Physicians Must Create Their Own HMOs

By Thomas J. Garvey, M.H.A.

If you put a frog in boiling water, it will attempt to escape for self-preservation. But if you take the same frog, place it in lukewarm water, place that water over a stove and gradually turn up the heat, the frog’s system will adjust to the change and eventually the frog will boil without trying to escape.

I use this parable to bring home to physicians what has been happening in recent years to the health care marketplace. In 1973, when President Nixon signed the federal HMO Act, HMO membership was negligible. By the end of 1994, HMOs had 51.1 million members–about 20 percent of the population. It is projected that by the turn of the century, HMOs and other managed care entities will boast more than 100 million members and will dominate health care services in the United States.

In 1996, physicians in private practice are losing their financial and clinical independence. The rise of HMOs has been and continues to be rapid, yet their triumph is not so sudden as to avoid the “boiling frog” syndrome. Trying to adjust to changing circumstances day by day by taking on managed care contracts and practicing more cost-effective medicine, physicians may miss a larger truth: The water is getting hotter.

But the problem facing physicians is not the HMO concept itself. The problem is the entities that own HMOs. I believe they are more concerned with enriching their executive staffs and providing an exceptional return on investment for their shareholders than they are with providing the highest possible quality of health care to their members.

What is the solution? I believe physicians must establish and control their own HMOs.

Now, my company has been helping physician groups do just that since 1986, when we completed a feasibility study that led to the creation of Connecticut’s M.D. Health Plan, a successful doctor-owned organization later sold to Health Systems International of California. That makes me an interested witness, of course. But I defy any doctor to survey the present health care marketplace and conclude that his or her clinical independence is safe from incursions in a conventional HMO.

Clinical independence and financial independence go hand in hand, after all. In the HMO industry there is a concept known as the 30-percent rule. That is, if one HMO controls 30 percent of an individual physician’s cash flow, it effectively controls that physician. As a business person, the physician cannot terminate that contract, lose 30 percent of his or her business, and still survive. Once cash flow control has been achieved, the HMO forces the physician to practice according to its own requirements as to quality measures and frequency of visits.

When physicians contract with an HMO, they agree to specific reimbursement rates or monthly capitation figures, and they agree to abide by the health plan’s utilization and quality improvement systems. What physicians fail to understand is that they have given the HMO the right to use their good names and reputations to convert the physicians’ fee-for-service patients to HMO members. If in the future the physician wants to terminate the HMO contract, his or her former patients, now HMO members, are shifted to another physician who participates in the plan.

HMOs do control rising health care costs in the commercial health benefits marketplace. That much has been proven. The trouble is that they do so by controlling physicians.

What to do?

Forming independent practice associations, physician organizations, preferred-provider organizations and physician-hospital organizations is not enough to protect physicians adequately. These entities merely make it easier for HMOs and other managed care organizations to contract with physicians and capture their patients. Physicians in one of these organizations are relegated to the role of laborers in a management-labor relationship. Physician fees and practice patterns are continually subject to renegotiation to the benefit of the HMO’s bottom line.

HMOs are competitive, market-based cost-control organizations. Thus, a physician strategy to compete with them must employ a competitive, market-based and cost-effective vehicle.

HMOs control health care dollars entering the system and determine how they will be distributed. Physicians must implement a strategy that controls the distribution of health care dollars. Physicians must establish their own HMOs.

Most HMOs are regionally based and concentrate their membership in large metropolitan areas. For marketing leverage, physicians must create statewide HMOs with hospital networks.

Most HMOs are capitalized by insurance companies or through initial public offerings. Physicians need organizational control; therefore they must capitalize these programs themselves.

The outrageous compensation packages given to HMO executives are unconscionable, excessive and previously unheard of in health care. Reverse pressure, through market-based competition, must be applied to the market by doctors to overcome these excesses.

If trends in managed care do not change by the year 2000, nonphysician HMOs will dictate the delivery and determine the quality of health care services in the United States. The private practice of medicine will go the way of the dinosaurs, to trade our amphibian metaphor for a reptilian one. If that happens, the quality of health care services will decrease dramatically as physicians and other health care providers lose their financial and clinical motivation to provide the highest-quality services. To prevent the complete erosion of their role as patient advocates, physicians must create leverage and develop their own market-based HMOs to win back their patients. They must start today to regain control of medicine.

The frog is immersed, and the water is very hot indeed.

The author is president of The Garvey Group, a managed care consulting firm located in Merrick, N.Y.

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