Will physicians take back medicine?

TWO DISTINCT, CONCURRENT SHIFTS THREATEN TO erode the medical profession's traditional economic and political dominance over the American health system. The first is a rapid, general shift of control from the supply side of the health sector--where the physicians reside--to its demand side. The second is a gradual, but inexorable shift of control away from government toward private regulators--the managed care industry.

Because organized medicine held much sway over government in the past, the latter has been a timid regulator. By contrast, the modus operandi of private regulators can resemble the rough tactic of bounty hunters, whose decisions are driven by the profit motive and who are, therefore, less easily manipulated than is government.[1]

Both shifts, of course, are facilitated by the health system's pervasive excess capacity that has developed over the last two decades. To illustrate the point, Jonathan Weiner projected in a recent study on the physician workforce that if 60 percent of the American population were enrolled in carefully managed health plans, such as HMOs, then about 140,000 specialists and 25,000 generalists in the pool of 571,000 physicians estimated to be available in the year 2000 would not be needed.[2]

It is possible that in the next millennium, the typical American physician will more resemble an engineer, who is employed in a large corporation that is managed by non-engineers--often by experts in finance. Is this trend towards greater dependence of practicing physicians on non-physician executives inevitable, or can physicians retain--and, in part, regain--their hitherto autonomous position in the health system. It is possible that the profession may be able to keep its hold on the health care system with the help of the government, but it is as yet an open question whether physicians will have the vision and staying power to do so.

Why physicians lost professional autonomy 

Until about the late 1980s, American physicians and their allies, hospitals and the health care manufacturing industries, dominated all facets of the health system--the clinical, the economic, and the political. The bulk of these providers' revenue flowed to them from a highly fragmented insurance system whose governing principle was to provide each insured person completely free choice of doctor and hospital at the time of illness.

Although large third-party payers, notably NIedicare, Medicaid, and some of the larger Blue Cross/Blue Shield plans, did enjoy enough market power to exercise varying degrees of control over the prices of health services, the principle of free choice robbed all third-party payers of the leverage to manage the volume of services going into treating patients. Furthermore, few politicians private-sector executives, or policy analysts then dared question the clinical autonomy of physicians, perhaps on the naive notion that modern medicine is a reasonably exact science and physicians could be trusted to apply that science to human suffering, without caving in to the financial conflict of interest inherent in fee-for-service medicine.

Under these circumstances, it is not surprising that the size, configuration, and total cost of the American health system was driven largely by its supply side, and that the annual growth of health spending eventually rose to double-digit rates, far in excess of the annual growth of the nation's gross national product.3 Nor is it surprising that this loosely structured system generated startling inter-regional variations in clinical practice patterns, in the prices of health services and, hence, in per-capita spending on health care, a fact illustrated graphically in the recently published Dartmouth Atlas of Health Care.[4]

In an earlier study of payments made in 1989 by Medicare to physicians treating elderly patients in various cities of the U.S., for example, it was found that, after adjusting the expenditure data for inter-city differences in the demographic composition of the elderly population and even for inter-city differences in the fees paid physicians in that year, the adjusted per-capita spending per Medicare beneficiary ranged from a low of $822 in Minneapolis, Minnesota to a high of $1,847 in Miami, Florida.[5]

These intra-U.S. variations in per-capita health spending exceed the comparable international variations within the industrialized world. Data of this sort, which first became available in the early 1980s, have become a nettlesome challenge to the medical profession, which has never been able to explain these variations with appeal, either to the health status of the populations being served or health outcomes.

It was, of course, only a matter of time before those who write most of the final checks for health care--government (accounting for close to 44 percent of all health spending) and private employers (accounting for another 35 percent)--reacted sharply to the rapid annual growth in health spending and to the growing research literature on geographic practice variations.

The first volley in this reaction came not from the private sector, but from the federal Medicare program. In 1983, that program replaced the traditional retrospective full-cost reimbursement of individual hospitals--a method that actively encouraged regional variations in costs--with a more uniform, nationwide schedule of prospectively set global payments for some 500 distinct medical cases. It was the first large-scale attempt to shift at least part of the financial risk of a patient's illness directly onto the shoulders of those responsible for managing patient care.

In 1992, Medicare imposed a federally set, uniform fee schedule covering all its patients nationwide. That move ended the individual physician's long-standing prerogative to determine, within fairly broad limits, his or her fees under the Medicare program.

Both of these measures, however, still left control over the volume of hospital admissions and physician services wholly in the hands of physicians, as did virtually all private insurance contracts. In the end, that control could be wrested from physicians only when anxious private employers were able to persuade their equally anxious employees to give up freedom to choose providers at the time of illness in return for continued provision of employer-provided health insurance. That concession enabled employers to enroll their employees in selected health plans, each of which was empowered to procure health care only from a select set of preferred physicians, hospitals, and pharmacists.

Selective contracting is the vehicle on which control over health care moved from the supply side to the demand side of the health sector. A health plan s power to limit the insured to a set of preferred providers ipso facto implies the power to exclude any provider found wanting by that health plan, either because that provider's prices are too high or, in the case of physicians, because the volume going into treating particular illnesses exceeds clinical practice guidelines.

Selective contracting, then, can be viewed as the foundation of what is now known as "managed care."

Forms of control over physicians

Health plans can exercise control over the prices and clinical activities of physicians by means of two distinct models: The first is prudent purchasing and the second is capitation, which is also sometimes called incentive alignment.

Under the prudent purchasing model, the health plan shoulders the financial risk for the insured's illness in return for an annual premium and then procures needed health services prudently from a selected set of providers, largely on a fee-for-service basis. The essential feature is that the health care providers do not bear the financial risk of the patient's illness--that risk remains with the health plan.

Using the economic leverage of selective contracting, however, and pitting individual health care providers against one another under the divide-etimpera principle, the health plan can extract steep price discounts from physicians, hospitals, and other providers. Using the same leverage, the health plan also gains the ability to proctor the providers' practice patterns and, if necessary, to micro-manage the treatment of patients by applying practice guidelines.

Together, the ability to extract price discounts from providers and impose micro-managing on the physician-patient relationship tend to be lumped together under the generic label "managed care," although there remains some confusion around the precise meaning of that term.

Some authors confine the term "managed care" strictly to the proctoring and, if necessary, the micro-managing of the volume of services going into treating patients. Others include in the term the practice of health plans to extract price discounts from health care providers. Still others expand the definition to include virtually any attempt by third-party payers to influence the price and utilization of health services, even if it is merely imposing deductibles and coinsurance on patients.

Under the second model of control, capitation or incentive alignment, the health plan absorbs the financial risk of illness from patients against payment of a premium, but then shifts that risk partly or wholly to health care providers, who receive a flat capitation payment for that task. This shifting of risk to the providers is the fundamental ingredient of "capitation."

Strictly speaking, of course, the premium an insured pays to an insurer could be viewed as a capitation payment as well, but that is not common usage for the term. Capitation always implies that those who make the decisions about treating patients (or those who control the delivery of health care within a health care facility, such as a hospital) are made to bear the financial risk inherent in their own decisions. Although the capitation model spares the health-insurance plan the need to manage care, the network of providers who do assume full risk for the cost of treating patients must control its members through some form of managed care.

Full-fledged capitation models, under which providers take full risk for all of the insureds' medical needs, are still relatively rare in the U.S. Aside from the long established group or staff model health maintenance organizations--such as the Kaiser Foundation Health Plan or the Health Insurance Plan of New York--which effectively integrate the insurance and the health care delivery function within one organization, full-fledged capitation arrangements between independent health plans and independent provider groups (such as multi-specialty group practices and their subcontractors) have emerged mainly in California.

But there are many hybrid models in between the prudent purchasing model relying strictly on fee-for-service compensation and the pure capitation model. Under some arrangements between insurers and providers, primary care physicians may be capitated for their own services and share in the residuals of budgeted risk pools for the services of specialists and hospitals.

From the viewpoint of physicians, the pure capitation model is a mixed blessing. On the downside, the model does saddle physicians (and other health care providers) with the unaccustomed financial risk of their patients' illnesses. Furthermore, any arrangement that rewards physicians financially for withholding health services from patients is apt to strain the physician-patient relationship, if patients are aware of that incentive.

On the other hand, however, the model shifts the task of "managing" care from the health plan into the hands of a presumably collegial community of physicians, whose techniques of controlling the individual member within that collegium might be more mindful of the physician's professional sentiments and, therefore, less nettlesome to the individual physician.

It is reasonable to expect that, once the task of managing that risk has been fully mastered by physicians, they will be tempted to form what is now known as provider-sponsored networks (PSNs) capable of contracting directly with either government, large private employers, or associations of small employers. That approach would eliminate the insurance industry as middleman between payer and provider, and capture for providers the profits now earned by that middleman.

It is for precisely that reason that the insurance industry is unlikely to push capitation onto health care providers, if it can at all avoid it. From the insurer's perspective, the preferred model remains the prudent purchasing model, based as it is on the divide-etimpera principle. The coming decade will show which of the two models will carry the day in American health care.

The nature of PSNs

Provider-sponsored networks are an integrated network of physicians, hospitals, pharmacies, and other allied health care facilities capable of assuming full financial risk for the cost of a group of insured patients.

The integration of the PSN may be physical, in the form of a large campus linked to a set of satellite facilities that are owned by the PSN or under exclusive contract with it. Alternatively the integration of the PSN may be merely virtual, by means of a set of contracts and information systems that bind together a dispersed set of free-standing parties.

A PSN may be organized by a group of physicians who control the capitation payment per insured life and, with it, the allocation of financial resources. Alternatively. the PSN may be centered on a hospital that controls the capitation and its allocation among PSN members. Finally, the PSN may take the form of joint ventures between hospitals and physicians with shared control over the capitation. although the stability of such models can easily be jeopardized by a power snuggle between physicians and the hospital.

The concept of PSNs gained prominence during the budget battle of 1995, which included a highly partisan debate over proposed reductions from the projected growth paths of Medicare and Medicaid spending. Traditionally, any such "cuts"--which, in truth, have always been mere reductions from future growth--have been vehemently protested by organized medicine and the hospital industry, with dark hints of rationing and a general deterioration of the quality of American health care.

In return for graceful acquiescence to the very sharp reductions proposed by the 104th Congress in 1995, physicians and hospitals were promised legislation that would greatly facilitate the formation of PSNs capable of competing head on with health plans organized around insurance companies. This legislation is of two kinds.

First, the American Medical Association has long sought removal of certain antitrust strictures that hinder the formation of physician-run PSNs. In particular, organized medicine wants to see a replacement of the per se rule (which holds certain behaviors as per se in violation of competition, even if that is actually not so) with rules that force the antitrust authorities (the Federal Trade Commission and the Justice Department) to prove that a particular behavior by health care providers in a particular instance was harmful to competition.[6]

Given the thin staffing of the two antitrust agencies and the cumbersome methods of proof in such matters, the proposed switch in rules would literally give the health care providers a free hand in organizing PSNs.

Second, the potential organizers of PSNs seek to be excused from the strict rules imposed by state governments on commercial insurance carriers within their jurisdiction. In particular, physicians and hospitals seek exemption from the costly monetary reserve requirements that must be met by commercial insurers who must purchase all of the health care they promise the insured from outsiders.

A PSN, argue providers, does not need to purchase much or any health care from outsiders; its members themselves constitute the needed reserve. Apparently persuaded by this logic, the 104th Congress was prepared to grant PSNs exemption from the otherwise onerous monetary reserve requirements.

These legislative changes are mired in the ongoing battle between President Clinton and the Republican Congress over the federal budget. In the meantime, the Federal Trade Commission (FTC) has revamped the antitrust guidelines under existing law, with an eye to facilitating the formation of PSNs, thereby removing the pressure by organized medicine for more formal and sweeping legislative relief that might eviscerate the FTC.[7]

PSNs have hitherto found it difficult to get off the ground, partly because of the legal restrictions on their formation, but also because private employers have not been accustomed to contracting directly with health care providers and, so far at least, have preferred to contract with their long-standing partner, the insurance industry. Ironically, the federal and state governments are likely to be much more open to the idea of signing full-risk contracts directly with health care providers.

Although the legislation required to that end is likely to remain hostage to partisan bickering in the 105th Congress, there is widespread sentiment in both parties to let the managed care industry control both the cost and the quality of health care financed by the Medicare and Medicaid programs, and to confine government's role merely to that of tax collector and limited managed care industry supervisor.[4]

Furthermore, there is widespread sentiment to give a prominent role in this process to PSNs. In other words, if the medical profession will soon regain its erstwhile dominance over American health care, it may well have to thank its traditional nemesis: the government. Ironies are one of the U.S. health system's major by-products.

Again, if cost and quality control for the Medicare and Medicaid programs are to be turned over to competing, private regulators (managed care companies), the government must put in place a regulatory infrastructure that makes that competition fair and efficient. Such an infrastructure is otherwise known as "managed [regulated] competition." The required infrastructure for managed competition will resemble nothing so much as the Health Insurance Purchasing Cooperatives (HIPCs) that were the centerpiece of the Clinton Plan and drew so much opposition, especially from the insurance industry. Some large, progressive private employers aside, managed competition is not now operative in the private sector.

The prospect of PSNs

The prospect of PSNs in the future American health system remains a hotly debated topic. Some observers believe that physicians and hospital executives lack the culture and skills to manage large, vertically integrated health systems that combine the insurance function with health care delivery. Other observers,8 the present author included,[9] believe that PSNs will play a significant role in American health care and may even come to dominate them.

In the Institute of Medicine's 25th Anniversary Symposium held in early 1996, Jeff Goldsmith deplored that, "Many cost management activities taking place in our health care system today are superimposed upon the doctor-patient relationship. Physicians find it necessary to have phone conversations with a far distant nurse about what they can or cannot do to patients they have known all of their lives for any clinical decision that involves more than a few hundred dollars."[10]

Goldsmith went on to conjecture that. As health plans shift risk to physician organizations. responsibility for effective clinical decision-making is going to devolve from a bank of nurses talking over 800-numbers to the communities of physicians who are at-risk. ....As risk devolves onto these physician enterprises. so will responsibility for setting clinical standards and for policing them."[11]

From the viewpoint of physicians, this is an optimistic vision It implies that physicians will achieve two related objectives. First, physicians will be able to develop for their "enterprises" stable organizational structures capable of preserving the clinical autonomy of physicians. Second, physicians can nurture the general public's trust in these organizational structures, which will not be easy under capitation.

Both objectives probably are reached most easily with a purely collegial organizational structure that resembles the structure of a private university, which can be viewed, in effect, as a not-for-profit, capitated, vertically integrated, multi-specialty pedagogic group practice. In the university there is, of course, some hierarchy among professionals. There is a president' there are deans, and there are chairs of academic departments.

Well-run universities, however, take care that the perquisites accorded levels within that hierarchy are not too visibly different. As a general rule, the salary of the president does not exceed that of ordinary full professors by more than a factor of two to three, and the salaries of full professors, in turn. tend to be only about twice the salary of newly hired assistant professors.

Great care is taken in most universities not to set the appearance of the "corporate office" apart too much from the rest of the campus. Finally, members of the university collegium do not own tradable shares or any other ownership rights, because the entity is not investor owned. All professionals in these entities are merely employees.

Although the top managers of a university do, on occasion, move the levers of power available to them, for the most part the governance of the institution proceeds on open, collegial debate and consensus. Most important, faculty members enjoy a high degree of autonomy over their teaching and research activities. To be sure, the content and quality of teaching is monitored by the department chairs through questionnaires completed by students at the end of each course and through informal reviews of the professors' syllabi and final examinations.

Furthermore, the products of research are routinely subjected to strict and often brutal outside peer review and monitored by means of regular reports to the dean of the faculty. Even so, in their day-to-day activities, most professionals in a well-run university enjoy a high measure of what physicians would call "clinical autonomy."

The "community of physicians" Goldsmith has in mind resembles the collegiate setting of a university in important respects. Some prominent physician enterprises--e.g., the Mayo Clinic, the Marshfield Clinic, and the Oxner Clinic--come close to this campus atmosphere. These organizations demonstrably have gained the trust of the public and, thus, meet the two objectives set forth earlier. Although these clinics have traditionally rendered their services to patients on a fee-for-service basis, they might well be able to preserve the patient's trust in them, even under full-fledged capitation.

At the other extreme of the organizational spectrum, however, one could imagine purely capitalist structures in which physicians' own shares can be traded for cash, at least under certain circumstances. Such structures would be similar to the traditional employee-owned companies, such as the Avis car rental company which has been owned in the last nine years by its 13,500 employees, but is now in the process of selling itself to the highest bidder, a hotel franchiser.

In a recent editorial on that transact ion, The New York Times pointedly observed: "Worker-owned fines--even those that are profitable like Avis--have a tough time surviving from one generation to the next. ....Apparently the financial gain [to the workers, from the sale] outweighs for Avis workers the psychic value of owning the firm."[12]

For similar reasons, physician-run PSNs, based on the capitalist model, are not likely to remain collegial. Over time, such organizations are prone to develop rigid hierarchies with corporate offices, whose inhabitants may have MD degrees but march to different financial drummers than do the physicians in clinical practice. For all intents and purposes, the MDs differ from ordinary executives with MBA degrees mainly in that, once upon a time, they could recite the anatomical structure of human beings. Salary differentials in these capitalist structures are likely to vary much more than they would in a truly collegiate structure, and so will the ownership stakes in the entity.

The rank and file physician in a purely capitalist PSN is likely to be removed even further from the corporate MD officers, if the latter decide to enhance the entity's capital through joint ventures with outsiders--for example, with an insurance carrier.[5] (Joint ventures between physicians and outsiders--e.g., an insurance carrier--would make sense in academic health centers whose physicians, including the corporate officers, remain mere employees solidly anchored in an academic structure.)

One would imagine that the corporate officers of such a joint venture will, sooner or later, begin to shop all of the entity's future money flow to outside investors, to cash out their presumably sizeable stakes when a good deal comes along--MDs in the rank and be damned.

Like the Avis deal remarked upon by The New York Times, such a deal may look sweet enough even to physicians in the trenches. For enough cash up front, they may be willing to trade in their professional autonomy to Wall Street. The rank and file would be more disposed that way, the more their corporate officers resembled non-physician executives in ordinary business firms, and the less the rank and file had to lose.

In between the purely collegiate and the purely capitalist model lie other forms of organization suitable for PSNs--for example. the partnership structure typical of law firms and some investment banks. These organizations group their professionals into partners who have non-tradable ownership rights in the firm, and those willing to undergo years of quasi-indentured labor in the hope of becoming partner. New partners are elected to their rank by the existing partners presumably on the basis of their ability to bring revenue to the firm.

That ability probably is not as easily demonstrated in a PSN as it is in a law firm or an investment bank so that sheer seniority might play a greater role. In any event partners in such structures enjoy the privilege of garnering not only profits generated strictly by them, but also a good part of the profits generated by the quasi-indentured professionals who are mere employees.

Would such partnerships be more stable, over time, than the capitalist model? If investment banks serve as a guide they might not be all that stable. Two decades ago, most investment banks were partnerships of this sort. In the meantime, the senior partners of most have cashed in their stakes through conversion of the partnerships into publicly traded companies. On the other hand, most law firms and many accounting firms have retained their partnership structure.

Would such partnerships gain as easily the trust of patients as might the collegial model of the Mayo Clinic? It would depend on the extent to which the partnership appears, to outsiders, to be profit-driven. If the senior partners were known to take home incomes coming close to those enjoyed by senior partners in law firms or investment banks, neither their patients nor the media would take kindly to the precarious interplay between capitation and managed care that begets these high incomes. Indeed, the media might be busily fed with information by 'deep throats" from the ranks of hardworking, underpaid, and disillusioned junior associates.

Conclusion

The complete professional autonomy the individual American physician has traditionally enjoyed in health care will, before long, be a thing of the past. In his or her daily work, the physician's clinical decisions are likely to be monitored and constrained by some organization, be it run by physicians or by non-physicians. The question is merely whether physicians as a group will be ruled by the insurance industry under the divide-et-impera principle, as is increasingly the case today, or whether physicians can topple that industry from its current position of power and make it subservient to the dictates of physician-run PSNs, just as that industry had been subservient to the medical profession's dicta until about the mid-1980s.

The answer to this question hinges in no small part on the organizational structure of physician-run PSNs, for two reasons.

First, the structure itself may be inherently unstable over time. A purely capitalist approach may lead physicians to sell their professional autonomy in the long run for short run monetary gains. If a sellout is what it turns out to be, history will say that in the late '90s American physicians had a short moment of glory where they could cash in on the networks they had formed--and then they went back into permanent servitude to Wall Street.[13]

Second, the organizational structure of PSNs will determine their acceptance by patients who, through their choices as enrollees in competing health plans, will establish the future shape of the managed care industry. In this respect, the purely collegiate model would be an easier sell than models that, by their very structure, highlight the profit motive driving modern medicine. That will be doubly so under full-risk capitation of PSNs, a method of payment that inevitably arouses suspicion among patients and the media.

It appears that Congress is open to the idea of letting physicians play a more dominant role in the managed care industry--perhaps the dominant role. Whether or not the medical profession will be able to rise to that challenge remains to be seen. We shall see in the decade ahead.

References

[1.] Reinhardt, U.E. The New Social Contract in health Care: Three Tier Medicine. with Bounty Hunting. Forthcoming in Medical Economics October. 1996.

[2.] Weiner, J.P. Forecasting the Effects of Health Reform on U.S. Physician Requirements: Evidence from HMO Staffing Patterns. JAMA, vol. 272. No. 3, 1994: pp. 333-S0.

[3.] Congressional Budget Office, Trends in Health Spending: An Update, Washington, D.C.: Government Printing Office. June, 1993

[4.] The Center for the Evaluative Clinical Sciences, The Dartmouth Atlas of Health Care, Chicago. IL: American Hospital Publishing Company, 1996

[5.] Welch, W.P. Miller, M.E, H. Welch, H.G. I Fisher, E.S., and Wennberg, J.H. Geographic Variation in Expenditures for Physicians' Services in the United States," The New England Journal of Medicine, vol. 328, No. 9, March 4, 1993: pp. 621-27.

[6.] Burda, D. FTC Previews "Network Antitrust Rules," Modern Healthcare, June 24, 1996: p. 8.

[7.] Ibid.

[8.] "How Doctors Can Regain Control of Health Care: Interview with Paul M. Ellwood Jr., MD," Medical Economics, vol. 73, No. 9, May 13, 1996; pp. 178-91.

[9.] "Why Doctors will Take Back Health Care: Interview with Uwe E. Reinhardt," Medical Economics, vol. 72. No. 24, December 26, 1995; pp. 72-87.

[10.] Goldsmith, J. "Risk and Responsibility: The Evolution of Health Care Payment," in Institute of Medicine, 2020 VISION: Health in the 21st Century, Washington, D.C.: National Academy Press, 1996: p. 55.

[11.] Ibid.

[12.] "Why Worker Owners Sell Out," The New York Times, July 7. 1996: p. 8

[13.] "Why Doctors will Take Back Health Care," op. cit., p.87.

Uwe E. Reinhardt, PhD, is Professor of Political Economy at Princeton University in New Jersey. An internationally acclaimed lecturer, Dr. Reinhardt speaks on key, emerging health care issues. He can be reached at 609/258-4781.