Taking on the payers: Provider-owned HMOs hold their own

But big 'ifs' apply, depending on your situation

The consolidation of large national managed care organizations in the past two years has left some physicians grumbling that the health insurance business will soon resemble the airline industry - ever fewer choices for consumers, and in some cases, market domination that can lead to steeper prices coupled with declining service standards.

As a result, many physicians have taken the matter to heart and started their own HMOs. But the recent highly publicized parting of ways between several provider-owned HMOs and large delivery systems, such as Virginia Mason Medical Center in Seattle and Samaritan Health System in Phoenix, has lead some critics to wonder if the trend has gone the way of the defunct People's Express airline: a fine concept, but one that doesn't translate to good dollars and cents.

The answer, Physician's Managed Care Report found out, is that provider-owned HMOs are alive and well, given two big "ifs": the status of market opportunities in the area in question, and the presence of physician leadership in the founding organization.

"Providers are beginning to get a better understanding of what it takes to be in the managed care business," says Lou Pavia, executive vice president of McManus Associates in Washington, DC, which has helped several provider groups start their own HMOs.

The trend has moved away from a rush among physician groups to start their own HMOs as a way to avoid dealing with managed care organizations. The current players are the ones who are getting into the HMO business for the right reasons, Pavia says: to translate care management strategies they have developed within the confines of managed care to broader business competencies like underwriting and marketing.

One such success story is the Detroit-based Henry Ford Medical System, which operates its Health Alliance Plan HMO as a fully owned subsidiary. Henry Ford opted to affiliate with an established HMO in 1985 rather than start an operation from the ground up, and last year developed the relationship from affiliate status to that of a subsidiary that now covers 550,000 lives.

"Henry Ford identified the need to become more managed care-oriented than any other provider delivery system in the area because of our central location and our desire to appeal to a suburban membership from an urban center," says Tom Simmer, MD, medical director of Health Alliance Plan. "One of our strategies was to enroll people in a managed care program and offer primary care services throughout the area by building [suburban] primary care sites."

Simmer says Henry Ford's foray into the HMO business has been successful for several reasons:

    · marketplace factors that lent themselves to opportunities for Henry Ford;

    · physician input and communication;

    · balancing this physician input with an equal amount of purchaser input.

"To be successful in an HMO marketplace, you need to determine if your group of doctors has something to market that others can't do as well," Simmer says. "What is the size of the delivery system you can bring to the market, and does it match the needs of your purchasers? If you have [as a major employer] a printing company with an office in two different cities, can you offer services to both sites? It's important that the delivery system be pretty big in order to succeed. If you're not big enough, perhaps it would be best to form a network" or to contract with community-based physicians as well as staff physicians, as Henry Ford does.

Market factors can come into play in terms of choice as well. Pavia points out that if a health system accounts for 20% to 25% of care in a community and has a strong brand name and demand among employers and consumers, it may be able to negotiate favorable rates if there are several major payer choices in a community. "But if there's only one HMO in your market, you may want to make sure there is an alternative by offering your own health plan or bringing another payer into the community," he says.

Research the existing HMOs in your market thoroughly, both Pavia and Simmer recommend. This helps you determine what advantages, if any, you can offer over these companies.

Knowing how purchasing decisions are made in your market also is essential. Overriding changes in the marketplace are what led Virginia-Mason Medical Center to exit the HMO business, says Darlene Corkrum, MPH, vice president of marketing and business development. The integrated delivery system sold its HMO in 1997 to Aetna US Healthcare because of changes in the way health care was purchased in Seattle, as well as its desire to focus on its core competency - delivering care, rather than financing it. "There's something about the rules and energy and activity of also having an insurance mechanism," Corkrum says. "Unless it's really robust and is bringing in thousands upon thousands of members you can't get through other vehicles, it's not worth it, especially as national companies [MCOs] are signing huge national contracts with employers."

In Seattle, Corkrum explains, most employers do not make benefit purchasing decisions locally. They want to contract with a national carrier who can provide coverage to employees in a multistate area, or else their purchasing decisions are made by someone within a parent company. "Take Safeway, a large grocery chain out here. They used to have regional human resource managers making benefits buying decisions. But they were downsized, and now all benefit decisions are made out of their corporate office in California."

Meeting purchasers' demands

Henry Ford's close relationship with its major employer clients, such as Ford Motor Company and General Motors, has been a key part of Health Alliance Plan's success, Simmer says. General Motors typically addresses a meeting of Henry Ford physicians about four times a year to talk about the needs and wants of the customer.

"HMOs have to deliver the message of the purchasers, because they cannot succeed without pleasing the customers," he says. "We go to the delivery system and say, 'these are the needs of the purchasers, and we need to meet these demands.'"

Balancing purchaser needs with provider needs can be tricky, Simmer says, but the extent to which that balance can be achieved is predictive of the HMO's likely degree of success.

Constant communication within the physician group also is important, Simmer adds. The plan schedules quarterly meetings to keep doctors informed of key medical and patient satisfaction issues. These meetings typically draw about one-third of the staff physicians.

Another way to ensure physician buy-in is to tie compensation to performance of the system, Pavia says. In a truly integrated system, 25% of physician compensation has to come from the performance of the overall system, he recommends.