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How to make smart decisions when under pressure to integrate

From the May 1995 ACP Observer, copyright © 1995 by the American College of Physicians.

By Deborah Gesensway

Never before has it been so important for physicians to understand the business of health care. HMOs, PPOs, PHOs, ISNs. ... What do you choose? How do you choose?

Which of the many managed care companies moving into town should you talk to? How can you tell the winners from the losers? Should you contract with, sell out or buy in? Is a hospital a better partner than an insurance company? Vertical integration or virtual integration?

Three doctors in top jobs at three very different kinds of managed care organizations spelled out their views of integration for internists at Annual Session. They concluded that the only clear answer-given an uncertain future-is that physicians are more likely to come out OK in the end if they come together as larger groups.

"Control your destiny or someone else will," said Robert D. Brickman, MD, JD, a vice president at Sentara Health System in Norfolk, Va. "Face reality. Change before you have to."

The good news, he said, is that "physicians are essential." But, he added, there is no question they will be more attractive to different integrated service networks (ISNs, also sometimes called integrated delivery systems), physician-hospital organizations (PHOs) or managed care organizations if they already have come together on their own. Better yet, he said, they should develop the ability to manage risk.

But even physicians already part of a group and already prepared for capitation still face a dilemma when deciding to throw their lot in with a bigger, integrated system: Which type of system should they choose?

"The interesting thing is that once there's 20% managed care in a market, we begin to see horizontal integration, consolidation," said Howard L. Bailit, DMD, PhD, a senior vice president at Aetna Health Plans in Hartford, Conn. The end point of these mergers, he said, can be glimpsed in places such as Minneapolis, Portland, Phoenix and Boston, where three to five managed care organizations control 85% of the market of privately insured patients.

Integrated organizations, he said, tend to fall into three general groupings:

  • Those that developed as extensions of hospitals or large group practices. These include Sentara, the Henry Ford Health System in Detroit and Park Nicolette in Minneapolis, and tend to be heavily committed to a model that depends on ownership of physician practices, hospitals and other assets. This type of integrated system accounts for 5%-10% of the market nationally, he said.
  • Those that started out as insurance companies. The various Blues plans make up about 15% of the market; the other insurance company ventures (Aetna, Prudential, Cigna, for example) account for another 15%. Some of these rely on contractual arrangements only, some on ownership, some on a combination of both.

"This segment of the managed care business is going through huge changes," Dr. Bailit said. There are hundreds of other insurance companies that tried managed care and have now gotten out or gone out of business because they couldn't make it work, he said.

  • Finally, there are those organizations that have been managed care companies from their founding, such as Kaiser, PacifiCare or United HealthCare. The bulk of the managed care market is made up of this type of organization.

Among these, the fastest-growing are those that are for-profit, Dr. Bailit said. "They are at the forefront of mergers and acquisitions because they have the money to invest."

As physicians look at this breakdown, they could conclude that there are three possibilities in the future, Dr. Bailit said: All models might survive. Or, there could be big winners and big losers. Or, he said, the successful companies will be those that develop into a hybrid; they may mix some ownership with some contractual relationships, combine some insurance industry culture with some physician group leadership. And, he said, keep in mind one caveat: No one formula will be right for all communities.

Nonetheless, Dr. Bailit said he thinks many of the most successful companies today seem to be moving toward this hybrid model. In general, he and the other panelists agreed, health systems that depend more on contractual alliances rather than outright ownership of bricks, mortar and personnel appear to be a better bet.

That's why physicians, if not the whole health care industry, might be better shying away from vertical integration, an organizational system now discredited by the rest of American industry.

At a recent meeting of executives of the Blues HMOs, for example, participants agreed that "virtual integration (which uses contracts) is preferable over vertical integration," said Daniel J. Dragalin, MD, MPH, and president of HMO Blue Cross-Blue Shield of New Jersey. To be successful in today's markets, he said, the Blues HMOs concluded also that asset ownership generally made little sense, that hospital capitation may not be cost-effective, that the key competitive factors for the immediate future are price, access and satisfaction.

The organization that succeeds also will probably need to have a predominance of primary care, be serious about professional standards and quality oversight and be willing to and capable of accepting risk-bearing contracts, he said.

Moreover, he said, successful systems will depend to a much greater extent on physician extenders. In fact, he said, there may be a time in the not too distant future in which integrated delivery systems conclude they are carrying an overabundance of primary care physicians.

"You are not now guaranteed a lifetime job," Sentara's Dr. Brickman said. The group "you make a decision to join is extremely important."

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