The Dangers–and Opportunities– Of a Maturing Health Care Market

By the time a market has entered what I’ve called Phase III of the transition to managed competition, it is clear that there is excess hospital capacity. That leads to the aggressive formation of physician-hospital organizations. But there are four dangers physicians should consider if they’re thinking of joining a PHO.

First, many of the hospitals that seek to establish PHOs eventually will merge with other hospitals or otherwise close their doors. Physicians should choose hospital allies carefully, after consideration of their long-term chances for survival.

Second, doctors must recognize that hospitals form PHO alliances primarily to gain decision-making influence in integrated managed care arrangements–influence they don’t have if physicians negotiate on their own. Indeed, when 50 percent of a PHO’s focus is on issues of primary importance to the hospital, physicians’ needs won’t be addressed as fully as they would be if the doctors negotiated through an independent practice association or on their own.

Third, the consolidation of the Phase III provider market results in an effort to create PHO arrangements that are exclusive or semi-exclusive. Physicians who join a particular PHO may have a difficult time also joining additional alliance organizations, particularly other PHOs. Therefore doctors need to evaluate whether they are aligning with a hospital that may be unattractive to certain insurers. (The same “attractiveness” concern will make hospitals more selective about which physicians are invited to join a PHO.)

The fourth danger, yielding too much power to a hospital, has actually peaked by Phase III. By then, physicians who once might have rushed to embrace the presumed safety of a PHO know they have other viable options. Single- or multispecialty mergers, combinations of independent practice associations, management services organizations and provider service networks with active quality assessment, utilization review and benchmarking programs, and direct contracting with some employers are all proven alternatives to PHOs in a Phase III market. The end result of all these options is diminished clout for hospitals.

Nonetheless, I observe the rapid formation of PHOs in markets in all phases. Many will fail, but many also will succeed in creating a relatively captive physician base. I believe that integrated care packages negotiated by PHOs in early market phases will be less physician-friendly than Phase III PHOs. Whether increased physician clout is accompanied by increased leverage in managed care negotiation remains to be seen.

Finally, near Phase III’s end, the consolidation and integration of health care providers gives them leverage to demand better payment from managed care organizations. The consolidation of the managed care organizations themselves creates fewer competitors, and thus promotes a greater ability to resist aggressive demands for price reduction from the purchasers of health care. Consequently, a mature Phase III market generally results in increased reimbursement for those providers who have positioned themselves to become successful, and a consequent increase in health care premiums by purchasers.

Phase IV usually kicks in when managed care has penetrated more than 40 to 50 percent of the market. At that point, we see an increased push towards capitated products. Many analysts (and many managed care organizations) believe that only medical groups with significant size and resources can handle capitation effectively. There’s some truth to this proposition on its face, and it gains further power as a self-fulfilling prophecy, as providers decide what they’ll need in order to get capitated contracts. Therefore, the push toward capitation becomes a further incentive for providers to grow through merger and consolidation.

Many markets, including some small ones, have been transformed quickly by capitation. Often, an increase in premium costs that is typical in late Phase III markets becomes the catalyst for progressing to Phase IV. In some markets, such an increase has led employers and other purchasers to form buying cooperatives to increase their negotiating leverage. But many markets are now being pushed toward capitated products before all the influences of Phase III have been felt. For that reason, future Phase IV markets may reflect the influence of capitation without a significant increase in purchasing cooperatives.

Leveling the field

In any event, a key factor in Phase IV is greater leverage for all parties–a kind of leveling of the negotiating field. Health care purchasers come to realize that managed care organizations often don’t add a lot of value to the market. As health care providers learn how to manage risk and improve utilization review and quality assessment, purchasers increasingly will try to bypass managed care organizations and negotiate directly with integrated delivery systems.

Managed competition is in full flower at this point. While several large, highly leveraged HMOs will remain care managers under traditional contracting arrangements, many other managed care organizations will instead ally themselves directly with purchasers and/or providers. Thus, as a Phase IV market matures, health care delivery management and health care financing themselves become integrated. Provider networks now include management physicians, institutions, home care providers and suppliers, ancillary service providers and “care management organizations” that bring more sophisticated risk assumption and credentialing mechanisms to the integrated network.

In exploring these four evolutionary phases of managed competition, my premise has been this: If physicians can evaluate the next phase ahead, they can enhance their ability to succeed in their markets. Because of their central, coordinating role, physicians are naturally positioned to be the key players in health care delivery. But they themselves are often the first to forget this fact. Too many physicians have been driven to premature practice sales or ill-advised affiliations by panic or a desire for a “protection” by hospitals or other large entities that often turns out to be illusory. Change need not mean disenfranchisement for physicians.

However, the maturing market achieves a rough balance of leverage among providers, purchasers and managed care organizations only by pushing too far in every direction. A natural consequence of our collective decision to drive health care reform through the marketplace is that the balance point will be found only by testing the outer fringes of “appropriate” negotiation. This means that physicians who accept bad deals with managed care organizations, purchasers or other providers will encourage further, worse deals to come. The market reacts to rebellion. If your choices are not acceptable and you do not complain, the choices will get worse. To be influential, to be treated fairly, physicians must be vocal–and offer superior value.

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