Staff-Model HMOs: Don’t Blink or You’ll Miss Them!

The staff model used to define the HMO. Now it’s almost gone. But wait — maybe it’s not the model that died, but the usefulness of the classification.

The shock was profound. When you thought about HMOs, you used to think about staff-model HMOs; everything else was mere variation. Yet here was InterStudy Publications’ HMO Industry Report 9.1 proclaiming that fewer than 1 percent of HMO enrollees in the United States were in staff-model plans. Further, nearly half of the remaining staff models disappeared last year — leaving just eight. The news from the American Association of Health Plans wasn’t any more encouraging. According to AAHP, there are 15 HMOs in the United States with a staff-model component — and only two pure staff-model HMOs!

What happened?

Right product, wrong market

Talk to people who have been around staff-model HMOs for a while, and they will wax nostalgic about the good old days when indemnity coverage was the only way. As Tom Mottard, marketing director for Group Health Cooperative of South Central Wisconsin, recalls wistfully, “When we started out, the other guys didn’t have a clue. Not just the insurance companies — the other doctors, other clinics, everyone.”

No longer. The competition has gotten intense, and to the deep chagrin of staff-model advocates, their strongest sales pitch — medical quality — seems to be falling on deaf ears. To David Bradford, president and CEO of Wisconsin’s Family Health Plan Cooperative, it’s like boarding an airplane.

“You want to take for granted that all airplanes have good maintenance, that they do not use substandard replacement parts, that the pilot is well trained and has not indulged in alcoholic beverages in the last 72 hours. The fact that those things are all crucially important to your safety becomes almost secondary because people want to take it for granted. Instead, they evaluate their airplane trip on whether they were served their soda and meal in a timely fashion and whether the flight attendants were nice.”

In the same way, confident that American medicine is the best in the world, people assume that all medical quality is the same. “So while we do do a good job, and can demonstrate it and measure it in ways that other people don’t bother,” concludes Bradford with more than a little frustration, “when others don’t bother, it’s acceptable because it’s assumed that if they were to bother to measure it, they would be as good as anyone else.”

The effect is exacerbated when physicians are in multiple networks. So with providers and quality assumed to be constant, consumers aren’t shopping for health care delivery, they’re shopping for health care financing — a different ball game.

Two rules of that game have hit staff-model HMOs particularly hard: market demands for broad choice and great geographic accessibility. Those are hard rules to play by if your team consists of a closed panel of employed physicians and you’re only located in your own few buildings.

Another rule that has developed is something that Mark Gerson, co-CEO of the Gerson Lehrman Group, an investment and research company, calls “network externalities.” What he means is that enough people have to join your efforts for everyone else to take you seriously. As Mottard explains, “People are joiners and followers. If we don’t know what’s a good health plan, how do we judge?

“Well,” he continues, “I ask my neighbor, ‘Where is everyone else going?’ If there’s a big line ….” then people assume it must be the place to be.

But it hasn’t been just external market pressures; there are internal pressures, too. “Staff models are challenged to compete with the physician productivity of other models,” Mottard admits.

While measures of productivity differ, many observers believe that physicians with an employee outlook don’t work as hard as physicians who share ownership of a practice. Second, “A fee-for-service patient can leave at any time; an HMO patient is generally locked in for a year,” notes Bradford. “So there is a certain amount of taking patients for granted that can happen in our industry.” The result can be a physician-centric, user-unfriendly bureaucracy.

There are also financial pressures. Staff-model HMOs have overhead costs that other HMOs don’t have — professional salaries that have to be paid whether the professionals see patients or not, and assets tied up in bricks and mortar.

What to do?

So what’s a staff-model HMO to do? There are three common structural responses: (a) Wrap the employee core in a network of community physicians; (b) convert the staff to a medical group; and (c) buy other health plans. And sometimes staff models choose (d) all of the above.

Network wrap

Group Health Cooperative of South Central Wisconsin is in a market that seems made for a staff-model HMO. As Mottard explains, “This is a vertically integrated market. We’re not competing against insurance companies; we’re competing against HMOs run by clinic delivery systems. The other plans in town, while they’re not staff models, look a lot like we do to the public.” So consumers are familiar with the idea that they are choosing doctors when they are choosing health plans.

But even here, “To meet market demands for broader choice, we cannot deliver on broader choice by continuing to hire people and build buildings,” Mottard asserts. “We’re still 80 percent staff model — it’s our heart and soul — but we’ve had to augment it to get the members we need.”

A pointer from the experienced:

“What we’re good at is differentiating ourselves on care management, on clinical quality, on prevention, on population-based care — and if we can’t find a group of community providers that are also interested in those issues as well, there’s no financial incentive in the world that’s going to make that relationship work,” cautions Cheryl Scott, president and CEO of Group Health Cooperative of Puget Sound. “One of the things we learned the hard way is that if the HMO’s medical philosophy is not shared with the network physicians, you’re going to have some real problems downstream.”

Staff to group

One of the key advantages when staff doctors become members of a medical group, reports Dan Wolfson, president and CEO of the Alliance of Community Health Plans, “is that the physicians are exposed to the marketplace.” Take, for example, the issue of adjusting physician compensation to reward such things as quality, patient satisfaction, and contribution to overall financial results. There’s a big difference between an employer saying, “According to the market, you’re not doing enough; we have to change your compensation and work environment (e.g., expanded hours) to make sure we’re getting the most out of you,” versus professionals in partnership saying, “We’ve got to figure out how to bring in more patients. If I work harder, see more patients, and boost group revenues, then I deserve to see some of that in my pay.”

This effect was illustrated with particular clarity in Boston. Almost a decade ago, Tom Pyle, then CEO of Harvard Community Health Plan (now Harvard Pilgrim Health Care), suggested moving to incentive compensation for staff physicians. The physicians completely rejected the idea — and rejected Pyle, who left shortly thereafter. But now that the physicians have formed Harvard Vanguard Medical Associates, they have adopted a compensation scheme similar to the one proposed by Pyle. (This effect can be overstated, cautions Alan Raymond, a Harvard Pilgrim vice president. Other things besides employee status changed. Incentive compensation became more generally accepted, and competitive pressures on physicians escalated.)

Is it working? “The Harvard Vanguard portion of Harvard Pilgrim essentially broke even in 1998,” confirms Raymond, “while the rest of Harvard Pilgrim had a substantial loss.” However, membership has not yet increased.

Multiple strategies

Multiple strategies are also common. Take, for example, HealthCarePlan in Buffalo. “We were a great staff-model HMO,” recalls Arthur Goshin, M.D., president and CEO. “In 1994 we had 80,000 members and received numerous quality awards. But because we were in just one part of the market and had two network-model competitors, we were being marginalized. We had to grow to be taken seriously.”

Grow they did, wrapping the staff-model core with a network of 2,500 community physicians and transforming the staff into a medical group. By 1999, membership had grown to 215,000 in the Buffalo area. HealthCarePlan has also merged with PNP in Syracuse. Throw in a Long Island subsidiary, Vytra Health Care, and the plan now has more than 580,000 members, and has changed its corporate name to Univera Healthcare.

Meanwhile, staff-model Harvard Community Health Plan expanded by acquiring a group-model plan, another staff-model plan and, in 1995, merging with an IPA to become Harvard Pilgrim Health Care.

Some remain staff models

Of course, how far along the continuum you go depends on what continuum you think you’re on. The management of Family Health Plan Cooperative has kept it staff-model. (“They’re about as pure as they come,” reports Wolfson, president of the Alliance of Community Health Plans.)

The first thing to go at the not-for-profit plan was health plan administration. Starting in 1987, all nonmedical administrative functions have been performed by a for-profit affiliate, Family Health Systems. Second, instead of spinning off their staff physicians, they spun off their buildings. They recently completed a sale-and-lease-back of their seven clinics (“We’re within 15 minutes of every home in metro Milwaukee,” Bradford proudly notes) to reduce the proportion of assets tied up in concrete and steel.

Finally, faced like everyone else with shrinking staff-model enrollment, they didn’t reduce capacity, they decided to increase membership. With an integrated, easily-accessible, high-quality medical system, they figured they had something patients wanted. So if they couldn’t get patients in through the door marked “HMO,” they would get patients in through the door marked “care.” While 95 percent are still HMO patients, Bradford reports the organization has been going through “a tremendous cultural change to create a registration desk and a cash drawer and things that you’d think of in physician offices that staff models have never ever had to contend with.”

Is there no familiar-looking staff-model HMO left — one with employed physicians and an owned hospital? Yes, but it is an exception that proves the rule. Valley Health Plan has 170 staff physicians, an impressive hospital (the Santa Clara Valley Medical Center) and 6,000 commercial members. What’s the catch? It’s the county hospital, and the staff members are county employees. The county pays the expenses, then checks the income afterward. (Before others start drooling excessively at this enviable supply of capital, Medical Director Kent Imai, M.D., hastily points out that it comes at a big price — the downside of working in a very politicized environment.) The county was already funding medical services for about 120,000 patients a year when it turned its medical staff and medical center into an HMO, starting with service to its own county employees, to attract more income-producing patients to help defray the overhead of serving government-dependent patients.

Yet even in this protected environment, the HMO may not stay a pure staff model for long. As it contemplates marketing to more groups than just the county’s own employees, Imai reports wrestling with the familiar issues of building a supplemental network to be more attractive.

The spirit lives on

While staff-model HMOs have had to respond to the relentless power of the market, their advocates explain they have only changed, not vanished. And, as Scott points out, in a world defined by survival of the fittest, that is a sign of strength, not weakness. They are still engaged in the difficult challenge of pursuing two not-always-compatible activities, delivering quality care and maintaining economic viability.

“It’s a balancing act,” says Mottard. When you have too many going to one building and too few going to another one, you have to even it off and staff it appropriately.” But you can still hear the “I want to get up and go to work every day” commitment in Mottard’s voice as he reflects, “It’s really interesting. You feel you’re a part of things. You’re not just selling insurance.”

Karen L. Trespacz, J.D., is a frequent contributor to Managed Care.

The upside of staff models

It’s not that staff models don’t have advantages — they do. They have historically provided good preventive care and captured top- quality ratings.

Their member loyalty is renowned. “Our voluntary disenrollment rate is below 2 percent,” reports Mottard. “Once people get in this plan, you can’t get them out of it.” Which is good for staff models, in that they are likely to reap the benefits of their prevention efforts.

There are more subtle advantages. While a network HMO working to improve the HEDIS scores of its private-practice physicians is probably also increasing the HEDIS scores of its competitors, a staff-model HMO enjoys all the fruits of its HEDIS efforts. And even though fixed costs can be nasty with too little membership, adding members within existing capacity can be financially advantageous.