What’s in Store for Physicians When a Market Enters Phase III

In Phases I and II of the market evolution currently under way across the country, increased managed care penetration and the beginnings of coordinated competition prod physicians and other health care providers to form alliances designed to take on financial risk, implement and enforce rudimentary quality assurance and utilization review duties and find ways to offer enhanced “value” to third-party payers, managed care organizations and self-funded employers.

For many physicians, a detailed look at the activities that characterize Phases III and IV is a glimpse of the future. But it’s important to look ahead at this pattern of growth to prepare for the change. In addition, there are other insights to be gained in exploring these upcoming evolutionary phases. Note, for example, the increased competitiveness between managed care organizations, and between powerful alliances and integrated delivery systems, in Phase III – Phase IV markets. Many physicians today bemoan the “excessive” clout they perceive to be wielded by managed care organizations. But upcoming competition between managed care organizations will make them more responsive to effective management of their resources– and these resources include those physicians, health facilities and home health organizations that have proven most valuable in terms of quality and cost-effectiveness.

Physicians, take heart

Many health care providers believe they must go along with any managed care “opportunity,” no matter how unattractive, and no matter how disorganized or arrogant the managed care organization. But this is not true. Managed care organizations must offer “value” to patients and employers in the form of effective management of health care services, the ability to respond promptly and fairly to patient and employer needs and the ability to ensure timely medical services of high quality. A managed care organization that consistently treats its providers shabbily (financially or otherwise) will not retain a top quality panel for long. So to health care providers I say: Take heart! Sooner or later, managed care organizations in your market must compete for your services. (Of course, the irony is that a greater willingness by providers to go along with bad managed care organization contracts will postpone the time when managed care organizations must improve their treatment of their panel participants.)

A narrowing of options

A health care market enters Phase III when managed care comprises 20 percent to 40 percent of the covered lives in that market. At this point, the managed care organizations begin to consolidate, as the stronger HMOs, preferred-provider organizations and other plans acquire some of the other players. Competition begins to increase among these managed care organizations as well, as employers and other purchasers begin to narrow the quantity and range of managed care options they seek. Some of this narrowing is due to employers’ increased leverage through purchasing cooperatives they begin to form. (However, extensive alliances among employers and other purchasing entities do not typically occur until Phase IV.)

In any event, as employers and other purchasers begin to flex their muscles, there is further consolidation of the managed care market. That is because managed care plans respond to the increased purchaser leverage by driving hard bargains with providers, accompanied by an increased shifting of risk to the providers. These managed care organizations will be able to negotiate these sorts of deals only after they achieve a certain size and accompanying leverage.

In addition, increased competition among managed care plans will result in greater loyalty between those plans and those providers who can furnish a competitive edge. Thus, there will be a greater move towards exclusive or semi-exclusive relationships between certain managed care organizations and certain providers. Also, as the managed care organizations seek greater price concessions and/or risk assumption by the providers, they will compensate for these services with greater loyalty to providers, quicker payment turnaround time and more attractive performance incentives, to encourage providers to undertake a level of enhanced service that gives the managed care organization or provider alliance the competitive edge.

Physicians will be steered aggressively toward capitated models during Phase III. Effective management under a capitated system requires enhanced tracking of clinical, financial and administrative data, as well as the ability to have services performed by the least costly provider–that is, don’t use a specialist when a primary care physician will do, and don’t use a physician when a support professional will suffice. Accordingly, Phase III begins the push toward extensive delegation of services by physicians. Primary care physicians will learn to be “coaches” to their support professionals, and specialists will similarly “coach” certain procedures handled increasingly by primary care physicians. All of these duties will be made easier by the increased availability of clinical data transmission and the development of protocols that release the physician from some of the “hands-on” services typically performed under fee-for-service models.

Independent hospitals in a Phase III market quickly learn that they have an unacceptable amount of excess capacity, which cannot be satisfied fully by the formation of physician-hospital organizations or other networking efforts. Thus, Phase III usually triggers rapid consolidation among independent hospitals. Because of this consolidation, those networks that have established the infrastructure needed for Phase III will begin extensively to integrate their delivery efforts in order to gain control over the primary care base. Analysts have observed in some Phase III markets (Massachusetts, for example) that two-thirds of the managed care patients tend to be enrolled in only three or four managed care plans. Consolidation clearly is the name of the game.

This consolidation sets the stage for Phase IV, when managed care yields to managed competition. Next month, we’ll explore Phase IV and its implications for all market phases.

The author is president of The Health Law Center (Neil B. Caesar Law Associates, PA), a national health law/consulting practice in Greenville, S.C.

MANAGED CARE January 1996. ©1996 Stezzi Communications