Best-kept secret: Fee for service emerges as ‘one to watch’ in 1997

Payment models duke it out for consumer favor

You’ve heard the gospel of managed care — that it’s a revelation in the making, a foregone conclusion, soon to leave fee for service in the dust.

But employers and consumers have not been as quick to jump on the capitation bandwagon as experts originally thought they would be. Discounted fee for service, predominantly in the form of preferred provider organizations (PPOs), is still alive and kicking and should remain the predominant reimbursement form at least through 1997, according to data from several recent studies, as well as interviews with physician practice officials.

You could look at it this way: If the three leading methods of physician payment were represented by different kinds of mutual funds, you’d probably find a familiar-sounding menu of investments.

• An "aggressive growth" fund would be capitation plans run by HMOs, a high-risk venture that could bring big wins or devastating losses.

• A "bond" fund might be traditional indemnity with very low risk but less possibility of big payoffs.

• A "growth and income" mutual fund would be a plan that was based on fee for service, but with discounts negotiated in advance. These would be in the form of a preferred provider organization (PPO), or the popular variant for HMOs, the point-of-service (POS) model.

"Right now our practice has virtually nothing but fee for service with discounts," says James Linz, chief executive officer of Towson Orthopedic Associates, a 12-physician practice in Baltimore. "In areas [like Baltimore] where you have strong HMO concentration, people are on the rebound," Linz says. They are unhappy with lack of choice of physician — so much so, in fact, that the Maryland legislature passed a law that went into effect in January requiring HMOs to offer a POS option.

"People can access whatever physicians they want whenever they want," Linz says, which means fee for service in Linz’s practice actually is stronger than ever before. The key is getting good fees, which is tough in HMO-saturated markets, he says, and perhaps less tough in less competitive markets.

Health economists aren’t stock brokers selling payment model mutual funds, but if they were, all bets would be on discounted fee for service in 1997. Practice administrators interviewed by Physician’s Managed Care Report, as well as several current studies, bear this out.

Negotiate justifiable discounted rates

The best strategy for providers, many say, is to negotiate well-thought-out discounted fee-for-service contracts. Why? In short, because the field is wide open with little consistency among payers. That inconsistency signals lots of room to make a case for yourself in terms of fees you need to support the quality of care, patient outcomes, and cost efficiencies you are aiming for in your next contract year.

The current social and political atmosphere adds to the growth potential of PPOs, experts say. Many HMO beneficiaries are voicing discontent over HMO constraints in terms of physician choice and cost management. Some practice executives predict that managed care is settling out for good. That’s the view of Glen Bardon, MD, chief executive officer of Lakeland, FL-based Watson Clinic, a 150-physician multispecialty practice.

"Fortunately, or unfortunately, our total capitation is in the 4% range," says Bardon. "We know that will change," he says, but he also says he does not think capitation will rule the world of physician reimbursement.

Fee for service — and, in particular, discounted fee for service — will remain strong, he predicts, despite the massive HMO competition and growth of capitation contracts to the south of him in Miami and to the north in Orlando.

It also helps that businesses appreciate the cost-effectiveness of managed care, which includes not only HMOs but also PPOs and their close relative, POS plans.

Currently, managed care plans are far from being dominated by capitated models, points out John Erb, principal author of the 11th annual survey of health care benefit costs by Foster Higgins, the New York City-based benefits consulting firm. That may be surprising, given the billboard barrage you may be seeing in your hometown from competing HMOs. The survey tapped 3,290 employers, each of which had 10 or more employees.

Enrollment rates defy marketing images

For example, here are the beneficiary enrollment growth trends by payment model from 1995 to 1996, according to the Foster Higgins study:

Fast-growth PPOs. PPOs grew from 29% to 31% of employee enrollment among self-insured employers.

Steady growth POS plans. Point-of-service plans grew from 14% to 19%.

No-growth HMO enrollment. HMO enrollment remained exactly the same at 27% from one year to the next.

Ebb-tide indemnities. Traditional indemnity plans dropped from 29% to 23%. (See table of survey results on p. 39.)

Employers doubtless are enthusiastic about what managed care does for their costs, but that doesn’t mean physicians necessarily have to strap themselves into rigid capitation agreements. According to Erb’s survey, costs are in check when looking at growth rates from 1995 through 1996. Here are key indicators Erb cites:

• Total health care benefits costs rose only 2.5%. This computes to an average for all employers of $3,916 per employee in 1996, compared with $3,821 in 1995, when costs rose 2.1%.

• Average costs for large employers (500 or more employees) rose 3.6%, and smaller employers (10-499 workers) enjoyed a 2% decrease. This is largely credited to their shift to managed care.

• Traditional indemnity remains the most expensive at $3,739 per employee, up 2.4% overall, but which increased a whopping 6.6% for large employers.

• PPO costs rose 3.9% to $3,293 per employee.

• POS plans (or open-ended HMOs) rose 2.3%, or $3,494 per active worker.

• HMO costs fell 2.2% to an average of $3,185 per active employee.

Physicians prove to be effective negotiators

In fact, Erb warns that employers may see rising costs in 1997 partly due to the "ongoing consolidation of health care providers, who are gaining more bargaining clout with managed care plans," Erb says.

While no market is identical to another, rendering it impossible to make sweeping statements that apply perfectly to everyone, national trends can be highly informative, Erb and other experts contend. These surveys are popping up everywhere, suggesting the emergence of PPOs (and POS plans) as the favored pick of many employed Americans.

In certain markets — some where you’d expect heavy HMO interest, such as parts of Florida — the managed care icon is but a glimmer, such as the drop in the bucket of capitation dollars at the Watson Clinic, points out Bardon. Managed care will grow, but fee for service will hold its own, particularly well-crafted discounted fee-for-service contracts.

To back up his prediction, Bardon points to a recent survey conducted by the American Medical Group Association (AMGA) in Alexandria, VA. (See bar chart above, which summarizes revenue mix comparisons among 272 large medical group practices.)

The AMGA survey, among many its findings, clearly points out that fee for service is holding its own — 42% in 1995, and predicted to be 42% in 1996 (year-end figures are not yet available). That’s still pretty hefty, he says, given the expectation that capitation would kill off fee for service in pretty short order. "I think managed care is going to settle out before long," he says.

In fact, many experts say PPOs are the one to watch for 1997. They say PPOs offer wide-ranging opportunities to physician groups that have savvy negotiators, many experts suggest. This trend is expected to continue, Erb predicts. He offers as reasons a managed care backlash, and the achievement of the one-time savings managed care has created by moving employees out of expensive indemnity plans. A sign of the cost leveling out is that HMO rates are rising for 1997.