CHALLENGES AND OPPORTUNITIES FOR PREPAID GROUP PRACTICE Academy Health June 6, 2004

1. CHALLENGES AND OPPORTUNITIES FOR PREPAID GROUP PRACTICEAcademy HealthJune 6, 2004 Professor James C. Robinson University of California, Berkeley

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

3. 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?

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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?