A Visit with Consultant Peter Kongstvedt, M.D.

Looking for the single secret that will allow you to master managed care? Don’t read on. Peter Kongstvedt, M.D., insists that the industry is too diverse to be understood by any one key.

Peter Kongstvedt, M.D., is a consultant with Ernst & Young LLP÷formally, the firm’s “national practice leader for managed care strategy and medical management.” He has been both a practicing internist and an HMO CEO, and he is the author of The Managed Health Care Handbook and The Essentials of Managed Care, textbooks widely used in university graduate programs that train health care administrators. If there is an American who knows more about the business of managed care than Kongstvedt does, his or her name does not spring readily to mind. When Managed Care spoke with Kongstvedt at last month’s National Managed Health Care Congress in Washington, the range of topics was as broad as managed care itself.

MANAGED CARE: In the mass media there’s an outcry of resentment against penny-pinching HMOs and all the atrocities they’re guilty of. Here at the National Managed Health Care Congress, on the other hand, the primary tone seems to be upbeat and optimistic. Who’s got it wrong?

PETER KONGSTVEDT, M.D.: Well, there are plenty of data showing that, by and large, people actually are reasonably satisfied with their health care. In fact, looking at some data published by the “community snapshots” program at the Robert Wood Johnson Foundation, there’s some relatively positive feeling about quality and access as well. The positive feeling about managed care seems to be eroding a little bit, probably in response to the media onslaught. And the media stories appear to be following two very well-defined techniques. One is called the “identifiable victim,” where you open the story up by identifying a person who has had something happen to them, and then the other technique is called “orchestrated outrage,” where you string a few of these together. The best example of that was when Time magazine ran a big story in which it looked at the case of the breast cancer patient who needed a bone marrow transplant, and then ran parallel stories about how the executives of the HMO received multi-million-dollar payouts.

MC: This is Fox vs. Health Net?

KONGSTVEDT: Yes. And while all of those things were true, of course, it was quite selective, and it missed entirely the fact that Health Net has been doing a lot of preventive care, they’ve been in the forefront of screening and immunizations and they have probably saved countless lives.

MC: You might say the juxtaposition itself was sort of incendiary.

KONGSTVEDT: Highly incendiary. On the other hand, as I tell clients and professional associations, you can present all the positive stories you want. It makes no difference. You don’t get promoted in journalism by writing happy talk. So that’s fine. Live with it.

MC: But leaving aside journalistic sensationalism, are some HMO top executives’ salaries out of line?

KONGSTVEDT: It’s a free market. I mean, who’s to say? Should a cardiac surgeon make $5 million, or $75,000? What’s “right”? If Wall Street wants to reward an executive of any company for pushing up the stock price, whether it’s a company that makes widgets or an HMO, why should you single out the HMO industry and say that it doesn’t deserve it?

MC: Two reasons. You might single it out because there are aspects of health care that are never going to be a market. You’re lying there, you need a new heart, and you’re not going to go shopping amongst the various providers. You’re going to hope that the people who are taking care of you are doing a professional job. And, number two, regardless of moral judgments, could these companies be shooting themselves in the foot by paying top executives so much that they destroy their own image?

KONGSTVEDT: Certainly, there’s an emotional overlay. But if somebody makes umpteen million dollars and they put that money in their pocket, did they really shoot themselves in the foot? They’re rich.

MC: But I mean long-term.

KONGSTVEDT: Well, long-term they may not care. It is interesting to me that there’s no correlation at all between incomes that executives make and quality of care. It’s one that we’d like to make in our minds because it’s so emotionally appealing. But I certainly haven’t seen one, and if somebody can find one in a study, that would be terrific.

MC: No correlation directly between high salaries and high quality and also no inverse correlation?

KONGSTVEDT: No correlation at all. In fact, before Aetna purchased U.S. Healthcare, there were frequent reports in the media about U.S. Healthcare’s executive salaries. Yet U.S. Healthcare and its subsidiaries such as U.S. Quality Algorithms are fairly advanced in how they manage quality. And Wall Street still chose to reward them. You know, [Princeton health care economist] Uwe Reinhardt, in an article called “The Bounty Hunters,” made the point that HMOs are making money to do what society is unable or unwilling to do on its own. And while it’s certain that he meant that in a pejorative sense, if you remove the emotional tag from it, it’s not wrong. In fact, managed care is a way of financially rewarding organizations to lower costs÷and probably improve quality. The bulk of the literature supports improved quality. I’ve personally now looked at over 40 studies, and the vast preponderance of reasonably well-done studies shows that managed care improves quality.

MC: Some observers have suggested, though, that Wall Street’s greatest interest is in the initial waste that can be squeezed out of the health care system. They wonder whether, after that initial waste is gone, there will still be enough value on an ongoing basis to make HMOs an attractive investment.

KONGSTVEDT: Well, I can’t predict what Wall Street will do, just as I can’t predict what the Dow is going to be. But it would be incorrect for anybody to believe that any portion of the health care market is going to remain static and continue to do tomorrow exactly what it does today. It will change÷for hospitals, for doctors and for managed care organizations. The old days in which it was sufficient simply to squeeze down costs are going to fade into history within five years. Here’s a prediction. Peter predicts: The marketplace will never pay extra for quality, but the ability to provide and demonstrate superior quality will become a necessary attribute just to be in business. The best analogy I can think of there is the airline industry. The occasional outlier notwithstanding, if you have to buy a plane ticket out of your own pocket you will look at price, and you know that an absolute requirement for a major U.S. flag carrier to be in business is a certain level of quality. The FAA enforces that as well as the marketplace.

MC: Safety.

KONGSTVEDT: Yes. You won’t get killed.

MC: You might be squeezed in your seat.

KONGSTVEDT: Yes. You might not like the trip too much, but you’ll get there. What’s going to happen in this industry is that there’s going to be a continually rising baseline level for quality and satisfaction. And you won’t get to jack your prices up just to deliver it. Will price inflation occur? Yes, it’s starting to a little bit now. Will it reach the massive levels that it has in the past, far outstripping general inflation? Probably not. Could it get ahead of inflation? It could. I don’t think inflation’s going to do too much. But the marketplace is getting a lot better about purchasing, and now that it is understood how to manage these things, the marketplace isn’t going to simply accept massive cost increases in a passive way. It’s going to demand more for the money. The really big purchasers have already been doing this. Rather than price-sensitive, they’re price-dictating. They say, “Here’s what we’re going to pay you. If you want to do business with us, you’ll accept that payment. And, oh, by the way, here are all the other measures you’re going to have to meet.” That hasn’t translated to the rest of the market, but it’s going to get there.

MC: Speaking of quality, I’ve heard varying predictions about whether exclusivity between managed care organizations and providers will increase or decrease. How do you get quality if you’re the health plan, you’re demanding HEDIS data from your doctors and you’re also demanding certain behavioral changes from them, but they contract not only with you, but also with all of your competitors?

KONGSTVEDT: Yeah, it’s a real headache. When that happens, you get more of the attributes of a commodity market. And the commodity market is a pure price market with a definable base of quality, but not necessarily that high. Right now what we’re seeing is a counterswing back to demands for broad access.

MC: So we are seeing a decline in exclusivity right now.

KONGSTVEDT: Yes, absolutely, and there are two drivers of it. The major driver, by far, is the marketplace’s demand for greater access in terms of numbers of providers.

MC: Choice.

KONGSTVEDT: Yes. There’s a minor factor at work in some cases in the group- and staff-model HMOs, where those plans no longer desire to own, operate and carry the overhead of the physician practices and so they’re spinning them out. In most cases, when they spin them out, they’re saying, “We’ll keep doing business with you, but you need to find some business elsewhere, too.”

MC: Last fall, Ernst & Young reported on a survey of integrated delivery and financing systems.

KONGSTVEDT: Right. I was one of the researchers on it.

MC: It found many of those IDFSs to be woefully unprepared to compete in a vigorous business climate. And I guess these IDFSs are entities that both compete with, in some cases, and contract with, in other cases, the HMOs.


MC: Do you see them rapidly improving their business acumen, or do you see them primarily ending up as entities that contract with, rather than competing with, HMOs?

KONGSTVEDT: Well, they’re not improving rapidly, but they are improving. I think the jury’s out on whether they will compete or cooperate in the end. I have a slight bias toward cooperating with the HMOs, and the reason is that the HMO or any payer organization does more than any provider thinks it does. There’s a great deal of naiveté on both sides of the equation, but there’s more on the provider side. And the catch phrase for the naiveté is “Let’s cut out the middleman.” That implies that the middleman adds no value, takes away money, puts it in his pocket for no good reason, and interferes with their lives. What that fails to recognize is that, in a free and competitive market, if it were that easy to do, somebody would do it. Like me. There wouldn’t be a Blue Cross or a Cigna or an Aetna or a Kaiser. There’d only be me, if I could do it for two or three percent, and do all the things you need to do. The truth is, you need to do a lot of things. There are a lot of regulations. There are a lot of demands by employers and the government, and a lot of crazy benefit designs. There’s getting payments made and premiums collected, looking for fraud÷a myriad of activities. What happens is a lot of provider-sponsored organizations can do these things when they’re small, but when they reach a certain size, they can’t any more. This happened with the HMO industry, too. On the flip side of that, HMOs have to be willing to work with the evolving provider world, and some of them are not. They want to keep doing it the old way because they learned it, they’ve gotten good at it and they make money at it. And they don’t want to change either. That may drive the providers to do it more on their own. It’s not magic. It’s not mysterious. You could learn to do all this stuff. And one of the points that we make in our study is that it shouldn’t be too disheartening to the IDFSs, because their profile is not that dissimilar to the very, very early HMO industry profile, when HMOs first started in the early ’70s.

MC: When you say profile, you’re talking about what indices?

KONGSTVEDT: What they were capable of doing. Many of the early HMOs kind of ran out of shoe boxes. There wasn’t much in the way of systems, and financial management was pretty crude. They didn’t make any money.

MC: Speaking again of these IDFSs, your study indicates that more than three-quarters of the ones that you looked at were majority-owned by hospitals. It has become a cliché in magazines for physicians to caution against affiliation with hospitals, because even though they may be singing a new song, they’re still really about filling beds and you’re supposed to be about the opposite. Is there a need to abandon that cautionary advice? Have hospitals really changed?

KONGSTVEDT: [Laughs.] You need capital, and physician-only organizations just have a hell of a time getting enough capital to really make these things go. This is well proven by the great deal of difficulty that some of the medical society-sponsored HMOs have had in raising capital. They just haven’t gotten enough money and they cannot get started. What also is happening is that a number of these things start out with joint equity between the physicians and the hospitals and then they lose a pile of money. The money’s got to come from somewhere, and physicians don’t have it.

MC: The deep pockets are in the hospitals.

KONGSTVEDT: Yes, and they actually have problems with this, because they can’t just give the money to the docs. They have problems with private inurement if they’re not-for-profit and fraud and abuse from the Health Care Financing Administration, so it’s not like they can just open up their checkbook and start shoveling money out. In some cases what happens is a transfer of equity. They say, “O.K., we got the money, but the equity and the money have to match.” The IRS has been quite clear on that issue. In other cases they can present the organization with a choice: “We can do this through debt, but now you’re going to have to carry a debt service and that will crush us÷or we have to raise capital elsewhere.”

MC: Don’t hospitals still want to fill the beds they have?

KONGSTVEDT: Well, some of them do. Some of them don’t. Some of them are in an emotionally transitional phase in which they want to lower utilization, but still fill the beds by taking those beds away from their competition. It’s a nice strategy if you can make it work. It’s not so easy.

MC: A number of physician-owned HMOs have recently failed to attract the necessary physician contributions. To what do you attribute that failure?

KONGSTVEDT: I can only guess. Physicians certainly don’t have to pony up any capital to join in an existing HMO that somebody else is paying for. They can just sign up. It’s their money. Should they put it in this HMO, which will be illiquid by design, about which people have said, “We’re not going to go public. We’re not out there to make this profit-oriented. Just give us the money”? Or should they put it in a mutual fund and make some money on it? So part of it may have been a pure investment decision. Another part may have been the lack of confidence.

MC: We had the failure of the Clinton health care reform plan with its 1,300 pages of complexities. Now we have what’s been called “legislation by body part”÷length-of-stay minimums for deliveries, mastectomies, and so forth. Do you see that trend continuing?

KONGSTVEDT: I do see it continuing for a while. It’s just too easy a target. And states such as Hawaii and Maryland are deep into mandated benefits, and they have a cost. But there are a lot of cooler heads in the Congress right now who are getting awfully worried about being subject to “disease-of-the-month” lobbying. Typically, when the government mandates benefits, it exempts itself from them, and under ERISA [the Employee Retirement Income Security Act÷see page 25] any self-funded business is exempted from it. So mandating benefits generally just forces it on roughly a third of the population. But some of these might be forced on the entire population, and there’s always a cost to that. On the emotional side, when you sense somebody’s suffering from a problem, it’s hard not to give them what they want. But there isn’t anybody in Congress who has any sense of history who doesn’t remember what coverage for renal disease and renal failure has cost Medicare. And that was raised just that same way.

MC: Are some of the apostles of a single-payer health insurance system and critics of profit in health care just hopelessly naive and missing the boat, in your view?

KONGSTVEDT: Well, I’ve recently been doing a lot of work in the international arena, and while no country wants to emulate the U.S. health care system, they all want to borrow pieces from it, because they’re having their own cost problems. You know that little bumper sticker, “If You Think Health Care Is Expensive Now, Wait Till It’s Free”? It’s true. And so you’re getting pretty bad queuing in Canada, Sweden and other places. In some countries, like the United Kingdom, you have what is virtually a massive managed care system in which general practitioners receive capitated budgets to manage all the health care costs of the÷they call them patients, but they are enrollees. It just happens to be the national health system. A Canadian-style system is only in a handful of countries, actually. And I think that they are naive. On the subject of profit, health care generates a lot of emotion. There are things that are actually more basic to life than health care, but we have no qualms at all about people becoming filthy rich on them. Things like food and shelter. We allow real estate people to make a fortune. People who own supermarkets often get rich. But in health care, we feel that that’s somehow a little bit more immoral.

MC: Speaking of the international arena, though, isn’t it true that we’re almost alone among advanced industrial democracies in leaving health care as much to the private marketplace as we do? If you ask even the Tories in Britain, “Are you going to junk the National Health Service?”

KONGSTVEDT: No. They’re not going to.

MC: No way.

KONGSTVEDT: But, with the exception of Australia, there is a globally increasing market for private health insurance. Even in England there’s a fairly robust private health insurance market.

MC: How do you see the future role of the primary care physician÷more of a kind of coach of health maintenance for the individual to take better care of him- or herself?

KONGSTVEDT: Well, I still see a very substantial role for primary care physicians. In general, the public wants to be able to access physicians. Is there an increasing role for nonphysician providers? Yes. They certainly have an important role to play and they can be very cost-effective. But there are plenty of people who want to see a physician. And primary care physicians who are well trained and keep up on things can take care of a very broad array of problems that people have.

MC: Of course, there are all kinds of pressures on them in terms of time with patients, and÷

KONGSTVEDT: That’s the biggest pressure. Time. One of the biggest problems I see right now for all physicians is the inconsistency among managed care organizations. When you work with six or seven and they all want to get into disease management and clinical protocols and this and that, it’s a nightmare for the private physician. I do believe that the days of independent solo, small groups are coming to an end. Not that physicians who are in the middle years of their practice can’t go right on up through retirement; they can. But for brand new physicians coming out, the pressures are so much higher to join a big group or become employed or something like that in order to access capital÷so they can get paid. As physicians aggregate and the larger groups finally reach a critical mass where they can credibly do their own protocols and their own disease management, and do it in a way that really works, then the managed care organizations don’t have to try to force that on them. Most of the well-run organizations at least express a desire to get out of the micromanagement business. And they should. They don’t really want to be in it. It’s costly. It irritates the docs. Sometimes it irritates the members. It’s hard to do, and they do it as much because of a vacuum as anything else÷because they recognize that the use of care management protocols and demand management and disease management works, and the health care system left to its own devices doesn’t adopt this kind of continuous change.

MC: So you see disease management as a valuable tool?

KONGSTVEDT: One of the tools. There’s a whole tool chest.

MC: Is there any sense in which disease management has been oversold, given its role in pharmaceutical marketing?

KONGSTVEDT: It’s oversold, but I wouldn’t want to say why. Partly it’s oversold because it’s the “technique du jour.” It is not at all clear how many of these disease management activities are going to have a long-term payoff. Whenever you’re talking about disease management, everybody always uses asthma as the example. O.K., asthma. Got it. Check. What’s next? Well, we’ve got congestive heart failure, and÷

MC: Diabetes.

KONGSTVEDT: Diabetes. We’ve got AIDS and, well, maybe we have back pain. And then a few others and then you start to get into the murky ones like hypercholesterolemia and hypertension. We know that it’s the right thing to do. We also know that the treatment protocols that have been used as though they were issued from a burning bush have, in fact, changed fairly radically over the last 20 years. They’ll probably change again. And by the way, they’re very expensive. Those are two symptomless diseases, and you will spend a fortune controlling these diseases and you won’t get any economic payback for it. But you still do it because it’s the right thing to do.

MC: And by the time there is a financial benefit, if there ever is, the patients may have long since switched to a different health plan.

KONGSTVEDT: Probably they will. What it really helps to do, of course, is bankrupt Medicare. When the actuaries set Medicare rates a long time ago, they did it under the assumption that people would die at the rate that they were dying. Now they don’t. We’ve done a good job. People have stopped smoking. They don’t drink as much. They take better care of their hearts÷you know, and there’s better cancer detection. People live longer. And good for them. Thank God. I’m glad they do. But it does cost money.

MC: Is there a future for preferred-provider organizations?

KONGSTVEDT: Yes. PPOs are alive and well.

MC: What accounts for that, given that we all hear that the assumption of risk is the key to÷

KONGSTVEDT: There is no one key to this stuff. It’s a collection of tools and how you use them. For example, the typical PPO has economic barriers to care that the typical HMO does not have. You’ve got better benefits in network than out of network, but you still don’t have as rich benefits as you would have with an HMO, for example, with a $5 co-pay. In PPO you may still have a co-insurance and deductible and you have a smaller network and they’re going to give them data back and people are going to watch a little bit closer, plus a lot of the medical management techniques that are typical in HMOs are also now applied in PPOs. Concurrent review and selected contracting and things like that.

MC: Do you think parity between behavioral health care and physical health care is a practicable goal?

KONGSTVEDT: There’s a definitional problem. You can create parity in the sense that you don’t have lifetime limits or you match the lifetime limits, but that leaves silent the issues of what’s medically necessary and what isn’t, and what are cost-effective treatment alternatives and what aren’t.

MC: One conference speaker recently said something to the effect that “the bloom is off the rose of the point-of-service phenomenon.” Do you find that to be the case?

KONGSTVEDT: POS is still selling quite well. You know, there are no panaceas. Everybody’s always looking for one. Point-of-service wasn’t a panacea either, but it’s not ineffective. It may have been oversold in the beginning, but now people have more experience with it. They know what it is.

MC: Capitation has been trumpeted as the coming thing, and yet recently there have been observations that perhaps its predominance is somewhat delayed÷or maybe even that it’s in retreat in some places.

KONGSTVEDT: Well, I never announced that capitation was going to rule the world.

MC: Again, the thought of one thing being the key.

KONGSTVEDT: Yes. A lot of incredibly shallow people equate capitation with managed care, which is÷well, shallow. Capitation actually is increasing. By the latest statistics, it’s still increasing, albeit quite slowly. I remember an article by Jeff Goldsmith back in the early ’80s in which he said, “Those who pronounce fee-for-service medicine dead remain confronted with a very lively corpse.” And the same thing is happening here. But fee-for-service is becoming progressively thinner gruel. There is more economic value in capitation, if it’s done right. The other thing to remember about remuneration is that there are plenty of opportunities for its form to change. An HMO may capitate a giant management services organization, for example. So the HMO says: “We’re capitated.” The MSO, in turn, has several different contracts. In one, it contracts with individual physicians and pays them fee-for-service with a withhold. In another, it “downstreams” capitation to a large medical group, which in turn pays its doctors salaries. Or in some cases it pays docs straight capitation. There’s no uniformity here, and there probably won’t be for a while.

MC: How prevalent is the capitation of individual doctors? I’ve talked to people prominent in the business who are morally troubled by individual capitation.

KONGSTVEDT: We’re not talking about global capitation. We’re talking about individual.

MC: Capitation just for the services you yourself provide.

KONGSTVEDT: There are some that globally capitate small groups of doctors, which is troubling. Chance will hit you harder than your ability to manage.

MC: And you’ve got to measure your daughter’s college education against someone’s need for an operation?

KONGSTVEDT: I’m not that much of a cynic. I’ve met a lot of doctors who say, “I’m worried that capitation is going to make me practice second-class medicine.” But I haven’t met any doctors who say, “I will willingly provide bad care for money.” They don’t want to do it, and thank God for it. That doesn’t mean they get the right economics all the time.

MC: And also that doesn’t mean that the same end might not be reached through a subtler and more complex process.

KONGSTVEDT: Possibly. It hasn’t been proven, but I wouldn’t say it can’t.

MC: What do you see as the trend among these varied mechanisms for paying the individual physician?

KONGSTVEDT: Well, I think old-fashioned, non-performance-based fee-for-service is going to slowly continue to shrink. Capitation probably is going to continue to rise, though there are several different pathways that can take it there. One is through the managed care organizations themselves. As the market continues to experience premium cost compression, one way to deal with that is to capitate÷to push part of that compression out.

MC: Premium cost compression meaning?

KONGSTVEDT: The marketplace won’t allow premiums to rise real fast, but the costs are rising so there’s compression going on.

MC: So there’s less price difference between one HMO and another.

KONGSTVEDT: Yes. But another dynamic is provider systems taking on the risk more directly, either becoming HMOs or becoming provider service networks under Medicare. A bunch of those will fail, but some will do well and eventually that aspect of the business will get more understood. And those signs point to a slow increase, but definitely an increase, in risk transfer out to the providers again.

MC: The traditional pioneers of the managed care business, the not-for-profit staff-models like Harvard Community in Boston and Group Health in Seattle, are embracing different models. Is staff-model a dinosaur? I know I keep asking for these monolithic answers, and you keep telling me reality is more diverse than that. But what do we learn from these changes?

KONGSTVEDT: Nobody has created a new staff-model in a long time. And a lot of the old staff-models are, in fact, selling off the groups. Coventry sold its groups in Pittsburgh and St. Louis, Foundation sold its group to FPA, I believe it was. Cigna sold its California staff-model operations. The list goes on and on. And a lot of the hospitals that bought practices are having financial problems with those practices, and I think we’re going to start seeing those spin back out, too. The take-home message there is that physicians are probably better at running their own business than anybody else is at running their business. If you treat physicians like employees and give them a target income, they’ll behave like employees and take their target income and go home. It’s not that physicians are entrepreneurial, because they’re not. They’ve been forced to behave as entrepreneurs because of the way our health care culture has evolved, but by nature most physicians are target income-driven. They want to make their target income, and then they want to have a life. This is going to increase as people come out of medical school and residency training. They’ve had different expectations going in. A lot of them going in aren’t going in because they want to work 90 hours a week and have no life. They want to share call and take vacations and do things like that. As that happens, that’s yet one more pressure to form groups. But if you make doctors employees of these other types of organizations, now you’re carrying a lot of overhead and you may not know how to manage it. That’s why a lot of them are spitting them out to either physician practice management companies or private groups.

MC: Is a physician’s prospect for being reasonably remunerated for treating Medicare and Medicaid patients diminishing hopelessly?

KONGSTVEDT: Hopeless is in the eye of the beholder. But, yes, it’s certainly diminishing. The government has fewer resources. The demographics are getting worse. Managed care offers the possibility of improving the financial standing of providers in Medicare. You know, fee-for-service can only ratchet fees down, because it has no controls on volume, only on price. Managed care can have an influence on volume as well, and when you do that, there is less pressure on price.

MC: In a recent article, you were critical of the widely used “linear” model for assessing the maturity of managed care’s penetration in a market÷in four progressive phases. For example, you say, the final phase of market maturity is described as featuring both capitation and system integration, while in fact Minnesota is light on capitation and California is light on integration, and they’re the most advanced markets we have. Instead you suggest a “spider” model, by which a regional market would be described by points plotted on eleven lines protruding from a center point, each line representing a market characteristic. Are there actual dangers in drawing conclusions from the linear model?

The “spider” chart is Peter Kongstvedt, M.D.’s idea for a better way to illustrate the maturity of a managed care market than the traditional four-phase model. “If you don’t really know a market, you can’t use it very well for predictive purposes,” says Kongstvedt of the spider chart, “but you can use it quite well for operational ones.”

KONGSTVEDT: Absolutely.

MC: What are some of these dangers?

KONGSTVEDT: The biggest danger is that you assume that something is going to happen and you make massive investments in time and energy and money and the marketplace does not reward you for it.

MC: For example?

KONGSTVEDT: People went out and bought incredibly expensive computer systems to handle capitation, and capitation turns out to be a minor part of their practice. The linear model also suggests that vertical integration is absolutely, positively going to happen, and the more mature your market is, the more vertically integrated you’ll be. So everybody rushed to do this vertical integration. It burned up a lot of money. A lot of lawyers and consultants certainly got rich. But the marketplace looked at it and said, “So what?”

MC: I would love to distill for my readers a single test question to apply to any generalization that’s offered about the transition that a market may be undergoing.

KONGSTVEDT: I can give you the answer that nobody wants.

MC: O.K.

KONGSTVEDT: It’s that each market is unique÷ and it really is. There will be attributes of a market that will look like attributes of another market, but in no case will one market look precisely like another. It just won’t. Furthermore, physicians and hospitals can have a major impact themselves on how their market is going to look. Physicians are so reactive. They keep thinking that the marketplace is pushing them around. Actually, they can create a great deal of it themselves.

MC: So one should be less reactive and more÷

KONGSTVEDT: Proactive. But regrettably, in many physicians’ minds, proactive is a label tied to highly reactionary behavior÷you know, wagon-circling exercises. “We will proactively prevent change”÷which is the ultimate oxymoron. To be proactive, what you need to do is understand what the marketplace wants.

MC: Do you mind telling me what your own health care coverage is?

KONGSTVEDT: We have a point-of-service plan.

MC: Are you pretty well satisfied with it?

KONGSTVEDT: Yeah. We work pretty much in network on it.

MC: How long has it been since you’ve seen patients regularly?

KONGSTVEDT: Ten years.

MC: Can you identify a moment in the evolution of managed care and in your career where you got a glimpse that told you a lot about how managed care was going to work?

KONGSTVEDT: Well, I can give you my own epiphany, but it’s very personal. It was this. I was in a fee-for-service private practice in Illinois and I was called in the middle of the night to see a lady in the ICU who went into septic shock following surgery, and she was real sick. She was a Medicaid patient, and I spent the whole night by her bedside. She did O.K., I pulled her through. The surgeon got paid reasonably well by Medicaid. I got paid seven dollars. This was in the old days when cognitive services weren’t paid well. And that’s when I had this epiphany, because at that very same time I was exploring two opportunities. One was in academic medicine, and the other was to become a medical director of a primary care, group-model HMO. And I thought, “That’s a lot better for me. I like the way this works. Primary care physicians are going to basically figure out what they want to do, and through negotiations we’ll pick and choose whom we want to work with.” I really liked it. It was very attractive.

MC: Rather than earning seven dollars by staying all night at someone’s bedside.


MC: Thank you, Dr. Kongstvedt.

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