Physicians organize for direct contracting.

"IT'S EVERY PHYSICIANS DREAM. . .PROVIDER-SPONSORED networks contracting for patients directly with employers and government without an intermediary, HMO, insurance plan, or third-party administrator."

Provider-Sponsored networks (PSNs) are an emerging market option in sophisticated managed care markets, where buyers and sellers are cutting out the middleman. It's easy to understand why doctors refer to them as "Physician-Sponsored Networks," and are organizing them in many markets. "There is enormous interest in returning control back to provider groups. It (PSN concept) is also relatively easy to implement. It doesn't require a lot of government regulation. It's all at the private level, and doesn't require a Clinton 1,300-page health reform plan," states Tim Crimmins, MD, Chairman of the Minnesota Medical Association.[1]

The PSN concept is part of a wider movement by physicians to restructure for managed care to improve bargaining leverage for America's more than 600,000 active medical practitioners. Across the nation, doctors are organizing Independent Physician Associations (IPAs) and integrated group practices. National and state medical organizations, such as the American Medical Association, have provided technical assistance to medical networking initiatives. The California Medical Association has helped organize 6,000 doctors in the Golden State, who have invested $6 million in a statewide medical network. Some 99 provider-sponsored HMOs now serve 5 million enrollees, about 10 percent of the nation's 50 million HMO subscribers.[2]

This new marketplace of direct contracting may sound to doctors like the Garden of Eden, but there is plenty of opposition. PSNs will not become a national trend without a fight. Insurers and HMOs complain that providers are acting like insurance companies, but without the regulations or reserves. Managed care plans fear loss of market share and, worse yet, declining enrollment from private-sector employers, a traditionally lucrative business. The Health Insurance Association of America (HIAA) and Group Health Association of America (GHAA), are vehemently opposed to PSNs, and are lobbying hard in Washington to prevent unregulated providers from becoming competitors.

PSNs put providers in charge... and at risk

Direct contracting has a simple appeal--no intermediaries. Imagine managed care contracts without the costs or hassles of an HMO or third-party intermediary. The PSN is a new form of managed care organization, but without the middleman. Employer's define the health benefits they want covered, and negotiate the price. Providers hold and manage risk, delivering all needed health care and reporting outcomes to purchasers. The broadest market opportunity may be Medicare direct contracting, proposed under Republican budget deficit reform legislation. But PSNs must duplicate much of an HMO's infrastructure for cost control and network management if they are to succeed.

Savvy, self-insured employers, business coalitions, and government health programs are the potential "buyers." Doctors and hospitals are the "sellers," organizing provider networks on a regional and statewide basis. Up for grabs are over 225 million consumers, whose health benefits are currently managed by insurance plans, HMOs, and third-parties. High-profit HMOs are drawing fire from dismayed employers and irate providers. Some HMOs had medical loss ratios-what the plans spend for medical care-below 70 percent in 1995. Doctors are furious at only getting 70 cents of health benefits for every dollar of employer health spending.[4]

Is it realistic for physicians and their hospitals to think they might win bidding wars with HMOs? Direct purchasing opportunities will rise or fall based on whether providers can reduce the 15- to 25-percent administrative costs taken "off the top" by insurers, HMOs, and third-parties today. If PSNs can reduce overhead costs, including profit, to 10 to 13 percent of premium, or less--out-competing HMOs whose administration/profit level averages 18 percent--this new provider-sponsored revolution may succeed.

PSNs may be the silver lining of health reform

"Doctors and hospitals will be allowed to form provider service networks to cover Medicare beneficiaries, with the insurance company or managed care company as intermediary" ... Under the Republican-sponsored "Medicare Preservation Act of 1995," this one-line provision in the House Republican's plan for Medicare reform and federal budget reconciliation has set off a national tornado in an already stormy battle between majority Republicans and minority Democrats in Washington, D.C.[5] Under the House plan, also adopted by the Senate, seniors would be given a choice of several health plans, including traditional fee-for-service Medicare, as well as HMOs, medical savings accounts, and provider service networks organized by doctors and hospitals.

Doctors quickly recognized the potential of the PSN concept. In exchange for PSNs, malpractice reform, and a smaller cut in Medicare physician payments, organized medicine threw its support behind Republican plans for Medicare and Medicaid budget reductions.[6] Pleased to have won reductions in the physicians' share of budget cuts, AMA president Dr. Lonnie Bristow stated: "This legislation will expand choices for Medicare beneficiaries, allowing them to open medical savings accounts in conjunction with high-deductible insurance policies enroll in private sector coverage plans, or remain in the traditional Medicare program."[7]

The PSN provision immediately drew a storm of protests from HMOs insurance executives, and state insurance commissioners Insurers were even considering reviving the "Harry and Louise" ads which helped kill the Clinton health plan in 1995.[5] The PSN proposal was authored by California Congressman William Thomas from Bakersfield, who has emerged as a major new force in Washington health politics Thomas replaced California Democrat Pete Stark as head of the House Ways and Means' Health Subcommittee, which oversees Medicare. Thomas drew on his hometown experience in Ridgecrest, California, where the local hospital is organizing a "community-health organization."[8]

Will PSN legislation ultimately be enacted into law? The bill is now "grid-locked" for 1996, as presidential election politics tie up action on budget reconciliation until after the November election. President Clinton has announced no opposition, despite the Republican origins of the PSN concept. Regardless of the outcome of elections in 1996, the PSN Medicare contracting opportunity may be passed in 1997.

PSNs' secret weapon

PSNs may have a secret weapon--active leadership from physicians in managing costs under capitation From a physician's perspective, "managed care" is an oxymoron. HMOs make money by managing costs and reimbursement, not by delivering efficiencies in the process or outcomes of care. The current status of managed care might more accurately be called "care denial" than care management. Third-party review companies are paid on the basis of their denial rate, and HMO treatment guidelines are crude and negatively biased. There is little payer-provider cooperation in the system.

At the Lovelace Clinic in Albuquerque, New Mexico, physicians are cooperating in a new "episodes of care" (EOC) approach to manage a patient's entire encounter with the health care system.[9]

Doctors at Lovelace have established 20 teams to develop EOC guidelines and clinical pathways. For example, Lovelace manages its diabetic patients through its primary care network, utilizing a collaborative approach between specialist and primary care physicians as specified in the EOC protocol. Primary care physicians are given disease-specific data on their performance in managing patients within the guidelines. The protocol encourages patient involvement with a Diabetes Care Card, which tracks symptoms, as well as system performance, e.g., did the physician check their feet? As a result, the hospital admission rate for diabetic patients under this new program is only 2.3 percent, versus 4.8 percent in non-Lovelace patients, and with shorter inpatient stays of 5.2 days versus 7.2.

Disease management to control PSN costs

PSNs must quickly develop standardized "disease management" like Lovelace's EOC protocols and clinical paths to manage the costs and outcomes of care. This strategy focuses on the medical care part of the premium. Assume that PSN administrative costs must be low-less than 10 percent-to be competitive with HMOs, so the PSNs may still earn a profit. Many buyers will place a 12 to 15 percent cap on administrative costs and profit. Managing the medical care part of the premium, some 85 percent of every health benefit dollar, must be the focus of PSN cost management strategies.

The essence of physician-hospital cooperation lies in disease management. San Francisco-based Mark Zitter, publisher of the Outcomes Measurement and Management newsletter, defines disease management as "a comprehensive, integrated approach to reimbursement, based fundamentally on the natural course of a disease, with treatment designed to address the illness with maximum effectiveness and efficiency."[10]

Conceptually, the disease management approach begins with prevention measures, well before the onset of acute illness. Disease management programs define risk in an enrolled population, identify patients at risk, and institute preventive activities. When acute symptoms emerge, disease management protocols determine the most cost-effective way of managing the illness, in the least-cost settings. These programs routinely track each patient's progress, using outcomes data captured from patient-completed surveys like the "SF (short-form) 36," which queries patients on the status of their health, functioning, and sense of well-being.

A number of health systems are pioneering development of extensive disease management programs:

Henry Ford Health System in Detroit, Michigan, has developed a provider-sponsored report card based on its Consortium Research on Indicators of System Performance ("CRISP") across a community-based system in a joint venture with the Mercy Health System of Farmington Hills, Michigan, and a dozen other large health systems like Allina Health System (Minneapolis, Minnesota), Baylor Health System (Dallas, Texas), Northwestern Healthcare Network (Chicago, Illinois), and Virginia Mason Medical Center (Seattle, Washington).

Sentara Health Systems of Norfolk, Virginia, is piloting a sophisticated artificial intelligence-based computer program that uses predictive outcomes to provide clinical decision support. Dartmouth Medical School/Mary Hitchcock Health System in New Hampshire is implementing its "COOP" system for clinical improvement, utilizing an inexpensive network of personal computers across multiple care sites.

Advocate Health System, in the northern Chicago suburbs, has developed systems for tracking health care measures for specific diseases across its integrated delivery system.

Graduate Health System in Philadelphia, Pennsylvania, is working with the Wharton School of the University of Pennsylvania's "CADU/CIS" system, which uses Wharton-developed algorithms to risk-adjust and measure clinical outcomes.

PSNs come from the "land of 10,000 HMOs"

Health care's next revolution is starting in Minnesota's Twin Cities, birthplace of the HMO concept. In mid-1995, the region's influential large-employer coalition, BHCAG (Business Health Care Action Group) put its HMOs on notice.[11] Beginning in 1997, when its agreement expires with Health Partners, the employers' group intends to contract directly with local networks of physicians and hospitals. To avoid insurance regulations, the employers will start with a modified fee-for-service system that will approximate capitation. Under the plan, providers will be given a utilization rate and be rewarded or penalized for coming in above or below the target.[12] HMOs can participate, but only as PSN organizers. But clearly, the HMOs will suffer a major market defeat in Minneapolis-St. Paul, arguably the most advanced managed care market in America.

PSNs will operate outside of state HMO regulation. For providers to obtain an HMO license in Minnesota is burdensome because of high regulatory barriers and reserve requirements enacted after several HMOs failed in the 1970s. "We hospitals cut our own throats with HMO regulation," explains Roger Green, Senior Vice President for Marketing and Planning at St. Paul's HealthEast System. "After hospitals got burned by the HMO failures, they lobbied for high reserves to protect provider payments in case of future HMO bankruptcies."[13]

Despite lowering health costs to about 80 percent of comparable markets, Minnesota employers still are not satisfied. "Basically we have tried everything else, and we still don't have right incentives in the market," explains Steve Wetzell, BHCAG Executive Director.[12] As evidence of lack of competition, Wetzell cites that 70 percent of the area's population are members of all three major HMOs, including Allina Health System/Medica, Blue Cross and Blue Shield of Minnesota, and HealthPartners. PSNs will open a window of opportunity for Minnesota providers. BHCAG has already been contacted by 15 provider groups, and more than 100 providers have participated in information sessions on contracting with the coalition. The new direct contracting experiment is scheduled to begin January 1, 1997.

Physician's need partners for PSNs

Physicians will need partners to develop PSNs. Doctors are likely to turn to three sources for capital to organize and operate: (1) hospitals, (2) for-profit physician management companies, or (3) venture capitalists. In most markets, physicians will be unable to develop internally-generated capital fast enough for quick market entry. For many physician networks, the local hospital or health system will be the most convenient choice as a capital partner.

Over the next five years, the real test of the PSN concept is whether doctors and their health systems can forge an alliance to cooperatively manage patient care more effectively. Capitation will form the payment framework for collaboration. Physicians and hospitals will share a risk pool to incentivize reducing unnecessary utilization, while protecting patients and outcomes. This level of cooperafion will not come easily. Doctors and hospitals must bridge a chasm of mistrust if PSNs are to be a win-win solution for providers.

RELATED ARTICLE: Components of the PSN concept include:

* Networks of physicians and hospitals

* Enrolled patient population

* Self-insured employer or business coalition

* Regional market coverage

* Purchaser-provider direct negotiation of benefit scope

* Capitated premium that puts providers at risk

* Provider-set reimbursement schedule

* Provider-managed utilization and cost infrastructure top-loss, reinsurance, and out-of-area coverage to limit provider risk

* Purchaser-established performance standards ("report card")

* Purchaser-provider shared information system[3]

References

[1.] Weissenstein, E. Cut Out the Middleman. Modern Healthcare. 25(27):28-30. July 3, 1995.

[2.] Hamer, R. 1996. HMO Industry Report. Part 11. InterStudy Competitive Edge. 6(1):1-153. April.

[3.] Coile, R. Provider-Sponsored Networks (PSNs): The Post-Reform Market for Direct Contracting with Employers and Government. Health Trends 8(3):1-8. Dec., 1995.

[4.] California Medical Association, Knox-Keene Health Plan Expenditures Summary, FY 1994-95. Sacramento, CA. Feb., 1996.

[5.] Kostreski, F House Medicare-reform Provision Sets Off Debate. AHA Neus. 31(38):1. Sept. 18, 1995.

[6.] Georges, C. House G.O.P Medicare Bill Wins Over Doctors With Hidden Enticements, Promise of Profits. Wall Street Journal. Oct. 12, 1995, p. A24.

[7.] Pear, R. 1995. Doctors' Group Backs Plan of Republicans on Medicare. Neu York Times. Oct. 11. pp. A1, C18.

[8.] Kostreski, F. Provider-Sponsored Networks: Doctors and Hospitals Bid for Control. AHA News 31(40):7, 1995.

[9.] Dearing, G. Diabetes and Disease Management: Patients and Primary Care Physicians Drive "Episodes of Care" Approach, Outcomes Measurement and Management, Oct., 1995, pp 3-5.

[10.] Zitter, M. Disease Management: A New Approach to Health Care. Medical Interface. 7(8):70-76. Aug., 1994.

[11.] Winslow, R. Employer Group Rethinks Commitment to Big HMOs. Wall Street Journal. July 21, 1995, pp. B1,4.

[12.] Weissenstein, E. Provider Networks Gaining in Senate. Modern Healthcare 25(40):2. Oct, 1995.

[13.] Green, R. Author conversation. St. Paul, MN, Oct. 11, 1995.

Russell C. Coile, Jr., is President of the Health Forecasting Group, in Santa Clarita, California. He is the author of two books on the future of medicine, including The New Medicine (Aspen, 1990) and Revolution: The New Health Care System Takes Shape (Grand Rounds Press, 1993). His next book, The Five Stages of Managed Care isforthcoming in late 1996. He is the Editor of Russ Coile's Health Trends newsletter, and a faculty member in ACPE's Physicians in Management series. He can be reacbed at 805/286-1085.