenly on quality, outcomes, and service alongside price. Just like the buyers who organized themselves into larger buyer groups to get better prices, the MCOs are now organizing to become larger, more integrated, and more efficient. Their cmTent focus is now shifting to prevention, wellness, reducing inappropriate care, and improving clinical and financial outcomes. HMO enrollment jumped to an estimated 55 million people by the end of 1994. This was a 12% increase from the 1993 end-of-year enrollment of 49 million. The number of operating HMOs increased from 541 to 556 in 1994. In 1995 the number increased again to 564. To compete more efficiently, large HMOs continued to buy both large and small HMOs in record numbers in 1995. In 1995 there were 12 major HMO mergers or acquisitions worth nearly $4 billion. This includes the mega-merger of United Healthcare (3.7 million members) with Metraliealth. With this purchase for $1.65 billion, United gained access to 13 million policyholders for future managed care businesses. HMOs will continue to have dramatic growth in 1996 because the Health Care Financing Administration (HCFA) and the states are promoting them to care for more Medicare and Medicaid populations. HMOs will surely grow when the HCFA finally decides to approve additional types of MCOs (PPOs, liMOs, and other forms of managed care systems) to be offered to the 37 million persons receiving Medicare benefits. So far, only 9% of the Medicare beneficiaries are in HMOs. With nearly 40 states holding Medicaid 1115B waivers that can be used to enroll more Medicaid beneficiaries into MCOs, the HMOs will grow even larger. After the Congress finally decides how the Medicare and Medicaid programs are to be reengineered, enrollment in HMOs should increase dramatically. With the help of HCFA and the urging of the

MCO TRENDScont. states, new HMOs and other forms of MCOs will be started in 1996 to enroll more people receiving Medicaid. Other start-up HMOs will be developed with the hope of being purchased by large for-profit HMOs that have ample cash to purchase more memberships and geography. Although some think it is too late to start HMOs for the purpose of selling them to the now cash-rich, for-profit organizations, the selling window will probably remain open for a few more years. Enrollment in HMOs could quickly grow to 100 million before the year 2000 because of new markets, new products, and continued growth of current product lines. Membership growth will come from 9 More point-of-service products being offered 9 More employees choosing HMOs because of low price increases 9 More states promoting Medicaid enrollment in HMOs 9 Increased promotion of Medicare by HCFA 9 Offering more managed care workers' compensation programs 9 The introduction of more one-stop insurance programs--24-hour programs An annual growth of 10% per year on 1995 membership alone will push HMO enrollment past the 100 million mark in the year 2000. With more HMOs entering the marketplace, there will be more opportunities for case managers. The larger HMOs are learning to become integrated systems of care....and this has promise for case managers. As HMOs learn that the needs of Medicaid and Medicare enrollees are significantly different from and greater than those of current commercial members, more case management opportunities will open up.

PPOs The number of employees offered PPOs in 1994 increased to 79 million - - a 3% increase from 1993 levels. PPO enrollment in 1995

38TCM 9 MARCH/APRIL 1996

remained pretty much at 1994 levels as HMOs continued to keep prices down and effectively marketed their point-of-service programs and appealed to more employers as moreorganized systems of care. Because PPOs didn't have industry-wide report cards or performance measures similar to HEDIS (Health Plan Employer Data and Information Set), they were at a slight marketing disadvantage in terms of selling their efficacy. With the National Committee for Quality Assurance (NCQA) accrediting HMOs and with HMOs pushing HEDIS reporting, the PPO industry is now focusing on getting PPO accreditation and credentialing programs on the same competitive level as NCQA and HEDIS. The number of employees offered PPOs reached an estimated 81 million at the end of 1995 -- up only 2 million from 1994 levels. The number of operational PPOs reached 799 in 1994. PPOs remain very competitive in the employer markets and in workers' compensation PPO programs; however, they are still not able to compete in the Medicaid and Medicare markets because they are not risk-bearing organizations. When HCFA and the states allow them to compete for Medicaid and Medicare contracts, their enrollments will show higher gains in 1996 and 1997. PPOs, in addition to competing against HMOs, now have to contend with PHOs and other business ventures that are trying to bypass HMOs and PPOs altogether and contract directly with payers, employers, and health purchasing cooperatives, organized by business.

Integrated Delivery Systems (IDSs) IDSs received a lot of attention in 1995 because they are "integrated" delivery systems. In fact, some view them as the health care system of the future. IDSs are receiving a lot of attention today because they are beginning to integrate care, not just organizations and balance sheets. Market forces, the promise of capitation contracts, and health care reform initiatives at the state level are driving hospitals, physicians, and other providers into new or existing IDSs. In 1995 many organizations were bitten by

the integration bug inasmuch as there were an estimated 400 IDSs being formed or in operation. Most of these were formed in 1995 and are not highly integrated, unlike some IDSs that have been in business for 10 or more years. IDSs come in many shapes, sizes, and configurations. Many of the older integrated care systems are built around either very large multispecialty medical groups (more than 150 physicians) or very large regional hospital networks. As long as IDSs integrate and streamline the care, reduce duplication, and eliminate unnecessary procedures and practices, they hold great promise. However, they must compete on a cost basis with huge HMOs and PPOs and insurance programs that can access capital markets. IDSs that are just integrators of networks and organizations may be crushed by the weight of all the organizations they are to support with the risk contracts they negotiate with payers. By the year 2000, IDSs are expected to become a significant player in MCO markets, particularly in metropolitan areas. IDSs will become both major competitors and partners with HMOs. In some metropolitan areas, IDSs already contract with two or three major HMOs and compete head-to-head with others. IDSs combine health care delivery and financing under one organization that owns or contracts for health care services across the entire care continuum. Highly integrated IDSs (vertically integrated organizations such as the Ochsner Health Foundation, Scott and White, Henry Ford Health System, InterMountain Health Care, and Sutter Health Plan) own hospitals, physician practices, ambulatory care facilities, diagnostic centers, nursing homes, home care agencies, and intravenous-therapy companies. Another form of IDS is centered around large multispecialty medical groups that own primary care networks and contract with other physicians, hospitals, and suppliers of other health care services. Medical group IDSs hold promise for physicians who do not want to sell out to hospitals or to physician management companies like Coastal, MedPartners, PhysCor, and CareMark.

MCO TRENDScont. Figure I IDS Models

step toward a different model of health care delivery system that will emerge in the future. To control health care costs an IDS focuses on preventive care, wellness, rehabilitation, home care, acute care, and hospice care. Many of the older first-generation IDSs are developing disease-state management models and clinical pathways. Many of the older, larger medical groups that have come together to develop clinical pathways are also involved in the creation of IDSs. At this point most of the IDSs have not established proven cost efficiencies. Nevertheless, the development of IDSs is primarily a response to the demands of purchasers of services and managed care entities that are selecting provider organizations on their ability to offer a broad spectrum of care services to large enrollment bases and service areas.

PHOs

IDSs build complete networks by owning, leasing, or linking together providers of all types by long-term contracts. They obtain customers (patients) by contracting with employers who are self-insured, business coalitions that are purchasing for groups of businesses, HMOs, and insurance carriers. The integrators of IDSs are usually hospitals and large multispecialty medical groups (see Figure 1). Because a vertically fully integrated IDS requires extensive capital to acquire and operate all the pieces, hospitals usually are the integrators and act as the hub of such vertically integrated systems. When the integrator is a large medical group, ownership is many times limited to physicians. In this IDS model primary care physicians, hospitals, and other providers of health care services are linked by contracts to the hub medical group. Current IDS models are viewed by many as a

More than half of U,S. hospitals have formed PHOs since the early 1980s. In 1995 there were an estimated 3000 PHOs. Of this number, fewer than half have a good chance of surviving in the managed care world. The failure rate is projected to be high because many lack sufficient resources and do not have the management expertise to run them. As joint business ventures between physicians and hospitals, PHOs allow hospitals and physicians to pretty much cling to the status quo. PHOs typically contract with HMOs, insurance carriers, and self-insured employers to provide a full range of hospital and physician services for a capitated fee or under a discounted fee-for-service arrangement. To date, only a few PHOs have more than 25200 capitated lives. PHOs are an attempt by hospitals and physicians to be prime contractors in a managed care world. By forming a complete delivery system they hope eventually to eliminate the HMO or PPO middleman and go directly to employers and insurance carriers with a complete package of care services in exchange for capitated or fixed-price contracts. Because it is a business partnership there is no dominate hub like an IDS. Usually there is little vertical

integration and no ownership of facilities,

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Home Care laboratories, or home care agencies by the PHO itself. Whereas the hospital(s) and medical staff(s) have formed a delivery system to care for HMO patients, most HMOs view them as competitors and have rejected them as contracting partners. Profitable PHOs are few and far between. Many PHOs have fallen on hard times and have closed. Several have been reengineered and are now on their second and third organizations. PHOs are learning the hard way that the utilization, financing, and provider reimbursement systems needed to operate them successfully have to be pretty sophisticated. Because they are an intricate organization many PHOs are now turning to MSOs (management service organizations} to provide the marketing, administration, claims payment, and utilization management functions needed to be competitive and efficient. The casualty rates of PHOs will remain high because of poor planning, poor capitalization, and lack of management skills and because some are being put together just to appease doctors. IV

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MARCH/APRIL 1996 9 TQM 39

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Rebuilding lives is a science. And an art. Daniel F r e e m a n Hospitals, focuses on the physical, e m o t i o n a l a n d s p i r i t u a l n e e d s o f each i n d i v i d u a l . I n n o v a t i v e p r o g r a m s follow a comprehensive continuum of care f r o m s u b a c u t e t h r o u g h p o s t a c u t e . O u r goal is to h e l p each p a t i e n t t r a n s i t i o n b a c k to a n i n d e p e n d e n t life w i t h i n t h e community.

I MCO TRENDS cont. ]

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Justice against a couple of PHOs that attempted to control the flow of patients and were designed to prevent MCOs from entering their markets. Because of the financial risks involved PHOs are also now being looked at by many state insurance departments because they fall between the cracks of federal and state regulations. So far PHOs have been shown to have a short shelf life. Over time many of them will be transformed into independent practice associations (IPAs) by physicians who realize that they are the key component of the organization. The prognosis for PHOs is "guarded" at best.

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Evidence shows that health plans want to deal with groups of doctors and hold fewer contracts with physicians and other types of providers. Recognizing the shift and the weakened contracting position of solo and small practices, physicians are starting to take control of their destinies by creating larger group practices, networks, and IPAs to regain control of managed care. As a result physician-driven managed care networks, larger multispecialty medical groups, and PSNs are popping up across the country. PSNs, by definition, now include physician networks, hospital networks, PHOs, and ancillary networks. Not to be left out, other providers also are forming networks at the local, regional, and national levels -- chiropractors, home care companies, intravenoustherapy companies, and physical therapy and rehabilitation facilities. Statewide and regional physician networks are competing already for obstetric/gynecologic, pediatric, surgical, cardiac, rehabilitation, and oncology care/contracts with MCOs. As reported in previous columns, national networks already compete for local and regional managed care contracts. Organ transplant, physical therapy, cancer treatment, rehabilitation, transitional care (subacute), and pharmacy networks are multiplying and gaining popularity across the country. This realignment of providers is pitting doctor against doctor and provider against provider. Starting in 1996 it will now be network against network. Using the strategy that the bigger you are and the more services you provide, the larger piece of the capitation dollar you will get, medical groups are including more physician specialties, and IPAs are growing bigger. Similarly, nonphysician networks are combining home care, durable medical equipment, intravenous-therapy, diagnostic laboratories, and imaging services under "one umbrella" companies to offer a complete spectrum of ancillary services. The combinations that are being put together depend on the market needs of the local PSNs and the MCOs they are pursuing.

What Does It All Mean For Case Managers? There is now more opportunity for case manager employment. How many of the new MCOs and networks will recognize the importance of case managers is not known. Usually case managers aren't included until trouble arrives. The creation of more and larger HMOs, PPOs, IDSs, and now PSNs creates more opportunities for case managers. The movement to construct more complete, comprehensive, and integrated networks and to cover more populations by use of the principles of

I MCO TRENDS cont. ] managed care will provide challenges to case managers well into the next century. Case managers are at the right place and time to apply their professional skills of managing the medical care needs of millions of persons who will choose MCOs to provide for their total health care needs.

CUTTING THE COST..,

Bibliography Beckham D. Trends that matter. Healthcare Leadership Rev 1995;14(7):1. Findlay S. Will big HMOs stamp out competition? Business Health 1995;13(10):52-61. Findlay S. A bend in the river. Business Health 1995;13(11):55-6. HMO-PPO digest 1995.1st ed. Kansas City, Missouri: Hoechst, Marion Roussel, 1995. Jaklevic MC. PHOs fall short of expectations. Mod Healthcare 1995;25(41):77-82. Jaklevic MC. Docs try to own managed care. Mod Healthcare 1995;25(17):63-8. Morrissey J. Building networks to stay competitive. Mod Healthcare 1995;25(34):150-4. Shriver K. Study: number of networks up 69% in 1995. Mod Healthcare 1995;25(26):30. Unland J. Hospitals versus physicians, POs versus PHOs: the providers' struggle to control managed care contracting. J Health Care Financing 1995;21(3):17-36. 71

John R. Coleman, PhD, is director of special projects with PCA Solutions in Florida.

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