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

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Is California-style health care the future?

Bigger groups, capitation, physician layoffs are shaking things up

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

By Deborah Gesensway

SAN BERNARDINO, Calif.--A few years ago, when managed care stormed this economically troubled city where the Los Angeles megalopolis abuts the notoriously smog-obscured mountains, general internist William A. Blee, MD, decided the smart move was to sell his 20-year-old solo practice to his local hospital, St. Bernardine Medical Center.

The result has been less control over his pace, his procedures and even his nurses. But, despite a big drop in fee-for-service patients--from 60% to 30%--Dr. Blee found he continued to collect a reasonable salary. In many ways, adjusting to group culture was easier and more appealing than he anticipated. He did not miss office management hassles at all. Perhaps more surprisingly, he felt he has been able to continue to do what he needs to for his patients; it just takes more phone calls. All in all, the change had worked out OK.

But in California today, change is the only constant. Recently, Dr. Blee's practice has been in flux again. He is finding he must share his exam rooms with new partners as doctor turnover occurs within the group; as exclusive provider contracts are renegotiated, he may have to begin to refer patients to specialists he doesn't know; he must deal with new management bringing new priorities to the group; and he must adjust to new, harsh economic realities that have left some of his medical colleagues without work. Last winter, three of Dr. Blee's colleagues--an internist and two pediatricians--in the Inland Healthcare Group were laid off.

In the background of this local shake-up is St. Bernardine's ongoing merger negotiations with two other Catholic hospital systems to create a large, statewide health care delivery system. The hospital-owned management services organization (MSO) that operates the medical group is paying close attention to the message of the negotiations: No one is interested in an alliance with a company that is losing money, explained Daniel S. Murray, MBA, the MSO's director of medical practice management.

"So we had to send through an earthquake," Mr. Murray said. "But looking at the projections we have put together now, with the realignment, the staffing reorganization, I think we will be fine. Part of the downsizing was to position ourselves for what's happening. What we're dealing with is uncertainty in the industry. The environment here is changing so fast."

Dr. Blee, a retired Army colonel, says he expects to react to the latest changes as have most of his friends--retire early.

Shaking things up

It is hard to talk about California without thinking of earthquakes. But although the tremors and temblors of managed care rocking California may originate in fault lines near Dr. Blee's San Bernardino and run along the congested freeways to Los Angeles and San Francisco, where HMOs now enroll two-thirds of the insured population and 30% to 50% of the Medicare population, the upheavals seem to stretch clear across the country.

Health care economists, consultants and policy-makers usually, but not unanimously, agree that California-style health care is the future for the rest of the country. But no matter who you ask, doctors would be deluding themselves if they were to discount California's managed care trends as nothing more lunacy from the left coast.

"It's a very different atmosphere [in California], but everything is moving from the West to the East Coast," said Paul J. Feldstein, PhD, professor of health care management at the University of California, Irvine, Graduate School of Management. "This is the laboratory where everything is happening. And it's going to happen even faster in other parts of the country."

What is it about California-style health care that cannot be ignored?

Overall, twice the percentage of Californians as Americans get their medical care through HMOs. And most Californians in HMOs (85%) are in staff- or group-model types, not other less restrictive models more common across the country. When Californians say managed care, they are talking about the capitated form, where providers are prepaid a negotiated amount of money to render all the medical care for a population of patients, which is still a rarity in other states.

"Many groups in California now are closing their doors to PPOs and traditional Medicare, because they would rather have those patients come in under a capitated program," said Linda Lyons, FACP, senior vice president for resource management and managed care operations at Scripps Clinic in San Diego and chair of the board of the Unified Medical Group Association, which represents large multi-specialty group practices across the country. "They have learned that once you get up past 30% [of patients under capitation], you've got so much infrastructure invested in managing your capitated business that it is better to manage them all that way."

Californians' embracement of capitated managed has contributed to the significant decrease in per-capita health care spending in the state. After years of ranking among the nation's highest spenders on health care services, California in 1994 dropped below the national average, according to a study by consultants Lewin-VHI Inc.

To accomplish this reduction, Californians go to the hospital much less often than do other Americans--there are 95 admissions per 1,000 Californians compared with 118 per 1,000 Americans--and then they stay in the hospital less time--5.7 days compared with 7. Recent evidence suggests also that patients in the largest integrated group practices throughout California visit their doctors fewer times than do Americans overall.

This finding is true even though California is the most doctor-heavy state, with 2.15 physicians for every 1,000 residents compared with 2.04 nationwide (San Francisco tops all with 3.2 doctors per 1,000 residents). Some are starting to wonder, however, how long that will last. The number of doctors in California grew 4.4% from 1987 to 1993 compared with 12.7% in the rest of the country, and the oversupply shakeout appears to have begun, with anecdotes galore of California specialists packing up and moving East.

William J. Ceretto, FACP, a San Diego cardiologist who lost 40% of his business last March after a leading HMO dropped him and most of his hospital's other cardiologists from its panel, says that when he got around to making inquiries about jobs in Colorado, he found very few positions open. People told him it was because of all the Californians who beat him to the jobs. According to the California Medical Board, more than 2,600 doctors gave up their California licenses in 1994.

Purchasing power

Key to this portrait of California's health care delivery system are the payers. Only about half of Californians have coverage through their jobs, down from 57% in 1988. And the dwindling number of California employers still committed to providing health insurance to their workers have led the nationwide trend to purchasing cooperatives. The success of these buying groups has, in turn, driven premium prices lower and lower, prompting doctors and hospitals to reorganize their business operations to drive better bargains and cope with the pay cuts. Some analysts, in fact, say that this incarnation of managed competition is what most characterizes California health care.

Employers, by "reducing the number of health plans offered to their employees, standardizing the benefit package, using collective negotiations to contain costs, and shifting from vendor to partner relations with HMOs," wrote University of California, Berkeley, economist James C. Robinson, PhD, in Health Affairs last winter are influencing the configuration of the delivery system and consequently even the doctor-patient relationship.

Doctors are merging into ever bigger groups; hospitals are affiliating with partners who can bring them capital to buy doctors and undercut competitors in this buyers' market. Doctors, hospitals and insurance companies together are well on their way to aligning into vertically integrated provider networks. Some of the first instances of not-for-profit HMOs converting to for-profit status were to be found in California.

The Healthcare Association of Southern California predicts that the future holds the promise of even more mergers and consolidations. According to the American Association of Health Plans, the number of HMOs in California has already begun to shrink, to 36 at the end of 1994, down from 40 the year before and 50 in 1988-1990. Meanwhile, some of the largest California health plans, including FHP, PacifiCare and HSI, have been spreading their influence directly, acquiring in the last two years local HMOs, hospitals and physician groups from Connecticut to Texas.

"As health plans get bigger and meaner, the best posture [for physicians] is to be just as big," Dr. Lyons said.

"There are a lot of groups in California that have learned now that if they are going to be the ones delivering the care, they have to get organized. ... They are finding ways to expand and then to help other physicians in other areas organize too."

But will it play ...?

California-style managed care, however, is not a foregone conclusion for all doctors, patients and hospitals. California's history and economy have been unique, particularly when it comes to health care. Since its starting point is different, its end result could be as well. Large physician group practices such as Scripps and Rees-Stealy in San Diego can trace their histories back nearly a century; Oakland-based Kaiser Permanente stunned the medical establishment 50 years ago by promoting prepaid health care, the predecessor to 1990s-style capitation.

"Demographics is a significant part of what is going on in California," said Sam J.W. Romeo, MD, president and CEO of USC IPA in Los Angeles and a member of the board of directors at the Medical Group Management Association. But consumers, industry and governments all look at California's ability to cut costs through use of managed care, consolidation and management competition as generally desirable, particularly in the absence of real evidence on how these changes affect the quality of American health care. "My view is that it's going to happen in Florida, Idaho, Wisconsin, and at an accelerated rate," he said.

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