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A new role for ambulatory care: managing the system.

The three-legged stool structure of health care has been with us now for at least 40 years. The model envisions the supports of the health care platform to consist of the hospital leg, the insurance leg, and the physician provider leg. In recent years, as each leg has attempted to increase its role relative to the others, the structure has become unstable.


Hospitals, as an independent industry, are a relatively new phenomenon. Their origins extend back many centuries to the almshouses and charitable institutions of Europe and Asia, where they served as refuges for the indigent, the contagious, or the frightening members of society. They were generally created under the auspices of churches or of municipal or national authorities. What is frequently acknowledged as the first hospital in the United States, Pennsylvania Hospital, Philadelphia, was itself derived from an institution called the Philadelphia Alms House, denoting its obvious charitable legacy.

By the beginning of the 20th Century, new advances in medical care, such as sterile and isolation techniques, reduced mortality and helped hospitals gain public acceptance as agencies of public good. Further improvements in health care occurred rapidly, many of them requiring complex equipment and nursing services that could only be offered in a hospital setting. To offset the increasing costs of these developments, first private health insurance and then, in 1965, Medicare became available. Finally, the stage was set for a profitable "hospital industry."

Initially, both private insurance and Medicare paid essentially on a cost-plus basis and provided no real incentives to control expenses by either provider or patient. Private and publicly owned hospitals and hospital chains grew and prospered, much of the growth subsidized by government funding. A major amendment to the Medicare program in 1983 brought about the prospective payment system, swiftly and effectively ending the heyday of increasingly profitable hospital growth.

Compounding the difficulties wrought by the change in Medicare reimbursement has been a host of other trends adverse to hospital profitability. One of the most notable has been the separation of "traditional" hospital profit centers - such as surgical suites, imaging departments, and obstetrical departments - into the ambulatory sector, causing hospitals to lose at least partial administrative and financial control of these enterprises. Still other major trends propel the decline of the hospital industry. These include the emphasis on lifestyle changes and preventive medicine that may bring about earlier intervention in disease processes, eliminating the need for costly inpatient crisis care. Indeed, outpatient management seems to be accelerating as technology provides us with laparoscopic surgery, lasers, lithotripsy, and other innovations to simplify costly inpatient surgical procedures. Genetic interventions and the whole field of biotechnology cannot help but further move hospitals from their central position in health care. Innovations such as comprehensive case management, home health, advanced directives, and congruent living arrangements for the elderly will transfer care back to the home and eliminate many costly and unwanted hospital readmissions. Unified medical records and guidelines of care will serve to link and coordinate ambulatory and hospital systems and reduce redundant testing and procedures that now provide considerable hospital revenue. There seem to be no developments in the foreseeable future capable of reversing these trends.

Of course, a large but well-defined role for hospitals will continue. This role will include the provision of complex and nursing-intensive services, most notably for patients with severe multisystem disease and those needing cardiovascular surgery and in other sophisticated tertiary care areas. Similarly, a hospital function will continue in the teaching of health care professionals and in some niche areas, such as psychiatry and rehabilitation. But hospitals as major and pervasive profit centers may not survive. While they seem to have had a rather sudden and meteoric rise over the past few decades, it would seem that their star is no longer in ascendancy. A host of factors are gathering to pull it down.

Insurance Companies

Just as the line separating the ambulatory and the hospital care domains seems to be blurring, so does the distinction between services provided by insurance companies and those provided by some of the nation's larger and more creative medical group practices. In defining the traditional role of insurance companies, including HMOs, it may be seen to consist mainly of marketing; administration, including payment of claims; and assumption of risk. Large multispecialty medical groups, especially those with large prepaid patient enrollments, have already usurped many of these functions. They administer their own claims, sometimes with data systems superior to those of the insurance companies. They perform important marketing functions, because they already have the vital patient relationships necessary for establishing trust.

As group practices increase in size, they take increasing risk. Initially, for example, physician providers of prepaid medical care were asked to take limited risk on the professional component of fees. Sometimes, there was no downside risk - only sharing of any hospital savings. This situation is still prevalent in many parts of the country, or with practices just beginning in the prepaid arena. But, with large groups serving tens of thousands of prepaid enrollees, the situation is often entirely different. Some groups have their own inpatient facilities and are frequently at full risk for both the professional and the hospital components of capitation. It is no longer uncommon for HMOs to pass on pharmacy, out-of-area, reinsurance, and other components of risk to stronger groups. These large groups are, in a broad sense, self-insured and have the financial stature to support risk. This being the case, how does the insurance company justify its retention of premiums, often 20 to 30 percent, when it no longer provides significant risk and furnishes little administration or marketing?

From the insurance company's point of view, it does provide wide-area coverage and a certain sophistication when dealing with employer groups whose employees are frequently geographically dispersed. Sometimes this desire of insurance companies to proliferate geographically has resulted in loss of both quality and financial control. But medical groups can also network together over a geographic area and are in a much better position to deal with quality and utilization issues of their providers. And, increasingly, employers seem desirous of working directly with providers in order to eliminate the insurance company middle man. As the trend to larger and stronger medical groups continues and even IPAs unite and strengthen themselves financially and administratively, the role of insurance companies may further diminish.

Medical Group Practice

If health care is a continuum encompassing many components and structures, we must seek out the most effective modality upon which to fashion a strong and responsive health system. That entity must be able to provide appropriate access, selectively utilize new technologies and systems of care, maintain and standardize quality, control costs, and meet increasingly stringent public expectations. These are formidable goals. We do not see this entity deriving from the present hospital or insurance industry. Vertically integrated health care systems with major physician involvement and incentives, combined with meaningful patient education focused on prevention and intelligent utilization, seem to be the approach with the greatest chance of success. Medical group practice, as it matures and accepts its public responsibilities, employs skilled and creative lay management to effect its potential, and finds its voice on state and national levels, seems to have the best opportunity to achieve these objectives.

Albert E. Barnett, MD, is Chair/CEO, Friendly Hills HealthCare Network, La Habra, Calif. He is a member of the college's Society on Hospitals AND its Forum on Enterpreneurship.
COPYRIGHT 1993 American College of Physician Executives
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Author:Barnett, Albert E.
Publication:Physician Executive
Date:Jul 1, 1993
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