Managed Care 2002: Beyond Capitation-Clinical and Professional Autonomy
Raymond Fay, M.D.*
(an excerpt of the presentation made at the CAMS/AAAP
joined 1997 Scientific Meeting, Nov. 22, 1997)

The "stake-holders". Managed care is a revolutionary social-political-economic force. There are six "stakeholders" in the managed care marketplace:
Integrated multispecialty and single specialty large physician groups: IPAs, PPOs, HPOs, MSOs, equity consortiums.
Regional and national HMOs (publicly traded).
Business health care alliances.
Integrated regional/national hospital systems.
Government health care policy regulators.
National pharmaceutical and device companies.

What is managed care? From the perspective of health care systems, managed care represents all systems attempting to integrate the delivery and financing of health care, and to apply new constraints on encounters between physicians and patients. A summary definition of managed care based on these perspectives is:
Physician behavior is responsible for escalating costs of health care; therefore, that behavior needs to be changed by managed care (management).
Management is based on business principles defined by the marketplace.
Rationing, or constraints on access to health care, is necessary to lower costs.
Payment for services must be risk-weighed against rewarding physicians for rendering expensive and unnecessary medical care.
The health care budget must be annualized by capitation formula.
Risks for services are passed on to the providers of care.

The market forces for change (integration). Managed care seeks to achieve cost-control objectives by changing the behavior of providers and patients.
In the 1980's:
The patient had freedom to choose his or her physicians.
The physician determined the type and intensity of care.
The physician/specialist defined the quality of care.
Physicians were customers of hospitals.
Payers were at risk.
By contrast, in the 1990's:
The patient's choice of physicians is limited;
Care is defined by clinical pathways or best practice models;
Quality (value) = outcome x patient satisfaction;
cost
Physicians and hospitals are partners (PHOs);
Providers are at risk;
Primary care physicians are "gatekeepers";
Physician services are now cost centers;
Health care is driven by payers (HMOs and business alliances);
Physician groups and hospitals are placed at risk through capitation;
Physicians are now licensed to own HMO's;
Physician practice management corporations are forming;
Health care delivery is corporatized and regionalized and
Disease management per unit population will determine success in the marketplace.
These changes in the marketplace take no account of whether one is good or bad. They merely reflect the market forces that affect all physicians. To the payers of health care services, to the patients and to the government, these changes represent "reform" of the health care system. "Revolution", by contrast, requires an appreciation of the basic changes in culture and values of medical practice, which may then lead to reform.

Currently, there are 3 groups of practitioners:
Traditional Practitioners began practice with the inception of Medicare programs when the economy was expending. Now they are ready for, or, are already in retirement.
Disappointed Practitioners are the products of Vietnam war, raised with middle-class expectations of an expanding economy. They have inherited downsizing, global competition, fear and disillusionment.
Cheated Practitioners are the new graduates who cannot find a job, or have been laid off from a lucrative position with an HMO. They frequently experience underemployment rather than unemployment. They can afford neither their home nor their family.

Stages of managed care: The evolution of managed care can now be broken down into five stages:
Stage one
HMO's are just starting up and have less than 5% of the market share. Payments by indemnity exceed 30% of the market share. Prices are bundled.
Both physician practices and hospitals are stand-alone.
Open PPOs (Preferred Provider Organizations) and IPAs (Individual Practice Associations).
Standards of care and quality are still defined by physician-hospital organizations such as the Joint Commission of the American Hospital Organization (JCAHO).
Example: Bangor, Maine.
Stage two
HMOs penetration extend to 5-15%, indemnity <25%.
Primary care practices are organized into group practices with primary care capitation.
Small and weak practices are purchased by hospitals, HMOs or Medical Service Organizations (MSOs).
Appearance of integration by groups without walls.
Quality of care is frequently characterized by the phrase "centers of excellence".
Examples: Atlanta, Dallas and Oklahoma City.
Stage three
HMOs 25%, indemnity <15%.
Primary care widely capitated.
Hospital/physician groups merge regionally and statewide.
Hospitals and MSOs actively buy primary care groups to ensure hospital admissions and referrals to specialists.
Significant discounts for fee-for-service payments and limited capitation occur for specialists.
Focused care is emphasized.
Examples: Phoenix and Seattle.
Stage four
HMOs 25-40%, indemnity <5%.
Merger of large HMOs.
Hospitals and large physician groups merge regionally.
Specialty care is capitated.
Point of service plans are losing leaders for marketing by the HMOs to entice subscribers.
Tertiary services are consolidated regionally.
Quality is now defined by clinical pathways or best practice models and benchmark outcomes.
Examples: San Francisco, San Diego and Los Angeles.
Stage five
HMOs 40%, indemnity disappears.
Medicare/State medical programs embrace managed care method to contain costs (rationing).
Integrated providers struggle to sustain reasonable capitation fees.
Further merger and integration of hospitals, physicians and HMOs into larger corporate entities.
Health care outcomes are defined by per-unit population; value is defined by improvement of health by disease management per unit population per annum.
Examples: Minneapolis-St Paul, Portland, San Francisco, Los Angeles and San Diego.

Classification of physician integration
Transitional models: The durability of even large PPOs. IPOs and IPAs in the market place is over.
Sustainable models: the foundation (Mayo Clinic), staff (Kaiser HMO), and equity (Medpartners-Mullikin Group) models have all dramatically changed. Substantially downsizing of management and providers has occurred. Because quality is difficult to define, price is the single most reliable discriminator in the local health care marketplace. Clearly, the value of health care resides in the ownership of integrated physician groups and not in acute care facilities, the highest cost centers. With smaller numbers of regional HMOs and a fully integrated health care delivery system, and with anticipated changes in federal and state laws, it is hoped there will be opportunities from direct employer-provider contracts so that the middleman (HMOs) can be squeezed out of the system, thereby increasing the monies available for local health care. Competition will take place on the basis of price, outcomes, and health care improvement by disease management per unit population.

Health Care Alliances. The goals for both the HMOs and business alliances are exactly the same, namely, to contain cost of health care by means of total capitation: Cost per member per year = Capitation. These groups have successfully decreased the cost of health care at the expenses of providers-physicians and hospitals- and consumers.

The Physician Practice Management Corporation.

For cost containment to be successful without loss of quality to the patient, physicians need to lead the changes in managed care and embrace capitation as merely another payment system. They must regain their clinical/professional autonomy and stabilize their revenue by creating a management company that is mutually owned by physicians and the public- an equity model. The benefits of this model are:
Professional and superior management;
Professional marketing;
Capital development;
Group purchasing;
Group contracting: revenue stabilization based upon data (medical information system);
Lower cost of practice by developing the "Best Practice Model".
Improved quality of care by developing knowledge-based clinical pathways.
Diversification of risks by establishing revenues other than those from clinical practice.
Greater financial stability - "too big to fail"; and
A professional forum for the exchange of information for disease management.

Future trends point to physician/professional autonomy as physicians recognize the forces of market changes. Academic centers will merge with integrated regional private health care systems to provide tertiary complex services and be part of the health care economic food chain. Physicians in California and other states have already begun establishing physician-owned HMOs to compete for economic control. With further managed care integration, one can foresee joint venture partnership of physician management corporations, HMOs, hospitals, and business alliances in disease management to measure and define health care improvement within a prescribed population. Only with such cooperation and new missions, where all benefits of all parties are in alignment, will the United States be able to control its escalating costs of health care delivery.
Summary and conclusions. I have reviewed the entire spectrum of managed care market force and the changes necessary to accommodate them. Why then have these changes occurred so slowly and often imperceptibly?
I believe that physicians do not fear change, because we are in the work of a "caring industry" that consists of three traditional components: caring, science and technology. We know that science and technology change and therefore our practice changes, but caring must never change and must always be present in the "caring industry". Unfortunately, caring has been lacking in the managed care marketplace, when patients have difficulty in getting access to the proper specialists and to certain expensive diagnostic and therapeutic modalities. The "caring industry" now includes a fourth component: the demands of business (managed care). I believe that if the business of physicians is managed professionally and by a physician, caring can be improved and sustained, quality and outcome can be defined and improved, and cost containment will be more effective and less brutal. The fear of change is not the reason physicians have been slow to accommodate the needs of managed care; it is the perceived fear of the loss of their clinical/professional autonomy, lifestyle, and valued traditional relationship with their patients. An understanding of the market forces in managed care will allow physicians to regain their clinical/professional autonomy. But in order to do so, they must have confidence in investing in themselves and in change.

* Dr. Fay is Chairman of Urology at the California Pacific Medical Center in San Francisco, CA.