By seizing opportunities, MDs emerge winners

Physician-owned HMO thrives in rural market

Just like the old stock market adage "Buy low, sell high," taking a proactive stance in managed care can work best when conditions in the managed care marketplace are less than ideal. The experience of a physician-led and owned managed care organization, Virginia-Carolina Managed Care Inc. (VICARE), is a prime example.

The Franklin, VA-based company seized the opportunity created by employer dissatisfaction with rising premiums by starting its own HMO in this rural area of approximately 12,000 in 1995. Three years later, the gamble has parlayed into a company with 27,000 covered lives, 1,700 physicians under contract, and 20 affiliated hospitals. The company’s coverage area runs down the eastern shore of Virginia, including Williamsburg, across the peninsula area of the state and into the northeast corner of North Carolina.

Bed days per thousand average 160, compared to the average of 200 for the other major system in town.

VICARE’s story illustrates the opportunities for physician-run organizations that are willing to take initiative, says Bob Coburn, a consultant with William M. Mercer consulting firm in Chicago. There will be an employer backlash against the ever-increasing premiums of large insurer-owned HMOs, he says. "The best-functioning plans on an ongoing basis are going to be integrated systems owned and run by physicians. They will be the better plans based on patient satisfaction, clinical excellence, and low costs. The only plans I’m aware of now that meet these four criteria are run by physicians."

VICARE’s beginnings were spurred by a local employer looking to lower its health care costs, says Karl Beier, MD, a physician with an OB/GYN practice who also serves as chairman of VICARE. In 1995, Union Camp Corp., a paper manufacturer that employs about 3,500, put the word out that it was dissatisfied with rising health care costs and was entertaining proposals from other insurers.

"That really sort of galvanized the doctors in this community to respond. In reality, they [Union Camp] represent 10% of anybody’s patients in this town," Beier says.

Union Camp’s announcement came at a good time. Three months earlier, a group of physicians (including Beier) and representatives from a local hospital had began working with a consultant to prepare for what they saw as the inevitable infiltration of managed care into their market. "At the time, we were sort of a cutoff for managed care. We started looking at what was happening in managed care in the peninsula area [about 30 miles from Franklin] and saw a lot of people who live in our community but work in the city being pulled into health plans." Beier’s practice and the other practices in town were not included in these networks, meaning some patients had less of a financial incentive to use their practices.

The Union Camp announcement set the group’s plans in motion, enabling it to respond to Union Camp’s proposal and create its own managed care organization. It was a bit of a gamble to try to convince the town’s largest employer that it should put its faith in a start-up organization. VICARE eventually won the contract after six months of negotiations, beating out the more experienced Centera Health System, an integrated delivery system of several large hospitals in a neighboring community.

Because Union Camp is self-insured, VICARE did not need to get an HMO license from the state. It assembled a network of 200 physicians and six hospitals, formed an organization financed by a $5,000 contribution from each of the 24 founding physician partners and matching funds contributed by a local hospital, and contracted with a third-party administrator to handle administrative processes. The result was something that resembles a point-of-service product, although it is reimbursed on a discounted fee-for-service basis. It utilizes a primary care physician gatekeeper system, with utilization management run by VICARE through a part-time medical director, two RNs, and three LPNs.

The Union Camp contract served as a model for the approach VICARE uses with other employers, using what Beier calls a "gain share" approach.

"With Union Camp, we had to promise them that we would drop the cost of health care 20% the first year," he says. "They [Union Camp] started from a traditional indemnity plan with no discounts. I used an actuary and came up with a fee schedule for the network, not even allowing for any utilization management savings or PCP savings. We ended up dropping costs 35% the first year. So I made an arrangement with them [for the next year]. I said, we’ll give you the first 20%, and we’ll take anything above that."

As a result, the participating physicians are motivated to practice good utilization management, Beier explains. "Physicians are owners, and they will work hard to make the company work. Because physicians are owners, they don’t churn the product," he says.

Word of the Union Camp success gave VICARE credibility with other employers. In addition, VICARE’s 15-member board includes three employer representatives, which serves as a marketing tool to other employers. (The three employer representatives are appointed by the hospital, which has seven board slots on the board; the physician group also has seven slots, and Beier, as chairman, occupies the 15th position, serving as a tiebreaker when needed).

Another element of the Union Camp relationship that VICARE uses with all employer clients is to generate monthly reports that illustrate health care costs and money saved through utilization management.

VICARE’s success has spurred developments beyond the extra employer business. VICARE eventually purchased the third-party administrator it was under contract with, increased its number of shareholders, and brought in two additional hospitals as equity partners.

In addition, the company is in the process of expanding from a self-insured client base into a partnership with a national company to develop a fully insured plan.

"Because we don’t have an HMO license, we need someone to take the risk," Beier says. "We’ve worked out an arrangement with a national insurer that will allow us to be their delivery system exclusively in Virginia and North Carolina. We hope to have that out by Jan. 1."

The company also is developing an electronic credentialing system, which will provide administrative support to physicians who must submit credentialing information to other payers with whom they contract. "When physicians get the credentialing packages from the insurer, they’ll send it to us. We’ll call the insurer and offer to sell our services to them," he says.

Beier also is spending more of his time traveling to other communities to work with physicians who hope to emulate VICARE’s success in their own market. The opportunities are there, Beier insists, if physicians are willing to seize it and can work together.