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IPAs down-but not out-with doctors

Despite a rash of recent failures, physicians may have few other options

From the September ACP-ASIM Observer, copyright 2001 by the American College of Physicians-American Society of Internal Medicine.

By Deborah Gesensway

Can IPAs survive a wave of state-based regulation?

Southern California's Orange County has the dubious honor as ground zero in the war over physicians' role in a managed care-oriented medical world. Throughout the 1990s, some of the largest independent practice associations (IPAs) were set up here to give physicians in private practice access to a growing pot of capitated money. In the last few years, however, Orange County has watched many IPAs, along with other provider groups, go belly up. In the process, physicians have been left holding the bag for millions of dollars in unpaid claims. At the same time, patients have been stranded without access to physicians, and legislators have been busy proposing ways to regulate physician groups. (See "Can IPAs survive a wave of state-based regulation?" below.)

Hard-hit physician groups in Southern California are not alone. From Texas to New York, IPA failures have been making headlines.

Not surprisingly, many physicians are eager to wash their hands of IPAs. Some like Gary Stewart, FACP, a general internist in Orange County, Calif., say they have become so disillusioned with IPAs' promises of new patients and bargaining clout with HMOs that they have dropped all alliances with them.

"The doctors here have a very high level of cynicism about the IPA model's ability to do any of the things it is supposed to do," he explained.

IPA'sSome experts say that IPAs' troubled past isn't likely to improve in the near future. In many parts of the country, capitation-the raison d'etre for most large physician organizations-is disappearing as managed care abandons some of its cost containment strategies. Without capitated payments, experts say, IPAs may become increasingly irrelevant to physicians.

Instead of vanishing, however, a number of IPAs are defying analysts' predictions and staying in business. In areas such as southern California, some of these groups are still helping physicians navigate capitated payments. Even in markets where capitation has all but disappeared, some IPAs are reinventing themselves to find new ways to serve physicians.

A second chance

A good example of both the challenges and opportunities facing IPAs can be found in Texas, where several large groups have crashed and burned.

About a year ago, Southwest Physician Associates, a Dallas-based IPA with 1,000 physicians, was forced to close the part of its business that handles risk contracts, which had been managing care for about 80,000 patients. Bruce W. Landes, ACP-ASIM Member, a general internist in Richardson, Texas, and president of the IPA, said that the problem was simple: The group's expenses were far outpacing its revenues.

The IPA had hoped to regroup and restructure by putting all capitation on hold. At about the same time, however, many of the health plans it contracted with decided to get out of the capitation business. In the end, Dr. Landes explained, the 1,300 doctors who had stuck with the IPA lost about $4,000 each in unpaid claims.

While many physicians were understandably angry, most did not bolt. Dr. Landes explained that the stories of colleagues who had even worse experiences-those who sold their practices to a for-profit practice management company that went bankrupt, for example-gave physicians who stuck with the IPA a new perspective. Many realized "that having an organization like an IPA was better than being out there by yourself," Dr. Landes said. Why would physicians burned by an IPA stick with it? Analysts say that in many cases, IPAs' advantages over the more traditional group practice model are still valid. Physicians realize this, they say, and many are giving their IPAs a second chance.

"IPAs can grow rapidly because they don't have to purchase practices or employ physicians," explained Lawrence P. Casalino, MD, PhD, assistant professor at the University of Chicago, who studies physician-health plan relations. "They don't have to worry about excess capacity if the economy takes a downturn. And when physicians can stay in independent practice, they work harder."

Moreover, multispecialty IPAs, as part of the managed care health care delivery system, have been particularly good for primary care physicians. They have raised primary care salaries by devoting a greater share of their money to primary care services, and they have often given their primary care members a significant voice in running the organizations. Perhaps most importantly, nothing else has developed to replace them.

"The news of IPAs' demise is a bit premature," said Elaine Batchlor, MD, vice president of the California Health Care Foundation, which has funded several studies on physician organizations including IPAs. "They are fragile and evolving, but some are still holding together. And some are actually doing better."

Shaky future for capitation?

In their bid for survival, however, IPAs' single greatest challenge will likely be navigating the changing face of capitation.

In cutting-edge markets like California, for example, where capitation is not about to disappear, IPAs are wondering how they can significantly boost capitated rates. Since 1998, between 30 and 40 IPAs and large groups in the state have closed their doors or declared bankruptcy, a problem that many analysts attribute to low capitation rates.

The California Medical Association, for example, estimates that capitation rates dropped 35% between 1993 and 1999, while the cost of living rose 25%.

In addition, Medicare HMO shutdowns hit California physicians particularly hard because Medicare risk contracts often gave IPAs "significantly higher levels of cash," according to the California health care consulting company Cattaneo & Stroud.

In more traditional markets outside of California, IPAs are learning to live not only with low capitation rates, but also a precipitous drop in managed care enrollment.

Frank Gamma, JD, who represents medical groups as a senior counsel for the San Francisco law firm Hanson Bridgett, said he thinks of capitation as a kind of pyramid scheme. "As long as enrollment keeps going up," he explained, "IPAs get more money, and they can use it to pay old claims. This goes on as long as enrollment goes up. But as soon as growth stops, all the claims catch up, and the IPAs say, 'We're bankrupt!' "

And in some parts of the country, HMOs and capitation never took over as people expected. In 1998, when researchers from the Washington-based Center for Studying Health System Change visited Syracuse, N.Y., they found that the big topic among physicians was the formation of IPAs. Most physicians were eager to join, even though HMO penetration was limited. "These IPAs formed in expectation of changes to come," explained Cara S. Lesser, director of site visits.

Two years later, when the researchers revisited Syracuse, they found one IPA had folded and the two remaining groups were struggling.

"HMO enrollment didn't grow, so these groups didn't get the number of lives they needed to build viable organizations," Ms. Lesser explained. In addition, she said, the local Blue Cross Blue Shield plan had decided it would not contract with IPAs.

Surviving through change

While some physician organizations are being forced out of business by the shrinking market for capitation, IPAs in other markets are learning to adapt.

In the past, most IPAs subscribed to one of two models. Under the "delegated model," physicians accept capitation-and the responsibility and risk of managing patient care. In other words, the health plans and HMOs "delegate" to the IPA the job of managing care and paying doctors.

Under the "messenger model," an IPA whose doctor-members do not accept financial risk together can act only as a "messenger" between health plans and its non-financially aligned physicians. The IPA negotiates the terms of fee-for-service contracts with health plans, but it is not allowed to negotiate the rate with individual physicians. It can only shop the contract around to members and try to convince them to sign on, but no back-and-forth negotiation is allowed. (That would be considered price-fixing.)

Both types of IPAs can provide other services for their members, such as help with credentialing and compliance. The messenger model can help doctors negotiate better terms-and possibly rates-in their managed care contracts. However, some say that the model is so flawed it hardly justifies itself.

With a shrinking pot of capitation, however, some physicians are now taking a new look at the messenger model. Dr. Landes from Southwest Physician Associates in Dallas, for example, said that with risk contracts disappearing in parts of the state, the messenger model will be attractive enough to retain physicians. He predicted that his IPA has a future as an organization that can help doctors negotiate fee-for-service contracts with health plans. Even if the IPA can't win its physicians better rates, he said, it can fight for better conditions that could lead to faster payment or reduce their costs in other ways.

Physician attitudes

Attracting physicians, however, is only part of the battle. Getting the support of physicians-and managing them-has proven difficult for many IPAs.

In some cases, analysts say, physicians joined multiple IPAs that were competing with each other for contracts. Because so many organizations were vying for contracts in some markets, health plans were able to drive down rates. Some of these IPAs failed because they became too entrepreneurial or got caught up in the stock market boom-and bust-that doomed other health care businesses. Some, it seems, forgot that their real business was providing health care.

In Orange County, for example, one IPA sold out to a medical management company that then declared bankruptcy. "The IPA's leadership wasn't there to represent the doctors, but to represent themselves," said Orange County general internist Dr. Stewart.

But in many instances, the problem was much more basic. Dr. Stewart, for example, said that most doctors (including him), never really identified with their IPA. As a result, he said, IPAs had far more difficulty "going toe-to-toe with health plans because the membership didn't really back them. "If one IPA ended up losing a contract because of an unwillingness to accept fees, the IPA would not have control of those patients' lives, but the doctors could see those patients through a competing IPA that paid them less," Dr. Stewart said.

Physicians who joined IPAs were, after all, the ones who wanted to stay independent, not be part of a group. Steve McDermott, CEO of Hill Physicians Medical Group, Northern California's largest and probably most successful IPA, pointed out that an IPA "is in part an unnatural act" for many physicians. "Independent physicians give up a degree of their independence to participate in something larger than themselves," Mr. McDermott said. "In exchange, they hope to be able to get more patients and have more power and influence over the HMOs that direct patients to them."

On the business side, many groups never learned to control costs well and manage their contracts with HMOs. Many groups failed to track their "incurred but not reported" (IBNR) expenses. In those cases, an IPA might mistakenly think it is $500,000 in the black, but not account for $3 million in incoming claims that must be paid to physicians.

Survival strategies

Despite a bumpy ride, many physicians and analysts say that IPAs remain a viable way to manage doctors' business dealings with health plans.

That attitude may be due in part to the fact that despite some high-profile failures, most IPAs are still in business. According to Albert Holloway, CEO of the Oakland, Calif.-based The IPA Association of America, 5% to 10% of the nation's IPAs have gone under in the last few years, a percentage he doesn't consider to be of crisis proportions. "Compared to any other start-up industry, it's not the crisis that people are making it out to be," he said. Some analysts say they're bullish on the future of physician organizations like IPAs because they believe that despite current trends, capitation is not dead. Dr. Batchlor from the California Health Care Foundation, for example, predicted that risk payments will rise again when the nation's economy sours, the labor market tightens and employers begin to see a return of double-digit premium increases.

Ms. Lesser from the Center for Studying Health System Change said that IPAs and risk contracting are expected to survive, although perhaps in more limited forms. In places like California, she said, "moving away from those payment arrangements would be a change of tremendous proportions. Everyone is pretty invested in finding a way to make it work."

IPAs will also survive, their proponents say, because physicians in small, private practices-most U.S. doctors, in other words-still need an umbrella organization to help with everything from contracting and credentialing to data collection that can be used to improve the quality of care.

Perhaps most importantly, physicians realize that despite their problems, IPAs offer help in a managed care world. Mr. McDermott from Hill Physicians said that as time has gone by (the group is 17 years old), most of its 2,500 doctor-members have come to understand that they need to back one large IPA to gain enough clout to successfully negotiate with HMOs. The average Hill primary care physician has 50% to 60% of his or her practice with the IPA, Mr. McDermott said.

An important difference between his group and some other IPAs, however, is that doctor-members are willing to hire and delegate power to professional managers who sometimes must make unpopular decisions. "When doctors try to retain tight control and don't allow the IPA to grow, they are going to suffer," he said. "That's why so many little IPAs have never gone anywhere. Many were organized for defensive purposes and never moved to the offense."

Deborah Gesensway is a freelance writer in Glenside, Pa.

Can IPAs survive a wave of state-based regulation?

The perils of transferring financial risk from HMOs to medical groups have captured the attention of state legislators and insurance regulators charged with protecting consumers. Ultimately, they worry that patients will be left scrambling if insurance companies or provider groups go belly up.

According to the National Conference of State Legislatures, nine states, including California, passed laws last year requiring medical groups and independent practice associations (IPAs) to meet some financial solvency standards. Rhode Island passed similar legislation in 1999. Other states, like New York, are proposing regulations to tackle the problem.

Some proposals require IPAs to maintain reserves and submit to routine audits. Others would hold health plans responsible for paying providers in the event that a middleman like an IPA goes under, which many health plans claim forces them to "pay twice."

But physician groups in some states say that the new requirements will cripple their ability to handle risk. In California, for example, a new department of managed health care opened its doors last summer. It includes a financial solvency standards board, which is currently determining how to regulate medical groups. More than half of the state's medical groups that reported financial data to the state last year would be incapable of meeting the minimum solvency requirements the board is considering, the department reported this summer.

And in New York, the state insurance department has proposed regulations requiring IPAs that receive $1 million in annual capitation from an individual insurer to post a security deposit equal to 12.5% of that payment. The regulation was first proposed after Wellcare HMO floundered in 1999. Wellcare blamed its IPA capitation contracts for part of its financial difficulties. HMOs in the state are only required to put aside 5% of their revenues. Physician organizations throughout New York have criticized the regulatory proposal, saying it is unfair to ask more of them than health plans, which more greatly impact patients when they fail. They also have said most IPAs will not be able to afford the 12.5% reserve requirement, which will put smaller organizations out of business or put the final nail in the coffin of capitation in the state.

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