CHALLENGES AND OPPORTUNITIES FOR PREPAID GROUP PRACTICE Academy Health June 6, 2004 Professor James C. Robinson University of California, Berkeley

OVERVIEW  Peeling the onion of the model  Market framework  Vertical integration  Capitation payment  Multispecialty group practice  What is the emerging model?

Prepaid Group Practice as Solution to Woes of Health Care System?  Long tradition of criticism of organizational fragmentation, excessive specialization, lack of cost- consciousness  Convergence of ideas and interests brought together advocates of market incentives, group practice, prepayment, organizational integration  The new American health care system?

The Elements of the New Jerusalem  Four key components of the model of a market-oriented, organizationally integrated, cost-conscious health system 1. Group practice v. physician cottage industry 2. Capitation v. fee-for-service 3. Vertical integration v. any-willing-provider 4. Cost-conscious choice v. paternalism

Strange Detours on the Road to the New Jerusalem  The market and polity seemed to be moving towards the new model, but now seem to be moving away from it  From managed competition to single sourcing  From vertical integration to broad networks  From capitation to fee-for-service  From multi-specialty to solo/specialty practice

Explaining the Detour  Peel the onion from the outside in: 4. Managed competition, cost-conscious choice 3. Vertical integration, insurers and MDs 2. Capitation payment 1. Multi-specialty group practice

4. Challenges to Managed Competition: Large Firms  Large employers abandon cost-conscious multiple choice by employees  Administrative costs of multiple plans  Fears of adverse selection  Complications of fixed dollar contributions  Insurers develop total replacement meta- products that include multiple network (HMO, PPO) and benefit (high/med/low) options

Challenges to Managed Competition: Small Firms  Small firms never offered multiple choice  Purchasing alliances never got going  No incentives to create nonprofit alliances  Large employers and labor unions don’t want to pool risk with small firms  Brokers are important intermediaries  Small firms want simplicity, economy

Challenges to Managed Competition: Government  Tax law subsidizes costly plan designs  Failure to expand FEHBP model  Medicare: good regulator, dumb purchaser  Overpay then underpay then overpay then…  Tricare, some Medicaid programs adopt single vendor model rather than multiple choice model

3. Challenges to Vertical Integration: Different Markets  Health care markets are small, local  Insurance markets are regional, national  Difficult to sell narrow-network products  Vertical integration accentuates internal organizational politics, undermines performance incentives for each unit  Successful examples have longstanding culture and market position

Challenges to Vertical Integration: Industry Life Cycles  Many industries begin with innovative technologies and organizational forms, then evolve from vertical integration towards non-exclusive (market contract) relations  Early PGPs needed to integrate insurance/financing with delivery  Maturation of industry eliminated this imperative, permitted market contracting

2. Challenges to Capitation: Complicated Incentives  Difficulties in developing measures and methods to deal with well-known problems  Risk selection and risk adjustment  Quality and quality measurement  Public perception that incentives to under- treat are worse than incentives to over-treat  Irony of success is slowing costs in 1990s undermined constituency for cost control

Challenges to Capitation: Weak Physician Governance  Capitation requires sophisticated physician entities to reap benefits, avoid problems  Financial management  Information technology  Strong governance and leadership  Adequate scale for spreading risk  With important exceptions, physician organizations were incapable of this

1. Challenges to Group Practice: Incentives for Productivity  Attenuation of individual incentives for productivity (free-rider) as physicians move from self-employment to employment  Traditional solo practice is for-profit firm where every dollar saved is a dollar earned  Productivity problems grow as the practice grows, especially across multiple sites

Challenges to Group Practice: Organizational Politics  Physicians distrust government, insurers, hospitals, and other physicians  Multi-specialty groups must mediate professional rivalries, relative income concerns of primary care, specialists  This is especially a problem when medical group is linked to (owned by) a hospital  War of all against all

What is the Emerging Model? 1. New market/policy framework?  What is consumerism in health insurance? 2. New insurer-provider relationships?  What are “efficient networks”? 3. New payment methods?  What is “episode of care” pricing? 4. New forms of physician organization?