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Managed care as it is known and despised by many APA members is becoming a thing of the past, so it is said, as physician groups increasingly assume control of systems that integrate delivery and financing of health care under capitated contracts.
So how are these physician-owned and operated systems faring in the highly competitive health care marketplace?
Not so great, according to the results of a survey by the consulting firm Ernst and Young. But the market is still young—most systems are less than three years old—and the future is still for the taking, according to the survey report, "Navigating Through the Changing Currents."
The survey of 202 provider-controlled organizations offers a compelling portrait of a phenomenon that many predict to be the final evolution of managed care.
This growth industry of integrated delivery and financing systems (IDFS's), mostly owned by hospitals or physician groups, are essentially start-up ventures with little infrastructure, unclear commitment from management, and no strategic planning for the future.
Seventy-one percent of the survey participants are three years old or less, and 26 percent are less than one year old. Only 17 percent have a full-time medical director, and most have only one to three employees performing duties such as utilization management, sales and marketing, and information systems support.
Most IDFS's do not yet cover Medicare or Medicaid beneficiaries, and most accept only a relatively small amount of risk—the critical task for physician groups that seek to take back clinical decision-making power from insurance and managed care companies.
"Accepting risk [for Medicare and Medicaid patients] will become an increasingly attractive option for IDFS's because federal actions will make fee-for-service undesirable as a result of continuing budget cuts," Ernst and Young predicts. "Federal legislation also may stimulate the private self-insured market through ERISA changes, thus creating more opportunities for IDFS's to contract with employers directly."
In addition, most IDFS's as presently configured are top heavy with specialists, have not fully integrated with primary care, and often do not include the full continuum of care. A minority provide services for mental illness, according to the survey (see box at end of story).
The consulting firm concludes that market forces will ultimately push the health care system in a direction that some fear is ethically untenable: one in which physicians have a financial motivation to hold down utilization of health care services by the same individuals for whom they are providing those services.
"Ultimately. . .market-driven changes will present IDFS's with an inescapable choice of deciding which sector of the health care market they will control—providing health care or financing its delivery," Ernst and Young states. "Those who choose to do both will have to resolve a key question: can they be a competitor with an insurer for covered lives and at the same time act as the insurer's customer and deliver health services on its behalf?"
The financial performance of provider-owned integrated delivery and financing systems is unfavorable when compared with the rest of the managed care industry, Ernst and Young reports.
Approximately 20 percent of IDFS's reported a loss in 1995 (see chart bottom left), and only 32 percent reported a profit. Approximately 22 percent did not know their financial status.
The consulting firm notes, however, that the profitability of provider-owned delivery and financing systems is comparable to the profitability of HMO's in the late 1980's—a promising sign.
The Ernst and Young survey found that a key predictor of profitability was the ability of a system to meet its own enrollment targets. In 1995 only 28 percent of IDFS's met their enrollment targets.
"Many businesses will make staffing decisions and build an administrative structure based on expected enrollment," states Ernst and Young. "Therefore, they will acquire fixed costs that must be offset by expected revenues. As a result, failure to meet enrollment projections typically leaves the IDFS with an administrative structure that cannot be supported by the revenues it receives.
"Attaining enrollment targets in a health plan setting is especially important because of the need for IDFS's to be able to balance the high utilization of individuals who have been enrolled with the plan for an extended time with the low utilization of new enrollees. New members typically use few medical services, as they seek to become acclimated to how the IDFS works and its network of providers. By contrast, long-term members will have gained experience accessing services and will also show higher utilization simply because they have aged since joining the IDFS."
The ability of a physician-owned and -operated health plan to assume risk—that is, to underwrite, as a typical insurance company would, the lives of the individuals served by the health plan—is the lynchpin of capitation.
The amount of risk being accepted by most integrated delivery and financing systems is relatively small, Ernst and Young reports. "While many IDFS's are accepting at-risk payments, their level of risk acceptance varies greatly. Almost all IDFS's are still receiving fee-for-service payments."
Of the 202 systems surveyed, 26 percent report receiving no revenues from at-risk payments, while only about 8 percent get 100 percent of their revenues from at-risk payments (see chart below).
"Market trends are encouraging [physician-owned systems] to accept risk, sometimes immediately, without gaining the requisite knowledge of various risk arrangements," Ernst and Young states. "With so little of their revenues being at risk at this stage in their development, the financial consequence of their not controlling utilization is relatively minor. But as their enrollment grows, IDFS's will need to increase their knowledge of utilization management techniques and various risk-sharing arrangements."
Yet the survey also found that many systems—even those that were accepting at-risk payments for covered lives—did not know the utilization trends of the population they covered.
Forty-one percent of those systems surveyed did not know the days-per-thousand-patients spent in the hospital—perhaps the most fundamental measure of health plan utilization performance—of the population they cover.
Only 38.5 percent of all survey participants reported such data.
"Not knowing your utilization performance is the surest way to lose money in a managed care setting," notes Peter Kongstvedt, M.D., a partner in Ernst and Young's health care consulting practice.
The Ernst and Young survey also found that the management information systems in most physician-owned integrated financing and delivery systems are rudimentary.
Less than 40 percent have sophisticated capabilities such as automated case management. Only 27 percent reported that they could produce data required by the National Committee for Quality Assurance.
Kongstvedt pointed out that the lack of information management abilities will hamper these systems of care.
"This could be a critical shortcoming since employers are increasingly basing their contracting decisions on an organization's ability to produce outcome data," he said. "IDFS's will have to decide whether to make major investments in the information technology necessary to control medical utilization and provide timely information for management decisions."
Copies of "Navigating Through the Changing Currents" are available from Ernst and Young for $10 each (a minimum order of 10 copies is required) by calling (800) 726-7339.
Mental health services are not widely provided by physician-owned integrated financing and delivery systems, according to the report "Navigating Through the Changing Currents" by the consulting firm Ernst and Young.
Those systems, predicted by many to be the final evolution of managed care, are not yet offering the full continuum of services as they have been envisioned to.
Approximately half of the 202 systems surveyed do not cover home health, prescriptions, mental health, and substance abuse treatment under at-risk payments, Ernst and Young reports.
Just 49 percent of survey respondents said they offered mental health services under capitated arrangements, and 44 percent said they offered substance abuse services.
Seventy-eight percent of those surveyed provided primary care, 72 percent provided specialty care of an unspecified nature, 69 percent provided hospitalization, and 55 percent provided home health services.
Just 42 percent of the survey respondents said they provided prescriptions.
"The gaps in coverage may decrease the attractiveness of IDFS's to employers, who typically seek one-stop shopping for health care services," according to the Ernst and Young report. "If IDFS's expand the array of services they cover in response to market demands, they would need to quickly build utilization management expertise in these areas or develop an ability to monitor and evaluate their contractual arrangements with other organizations providing the services."
Integrated financing and delivery systems that are interested in contracting directly with Medicare will be required to develop agreements with other providers to offer mental health, substance abuse, and home health services, Ernst and Young says. IDFS's also may be forced to contract with pharmacies for prescription drug coverage to offer a competitive product.
(Psychiatric News, October 18, 1996)