State mulls expanding physicians' financial role.

Plan would give them key role in managed health care

A state task force is studying a policy change that would allow California physicians to take on the full financial risk of managing health care.

For the first time, physicians would be given a prepaid amount of money per patient with which to provide primary, specialty and hospital care, under a policy being considered by a task force within the Department of Corporations.

Physicians would be given the money by health maintenance organizations (HMOs), which collect it from their enrollees. HMOs currently assume all or most of the financial risk. But under the proposed policy change, the HMOs would no longer be responsible for the managing of care. They would simply be "money handlers" for physicians.

If an enrollee, or patient, uses only part of the prepaid amount for his or her care, the doctors would be able to keep the surplus. But if the patient develops, say, a catastrophic illness and the costs of treatment exceed the prepaid amount, the physician is financially responsible to incur the additional expenses.

The policy change could "open up a can of worms," according to one health care expert. Yet it would have significant and precedent-setting effects on health care delivery throughout the country, industry sources said. That's because California is a leader in managed care and often sets the trends nationwide.

Medical industry observers said the proposed change could mean lower costs for patients because doctors would be more focused on cost efficiency. It could mean more emphasis on outpatient care, instead of long hospital stays. And it could mean preventative care would take precedence over treatments for sickness.

"It shifts the attitude of the doctor and the hospital to be concerned about a patient's wellness," said John McDonald, chief executive of Long Beach-based Mullikin Medical Center, a for-profit, doctor-owned group that already manages its care and takes on full financial risk. "Now, they'll be concerned about the patients' preventative care. One example of this is in the area of obstetrics. There's a high cost for low-birth-weight babies. The way to avoid that is to pay for prenatal care."

Immunizations, mammograms and other forms of preventative care probably would surge, he said.

Outpatient care would become a more viable alternative as well, said Lyle Swallow, a task force member who also is a partner in the Woodland Hills-based law firm of Vogt, Meadville & Swallow, which represents HMO Health Net.

"If it's no skin off anyone's nose if a patient goes inpatient or outpatient, the doctor might just put them in inpatient because it's more comfortable," said Swallow. "But if he has an incentive, he'll put them in outpatient."

Russell Coile, president of Health Forecasting Group in Santa Clarita, a group that advises hospitals and medical groups, called the proposed policy change "the last best hope for medical reform as we know it."

That may be a dramatic way to put it, he admitted, but "we've tried everything else."

"What we need is an group of incentivized physicians with a broad base of expertise and financial responsibility," Coile said. "For the past 10 to 15 years, we've acted like the core business of health care was finance. What we've tried to manage is the dollars. We are coming to discover that the core business of health care is patient care."

And who better to do that than doctors, he concluded.

The full-risk rule change, which is being studied by a subcommittee of the state Department of Corporations' Health Care Service Plan Advisory Committee, is still in the consideration stages. But it is already raising eyebrows, ire and interest in the medical community.

Under the proposed change, physicians would be able to subcontract with professional service providers -- such as laboratories, radiologists and hospitals. Then, for the first time, physicians would receive payment from the HMO and then forward on portions of that payment to the various service providers.

Critics of the proposed change said it would turn the traditional physician-hospital relationship upside down, giving doctors control of a significant portion of hospitals' revenue stream and the ability to negotiate so called "capitation rates" to hospitals.

Capitation, a buzz word in the medical community that some industry observers said may become a household word as health care reform takes shape, refers to the set dollar amount a person or employer pays to a HMO, regardless of how much the person uses the services offered by the HMO doctors.

The prepaid fee, or capitation rate, is based on the number of members enrolled per month and the types of services the provider offers.

Task force member Noah Rosenberg, a Beverly Hills-based attorney, called capitation the "biggest single issue facing the health care industry today."

Currently, state regulations allow only a handful of physician groups that own hospitals to negotiate the prepaid hospital rates.

Physician groups argue that the proposed policy change would help them to become more competitive in the marketplace and would allow them to provide better, more cost effective service.

In recent years, a growing number of physicians have complained about losing revenue, as more and more consumers joined managed health insurance plans. About 11 million Californians -- or about one-third of the state's population -- are enrolled in HMOs. In response to that shift to managed care, doctors have been getting involved in prepaid arrangements with HMOs instead of remaining alone, charging on a fee-for-service basis.

In addition, doctors are joining large medical groups, and hospitals are hooking up with their physicians, primarily to win these HMO contracts. Medical groups, in turn, are beginning to use prepaid arrangements with specialists, such as radiologists, instead of paying them on a fee-for-service basis.

Don Shubert, president of the National Institute for Medical Management Services, a Camarillo-based consulting firm to hospitals and medical groups, said the proposed change would set a bad precedent.

"I think it puts an awful lot of power into the medical groups," Shubert said.

Such a policy change, he said, could put hospitals in the center of bidding wars between medical groups.

"To just give the medical group the full (financial risk) is opening up a potential can of worms," he said.

The California Association of Hospitals and Health Systems, an industry trade group in Sacramento, opposes the proposed policy change unless it is limited to integrated entities made up of both medical doctors and hospitals, such as medical groups that own hospitals.

Otherwise, the effects could be devastating to California's financially ailing hospital industry, said Charles Forbes, an attorney at the law firm of Musick, Peeler & Garrett in Los Angeles, which is the outside legal counsel for the California Association of Hospitals and Health Systems.

"It could cause hospitals to be forced into providing services at a very low reimbursement rate and place them into further financial difficulty than they currently are," Forbes said. "It could force certain hospitals to go out of business."

Robert Margolis, chief executive officer of Los Angeles-based HealthCare Partners, a large medical group, said most of the opposition to giving full financial risk to physicians comes from independent hospitals and independent physicians who "haven't seen the future of health care coming."

"This is not intended to rebalance the playing field. Whoever develops the most efficient and most cost-effective model, and meets all the safeguards, should be able to receive the full capitation," he said.

Some critics of the proposed change said HMOs are much better equipped to handle financial risk because they are regulated by the Department of Corporations under the 1975 Knox-Keene Act. Physician groups' capacity to handle financial risk is not regulated, but such groups are held accountable by the health plans that contract them.

"Those who are more skeptical are concerned about whether the physician groups have the capability and the capital base to assume this risk," Southam said. "If they fell on hard economic times, it could be a problem for the health plans, and maybe also the consumer."

Deborah Kelch, director of policy for the California Association of HMOs in Sacramento, said the association is troubled by the proposal because HMOs do not want to be put in the position of monitoring and evaluating the financial solvency of provider groups.

That possible side effect of the proposed policy change -- forcing HMOs into becoming evaluators and monitors of physician groups' financial solvency -- is a major area of discussion with the task force, said Dr. Arthur Southam, president of Chatsworth-based HMO CareAmerica Health Plans and a task force member. That's why the task force is developing financial and operational guidelines that would be required for physician groups if they were allowed to handle the financial risk.

Most likely, only well-capitalized physician groups or smaller groups that have an alliance with a hospital would be able to afford to take on this type of financial risk.

"I don't think the small medical groups or small independent groups will be able to do this unless they are in partnership with a hospital," McDonald said. "Even as large as Mullikin (Medical Center) is, we need to have hospital partners and a HMO partner."

With 400 physicians and 300,000 capitated enrollees, Mullikin's annual revenues are more than $300 million. It also owns its own hospital and contracts with 18 other hospitals.

Because HMOs are responsible for the parties they contract with, another regulation under Knox-Keene, HMOs ultimately would be responsible if the medical group they contracted with filed bankruptcy. But the HMO would not be responsible for routine operational expenditures.

If California was to adopt this policy, it could set the trend for physicians nationwide, industry sources said.

"The whole country is anxious to do what we do," said McDonald, who speaks around the country about Mullikin. "The fundamental change from a sickness system to a wellness system isn't going to occur until doctors and hospitals have alignment incentives. Alignment comes when hospitals and doctors integrate."

Health Forecasting Group's Coile said the proposed policy change would channel money from profits to patients.

"In the old days ... the riders tried to beat the system, and the members tried to beat the claim," Coile said.

That was costing 15 to 25 percent of the health care dollar, he estimated.

"If we could translate that (percentage) into patient care, we could go a long way to meet the needs of the insured and the uninsured," Coile said.

The state task force itself has drawn criticism because its members are from HMOs, medical groups and hospitals, not from consumer groups.

"To ignore consumers when they're looking at how to improve quality of care for consumers, it's all pretty scary," said Geraldine Dallek, executive director of the Center for Health Care Rights, a non-profit health care consumer advocacy group.

The task force has had nine meetings since it convened last September, all open to the public. Eventually, it plans to present a report on its conclusions to Department of Corporations Commissioner Gary Mendoza. Its next meeting is scheduled for today (May 23) at 10 a.m. at the Department of Corporations' Los Angeles Office, 3700 Wilshire Blvd.

Name of the game is 'capitation' -- but what's that?

The following is an example of how capitation works.

Say a HMO has 100 enrollees, each covered by a $100 monthly premium. The HMO takes $20 from each $100 premium to cover its administrative costs and to cover its profit. It divides the remaining $80 equally between the physician group and hospital.

The physician's payment:

For each HMO enrollee who selects a primary care doctor in a particular physicians' group, that group gets paid $40 per month from the $100 premium. The $40 is paid monthly regardless of the amount of treatment administered to the enrollee. Of that $40, the physicians' group gets $10 to cover administrative and other costs. The enrollee's primary care physician gets $10. And the remaining $20 is placed in a risk pool to help cover costs arising from the providing of specialty care as it occurs. Most groups pay their specialists on a fee-for-service basis, although a growing number are beginning to pay specialists on a prepaid basis.

The hospital's payment:

The hospital gets $40 per member per month for the same number of HMO enrollees that sign up with the medical group. The amount usually covers inpatient care, ambulance services and durable medical equipment. It also may cover outpatient care.

To pay for these costs, the hospital establishes a risk pool that equals the number of enrollees (100 in this case) multiplied by the hospital's portion of the monthly premium ($40), or a total of $4,000.

Since hospitals typically budget on an annual basis, this hospital would consider its total annual capitation to be 12 months of $4000 payments, or $48,000.

Based on experience, the hospital would allocate about $25,000 of the pool to be used for inpatient care, $12,000 to be spent on outpatient care and an additional $1,000 for out-of-area care. That would leave a $10,000 surplus, which the hospital would typically split with the physician group as a reward for controlling use of services.

If the year ends with a deficit, the hospital would also typically split that with the physicians. The physicians would pay for their portion of the deficit out of the reserve pool they had established, or by borrowing money.