Diane H. Malcolm, M.B.A.
MANAGED CARE February 1997. ©1997 Stezzi Communications
A Personal View

In the September Managed Care, consultant Thomas Garvey wrote that "Physicians Must Create Their Own HMOs." We invited well-argued replies from readers who disagreed, and we got this one.

Diane H. Malcolm, M.B.A.

I was stunned at Thomas Garvey's recommendation. Like many consultants, he offers a cookie-cutter idea (consultants call an idea a strategy) with a catchy analogy for the enjoyment of us left-brainers, without evaluating the external or internal environment, completing a readiness test or offering an implementation plan. As a director of provider network management for a hospital-owned HMO covering over 250,000 lives, my views differ by 170 degrees from his call for physicians to create their own HMOs to protect their clinical and financial independence.

Let's begin with the 10 degrees where we are in agreement. We agree that HMOs are growing, that a statewide HMO is helpful from a marketing perspective, and that it takes capital to develop an HMO.

No strategy is the right one for everyone all of the time, but good timing is the key characteristic of successful strategies. To assure that the time is ripe for such a huge investment and endeavor, a physician-hospital organization must complete an assessment first. In the case of an independent practice association or a PHO considering entering the complicated HMO business, I would recommend commencing with an external assessment. If managed care's local penetration is greater than 20 percent and three or more HMOs are well established, forget creating your own. It is too late; you cannot be the lead dog. Warning: If you try anyway, "count on the other three HMOs terminating their contracts with your doctors within weeks of your initial marketing efforts," says Tom Summerill, president and CEO of Allegiance Corp., a PHO in Ann Arbor, Mich.

If your market does not have significant managed care penetration, you can move to Step 2: the internal assessment. This is far more difficult, because it requires you to evaluate your core competencies and weaknesses. Begin by answering these 10 questions:

1. Are you an IPA or a PHO? If you are an IPA, where are you planning to generate the $10 to $15 million required for entry into the HMO business? If it will come out of the physicians' pockets, the issue of fund generation gets personal and unpopular. If your organization is a PHO and the hospital is willing to contribute money from its cash box, consider proceeding. But since "nearly three-fourths of PHOs are less than 25 months old, and more than half are less than one year old," as the consulting firm Ernst & Young reported last year, I doubt that most PHOs are ready to negotiate managed care contracts with substantial risk, much less have the resources, integration and cooperative vision to start an HMO.

2. What kind of PHO are you? If yours is an open PHO or a single-specialty PHO, forget the idea. If it is a closed PHO as defined by the Washington, D.C.-based research and publishing firm The Advisory Board and it is capitated, again, consider proceeding.

3. Does your IPA have more than 50 percent of the physicians in your market? Are there any access issues?

4. Is your IPA primary care-driven and are your specialists efficient, compared with regional or statewide benchmarks?

5. Do you have effective physician leadership, or do you have to pay physicians to attend committee meetings? Are physicians willing to share with and learn from one another? Can you rate your governance and communication system as strong? The most effective PHO with which my organization contracts has 20 committees and eight task forces. These do not include the numerous committees formed between the PHO and the payer. (One obvious concern for a committee is physician compensation. According to The Advisory Board, there are 461,760 possible combinations of physician compensation.)

6. How sophisticated are your medical management systems? Can you truly manage costs, recognizing that 10 percent of the population spends more than 50 percent of the health care dollar?

7. Is there trust between the hospital and physicians?

8. Have the physicians "bought into" managed care? If so, why hasn't managed care penetrated more? Do physicians come in out of fear, or because they believe managed care can improve quality and value? As Tom Summerill explains, "If they are not brought in because of improved value, they will become the great resisters of change."

9. Is your PHO measuring health outcomes and patient satisfaction, or just utilization and cost?

10. Have you developed a true physician educational process to gather relevant data, turn it into information and deliver it successfully? And are the physicians willing to modify their behavior as a result of this information? Have you obtained benchmarks and set targets, recognizing that the current three key cost areas are physician, hospital and pharmacy costs?

If you are able to answer all these questions in the affirmative, you may wish to proceed with the idea of forming your own HMO. However, proceed with caution. Every PHO has its own purpose, politics, philosophy, culture, structure, level of sophistication, goals and focus. Evaluate yours carefully. Hire a CEO who has a good reputation for building partnerships and can implement plans with zealous attention to detail. Also, recognize that no one in the partnership can be treated as a commodity.

As for forming an HMO on a statewide basis, you are in la-la land if you even consider it. Medical care, protocols, critical pathways and attitudes are extremely parochial. Never would you succeed in developing a consensus about most medical management issues, much less risk-sharing models. The super PHOs are demonstrating this fact and adjusting accordingly.

A better alternative

It is not necessary to do any of the above evaluation or to locate the millions of dollars necessary to start an HMO. Many HMOs will now share substantial risk, if not all the risk, with a well-organized, well-managed PHO. Spend your resources locating such a payer. Contract with it to do the marketing, rating, premium billing, enrollment, member servicing and claims payment. Some are also strong in physician performance analysis. Search diligently for that partner so you can focus on contributing the medical management expertise. Everyone can then bring strength to the table, with the physicians' clinical independence being protected.

Another alternative is to build a preferred-provider organization and market your PHO to self-funded employers, who can make up as much as 60 percent of your market.

In his article, Thomas Garvey cites the following analogy: "If you put a frog in boiling water, it will attempt to escape for self-preservation. But if you take the same frog, place it in lukewarm water, place that water over a stove and gradually turn up the heat, the frog's system will adjust to the change and eventually the frog will boil without trying to escape."

He has proposed a strategy that may be appropriate for 1 percent of the PHOs in the nation, and he states that if this strategy is not followed, private practice will go the way of the dinosaur. He is recommending that IPAs and PHOs jump in the pot of water, reach out and turn on the heat, and enjoy a deathly sauna. Better alternatives exist. Private practice will not follow the dinosaur to extinction, but fee-for-service health care is doing so. PHOs need to prepare to take risk, avoid being internally focused, and not enter into a little-known environment in which external focus is a requirement for success.

The water is not very hot; the room temperature is just changing. This is called a market adjustment.

Thomas Garvey is all wet in his recommendation. He should get out of his consultant's armchair and go play in the real world for awhile. He should also ask himself where Connecticut's M.D. Health Plan, which began as a doctor-owned organization, is today. (It is now part of Health Systems International, which is publicly traded and whose principal and chairman of the board are nonphysicians.) Maybe Garvey's consulting salary should be questioned, not the compensation of physicians or the senior management executives at HMOs.

The author is director of provider network management for Mercy Health Plans in Ann Arbor, Mich. She offers another identifying detail: "Salary: About half of a primary care physician's."

Thomas Garvey replies:

Ms. Malcolm extols the virtues of physician-hospital organizations — an unproven, untested, poorly defined and unmanageable solution for physicians who are trying desperately to preserve their financial and clinical independence in the era of managed care/HMO financing.

I assume that Ms. Malcolm does not know that PHOs are simply a gimmick hospitals are using to turn their physicians into employees by controlling physician cash flows. In a PHO arrangement, the PHO is paid for services and then it pays the physicians.

In such arrangements, the hospital has control over physician cash flows, and if the PHO reaches 30 percent of the physician's earnings, bingo! — physicians cannot terminate that relationship and survive financially. At this point, physicians lose control over their cash flow and the hospital takes over the practice without having to lay out a dime. It is a hospital buyout strategy pure and simple. If it looks like a duck (buyout) and quacks like a duck (takeover), it probably is a duck (PHO).

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