Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. D. Provider Networks.


Recent research sponsored for MedPAC39 provides a detailed picture of the most common network configurations among HMOs across the country. The results illustrate that plans commonly employ multiple contracting strategies, even within the same market, to enable them to launch the diversity of products described earlier, and to adapt to distinctive local provider market configurations they are confronting. Contracting arrangements include individual physician contracts, contracts with groups or associations of physicians, and in some instances with pre-existing integrated delivery systems. Likewise, payment methods range from fee-schedules to capitation for varying scopes of services, again depending on plan preferences and provider willingness to assume risk for specified sets of services. For hospitals, plans contract primarily with individual facilities, though a sizable number contract with systems of hospitals. Plans commonly pay them on per diem, per case such as DRGs, and, in rare instances, capitation.

The MedPAC study estimates that nearly half of the lives in health plans are enrolled in plans that pay capitation to other intermediate entities for professional (commonly primary and specialty physician care), global (physician and hospital care), or only for inpatient care. Plans delegate a substantial amount of control to these capitated entities including utilization management functions, decisions about individual provider compensation, and, in some instances, quality oversight and improvement. It is also noteworthy, that the MedPAC study found that risk is more likely to be “down-streamed” or passed on to provider organizations for Medicare products than for commercial products.

The experience of providers with risk-assumption has been very mixed. There have been some notorious failures of risk-bearing provider groups—including the MedPartners/FPA bankruptcy40 and the collapse of the Allegheny Health Care System41. In both instances, health plans had made substantial capitation payments to these organizations for the care of members enrolled in their owned physician practices. With the bankruptcy of the parent corporation and its inability to its pay providers, the care for these members was put in jeopardy. Medpartners’ problems are also reflective of the near total failure of the physician practice management industry that was, for a brief time in the 1990s, expected to be a major aggregator and corporate rationalizer of what is generally acknowledged to be a cottage industry of physicians42.

The problems of financial instability of provider groups has received the most notice in California. This is due in part to the large number of large physician organizations, the extensiveness of downstream financial arrangements, and what are relatively low utilization and premium rates that have left little room for further economizing in care delivery43. Certainly, the experience there has heightened regulatory concerns and bolstered oversight of plan-to-provider risk arrangements. The California Medical Association has reported as many 75 to 95 percent of capitated groups and IPAs in California are in serious financial difficulty44. The physician service marketplace remains deeply distressed, as the management organization (KPS Global) that acquired many of the practices sold off when MedPartners went into bankruptcy is itself struggling. It has been able to survive by allowing own physicians to purchase their practices back and by obtaining loans and additional payment increases from health plans. It is also possible that problems of risk bearing provider groups have been more extensive than is commonly acknowledged. This is because plans may have “bailed out” delivery systems that have not been able to manage their prepayment well or, in other instances, deeper-pocketed hospital partners may have been able to finance shortfalls for affiliated IPAs or physician hospital organizations (PHOs). All of these indications suggest that substantial premiums will be forthcoming to shore up these ailing arrangements.

Along with the practice management companies, another enterprise that has largely failed to thrive as anticipated by some during the 1990s was the hospital-sponsored or -centered integrated delivery system45. These systems were expected to be the product of concerted efforts at vertical integration. Integrated systems for which the hospital was to be the anchor and the banker engaged in physician practice acquisition, purchase of post acute facilities, initiation of home health and other community-based services, and even development of their own health insurance plans. Vertical integration along a continuum of care was touted as a means to control one’s operating environment. But many of these systems found that diversification of business lines ended up exposing them to more uncertainty; subjected them to competition from more agile and specialized players; and, in many instances, exceeded their ability to effectively manage enterprises removed from their core businesses46. And if they started their own HMO or were able to secure global capitation contracts with health plans, as many had been designed to do, they found that allocation of these dollars proved more challenging and disputatious than they had anticipated. So by the end of the 1990s, vertical dis- integration had become widespread and sticking to the knitting/returning to core business became the operative watchwords for much of the hospital industry.

The experiences with both practice management companies and integrated delivery systems have cast doubt on the readiness and willingness of provider organizations to assume and manage risk effectively. Notwithstanding the evidence from the recent MedPAC report on how extensively risk has been shared, it may be that risk-bearing among providers may not prove to be a viable long-term strategy as financial pressures grow and easy savings in terms of reduced utilization and inefficiency are eliminated. Providers appear to be uncomfortable with the conflicting pressures between the insurance (prepayment) function and the care delivery responsibility. Moreover, they have struggled with reengineering care delivery processes that depart from traditional roles and responsibilities, such as hospitals promoting community-based ambulatory care services. They have also been slow to develop sufficient administrative infrastructures to enable them to use more sophisticated information and decision support systems. As discussed below, this has led to a determined pushback by providers that in some instances entails using their negotiating clout to forestall, rather than accept, risk arrangements.

  1. L. Litvan, “Switching to Self-Insurance,” Nation’s Business, March, 1996, pp: 16-21, 1996.
  2. T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
  3. T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
  4. T. Lake, M. Gold, R. Hurley, M. Sinclair, and S. Waltman. Health Plans’ Selection and Payment of Health Care Providers, 1999: Final Report. Washington, DC: Medicare Payment Advisory Commission, 2000.
  5. P. Elkind, “Vulgarians at the Gate: How Ego, Greed, and Envy Turned Medpartners from a Hot Stock to a Wall Street Fiasco,” Fortune, (12(1):132-145, 1999.
  6. L. R. Burns et al , “The Fall of the House of AHERF: The Allegheny Bankruptcy,” Health Affairs, 19(1): 7-41, 2000.
  7. Kaiser Family Foundation, “A Risky Proposition? Risk-Bearing and Solvency in California’s Medical Groups, “ California Health Policy Roundtable Report, Menlo Park, CA: KFF, February 2000.
  8. J. Robinson, “Consolidation of Medical Groups into Physician Practice Management Organization,” Journal of the American Medical Association, 270(2):144-149, 1998.