Managed Care’s West Coast Champion


The head of the California Association of Health Plans began as an activist against the HMO industry, and gradually came to see the system as the best way to manage both care and costs.

How did Walter Zelman, Ph.D., former executive director for California Common Cause and onetime advocate of a government-run, single-payer health system, end up as head of the trade association for the state’s managed care plans?

Zelman’s thinking about the right balance between government and the market in health care evolved while he chaired a task force on universal coverage for California’s insurance commissioner in 1991-92. He expected the mostly liberal group to propose a single-payer system for the state, and he expected to support the proposal. Instead, he came to three conclusions, which he described in The Managed Care Blues and How To Cure Them, published in 1998 by Georgetown University Press, and cowritten with Robert A. Berenson, M.D. Those conclusions: Managed care was creating savings that could be used to expand coverage to the uninsured; massive regulation of health costs lacked political support and might not work; and managed care, done right, could improve the quality of health care.

For the past year, as president and CEO of the California Association of Health Plans, Zelman has worked to close what he sees as a gap between the perception and reality of managed care. Prior to joining CAHP, he was a professor of health policy and management at Harvard University’s School of Public Health from 1994 to 1998. Before that, he worked in Washington as a senior health adviser to President Clinton during the health care reform debate of 1993-94, then as special assistant to the administrator of the U.S. Agency for Health Care Policy and Research. He spoke recently with Senior Contributing Editor Patrick Mullen

MANAGED CARE: Given the current public mood about managed care, and your background as a consumer advocate, I would imagine that some of your former colleagues thought you had lost your mind when you took a job with the California Association of Health Plans. What was their response?

WALTER A. ZELMAN: My health care colleagues thought this was a great job for me. They know I enjoy policy and politics and the challenges of trying to explain things to people. Some of my friends from the consumer and public-interest world tended to think it was a sellout. They have strong biases against for-profit organizations and large businesses, and may ultimately believe that health care should be run by the government.

MC: You’ve come to oppose the single-payer approach. Why?

ZELMAN: One problem with those who say they want a government-run system is that in many cases they haven’t thought through carefully what they mean by that. First, they mean that the government gets all the money. How is the government going to pay for health care? I don’t think anybody in policy circles really believes that the government’s going to go back to the traditional Medicare system with Medicare for all and without managed care organizations. It wouldn’t make any sense for the government to do such a thing.

MC: I haven’t heard of any credible plan to simply expand Medicare into a system for all, without any organized systems of care.

ZELMAN: Then what are we talking about? That’s the problem with the single-payer argument. It doesn’t separate the issue of how you would collect the money from the issue of how you deliver care. Anyone today who addresses the question of the mechanism of delivery starts talking about organizing groups of doctors and hospitals. We just call it an HMO when an insurer leads it, and an integrated delivery system when doctors and hospitals lead it.

MC: How can a useful health policy debate occur when one side wants a government-run solution and mistrusts the market, while the other side mistrusts government and embraces market competition? For example, one Republican state senator in California called a bill would make health plans pay for second opinions “a calculated attempt by Democrats to drive the costs of health care so high that HMOs and insurers would be forced out of business.” How prevalent is that view?

ZELMAN: A lot of that is political posturing. One of my frustrations has been that I haven’t been able to pull the health-policy types into this debate. They would moderate it. Managed care would do infinitely better if we could engage members of the intellectual public-policy community in this debate. They know that managed care, while maybe not achieving all its potential, has produced great value to the society at large. They would help the public to understand that.

MC: Why haven’t you been able to engage them?

ZELMAN: Some of them are just research oriented. They don’t want to write policy-oriented articles. Some of them don’t want to get on what is perceived as the wrong side of this debate. They don’t want to be perceived as defending large companies or for-profit entities. They’re also careful about their academic independence. My response to that is, fine, be independent, but comment on policy.

MC: A number of medical groups in California and elsewhere across the country are in deep financial trouble. [See Page 45.] What caused this solvency crunch and what is its possible impact?

ZELMAN: While there is a real issue with the solvency of medical groups, I think some physician associations have tried to exaggerate the extent of the crisis, especially the extent of its impact on consumers. They have turned what is largely a problem between plans and providers into a threat to consumers in an effort to build more consumer support for their position. The problems are, fundamentally, how physicians are going to get paid, and whether physician groups will survive as organizations. The problem is not whether patients will get adequate access to quality care. The plans have been aggressive about trying to make sure that the impact of these insolvencies on patients and consumers is minimal, and I think they have been successful at it.

MC: What is the root problem with these groups? Are physician groups trying to manage financial risk in ways they’re not able to handle?

ZELMAN: I think that’s accurate. Many groups in California are sophisticated and experienced and know how to handle risk. They run a good business and deliver high quality care at low cost. Other groups are less organized and less sophisticated. They don’t necessarily have the leadership and business skills needed to bear risk in this kind of way. In some cases, no doubt in the effort to get business, they have taken capitation rates that are probably too low for them. They cannot deliver the kind of care they want to deliver — and are used to delivering — without losing money. Maybe if they were better managers of their business, and were smarter at doing utilization review, and getting the right patient to the right provider for the right needs, they might be able to survive on their capitation rates. If they’re not highly efficient, those capitation rates are going to prove too low.

MC: In other words, physicians who accept a low capitation rate have to be willing and able to make all the other changes in the way they run their practices in order to survive.

ZELMAN: In part that’s true. Another way of looking at it is to look at circumstances of two different physician groups getting essentially the same capitation rate. One is doing well, while the other is not. Let’s assume that there’s no radical difference in the quality of care they’re offering or the populations they serve. So then you look to other factors that are determining whether this group is doing well or not. It usually has to do with how well it’s running its business operation and its health care operation.

MC: How viable is capitation as a payment method? Variations on fee-for-service payments are coming back, certainly with more controls than in the past. Can capitation work in a way that makes sense for physicians, patients, and plans?

ZELMAN: Yes, it can, but it takes a certain level of sophistication, coordination, and integration to do it well. As many economists have written, Americans don’t pay directly for their health care and don’t see their health care costs. In a sense, all insurance suffers from this problem, because once you’ve paid for your car insurance or life insurance or homeowners insurance, you want the insurer to pay as much as possible. You’ve already paid the bill. With car insurance, people at least pay their premiums, so when they see proposals that they know are going to push premiums up, they stop and think. In health insurance, the problem is compounded by the fact that we don’t even pay the premium, so those limiting forces are absent.

MC: How do you make the case?

ZELMAN: Managed care — or your HMO — is caught between a rock and a hard place. The rock is the patient, the consumer who, understandably enough, wants everything, but doesn’t pay directly for it. The hard place is the government and the employer who buy virtually all the insurance in America and don’t want to pay any more than they have to for it. The managed care organization has to please both masters. When I began this job, I used to say that that’s a difficult thing to do. Now I’m almost convinced that it’s an impossible thing to do.

MC: There’s also a mistrust that exists among those who believe that managed care plans are just out to make money.

ZELMAN: If people saw the costs more directly and realized the value they were getting, they wouldn’t be quite as mistrustful, but they discount cost. Imagine a debate between a Lexus and a Camry over which one offers the greater value. The rules of the game are that the Camry is not allowed to say two things: first, that it has essentially the same engine as the Lexus, and second, that it costs $20,000 less. How does the Camry win the argument? Who would buy a Camry if it cost the same as a Lexus? That’s some of the dilemma of managed care. Managed care is just as good as fee-for-service on quality, by all studies. I’m not going to say it’s clearly better. I wish it were, but it is as good, and sometimes better. And it costs a great deal less. People just don’t realize it.

MC: I’d like to talk about some of the managed care reforms passed in California in the last couple of months. You’ve been quoted as saying that a new independent-review mechanism is the most important reform. How will that work and why is that the most important piece?

ZELMAN: It’s important because we think the public’s greatest and deepest concern is that somehow in a managed care environment they won’t get the care they need when they need it. External review directly addresses that question. It guarantees everyone in a health plan that if your health plan denies you something you think you need, you can get an independent expert to review that decision, and the health plan must abide by the expert’s decision.

MC: What rights to sue will consumers have that they didn’t have before?

ZELMAN: Our concerns about the new managed care reform laws focus on two areas. The first is the expanded right to sue an HMO. The second is the right to a second opinion, which is a smaller issue, but was really butchered in the legislative process this year.

MC: What happened regarding the right to sue?

ZELMAN: Obviously, we would have preferred no legislation at all, but from the beginning we knew we were going to get liability legislation. There was no question there. Under the governor’s original proposal, in order to sue your HMO, you must have experienced substantial harm, originally defined as serious physical harm. Before you could sue, you also would have to have had your care somehow delayed, denied, or modified by your HMO. So you couldn’t sue your HMO just because a doctor made a mistake, or because the doctor was capitated, or because the HMO directed you toward the network. Somehow or other the HMO itself has to interfere, intervene, delay, deny, or modify your care. When we saw the governor’s proposal we thought, “He has a high threshold to sue. He’s not allowing suits for such things as capitation or networks. You have to go through external review, and external review is admissible in court.” We thought that was a pretty tight package. The one additional thing we wanted that we really think is good public policy is some limit or safe harbor on punitive damages. Aetna U.S. Healthcare, for example, is going to have to pay 100 million dollars or more in punitive damages to one individual and that individual’s lawyer, and take that money out of the health care system. I can’t see any balance or compelling public interest that justifies making everybody pay 100 million dollars to reward one person and a lawyer.

MC: So you don’t buy the view that it’s a serious deterrent to future illegal behavior by others?

ZELMAN: Even if you accept the argument that there’s some deterrence there, you have to seek some balance. Is there balance in 100 million dollars’ worth of deterrence that we’re all going to pay in higher premiums?

MC: So you wanted to see a limit placed on punitive damages?

ZELMAN: What we specifically requested was a safe harbor from punitive damages, and this is what I understand to be the case in the federal proposals right now. If an HMO offered external review and abided by external review, that ought to be a safe harbor from punitive damages. We could not get the governor to sign on to that. Then, at the last minute, this reasonably tight gubernatorial package became unglued a little bit. Obviously the lawyers and their allies were able to persuade the governor to add the phrase “significant financial loss” to the category of substantial harm. That opened up some doors that I think the governor’s people didn’t realize. Not only did it obviously lower the bar in terms of the right to sue, but it set up a process by which the external-review system could be easily bypassed. All one has to do to bypass external review in the system is go outside of your HMO for care. Your HMO denies you because it’s not going to pay for care outside the network. Now you have significant financial loss and a denial, and you can sue because the provision says you have to go through external review unless the substantial harm is imminent or has already occurred. Because you have suffered financial loss and you’ve been denied by your HMO, the harm has already occurred. Now you can sue, presumably without going through external review. The governor’s people didn’t see how allowing financial loss to go into the definition of substantial harm would enable people to bypass the external-review system.

MC: What’s your objection to the second-opinion language?

ZELMAN: We supported a reasonable right to a second opinion. It’s disappointing that it came out so badly. In fact, most people in HMOs do get second opinions when necessary. We thought that, given the capitated model that we have in California, the second opinion ought to go through the medical group first, if that’s at all possible and reasonable. If it can’t go through the medical group, then it should go through some provider outside the medical group that the medical group directed you to. That way it would be within the capitation payment to the medical group. This proposal says, in effect, when it comes to specialty care, anyone can get any second opinion any time from any provider in the insurance company’s network. In California, that means thousands of physicians across the state. Can an HMO ever deny a second opinion now? That is a little murky. It may not have to be necessary or appropriate. It doesn’t have to be recommended by a doctor. It doesn’t have to be within your medical group. You can go from your local medical group in Los Angeles to Stanford University Medical Center to get the most high-tech cardiologist to give you a second opinion, and the plan has to pay for it. The problem with saying the plan has to pay for it is that it will force plans to rewrite hundreds of contracts with medical groups and physicians. Until now, medical groups have paid for second opinions through the capitated model. Now the plan is going to have to pay for them, which means the plan’s going to want to take it out of the capitation payment.

MC: Do you expect that your member plans will spend a fair amount of time over the next year accommodating themselves to these new regulations?

ZELMAN: I think we’re going to have to spend a good deal more time and energy focusing on the regulatory, as opposed to the legislative, process and that’s not all bad. There’s no question setting up external review is going to take some time, as will abiding by new time frames on utilization review and grievance processes. It’s going to take some time.

MC: Thank you.

MANAGED CARE October 1999. ©1999 MediMedia USA

Our most popular topics on