MANAGED CARE June 1997. ©1997 Stezzi Communications

News that his HMO is being sold to Malik Hasan, M.D.'s fast-growing Foundation Health Systems Inc. doesn't change Mickey Herbert's role as an industry advocate and chairman of the American Association of Health Plans.

This spring, readers of the policy journal Health Affairs [March-April 1997, 16:2:121 - 124] heard from a top for-profit HMO executive about the challenge of trying to deliver quality health care and be a good corporate citizen while also satisfying shareholders. The executive described the "grow or go" imperative that faces publicly traded, for-profit companies in health care — an imperative, he said, that brings welcome vitality while also requiring that time and energy be spent "looking at whom we might acquire and at who might acquire us.

"I admit," he wrote, "that I do not like the latter exercise."

The executive was Michael E. Herbert, vice chairman and co-CEO of Physicians Health Services Inc. (PHS), a Connecticut-based HMO company with an enrollment of more than 400,000. And because he also happened to be a high-visibility spokesman for the HMO industry as two-year chairman of the American Association of Health Plans, it was of national note when his acquisition uncertainties were almost immediately resolved. Foundation Health Services Inc. — product of an April merger between two California giants, Health Systems International Inc. and Foundation Health Corp. — announced in early May that it had agreed to acquire PHS for about $280 million.

Herbert agreed to meet with Managed Care last month for a wide-ranging discussion of issues facing HMOs and the physicians who work with them.

MANAGED CARE: Your health plan has been in the news recently for its projected purchase by Foundation Health Systems. That's an eventful addition to your term as AAHP chairman. How does it affect your functioning and your dual roles?

HERBERT: Well, first of all, the merger is very consistent with what's happening in managed care. We're seeing a lot of new health plans start and a lot of mega-mergers occur, and what we seem to be losing is the mid-sized health plan, such as PHS has been.

I expect to continue my role with AAHP, certainly through my term, which ends in June of 1998. I also expect to continue working with Foundation in a senior management role that we will determine over the course of the next few months. Our merger should conclude sometime this fall, and clearly, until that occurs, I will continue as a co-CEO of Physicians Health Services. But I intend to continue in both roles despite the merger.

MC: The merger puts you in direct affiliation with Malik Hasan, M.D., one of the least bashful leaders of the managed care industry. In your recent article in Health Affairs, you argue that although some have been troubled by the distinction between for-profit and not-for-profit health plans, you find little difference. Dr. Hasan has gone a step further and called for an end to not-for-profit HMOs ["Let's End the Nonprofit Charade," New England Journal of Medicine, April 18, 1996, 334:16;1055 - 1057]. Do you go as far as that?

HERBERT: I have a great deal of respect for Dr. Hasan, and I agree with much of what he has to say with respect to for-profit health care, including the idea that it is largely responsible for the revolution in health care delivery and the extraordinary growth of managed care that we've seen in the 1990s. But I am not one to state in any fashion that we ought not to have nonprofit health plans. I think one of the great advantages of the American health care delivery system is its pluralism, and there's plenty of room for all kinds of health plans, including nonprofits.

Most of the growth in our industry is coming from the for-profit side. And, as I explained in that article, the reasons for that have to do primarily with the necessity to employ the investor dollar to guarantee a satisfactory return if you choose to accept investor funding for your operation. Investor funding creates a "grow or go" imperative, and I don't believe you see nearly as much of that in the nonprofit world.

MC: Most of your article was very bullish on the role that the current HMO industry, especially its for-profit sector, has played in providing quality health care to everyone. But you do express some concerns about having to expend a lot of time and energy worrying about things that have very little to do with providing health care. What's the answer to those concerns?

HERBERT: I tried to present a balanced position, and I think you take the bad with the good. Our situation here is not perfect or ideal. But we as a society have opted for a market-based approach to health care delivery, and I know that has been a correct decision for the American health care system. It has led to more dyna-mism, more innovation, more entrepreneurialism in our form of health care delivery than any other in the world. With that come the warts, and the warts are, from a CEO's perspective, spending occasionally an undue amount of time concerned with your ownership status when, in fact, you ought to be working on your core competencies.

I imagine the alternative to our present system being some sort of public utility model of health care where we have a huge degree of government oversight, whether it's in the form of price controls or global budgets or the health care purchasing alliances that were advocated with President Clinton's health care plan. And I absolutely believe the current situation is far better for the American public.

MC: Isn't it, to some degree, though, necessarily a fight for the healthier populations rather than the struggle to make populations healthier?

HERBERT: I don't see it that way. Our health plan has gone through several iterations — being nonprofit, being private for-profit and then being a public company. And I haven't felt that in any of its 20 years this health plan has sought out the healthy or somehow skimmed the cream. As a matter of fact, as managed care is now insuring well over half the population in this country, that argument, to the extent it ever had any validity, has become less and less valid, because increasingly we're insuring all Americans, not just healthy Americans. Yet I don't think that was ever a really valid claim with respect to the managed care industry, except perhaps in very isolated instances.

MC: One place where some might make that complaint is about the first groups of the elderly getting into Medicare HMOs. Now that more and more Medicare recipients of all levels of health are moving into managed care, what do you see as the fiscal practicality of dealing with the Medicare population without going bust?

HERBERT: I think we make a great mistake if we underestimate the ability of the health plans of America to address those needs both from a qualitative standpoint and from a financial standpoint. In our health plan, for example, we are now aggressively enrolling Medicare beneficiaries into a Medicare risk contract. We're getting important baseline demographic information on those enrollees at the time they enroll, including clinical data about their health care status. In gathering that information, we are able to assign a personal health manager to those individuals from the day they become effective with us — perhaps even before. And, if you take something like diabetes management, if we're aware of a patient's condition, we can bring a whole team together to treat that diabetes in a far better fashion than it's ever been treated before — more cost-effectively and with higher quality. So I don't have any problems with us treating even the frailest of the elderly. Frankly, I think we've really just scratched the surface in our ability to do this in the highest-quality, most cost-effective way.

MC: Beyond diabetes, do you see a large role for formal disease management programs?

HERBERT: I think we will see more and more disease management as time goes on. That is why we at PHS are working with pharmaceutical manufacturers to develop increasingly effective disease management programs. I also see demand management being employed much more aggressively by managed care firms. PHS has recently implemented a 24-hour nurse advice line where we're managing our patients' needs in a more efficient way than we've ever done before, and yet in doing so we're not replacing the doctor-patient relationship.

MC: Speaking of the physician-patient relationship, does your plan have a gatekeeper requirement?

HERBERT: Usually my answer to that kind of question is "all of the above." Our health plan operated for many years, from 1977 until 1993, without any type of gatekeeper. Since 1993, we have had a lower-priced product in the marketplace that does call for a gatekeeper. We call it our "Passport" plan. But still, most of our enrollment does not utilize a gatekeeper.

MC: What do you see as the future of the gatekeeper requirement? Some plans have made variations to it.

HERBERT: Our industry needs to make things easier for doctors and doctors' offices. We've done a great job in eliminating claims hassles for patients. We now have to do a much better job of eliminating claims hassles for physicians and other caregivers, and that includes this often bureaucratic process of approving the referral from a primary care physician to a specialist. One of the main complaints doctors have with managed care is that the referral approval process requires a piece of paper to be transmitted either from patient to doctor or from doctor to health plan. With the explosion in information technology we ought to be able to do better than that, to figure out a way to make the approval process much more painless for everyone. For example, you might have a selective procedure where the physicians who have the most conservative style and have never been shown to abuse the system are left to refer without going through a difficult paper process.

MC: I assume PHS also embraces variety in the way it pays physicians.

HERBERT: We have individual practice association contracts. We have physician-hospital organization contracts. We actually have in excess of 30,000 physicians under some form of contract. It does run the gamut. We use primary care capitation with some physicians, but most of our physicians are paid by a discounted fee-for-service system. My feeling about reimbursement is that the challenge is to find an adequate and fair means of compensating physicians, and it doesn't matter what form it is as long as both parties can agree that it's fair.

MC: Does capitation trouble you at all? I know there were potentially worrisome incentives in old-style fee-for-service medicine. But is there anything inherently disturbing about capitation, or is it really a better way since its incentive is to keep you well?

HERBERT: The way that I get paid, and probably the way that you get paid, is through capitation. I draw a salary. That is a form of prepayment, if you will, for a service. So I think the important thing is that the health plan and the doctor work to assure that the patient gets the right care at the right time, in the right setting. How the health plan chooses to compensate the doctor for that is relatively unimportant in the greater scheme of things.

MC: Do you have difficulty influencing physicians toward more cost-effective means of practicing medicine when, in some cases, you're one of many plans they deal with and yours is one of many sets of rules their offices have to follow?

HERBERT: I'm a strong believer in incentives, and I believe when financial incentives are properly structured, they do work. Our health plan has always been controlled by physicians, so we have striven very hard to have a positive relationship with physicians. At the same time, we're trying to change for the better the way health care is delivered in our region, and physicians are professionals who oftentimes don't want a health plan looking over their shoulder suggesting to them that there might be a better way to do something. So there are some natural tensions here. But I think our health plan has done a very good job over the years in working through that relationship in a positive way.

MC: A few years ago there were predictions that doctors were going to have to "choose up sides" and affiliate exclusively with a given hospital, health plan and network of specialists. But instead we still have multiple contracting all over the place. What do you see for the future in this regard, and what special problems are we going to have if multiple contracting stays with us?

HERBERT: I'm not sure my crystal ball is any better than anyone else's. Physicians Health Services has dealt with doctors in different ways over the years, but there's been an explosion of physician organizations in the last two or three years in this region. We haven't changed our contracting much, because we were an established health plan, but if you were to ask me in the next five years will we be contracting with any of these new organizations, I would say that we almost certainly will, but it's not clear to me how that's going to sort out at this point. I feel a little bit like the czar during the Russian Revolution who said, "I know there's something going on out there. I just can't figure out what it is."

MC: That's a disturbing model.

HERBERT: Well, this is not a question that you asked, but I believe that physicians and health plans are going to largely resolve their differences and end up working much more closely in the future than we have in the past. And there are two different reasons for that. One is that we both have the same goal in mind. From the health plan's perspective we want to see that our customer gets the best service possible. The doctor wants to see that his patient gets the best health care possible. Well, that's really the same end. That's the positive part of it. The negative part is we are seeing a growth in populism in this country — some people call it consumerism — where there's a feeling that the elites have it quite well, and there's a fair amount of resentment of the elites, including both so-called "comfortable" health plan execs and "comfortable" physicians. The concern here is that the American public will say, "A pox on both your houses." If we concentrate on the positive here, seeing that our customer or patient gets the best service imaginable, we'll largely avoid that.

MC: There does seem to be backlash going on among the public against HMOs.

HERBERT: At AAHP, we actually feel we're changing that. We have been involved with what we call our "Putting Patients First" initiative for some 15 months now. Through it, we have espoused a philosophy of care for our member health plans. This is a serious effort at policing our own ranks — actually employing a code of conduct, if you will, for our member plans. We are raising the bar in terms of quality health care rendered by our member health plans, and in doing so we are gaining credibility with the media, and ultimately with the public.

MC: Isn't the backlash partly based on public misunderstanding?

HERBERT: I think there's a grudging acceptance of managed care by the American public, because there's an increasing acknowledgment that the old system wasn't working. That system — or non-system, if you will — led to rampant medical inflation. It led to a whole host of problems that caused President Clinton, when he came into office, to propose an overarching federal government role to resolve them. When that failed, we said, "Let's let managed care deal with these problems" — of uncoordinated care, of 37 million Americans without coverage, all the problems that a health care system has. Managed care has now been fully engaged in resolving the problems of health care delivery in America for several years, and medical inflation has been brought under control. There is increasing evidence that HMOs provide the highest-quality health care. Patient satisfaction levels are very high in our health plans. Enrollment is absolutely booming. So we've moved from an alternative form of health care delivery to the predominant form of health care delivery in America. Now we've reached the third part of this triangle. And that is the part where managed care leaders stand up and say we haven't yet done enough, that we have to provide better information to our doctors and our members, that we have to provide even higher-quality health care. We have to ban certain practices that are inappropriate — for example, health plans that were hospitalizing a woman 24 hours or less for breast removal. We came out and said it's unacceptable for a member health plan to do that. Over time, the American public is starting to understand that this is the best form of health care delivery in America. We do need regulations to assure that our market-based system functions properly and we do our jobs well. But we're not going back to Marcus Welby. Managed care is the form of health care delivery we've elected in this country. And what we do is increasingly in demand all over the world. Even socialistic countries that have had rigid delivery systems for years are crying out for the entrepreneurialism and the dynamism that American managed care represents.

MC: The AAHP was born in a 1996 merger between the Group Health Association of America and the American Managed Care and Review Association. Has the merger yet produced any concrete benefits?

HERBERT: First of all, the merger has gone more smoothly than any of us ever imagined. We are clearly able, I believe, to speak with one voice now for the industry. When I was chairman of AMCRA from 1992 to 1994, I had a great fear that AMCRA and GHAA were going to take divergent positions on health care policy. There actually were some very minor issues where we were divergent, and it would have been extremely problematic for us, as an industry, if we ever took divergent positions on a major policy issue. We are a vastly more effective trade association now that we've brought these two organizations together. We were able to capitalize on the strengths of both organizations in doing this. AMCRA had a strong degree of support from the IPA and preferred-provider organization part of the managed care industry. GHAA, of course, had its strong support in the group- and staff-models. We were able to put this together so as to embrace all models in a very effective way.

MC: Did PHS ever have a gag rule of any kind?

HERBERT: In the early years, PHS had what today is referred as an anti-disparagement rule. And, frankly, it was very much needed, because we found many instances where our participating doctors would actually be discouraging their patients from joining our health plan. This was because these doctors had agreed to accept a lower payment from us than they were charging their patients who had indemnity insurance. So we had a clause in our contract for years that said, "If you join our health plan, you can't tell our potential members that they ought not join our health plan." That had nothing to do with discussing treatment options with their patients. It had to do purely with the reimbursement issue.

MC: Is it still in place?

HERBERT: We took that anti-disparagement clause out of our contract some time ago, because we wanted to avoid the perception that somehow we might be gagging doctors in their ability to discuss treatment options with their patients — even though that was never the intent or the reality of that clause.

MC: Do you think there are too many different entities trying to measure health plans' quality right now?

HERBERT: From a health plan perspective, there is a great concern that there are too many organizations out there that we have to answer to, particularly when they have divergent criteria that we have to meet. It is enormously time-consuming and very expensive to answer to these various accreditors, so much so that some health plan executives in this country are beginning to think in terms of having this entire function turned over to a government agency like the Securities and Exchange Commission. We don't want to do anything that would disturb the market-based system under which HMOs have thrived. But, at the same time, we can look to the SEC as a model that enables the investment banking world to function quite well in a market-based system. We're not yet ready to embrace or endorse that, but we've begun to talk about it. And perhaps, in the next year or two, we will develop a position in support of that. One of the reasons is that we have 50 state legislatures creating their own sets of laws affecting managed care. Many of our health plans now are multi-state plans, and it can become a nightmare to try to operate in compliance with 50 different sets of state laws.

MC: I assume your family's health insurance is through a PHS plan.

HERBERT: Yes. We've been covered by PHS since its inception. We're in a traditional IPA-model plan, and our physicians have been practicing in the community and contracting with PHS since 1977.

MC: In your Health Affairs article you refer to many early HMO leaders as having been "disciples of President John F. Kennedy's New Frontier" who had served in the Peace Corps or VISTA. Does that apply to you?

HERBERT: No. I failed my draft physical, and I didn't go in the Peace Corps, either. I went straight from college to graduate business school to working for a management consulting firm in New York. Then I was laid off in the recession of 1970 and, somewhat on a lark, answered an ad in the Wall Street Journal to go to work for Paul Ellwood [M.D.] out in Minneapolis. He had coined the term HMO, and at that time he was trying to sell the Nixon administration on making HMOs part of federal health policy. I decided to become Paul Ellwood's administrative assistant, and ended up working for him for six years. I was at InterStudy, involved in HMO research and HMO policy, at the time the federal HMO Act became law. Then I decided I wanted to start one of these health plans. That's when I came here, and I've been here ever since.

MC: That must have been a unique vantage point on history.

HERBERT: Yes, it was a very exciting time, especially for someone as young as I was. At first, I didn't have much of a role in that process other than observer, but I was there.

MC: What's been the biggest surprise in the development of HMOs since then?

HERBERT: None of us really thought a lot about for-profit health care back then. That took off when President Reagan shut off the federal spigot and took the federal government out of the role of venture capitalist for HMOs.

MC: Thank you, Mr. Herbert.

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