New market forces are special challenge to academic health centers.

ABSTRACT

New market forces - insurer integration into the provider business, "mega-mergers, price and premium reductions, a scramble to create speciaby carve-out networks, and the like - have emerged that are placing significant pressure on academic medical centers. All of these forces are accelerating the pace of managed care market maturation. In order to effectively compete in this new marketplace, "academic health centers have substantial barriers to overcome. To do so will require the creation of a system to manage the health care of populations while minimizing system costs and maximizing quality. This will require the establishment of a unified medical center approach to markets and value management. Academic health centers will by necessity develop strategies to include strong primary care-based network affiliations in order to accomplish these tasks.

One of the findings presented at the University Hospital Consortium's 1995 Research Conference was that "to maintain clinical income to support the academic missions of patient care, research. and education, every academic health center will need to respond radically and,quickly to the eventual dondnance of managed care and integrated delivery systems.[1]

New market forces have emerged that are placing significant pressure on academic medical centers. These include insurer integration into the provider business; mega-mergers" (HCA/Columbia/Epic/ Healthtrust. HSI/Wellpoint, California Healthcare Network, Allina); price and premium reductions; and the scramble to create specialty carve out networks (Salick Healthcare, Caremark, National Cardiac Network). All of these forces are acceterating the pace of managed care market maturation.

One possible result of this market maturation could be provider networks, with market share forcing true partnerships with insurers and the elimination of duplicated network management functions, which would become shared margins. Each provider system would concentrate its efforts on its unique competencies, and specialists will become primary care providers for chronic, high-risk individuals. Academic health centers AHCS) may create market advantages through the development of new technology that decreases per member per month health care expenditures. Large integrated systems and the government will intervenue to sustain education support.

In any case, the purchasers of health care are insisting on lower costs, high patient satisfaction, excellent access, and medically appropriate care as documented by outcome measurements. To this end, employers are migrating toward more restrictive health plans, consolidating into purchaser coalitions to force price reductions, and restructuring, employee incentives to encourae the channeling, of employees into lower cost health plans. The importance of cost is a message health plan customers are sending out loud and clear. Seventeen HMOS in the San Francisco Bay area granted 5-10 percent price reductions to the Bay Area Business Group on Health for 1995; Calpers cut its average health insurance premium by 1.1 percent; Foundation Health Plan reduced its premium to the City of Sacramento by 15 percent to retain its contracts for 1995; Pacificare lowered its premium to the state of Oregon by 5 percent; and Medica lowered its premium for Minnesota state employees by 25 percent.2

In response to these price pressures, managed care health plans are themselves becoming provider networks with a primary care physician foundation. The are restricting network participants to efficient physician and hospital providers; increasing premium differentials between full choice, open network options; mandating clinical protocol and drug formulary usage; creating direct economic incentives for physicians to control medical costs; and executing, strategies to control medical losses at every level.

Health plans are becoming increasingly selective in their choice of providers. Criteria that they utilize for provider selection include willingness to accept risk; ease of contracting with single point contracting authority for physician and hospital services; active utilization control program with incentives for physicians to man medical costs; and skills and systems for outcome, cost. and quality analysis.

Unfortunately, academic health centers frequentl fall short when measured against the above criteria, and payers' attitudes toward them are rather unfavorable. Academic health centers are not seen as adding value or improving payers' margin or share: * "Having academic health centers as visible

members of the network is a minus.

They're just not cost competitive." * "We recognize academic health centers

have education costs. We just aren't

going to pay them."

Academic health centers are not seen as much help in adding value or improving payer's margin share: * "They don't understand capitation economics,

they don't make consistent decisions,

their agreements don't stick." * "We tried a capitation contract. We had

to deal with every department. The deal

fell apart." * "Academic health centers can't demonstrate

better quality, especially around

consumer issues."[3]

In order to effectively compete in this new market place.. academic health centers have substantial barriers to overcome. To do so will require the creation of a system to manage the health care of populations while minimizing system costs and maximizing quality. This will require the establishment of a unified medical center approach to markets and value management. Academic health centers will by necessity develop strategies to include strong pfimary care-based network affiliations in order to accomplish these tasks.

The development of an integrated clinical enterprise (physician group practice, hospital, and network partners) will require the development of an integrated faculty, multispecialty group practice. An integrated clinical enterpfise can provide a major competitive advantage, with common leadership and governance creating a common vision, mission, and strategic plan. It will cause profound cultural shifts, resulting in the ali,nment of financial and organizational incentives with clarification of roles and responsibilities. The barriers to the creation of a faculty roup practice are a department orientation, absence of clinical performance standards, promotion and tenure, faculty time allocations, and "towngown" issues.

Managed care growth creates a need for a strong base of primary care physicians. Enrollees choose a primary care physician who then serves as the entry point to the health care system. This need for a primary care-based network places the majority of AHCS at a significant competitive disadvantage, because they historically have been specialty dominated. In addition, many AHCS have not emphasized clinical faculty tracks,, which further distances primary care practitioners.

Across the country, community-based primary care physician networks have developed the capability of acceptina full risk contracts. These networks provide georaphic coverage of a community so that patients. access to primary care physicians is enhanced, especially in comparison to some of the geographic locations of AHCS. In these networks, primary care physicians channel their specialty referrals to proven cost-effective specialists. These specialists can provide the vast majority of specialty needs, leaving only a small pool of tertiary/quatemary subspecialty patients available to the AHCs. Thus, channeling patients away from the AHCs has occurred and has threatened the very survival of AHCS as they are currentiv structured.

In advanced managed care markets. sppecialty physicians' utilization and expenditures per member per month dectine by 25-50 percent.4 Some specialty areas have experienced 70 percent declines in utilization![5] Inpatient hospital utilization trends continue on a downward path, reaching levels of 125-150 days/1,000 enrollees for commercial populations and 750-900 days/1,000 Medicare enrottees in a number of markets.6 The University Hospital Consortium 1995 research project predicts revenue decreases of up to 40 percent for faculty practices and 35-40 percent for medical centers.[1] The survival of AHCS will depend on their ability to mount a successful response to these challenges. AHC need to develop relationships with community-based primary care physician network that allow and/or encourage these community physician to utilize the AHC for specialty care. These relationships will, by necessity, vary from market to market and from group to group. There are many obstacles to overcome in order to accomplish this task, including the traditional towngown" rivalry, lack of coordination between faculty departments, cost position, poorly developed medical management systems, patient access and service deficiencies, and lack of a managed care administrative infrastructure.

AHCS will need to transition themselves into a health care system that can be a "preferred partner" for managed care plans. This can only be done by becoming a cost-effective provider and by developing and demonstrating the value of education in the system. The management of these AHC systems will require centralized contracting capability, shared governance and control with the medical community, shared clinical management and information systems, a powerful physician organization, competitive superiority in cost delivery, leading edge mana,ement, integration of clinical and teaching relationships, and unified capital management.

The scope of this task cannot be underestimated. To manage the health care for a population of 250,000 individuals, the system would require approximately 140 primary care physicians. The average AHC has 10-25 FTE primary care physicians. Tertiary care bed requirements would be in the 55 to 77 ran,e. The average AHC staffs 487 acute care beds, with a bias toward tertiary care.[7]

Primary care development is a leading strategic priority for AHCS in markets where capitation is imminent. Approaches to developing primary care range broadly practice acquisition, joint venture MSOs with local physicians, PHO alliances with community hospitals, and affiliations with health plans' primary care networks), and most AHCs use several approaches simultaneously. AHCs can be attractive partners for community primary care physicians if initiatives are physician-led, the model Fespects clinical practice, and there is evidence of managed care skill and a coherent strategy.

As these primary care relationships are developed and the faculty practice is reorganized, there are difficult issues to manage, age, including potential further isolation of academic faculty from primary care physicians; diversion of referrals to the most cost-efficient specialists; and potential precipitate loss of academic practice revenue as the managed care group funds market level compensation, information systems, and recruitment. The new group of physicians will need to teach and sustain clinical productivity and maintain long-term retention of both clinically and academically focused staff.

At most AHCs. the development of large-scale primary care networks usually occurs outside of the traditional faculty structures so that a more economical and service-oriented culture for primary care physicians can be created. These networks can be linked to the AHC in a number of ways: within the medical school department (e.g., University of Chicago, Emory); as a separate entity within the faculty practice plan (e.g., University of Alabama at Birmingham); as a separate entity within the medical school (e.g., University of California at San Francisco, Washington University); as a separate entity under the hospital (e.g., Stanford University, University of Minnesota); and as a separate entity within an integrated delivery system (e.g., University of Massachusetts, University of Arizona).

Many AHCS are restructuring new faculty groups as vehicles for managing capitation effectively. These programs share similar characteristics. The physician groups report variously to the dean or to a central AHC executive group, but not hrough the traditional department structure. While most are organized as part of verall faculty practice plans, compensaion, promotion, and productivity criteria are almost always specific for this group. When recruiting physicians to the group, standards are set for a minimum amount of clinical time to ensure continuity of care and patient access. Patient visits per day and 7 days per week, 24 hour coverage are also required. These groups typically develop the pfimary care base first and then add specialists to the panel as patient volume increases. Teaching responsibilities for these physicians also tend toward creating/enhancing the clinical teaching venue; however, the teaching component for the managed care group is secondary and is only accomplished after the clinical needs of patients are handled. These groups are usually a faculty initiative but coordinate their managed care contracting with the academic hospital so that the AHC is viewed as "one entity" by managed care plans. Physician compensation is market-based (competitive with local practicing physicians) and includes bonuses for productivity, patient satisfaction, and utilization management criteria.

As capitation becomes an increasingly larger portion of the AHCS business, the surpluses now accruing to individual departments will migrate in part to payers, but largely to network integrators and managers (primary care networks), subacute care, and other "substitution" providers. It is important that these network components (primary care networks, subacute care, etc.) remain within the AHC system.

The departments and the medical school must approach the tasks of downsizing, productivity improvement, and reengineering of all clinical and academic "production" processes with the same rigor that leading AHC hospitals have brought to the process. If they achieve similar results e.g., 20 percent real reductions in cost in best case example),8 the impact of captitation on core programs and mission will be substantially mitigated. Ambulatory practice costs and processes are virtually untapped sources of both clinical resource management and unit cost reduction at most AHCS, and teachin, and research enterprises are essentially unexamined. The CEO of a "Big Five" HMO company (who was an AHC administrator) opined that "there is a wealth of opportunity in the teaching enterprise. We have access to all of these wonderful new tools and resources, but we are still teaching the same way we have for 200 years." Recruiting, primary care physicians and generalists into a structure that is responsive to payer/enrollee demands and singleminded about state-of-the-art practice efficiency and effectiveness may help support the school financially. In any event, it is critical to meetin, the service demands of the network, and probably the teaching demands of the new ambulatory/primary care-weighted curricula that many AHCS will need to adopt.

In addition to linkages with communitybased primary care networks, redoubled efforts to package and market distinctive specialty and tertiary care products will be especially important to AHC hospitals to sustain both revenues and teaching/research program volumes. There are four general approaches used by AHCS to package and market specialty care services: package pricing or captitating tertiary and other special services; specialty management of chronic conditions and broader carve-outs; screening/assessment/tria,e service for chronic difficult to manage conditions; and specialist Ipas.

Package pricin,/capitatin, tertiary services can extend product lines such as CABG, transplants, and catastrophic care cases. Specialty manaement of chronic conditions can allow specialists to manage the care for brittle" diabetics, COPD.. cystic fibrosis, etc. The screening/assessment pro,ram can be utilized for new Medicaid/medicare managed care enrollees to provide early referral of cases to case managers and specialists as well as identify current enrollees with emerging chronic or high-tisk conditions. The specialty IPA can provide a regional contracting vehicle that helps to develop care guidelines/protocols and data-sharing groups by specialty so that competitive contractin, for regional "carve out" contracts can be viable. The transition to a health care system that is primary care-oriented, with an emphasis on health maintenance and proven cost-effective treatment with documented outcomes, is causing AHCs to examine their traditional roles and creating challenges that must not be underestimated. Failure of AHCs to respond to these challenges with a fufidamental redesign of their enterprises will lead to their ultimate decline. However, AHCs that meet these challenges by mobilizing their vast talent resources can create even stronger institutions that maintain their positions as leaders in the health care arena.

References

[1.] University Hospital Consortium 1995 Research

Conference. Jan, 5-6, 1995, San Diego, Calif. [2.] Sedgwick Noble Lowndes Survey, Milliman and

Robertson. San Francisco, Calif., 1994. [3.] Selected payer interviews, APM, Inc., San Francisco,

Calif., June 1994. [4.] 1994 Database, Milliman and Robertson. [5.] "Integrated Healthcare Report." Cochrane, J.,

Ed., Lake Arrowhead, Calif., December 1994. [6.] Managed Care Database, Unified Medical

Group Management Association, Seal Beach,

Calif., 1994. [7.] Based on 85 percent occupancy under utilization

ranging from loose to moderate levels using utilization

levels of Milliman and Robertson. [8.] National Hospital Best Practices Database,

APM, Inc., San Francisco, Calif., Second Quarter

1995.