American College of Physicians: Internal Medicine — Doctors for Adults ®

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Doctors in charge? Direct contracting may make it happen

From the January 1996 ACP Observer, copyright © 1996 by the American College of Physicians.

By Deborah Gesensway

WASHINGTON, D.C.--A new model of health care delivery--one that could put doctors back in charge--is likely to emerge soon in some of the most heavily managed care-penetrated communities nationwide, according to a panel of physician health care experts who spoke to the AMA's House of Delegates last month.

This new model would allow patients to bypass HMOs and other insurance industry-oriented health plans and buy their managed care directly from the providers of that care--doctors and hospitals organized into "care systems."

A key obstacle to the development and growth of this direct-contracting model of health care delivery, however, is physicians themselves, who largely have eschewed integration.

"There are relatively few parts of our system that are organized with the kinds of capabilities and competencies that these systems will require," said James L. Reinertsen, FACP. Dr. Reinertsen is the CEO of Healthsystem Minnesota, a large integrated health system in Minneapolis, which includes 400 physicians and the Park Nicollet Clinic.

In the Twin Cities, the Business Health Care Action Group, a purchasing coalition that buys health insurance for more than 250,000 Minnesotans employed by the region's largest self-insured employers, has announced plans to give its members' employees cash vouchers. Members are to use the vouchers to buy their health care coverage starting in 1997, Dr. Reinertsen said. Any provider group--not just an HMO--will be able to compete for this business.

"Is this just a local Minneapolis phenomenon?" asked Dr. Reinertsen. ŅI don't think so. Think about Medicare: a national market of individual consumers. This model fits with the Republicans' 'defined contribution' or 'voucher' type of model for Medicare reform perfectly."

Stanley Pappelbaum, MD, a California-based pediatric cardiologist who also works as a consultant to physician groups, said there are only a few possible relationships doctors can have with insurance companies: They can be owned by the health plans, sell their services to them, partner with them or replace them.

Although many health policy experts had hoped capitation--accepting the full financial risk for the care of a population of patients--was going to help physicians recapture some of the control over health care now retained by health plans, in fact, little capitation is occurring in the country. Fewer experts now expect it to become a common way of paying doctors.

"[Insurers] are not going to be giving [physicians] a lot of capitation because they've figured out that keeping the risk is where the profit is," said Dr. Reinertsen. Added Noah D. Rosenberg, JD, a Beverly Hills, Calif.-based health care attorney, "By capitating the provider side, good-bye insurance company margin."

According to Dr. Reinertsen, "They'll let 20-30% of the market in your area become capitated, and then you'll practice a capitated mode of practice for all of your patients, and they are going to live off the profit."

So how can physicians spur more direct contracting? The panelists at the AMA meeting offered several suggestions:

  • Integrate further. At minimum, a physician group capable of contracting directly for managed care patients must have 30 physicians. "You have to have enough people in your system to be able to take risk and set a price for your services," Dr. Reinertsen said.

Think about ways to expand your geographic coverage, added Robert A. Ganz, MD, a Minneapolis-based gastroenterologist. That is a key way to increase your bargaining power with insurance companies as well as to position yourself for direct contracting.

  • Learn how to take risk. If physicians design their systems for capitation, Dr. Pappelbaum said, they will begin to figure out innovative ways to provide better care for their entire population of patients in a more cost-effective manner.
  • Hire out the insurance functions. As a group becomes more of an integrated care delivery system, it should look into contracting or joint venturing with an HMO or insurance company to do the kinds of things health plans have done for a long time, such as claims payment, data analysis and marketing.

Dr. Reinertsen likes that the direct contracting model upends the relationship physicians have had with health plans. "In this model, the plans become vendors to the care systems, rather than the other way around," he said.

"The plans, in effect, will be selling ˆ la carte the services they now sell on a fixed price menu."

  • Pay attention to patient satisfaction. Service becomes key when it is the patient who can choose rather than her employer.
  • Go slow. Implement changes incrementally.

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