A Conversation with Margaret T. Stanley

An executive with the nation’s second-largest health care buyer discusses issues raised by HMOs’ financial losses, direct contracting and the challenges of building better information systems.

Margaret T. Stanley is the kind of customer that managed care executives listen to carefully. As health benefits administrator for the California Public Employees Retirement System (CalPERS), she’s in charge of buying health benefits for more than 1 million state and public-agency employees and retirees. CalPERS is the nation’s second-largest benefits purchaser, after the federal government.

CalPERS uses its clout to push health plans to improve service, hold the line on premiums, and increasingly, to define and achieve standards of clinical excellence. CalPERS buys services from 14 plans, including 10 HMOs, and runs two self-funded preferred-provider organizations and a long-term care program.

Before joining CalPERS in 1996, Stanley administered Washington State’s Health Care Authority. There, she was responsible for contracts with 19 managed care plans. She’s also had experience on the other side: Stanley was CEO of HealthPlus, an HMO in Seattle, from 1981 to 1988.

CalPERS is in a dispute with Kaiser Permanente over the HMO’s imposition of a 12-percent rate hike. CalPERS negotiated rate increases averaging 5 percent with nine other HMOs, but Kaiser doesn’t negotiate rates, and the size of its request took CalPERS by surprise. At press time, CalPERS was threatening to freeze enrollment in Kaiser beginning next January if the rate hike goes through.

She addressed this and broader managed care issues with Senior Contributing Editor Patrick Mullen.

MANAGED CARE: What questions do the size of Kaiser’s rate request–and the fact that it lost $270 million last year–raise about how well it’s running its plan?

MARGARET STANLEY: That this loss came as a surprise to them is cause for concern about operational and financial management issues. In operational terms, Kaiser grew quickly, partly because of its very competitive rates. Then Kaiser was unable to manage its growth, particularly in Southern California. Patients ended up at outside hospitals where in some cases Kaiser did not have contracts, so it was paying full retail. Kaiser indicates that this was a major reason for its loss. It concerns us that it wasn’t able to manage that growth better and go out and quickly negotiate [hospital] contracts. And we’re quite concerned that it continues to have losses. For the first quarter of 1998, while its official loss was only $30 million, because it had some sort of carry-forward gain, its operating loss was over $90 million.

MC: Does Kaiser’s situation raise questions about the viability of group- or staff-model HMOs in competitive markets such as California? Can anyone, not just Kaiser, manage growth and stay competitive using that model, given the bricks-and-mortar costs that go with it?

STANLEY: It would be a reach for me to come to that conclusion. The staff or group models have some real advantages that IPA or network models don’t have. They can reach concurrence on standards of care, and at least potentially have the same good information system throughout the organization. Theoretically, they have the ability to control costs much better. Right now, Kaiser is dealing with some difficult cultural and historical issues, such as its contract negotiations with nurses, and structural issues about how to share power between the HMO and Permanente Medical Groups. But over the years, Kaiser has demonstrated that it’s had some tremendous competitive advantages. It can make its own decisions on bricks and mortar, in terms of how much it builds, leases or rents. It has more flexibility than it may have taken advantage of. Part of its problem is that it doesn’t buy care on the spot market, and periodically that is likely to cause trouble for a group- or staff-model HMO.

MC: When it does miscalculate, you would prefer that it not try to make up for that in one year with one big rate increase?

STANLEY: Correct. Over the years, Kaiser has never negotiated premiums with any purchaser. It has made its own decisions about premium levels for competitive purposes. It had decreases for a number of years, a very modest increase last year, and then, all of a sudden, 12 percent. That creates havoc for the 1,100 public agencies that contract with us because their budgets are based on certain assumptions, then all of a sudden they’re faced with this huge increase. Either employees will pay for it out-of-pocket–and state employees haven’t had a raise in three years, so that’s a real salary takeaway–or the employer will pay for it, which may not be feasible, depending on that company’s budget situation.

MC: Nationally, health premiums are heading back up after several years of moderate increases and even declines. Many managed care plans are losing money. Aetna U.S. Healthcare’s first-quarter earnings were down 23 percent from 1997, due mainly to higher medical costs. To what degree have managed care plans figured out how to predict and control health costs? And if they haven’t, why not?

STANLEY: That Kaiser didn’t see its loss coming, or that Oxford Health Plans didn’t have information systems that gave it good information, is cause for concern. One, do plans have the information systems to track what’s going on and report it so that management can take action? Two, are they able to guess what will be going on in health care that will affect costs?

MC: Is that what it boils down to–guesswork? Do you have to guess what’s going to happen, or is it possible to predict what a given population will use in terms of health services?

STANLEY: One problem is that the technology of health care keeps changing and new prescription drugs are invented. Populations for no apparent reason end up using more or fewer services than they have in the past, so past practice doesn’t always repeat itself. For example, we’ve had years of declining hospital utilization, but that seems to be leveling off. The actuaries do the best job they can to predict these things, but sometimes they miss. And sometimes plans, for competitive reasons, don’t take the advice of the actuaries.

MC: Because they want to build market share?


MC: Managed care plans claim that once they get their information systems in line, they’ll reach a sort of promised land where clinical information is shared and financial information is available. Are you familiar with any plan that has its act together to the point that its information systems do what it says they can do?

STANLEY: No. In fact, purchasers in California are pushing hard for improvements in health information. There have been three health information summits with purchasers, plans and providers. We’re working with the Pacific Business Group on Health, major medical groups, hospitals and associations on an initiative we call CalLinx. We want to find a way to get standardized information and ultimately move it electronically, with the eventual goal being the electronic medical record. We all acknowledge that health care is behind a number of other industries, such as banking, in its use of information technology. The technology exists, but it hasn’t been deployed the way it should be.

MC: How much of that do you think is due to legitimate concerns about confidentiality, and how much is cultural resistance to change?

STANLEY: I think it’s primarily a failure of leadership. The people who could make this happen just haven’t gotten themselves together to accomplish it yet. It’s also a problem with capital. The logical place to do this is in the medical group practices, but they haven’t had a lot of capital ready to deploy for that purpose.

MC: CalPERS has developed its own report card for health plans. What kinds of things are you measuring and tracking?

STANLEY: We provide scores on consumer satisfaction, how satisfied people are with referrals to specialists and with their physicians. We also give information on how to use a plan administratively, how to use the system. One example would be whether you can go directly to an obstetrician/gynecologist, or first visit a primary care physician. We have preventive health guidelines, immunizations and so on. In the future, I’d like to provide information on outcomes and quality results by medical group and by hospital, because enrollees choose not only a health plan, but the providers who are going to take care of them within that health plan.

MC: Would the scrutiny ever get down to the individual physician level?

STANLEY: I’m not sure that the data would be actually good enough or reliable enough. We certainly would have difficulty doing that on paper. We might be able to post it on the Internet. Even with medical groups and hospitals, we worry about overwhelming people with too much information. I’d also like to provide more information on how well different health plans and medical groups and hospitals do at caring for people who are really ill, chronically ill or with very serious conditions. Consumer-satisfaction measures for the broad population may not give you the kind of information you need to have when people are in dire straits, and that’s important information.

MC: Is the goal a single standard across the country, so that plans and doctors are not filling in a dozen different reports?

STANLEY: Right. We’re moving in that direction already. We’re using HEDIS [the Health Plan Employer Data and Information Set] and the consumer satisfaction survey associated with NCQA, the National Committee for Quality Assurance. We’re trying very hard to not create extra demands on health plans and medical groups. Certainly HEDIS is a step in the right direction, and it’s important to keep the discipline on using one standard instrument.

MC: Do you think HEDIS has emerged as the de facto standard?

STANLEY: I think so. The Foundation for Accountability is also doing some very interesting work. I think we’ll see some collaboration to try to combine the best from both.

MC: How long will it be until plans compete on the basis of more objective measures–particularly clinical measures–rather than on the basis of patient-satisfaction surveys?

STANLEY: We’re getting closer. I’m particularly encouraged by the work that we’re doing on quality through the Pacific Business Group on Health. We established a quality fund where we’re all paying in four cents per member per month and then leveraging those funds with foundation money to do some purchaser-sponsored quality studies.

MC: How much money is that likely to add up to?

STANLEY: Several million dollars a year.

MC: So what kinds of things are you trying to measure?

STANLEY: With the purchaser-sponsored quality studies, breast cancer might be one. Purchasers are very interested in getting good, reliable data on clinical outcomes and seeing providers and health plans compete on quality.

MC: How many years do you think it will be before the people you purchase benefits for will have access to that kind of information when choosing among plans?

STANLEY: It’s a guess on my part, but I would say we’ll begin to provide better data in that direction in a couple of years. Some already are available on the Internet. We’re already measuring how satisfied physicians are with health plans and how satisfied patients are with medical groups. We’re getting risk-adjusted outcomes information on cardiac surgery results. We’re all chronically dissatisfied with where we are now and hope to make rapid progress, but it tends to be slow because going through paper medical charts is cumbersome.

MC: Even if physicians agree that moving to electronic medical records is a worthy goal, amid the daily pressures of taking care of patients, it tends to fall down the list of priorities.

STANLEY: Of course, some have moved to electronic medical records and don’t know how they would live without it, because it’s helped them deliver care so much better. Perhaps tax-free bonds could be used to provide financing for that kind of effort.

MC: You seem to be a fan of direct contracting. In an interview two years ago, you cited the direct contracting work you did in Washington state as your best business decision. Do you still feel that way?

STANLEY: Well, that worked out awfully well. The market has changed since I did that. That was contracting on a DRG and RBRVS basis. Now when we talk about direct contracting I think the assumption is that you would do capitation–or virtual capitation, as does the Buyers Health Care Action Group [in Minnesota.]

MC: Clarify for me the difference between capitation and virtual capitation.

STANLEY: Because of Minnesota law, they can’t capitate health care systems. So they create a target capitation rate and adjust a fee schedule to match it. Then they retroactively look at the numbers and adjust the fee schedule downward if they overrun the virtual capitation.

MC: To what degree does your interest in direct contracting reflect dissatisfaction with what you’re getting from the HMOs you work with?

STANLEY: First, I want to be clear that CalPERS has no plans to go into direct contracting at this time. It’s an option for the future. We’re concerned about where things will go with HMO consolidations and mergers. We wonder if the market will be as competitive as it has been in the past. We’re getting down to a small number of players [in California]. Eighty percent of our members belong to HMOs, and 80 percent of those are in the big three: Kaiser, HealthNet, and PacifiCare. Other HMOs are struggling. We’re concerned about their financial losses. One issue is, how dedicated to the community are large, for-profit HMOs? So there’s an appeal to direct contracting, because hospitals and medical groups are in the community. The question is, what kind of problems would you solve by direct contracting?

MC: And what problems would you create?

STANLEY: Exactly. Which problems would you inherit that HMOs are handling for you now, such as provider relations and the brinkmanship that goes on when a contract between a big HMO and a big health system must be renewed? In California, we go through that all the time. These huge health systems get into confrontations with HMOs, and we have to wait to see if they’re going to resolve it, or if huge numbers of our members will need to switch doctors.

MC: That gets to the issue of relations between HMOs and doctors, which these days are confrontational. There are battles over rates, over utilization review, over a whole spectrum of issues. Is that any way to run a health system?

STANLEY: If you don’t want to spend 100 percent of the gross domestic product on health care, then nobody is going to be totally satisfied and feel that they’re getting enough in terms of resources. It’s just a question of degree. Right now we’re in a very capitalistic and competitive kind of health care system, one that’s more that way than any other system in the world. I think a lot of people feel that some moderation of that would be desirable.

MC: Is one way CalPERS or other large purchasers can help bring about that moderation, doing business directly with health systems or physicians?

STANLEY: It’s something we need to study carefully. I think if we end up doing it sometime in the future it would be desirable to do it with other purchasers, and we’re in those discussions. You could share start-up costs and expertise and would be able to deliver more market share to providers who would sign up, which is more likely to get their attention.

MC: What have either entrepreneurial spirit or capitalistic drive, as embodied by for-profit companies, done for the health system that needed to be done?

STANLEY: A number of not-for-profits–HMOs and hospitals–were pretty sluggish and overly relaxed about administrative costs. The emergence of for-profits brought a lot of innovation and more business discipline that made the not-for-profits find better ways of delivering care that were more cost-effective and often of higher quality.

MC: What we now call the managed care industry was once considered a social movement. Has the conversion been a healthy transformation?

STANLEY: It’s hard to give one answer. In many parts of the country there was this immense overbuilding of hospitals and there was no effective constraint on it. There was an attempt at requiring certificates of need, which often was politicized. We have to remember those examples. Some of the opposition to managed care exists because when people think of their health care needs, they’re uncomfortable with health care being a business with a profit motive, and that’s understandable.

MC: Thank you.