types of managed care rganizations and integrated · pdf filediscuss in what type of market...

Study Objectives• Understand the different types of managed care organizations.• Understand key differences between managed care organizations.• Understand the inherent strengths and weaknesses of each model type.• Understand the basic forms of Integrated Delivery Systems (IDSs) and how they

are evolving.• Understand the major strengths and weakness of each type of IDS, initially, and

how they have played out as the markets developed.• Understand the roles of physicians and hospitals in each type of IDS.

Discussion Topics1. Describe the continuum of managed health care plans and key differences for

each, using examples of each.2. Discuss the principle elements of control found in each type of managed care

plan. In which plans do those elements appear? 3. Discuss the primary strengths and advantages, and weaknesses and disadvan-

tages, of each type of managed care plan.4. Discuss in what type of market situations each type of managed care plan

might be the preferred model.5. Describe how a managed care plan of one type might evolve into another type

of plan over time.6. Discuss the key elements of the different types of integrated delivery systems.

19

2

TYPES OF MANAGED CAREORGANIZATIONS AND INTEGRATEDHEALTH CARE DELIVERY SYSTEMS

Eric R. Wagner and Peter R. Kongstvedt

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INTRODUCTION

Serious challenges are associated with at-tempting to describe the types of organiza-tions in a field as dynamic as managed care.The health care system in the United Stateshas been continually evolving and change isthe only constant. Nevertheless, distinctionsremain between different managed care or-ganizations (MCOs), though many of thosedistinctions are rooted in the historic classifi-cations that separated different forms ofmanaged care, particularly during its time ofrapid growth (see also Chapter 1). Despitethe continual blurring of types of health careplans, it is useful to understand the differenttypes of organization even though the pureform may only rarely be observed. It also isworth noting that research done in 1999 sug-gested that most of the U.S. public, the ma-jority of whom were enrolled in a managedcare organization, did not believe that theyreceived their health care coverage throughmanaged care.*

A decade ago or longer, the various typesof MCOs were reasonably distinct. Since thenthe differences between traditional forms ofhealth insurance and managed care organi-zations have narrowed to the point where itis very difficult to tell whether an entity is aninsurance company or an MCO. In contrast tothe situation 20 years ago, when managedcare organizations were often referred to as

20 CHAPTER 2: TYPES OF MANAGED CARE ORGANIZATIONS

“alternative delivery systems,” managed carein various forms is now the dominant formof health insurance coverage in the UnitedStates, and relatively few people receive theirhealth insurance through the once traditionalform of indemnity health insurance cover-age. In other words, regardless of organiza-tional type, many of the aspects of managedhealth care migrated into other forms of cov-erage and continue to evolve and migrate allthe time.

Originally, health maintenance organiza-tions (HMOs), preferred provider organiza-tions (PPOs), and traditional forms ofindemnity health insurance were distinct,mutually exclusive products and mecha-nisms for providing health care coverage.Today, an observer may be hard-pressed touncover the differences between productsthat bill themselves as HMOs, PPOs, or man-aged care overlays to health insurance. Theadvent of consumer-directed health plans(CDHPs) beginning in the early part of 2000does provide a greater difference when com-pared to other types of health plans, how-ever, and these will be discussed later in thischapter as well as in Chapter 20, thougheven then, many aspects of managed healthcare are found in such plans.

For other types of health plans (ie, non-CDHPs), differences in plan type may behard to distinguish. For example, manyHMOs, which traditionally limit their mem-bers to a designated set of participatingproviders, now allow their members to usenonparticipating providers at a reduced cov-erage level. Such point-of-service (POS) planscombine HMO-like systems with indemnitysystems, allowing individual members tochoose which systems they wish to access at

*According to the 1999 Health ConfidenceSurvey conducted by the Employee Benefit Re-search Institute, almost two-thirds of the 87% ofworkers who are covered by managed care thinkthey have never been in a managed care plan. SeeSeptember 21, 1999, EBRI News Release.

7. Describe the conditions under which a managed care plan would desire tocontract with an integrated delivery system; describe these conditions for eachmodel type.

8. Describe the conditions under which a managed care plan would actively avoidcontracting with an integrated delivery system; describe these conditions foreach model type.

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the time they need the medical service. POSrose and fell in popularity as a plan design,however, and is no longer as prevalent as itonce was. Similarly, a few PPOs, which his-torically provided unrestricted access tophysicians and other health care providers(albeit at different coverage levels), imple-mented primary care physician (PCP) casemanagement or gatekeeper systems andeven added elements of financial risk to theirreimbursement systems. The majority of PPOsdid not implement a PCP case managementsystem, but even then often do provide forlower required copayments by members tosee a PCP and higher copayments to see a spe-cialty physician, thus encouraging a de factoform of PCP care management. Finally, almostall indemnity insurance (or self-insurance)plans now include utilization management(UM) features and provider networks in theirplans that were once found only in HMOs orPPOs, though indemnity insurance is now aquite rare form of coverage.

As a result of these changes, the descrip-tions of the different types of managed caresystems that follow provide only a guidelinefor determining the form of MCO that is ob-served. In many cases (or in most cases insome markets), the MCO will be a hybrid ofseveral specific types.

Further confusing this is the existence ofintegrated health care delivery systems(IDSs)* that were created by providers in re-sponse to managed care. In the never-endingmovement to render a taxonomy of MCOs,some of these types of IDSs even require li-censure from the state if they accept risk formedical costs (eg, a “limited Knox-Keene”license in California) or from the federal gov-ernment (eg, a provider-sponsored organiza-tion [PSO] contracting with Medicare on afinancial risk basis and that does not alreadyhave state licensure). IDSs are briefly dis-cussed later in this chapter.

Introduction 21

Some disagreement exists about whetherthe term managed care accurately describesthe new generation of health care deliveryand financing mechanisms. Those commen-tators who object to the term raise questionsabout what exactly it is that MCOs are man-aging. These commentators ask: Is the indi-vidual patient’s medical care being managedor is the organization simply managing thecomposition and reimbursement of theprovider delivery system?

Observers who favor the term managedcare believe that managing the provider de-livery system can be equivalent in its out-comes to managing the medical caredelivered to the patient. In contrast to histori-cal methods of financing health care deliveryin the United States, the current generationof financing mechanisms includes far moreactive management of both the delivery sys-tem through which care is provided and themedical care that is actually delivered to indi-vidual patients.

Perhaps the strongest reason that many inthe industry have for not using the term man-aged care is the negative perceptions now as-sociated with it. As managed care becamethe dominant model for health coverage inthe United States during the 1990s, therewas a strong public backlash against the re-strictive features that were part of manymanaged care plans. The backlash, discussedin Chapter 1, may also have been driven to acertain extent by the change in focus as thelarge, old-line insurance companies enteredthe managed care market. Their focus shiftedmore heavily toward cost control and awayfrom the old concepts of health mainte-nance, preventive care, and managing careby providing it in the most appropriate set-tings. In addition, many consumers were“forced” into managed care as the new man-aged care plans became the sole health bene-fit offering for many employers. Americanconsumers value choice in most of their eco-nomic transactions, and health care is noexception.

Many health plans now simply call them-selves that: health plans, or in the case of

*No reason that the H doesn’t get use in thisacronym other than “IDS” rolls off the tongue bet-ter, but IDS is the term commonly used.

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the larger commercial companies, healthinsurance plans. Although the term man-aged care may not perfectly describe thecurrent generation of financing and healthcare management vehicles, it continues toprovide a convenient shorthand descriptionfor the range of alternatives to be discussedin this book and will therefore continue tobe used.

A simplistic but useful concept regardingmanaged care is the continuum illustrated inFigure 2–1. On one end of the continuum ismanaged indemnity with simple precertifica-tion of elective admissions and large casemanagement of catastrophic cases, superim-posed on a traditional indemnity insuranceplan. Similar to indemnity is the service plan,which has contractual relationships withproviders addressing maximum fee allow-ances, prohibiting balance billing, and usingthe same utilization management techniquesas managed indemnity (the nearly universalexamples of service plans are traditional BlueCross and Blue Shield plans). Further alongthe continuum are PPOs, POS, open panel(both direct contract and individual practiceassociation [IPA] type) HMOs, and finallyclosed panel (group and staff model) HMOs.As you progress from one end of the contin-uum to the other, you add new and greaterelements of control and accountability, youtend to increase both the complexity and theoverhead required to operate the plan, andyou achieve greater potential control of costand quality.


CDHPs, which combine a high-deductibleinsurance policy with a PPO network and aunique pre-tax “up-front” financing mecha-nism, do not fit neatly on this continuum,however. Because of that, as well as their con-tinued highly rapid evolution, they are de-scribed later in the chapter, separate from themore traditional types of managed care plans.

This chapter provides a description of thedifferent types of managed health care orga-nizations and the common acronyms used torepresent them. A brief explanation is pro-vided for each type of organization. In addi-tion, this chapter includes descriptions of thebasic forms of HMOs—the original types ofmanaged care organizations—and their rela-tionships with physicians.

TYPES OF MANAGED CAREORGANIZATIONS

With the clear understanding that there arereally no firm distinctions or boundaries be-tween them, what follows is a discussion ofthe broad types of MCOs. Throughout thisbook, these types of MCOs may be referredto in such a way as to conform to what fol-lows in this chapter; in other cases, a chapterauthor might simply throw in the towel anduse the term MCO or health plan to cover thewhole array of plan types. But distinctionsbetween types of MCOs are not mere historicrelics; there are differences that matter, andthe terms themselves still enjoy wide usage(or misusage in some cases).

Figure 2–1 Continuum of Managed Care

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Indemnity Insurance

Indemnity type of health insurance is simplythat: It indemnifies the beneficiary from fi-nancial costs associated with health care.Indemnity insurance and service plans werethe main type of health plan prior to the ad-vent of managed health care, with notableexceptions as discussed in Chapter 1. Origi-nally, few controls were in place to managecost, and coverage was only for illness, notfor wellness, preventive services (immuniza-tions), or prescription drugs. The insurancecompany would also determine what themaximum appropriate charge should be for aprocedure or professional visit, and that wasall that was paid. A provider was then free tobill the beneficiary for anything not paid bythe insurance company. In some cases, theinsurance company paid the money directlyto the beneficiary and the provider needed tothen get paid by the beneficiary if it had notalready collected its charges.

Rising health care costs hit indemnity in-surance hard during the 1980s and early1990s, and as managed care grew, indemnityinsurance shrank. Indemnity insurance isnow relatively rare, though not extinct. Whereit does exist, it frequently has managed careapproaches applied.

Service Plans

Service plans, the majority of which (thoughnot exclusively so) are Blue Cross and BlueShield (BCBS) plans, are similar in their basicsto indemnity insurance with a very importantdifference: the existence of a contractedprovider network. This contracted networkprovides for several highly important ele-ments that carry throughout managed care ingeneral:

• The plan contracts directly with providers(physicians, hospitals, and so forth).

• Provider contracts specify that the planwill pay them directly, and they mayonly bill the patient (member) for coin-surance, copays, or deductibles.

Types of Managed Care Organizations 23

• As long as a member (beneficiary) re-ceives services from a contracted pro-vider, the member is protected frombalance billing; that is, a provider cannotbill the patient for charges denied by theplan (see chapter 30).

• The plan has a method of calculatingwhat maximum fee will be paid for allprocedures or provider visits as regardsprofessional services.

• The plan has a method for determiningappropriate payments to hospitals.

Unmanaged service plans were subject tothe same pressures as indemnity insurancein regards to medical costs with the same re-sult. The difference is that the service planhas not disappeared from the landscape tothe same degree as indemnity insurance andis often a part of another type of offering. Forexample, a PPO offered by a Blue Cross BlueShield plan provides a degree of networkcoverage even if the member does not go toa PPO-contracted provider.

Managed Care Applied to IndemnityInsurance and Service Plans

The perceived success of HMOs and othertypes of managed care organizations in con-trolling the utilization and cost of health ser-vices prompted the development of managedcare overlays that could be combined withtraditional indemnity insurance, service planinsurance, or indemnity-like self-insurance(the term indemnity insurance is used to referto all three forms of coverage in this context).These managed care overlays are intended toprovide cost control for insured plans whileretaining the individual’s freedom of choiceof provider and coverage for out-of-plan ser-vices. Though traditional indemnity insuranceis now uncommon because of the high cost,it is still worthwhile understanding how theseoverlays are applied.

The following types of managed care over-lays came into existence:

• General utilization management. Thesecompanies offer a complete menu of

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utilization management activities thatcan be selected by individual employersor insurers. Some offer or can developpanels of participating providers withinindividual markets and bear strong re-semblances to PPOs.

• Specialty utilization management. Firmsthat focus on utilization review for spe-cialty services have become common.Behavioral health (see chapter 13) anddental care are two common types of spe-cialty utilization management overlays.

• Disease management. Free-standing dis-ease management companies or an in-surer’s internal program may focus onspecific common and costly diseases (eg,diabetes) rather than on utilization morebroadly. See Chapter 10 for a detaileddiscussion on disease management.

• Catastrophic or large case management.Some firms have developed to assistemployers and insurers with managingcatastrophic cases regardless of the spe-cialty involved. This service includesscreening to identify cases that will be-come catastrophic, negotiation of ser-vices and reimbursement with providerswho can treat the patient’s condition,development of a treatment protocol forthe patient, and ongoing monitoring ofthe treatment. See chapter 11 for a de-tailed discussion of case management.

• Workers’ compensation utilization manage-ment. In response to the rapid increases inthe cost of workers’ compensation insur-ance, firms have developed managed careoverlays to address what they claim arethe unique needs of patients coveredunder workers’ compensation benefits.Workers’ compensation insurance is actu-ally property-casualty insurance, nothealth insurance. Nevertheless, managedcare methods may be applied in somecases.

Many indemnity insurance companieshave carried these concepts several steps far-ther along the continuum by transforming


themselves into MCOs through acquisitions ofHMOs and other managed care companies.In fact, all of the major indemnity insurancecompanies that existed at the beginning ofthe 1990s have either sold their health insur-ance business lines to other companies or ac-quired major managed care companies. Asnoted in Chapter 1, as of 2006 four compa-nies have become the largest MCOs in thecountry, surpassing the original managedcare companies or free-standing HMOs in sizeand geographic coverage. One of those com-panies began its life in managed care, onecompany had its origins in the Blue CrossBlue Shield system of service plans, and twobegan as indemnity insurers. All four now op-erate in the same markets and offer similartypes of services. At least in the case of thesefour large commercial companies, it is less anissue of blurring and more an issue of beingable to offer almost all types of health plans,with plenty of hybridization.

Preferred Provider Organizations

PPOs are entities through which employerhealth benefit plans and health insurancecarriers contract to purchase health care ser-vices for covered beneficiaries from a se-lected network of participating providers.Typically, participating providers in PPOsagree to abide by utilization managementand other procedures implemented by thePPO and agree to accept the PPO’s reim-bursement structure and payment levels. Inreturn, PPOs may limit the size of their par-ticipating provider panels and provide incen-tives for their covered individuals to useparticipating providers instead of other pro-viders. In contrast to traditional HMO cov-erage, individuals with PPO coverage arepermitted to use non-PPO providers, al-though higher levels of coinsurance ordeductibles routinely apply to services pro-vided by these nonparticipating providers.PPOs can be broad or they can be specialty-only (eg, behavioral health, chiropractic,dental).

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The key common characteristics of PPOsinclude the following:

• Provider network. PPOs typically estab-lish a network by contracting with se-lected providers in a community toprovide health services for covered indi-viduals. Most PPOs contract directly withhospitals, physicians, and other diagnos-tic facilities. Providers can be selected toparticipate on the basis of their cost effi-ciency, community reputation, and scopeof services. Some PPOs assemble mas-sive databases of information about po-tential providers, including costs bydiagnostic category, before they maketheir contracting decisions. As a practicalmatter, however, PPOs now rarely delib-erately limit the size of their network butrather contract with any provider willingto accept the terms and conditions of thePPO contract (and who meet screeningcriteria as discussed in Chapter 5).

• Negotiated payment rates. Most PPO par-ticipation agreements require partici-pating providers to accept the PPO’spayments as payment in full for coveredservices (except for applicable copays,coinsurance, or deductibles). Althoughnegotiating payment rates with physi-cians and other professional providersmay take place, it is more common forthe PPO simply to inform the physicianof what payment rates will be, which thephysician can either agree to and con-tract with the PPO, or not agree to inwhich case they do not become a PPOprovider. PPOs attempt to negotiate pay-ment rates with hospitals that providethem with a competitive cost advantagerelative to charge-based payment sys-tems. These payment rates usually takethe form of discounts from charges, fixedfee schedules, all-inclusive per diemrates, or payments based on diagnosis-related groups. Some PPOs have estab-lished bundled pricing arrangements forcertain services, including normal deliv-


ery, open-heart surgery, and some typesof oncology.

• Utilization management. Many PPOs im-plement utilization management pro-grams to control the utilization and cost ofhealth services provided to their coveredbeneficiaries. In the more sophisticatedPPOs, these utilization management pro-grams resemble the programs operatedby HMOs.

• Consumer choice. Unlike traditionalHMOs, PPOs generally allow coveredbeneficiaries to use non-PPO providersinstead of PPO providers when theyneed health services. Higher levels ofbeneficiary cost sharing, often in theform of higher copayments, typically areimposed when PPO beneficiaries usenon-PPO providers.

PPOs may be owned by many differenttypes of organizations, as illustrated in Table2–1. Furthermore, a PPO may be operatedsolely for the benefit of its owner (eg, a PPOcreated by a Blue Cross Blue Shield plan thatprovides services only to BCBS members), or itmay be so-called rental PPO that was formed tooffer services to any health plan under an ad-ministrative fee agreement (which may be lim-ited to an access fee alone, or may include feesfor other activities such as UM, claims repric-ing, and so forth).

Exclusive Provider Organizations

Exclusive provider organizations (EPOs) aresimilar to PPOs in their organization and pur-pose. Unlike PPOs, however, EPOs limit theirbeneficiaries to participating providers forany health care services. In other words, ben-eficiaries covered by an EPO are required toreceive all their covered health care servicesfrom providers that participate with the EPO.The EPO generally does not cover services re-ceived from other providers, although theremay be exceptions.

Some EPOs parallel HMOs in that they notonly require exclusive use of the EPO provider

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network but also use a gatekeeper approach toauthorizing non–primary care services. Inthese cases, the primary difference betweenan HMO and an EPO is that the former is regu-lated under HMO laws and regulations, whereasthe latter is regulated under insurance lawsand regulations or the Employee RetirementIncome Security Act (ERISA; see Chapter 31) inthe case of self-funded plans. Most EPOs areactually offered by PPOs, not HMOs.

EPOs usually are implemented by em-ployers whose primary motivation is costsaving. These employers are less concernedabout the reaction of their employees tosevere restrictions on the choice of healthcare provider and offer the EPO as a re-placement for traditional indemnity healthinsurance coverage. Because of the severerestrictions on provider choice, only a fewlarge employers have been willing to con-vert their entire health benefits programs toan EPO format. When EPOs originally sur-faced as a form of health coverage, some


observers predicted that they were the waveof the future and would be adopted by manylarge employers. In reality, some of thosewho established EPOs have abandonedthem in favor of insurance vehicles that of-fer more choice to beneficiaries. In anycase, although the number of PPOs that of-fer an EPO option to employers has grown,the actual number of individuals enrolled inEPOs has been declining.

Point-of-Service Plans

POS plans essentially combine an HMO orHMO-like health plan with indemnity (or ser-vice plan) coverage for care received outsideof the HMO. Once touted as yet another waveof the future, they grew in the mid-1990sonly to decline in popularity as their hoped-for cost savings failed to materialize. Thereare two ways in which POS plans were orga-nized, depending on the vehicle to providethe HMO or HMO-like services.

Table 2–1 PPO Ownership Models—2004

Number of Eligible Percentage of Number ofType of Owner Employees (millions) Eligible Employees PPOs

Employer/employer coalition 0.3 0.3 4

HMO 2.4 2.2 60

Hospital 0.3 0.3 6

Hospital alliance 5.0 4.7 55

Independent investor 43.6 40.4 59

Insurance company 51.7 47.9 415

Multiownership 2.0 1.9 34

Physician/hospital joint venture 1.4 1.3 15

Physician/medical group 0.5 0.5 7

Third-party administrator 0.6 0.6 6

Other 0.08 0.1 5

Total 107.9 100% 666

Source: Sanofi-Aventis Managed Care Digest Series. HMO-PPO/Medicare-Medicaid Digest 2005. Availableat: http://www.managedcaredigest.com.

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Primary Care Preferred ProviderOrganizations

These types of POS plans are hybrids ofmore traditional HMO and PPO models,though they are licensed as PPOs.

The following are characteristics of thesetypes of plans:

• Primary care physicians may be reim-bursed through capitation payments (ie,a fixed payment per member permonth) or other performance-based re-imbursement methods (see Chapters 6and 8).

• There may be an amount withheld fromphysician compensation that is paidcontingent upon achievement of utiliza-tion or cost targets. Some states restrictthe ability of managed care organiza-tions to establish withholds, and theyhave become less common over time.

• The primary care physician acts as agatekeeper for referral and institutionalmedical services.

• The member retains some coverage forservices rendered that either are not au-thorized by the primary care physician orare delivered by nonparticipating pro-viders. Such coverage is typically signifi-cantly lower than coverage for authorizedservices delivered by participating pro-viders is (eg, 100% compared to 60%).

Point-of-Service Health MaintenanceOrganizations

As POS plans grew, some HMOs recognizedthat the major impediment to enrolling addi-tional members and expanding market sharewas the reluctance of individuals to forfeitcompletely their ability to receive reimburse-ment for using nonparticipating providers.These individuals consider the possibility thatthey would need the services of a renownedspecialist for a rare (and expensive to treat)disorder and believe that the HMO would notrefer them for care or reimburse their ex-penses. This possibility, no matter how un-


likely, overshadows all the other benefits ofHMO coverage in the minds of many individu-als. It also precluded most employers fromlimiting health benefit choice to a single HMO.

A number of HMOs (and insurance carrierswith both HMOs and indemnity operations)adopted a solution to this problem: They pro-vide some level of indemnity-type coveragefor their members. HMO members coveredunder these types of benefit plans may decidewhether to use HMO benefits or indemnity-style benefits for each instance of care. Inother words, the member is allowed to makea coverage choice at the point of service whenmedical care is needed.

The indemnity coverage available underpoint-of-service options from HMOs typicallyincorporates high deductibles and coinsur-ance to encourage members to use HMO ser-vices within network instead of out-of-planservices. Members who use the non-HMObenefit portion of the benefit plan may alsobe subject to utilization review (eg, preadmis-sion certification and continued stay review).

Health Maintenance Organizations

HMOs are organized health care systems thatare responsible for both the financing andthe delivery of a broad range of comprehen-sive health services to an enrolled popula-tion. The original definition of an HMO alsoincluded the aspect of financing health carefor a prepaid fixed fee (hence the term pre-paid health plan), but that portion of the defi-nition is no longer absolute, although it is stillcommon.

In many ways, an HMO can be viewed as acombination of a health insurer and a healthcare delivery management system. Whereastraditional health care insurance companiesare responsible for reimbursing covered indi-viduals for the cost of their health care,HMOs are responsible for providing or coor-dinating health care services to their coveredmembers through affiliated providers whoare reimbursed under various methods (seeChapters 6 and 7).

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As a result of their responsibility for provid-ing covered health services to their members,HMOs must ensure that their members haveaccess to covered health care services. In addi-tion, HMOs generally are responsible for en-suring the quality and appropriateness of thehealth services they provide to their members.

Health Maintenance Organization Models

The commonly recognized models of HMOsare staff, group, network, independent (or in-dividual) practice association (IPA), and di-rect contract. An additional model is theopen access plan, which has characteristicsof an HMO and a PPO. The major differencesamong these models pertain to the relation-ship between the HMO and its participatingphysicians. At one time, individual HMOscould be neatly categorized into a singlemodel type for descriptive purposes. Cur-rently, many (if not most) HMOs have differ-ent relationships with different groups ofphysicians. As a result, many HMOs cannoteasily be classified as a single model type, al-though such plans are occasionally referredto as mixed models. The HMO model typedescriptions now may be more appropriatelyused to describe an HMO’s relationship withcertain segments of its physicians.

The following paragraphs provide brief de-scriptions of the five traditional HMO modeltypes, followed by a brief description of theopen access model.

Staff ModelIn a staff model HMO, the physicians whoserve the HMO’s covered beneficiaries areemployed by the HMO. These physicians typ-ically are paid on a salary basis and may alsoreceive bonus or incentive payments that arebased on their performance and productivity.Staff model HMOs must employ physiciansin all the most common specialties to providefor the health care needs of their members.These HMOs often contract with selectedsubspecialists in the community for infre-quently needed health services.


Staff model HMOs may also be known asclosed panel HMOs because most participat-ing physicians are employees of the HMO,and community physicians are unable to par-ticipate. There have been many well-knownexamples of staff model HMOs in the past,but most of them have since shed the physician components. Examples includedHarvard-Pilgrim Health Plan (the physiciansbecame an independent medical group thatis no longer exclusive to Harvard-Pilgrim),Group Health Association of Washington, DC(no longer in existence), FHP (no longer inexistence), and others. In most cases, theseplans “spun off” the physician component asa private medical group, though initially sub-sidized by the HMO parent. The track recordsof these suddenly free-standing groups werenot always good, and some of them are nowgone. Those staff model HMOs that still existare incorporating other types of physician re-lationships into their delivery system. And al-though insurance companies that dabbled inthe creation of staff model systems (eg,Aetna’s Healthways) have abandoned them,some integrated delivery systems still use astaff model approach (for example, in theTwin Cities).

Physicians in staff model HMOs usuallypractice in one or more centralized ambula-tory care facilities. These facilities, which of-ten resemble outpatient clinics, containphysician offices and ancillary support facili-ties (eg, laboratory and radiology) to supportthe health care needs of the HMO’s benefi-ciaries. Staff model HMOs usually contractwith hospitals and other inpatient facilities inthe community to provide nonphysician ser-vices for their members.

Staff model HMOs have a theoretical ad-vantage relative to other HMO models inmanaging health care delivery because theyhave a greater degree of control over thepractice patterns of their physicians. As a re-sult, it can be easier for staff model HMOs tomanage and control the utilization of healthservices. They also offer the convenience ofone-stop shopping for their members be-

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cause the HMO’s facilities tend to be full ser-vice (ie, they have laboratory, radiology, andother departments).

Offsetting this advantage are several disad-vantages for staff model HMOs. First, staffmodel HMOs are usually more costly to de-velop and implement because of the smallmembership and the large fixed salary ex-penses the HMO must incur for staff physi-cians and support staff. Second, staff modelHMOs provide a limited choice of participat-ing physicians from which potential HMOmembers may select. Many potential mem-bers are reluctant to change from their currentphysician and find the idea of a clinic settinguncomfortable. Third, many staff model HMOsexperienced productivity problems with theirstaff physicians, which raised their costs forproviding care. For example, the former GroupHealth Association in Washington, DC wasforced to sell itself to Humana and convert to a group model plan partially because ofphysician productivity concerns; eventually,Humana in turn sold its entire DC plan toKaiser (a group model plan, not a staff model).Finally, it is expensive for staff model HMOs toexpand their services into new areas becauseof the need to construct new ambulatory carefacilities. These disadvantages have led tosteadily eroding presence in the market to thepoint where they are only present in a few lo-cations in the country.

Group ModelIn pure group model HMOs, the HMO con-tracts with a multispecialty physician grouppractice to provide all physician services tothe HMO’s members. The physicians in thegroup practice are employed by the grouppractice and not by the HMO. In some cases,these physicians may be allowed to see bothHMO patients and other patients, althoughtheir primary function may be to treat HMOmembers.

Physicians in a group practice share facili-ties, equipment, medical records, and sup-port staff. The group may contract with theHMO on an all-inclusive capitation basis to


provide physician services to HMO members.Alternatively, the group may contract on acost basis to provide its services, in whichcase it shares attributes of a staff model de-scribed earlier.

There are two broad categories of groupmodel HMOs as described in the followingsubsections.

Captive Group. In the captive group model,the physician group practice exists solely toprovide services to the HMO’s beneficiaries.In most cases, the HMO formed the grouppractice to serve its members and recruitedphysicians and now provides administrativeservices to the group. The most prominentexample of this type of HMO is the KaiserFoundation Health Plan, where the Perman-ente Medical Groups provide all physicianservices for Kaiser’s members. The KaiserFoundation Health Plan, as the licensedHMO, is responsible for marketing the bene-fit plans, enrolling members, collecting pre-mium payments, and performing other HMOfunctions. The Permanente Medical Groupsare responsible for rendering physician ser-vices to Kaiser’s members under an exclusivecontractual relationship with Kaiser. Kaiser issometimes mistakenly thought to be a staffmodel HMO because of the close relation-ship between it and the Permanente MedicalGroups. Although not the only example, Kaiseris clearly the most robust, particularly inCalifornia.

Independent Group. In the independentgroup model HMO, the HMO contracts withan existing, independent, multispecialtyphysician group to provide physician servicesto its members. In some cases, the indepen-dent physician group is the sponsor or ownerof the HMO. An example of the independentgroup model HMO is Geisinger Health Plan ofDanville, Pennsylvania. The Geisinger Clinic,which is a large, multispecialty physiciangroup practice, is the independent group as-sociated with the Geisinger Health Plan(though the health plan also contracts with

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independent physicians to ensure adequatecoverage of its entire service area).

Typically, the physician group in an in-dependent group model HMO continues toprovide services to non-HMO patients whileit participates in the HMO. Although thegroup may have an exclusive relationshipwith the HMO, this relationship usually doesnot prevent the group from engaging in non-HMO business. These types of group modelsmay or may not also contract with other, in-dependent physicians in the community tobroaden the network for marketing reasons.

Common Features of Group Models. Both typesof group model HMOs may also be referred toas closed panel HMOs because physiciansmust be members of the group practice toparticipate in the HMO; as a result, the HMOis considered closed to physicians who arenot part of the group. This may not necessar-ily be the case if the HMO also contracts withcommunity physicians, though that is mostlikely to occur when the medical group doesnot cover all parts of the service area.

Both types of group model HMOs sharethe advantages of staff model HMOs of mak-ing it somewhat easier to conduct utilizationmanagement because of the integration ofphysician practices and of providing broadservices at its facilities. In addition, grouppractice HMOs may have lower capital needsthan staff model HMOs do because the HMOitself does not have to support the large fixedsalary costs associated with staff physicians.Related to that, group model HMOs often re-port very low administrative costs becausesome of the activities of the HMO (eg, caremanagement) are done by the medical groupand not the HMO and are therefore consid-ered part of the medical expense, not an ad-ministrative expense.

Group model HMOs have several disadvan-tages in common with staff model HMOs.Like staff model HMOs, group model HMOsprovide a limited choice of participatingphysicians from which potential HMO mem-bers can select. The limited physician panelcan be a disadvantage in marketing the


HMO. The limited number of office locationsfor the participating medical groups may alsorestrict the geographic accessibility of physi-cians for the HMO’s members. The lack ofaccessibility can make it difficult for theHMO to market its coverage to a wide geo-graphic area. Finally, certain group practicesmay be perceived by some potential HMOmembers as offering an undesirable clinicsetting. Offsetting this disadvantage may bethe perception of high quality associatedwith many of the physician group practicesthat are affiliated with HMOs. These disad-vantages become less of a problem if themedical group(s) are quite large as is the casewith Kaiser Permanente in California.

Network ModelIn network model HMOs, the HMO contractswith more than one group practice to providephysician services to the HMO’s members.These group practices may be broad-based,multispecialty groups, in which case theHMO resembles the group practice model de-scribed earlier. An example of this type ofHMO is Health Insurance Plan (HIP) ofGreater New York,* which contracts withmany multispecialty physician group prac-tices in the New York area. Network modelsalso predominate in California where thereare a number of existing large medicalgroups, unlike most other parts of the coun-try where groups tend to be smaller.

Alternatively, the HMO may contract withseveral small groups of primary care phy-sicians (ie, family practice, internal medi-cine, pediatrics, and obstetrics/gynecology),in which case the HMO can be classified as aprimary care network model. In the primarycare network model, the HMO contracts withseveral groups consisting of 7 to 15 primarycare physicians representing the specialties offamily practice and/or internal medicine, pe-diatrics, and obstetrics/gynecology to provide

*In 2006, HIP merged with Group Health Inc., anon-Blue Cross Blue Shield service plan, thus hy-bridizing the model to a significant degree.

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physician services to its members. The HMOmay compensate these groups on an all-inclusive physician capitation basis or on apartial capitation basis, but rarely on a fee-for-service basis (see Chapter 6). The group is re-sponsible for providing all physician servicesto the HMO’s members assigned to the groupand may refer to other physicians as neces-sary. In the case of all-inclusive physician cap-itation, the group is financially responsible forreimbursing other physicians for any referralsit makes. In some cases, the HMO may nego-tiate participation arrangements with special-ist physicians to make it easier for its primarycare groups to manage their referrals.

In contrast to the staff and group modelHMOs described previously, network modelsmay be either closed or open panel plans. Ifthe network model HMO is a closed panelplan, it will only contract with a limited num-ber of existing group practices. If it is anopen panel plan, participation in the grouppractices will be open to any physician whomeets the HMO’s and group’s credentials cri-teria. In some cases, network model HMOswill assist independent primary care physi-cians with the formation of primary caregroups for the sole purpose of participatingin the HMO’s network.

Network model HMOs address many of thedisadvantages associated with staff and groupmodel HMOs. In particular, the broader phy-sician participation that is usually identifiedwith network model HMOs helps overcomethe marketing disadvantage associated withthe closed panel staff and group model plans.Nevertheless, network model HMOs usuallyhave more limited physician participation thaneither Independent Practice Association (IPA)model or direct contract model plans do if forno other reason than the fact that there aresimply not that many large medical groups.

Independent (or Individual) Practice Association ModelIndependent (or individual) practice associa-tion (IPA) model HMOs contract with an asso-ciation of physicians—the IPA—to providephysician services to their members. The


physicians are members of the IPA, which isa separate legal entity, but they remain inde-pendent practitioners and retain their sepa-rate offices and identities. IPA physicianscontinue to see their non-HMO patients andmaintain their own offices, medical records,and support staff. IPA model HMOs are openpanel plans because participation is open toall community physicians who meet theHMO’s and IPA’s selection criteria.

Generally, IPAs attempt to recruit physi-cians from all specialties to participate intheir plans. Broad participation of physiciansallows the IPA to provide all necessary physi-cian services through participating physiciansand minimizes the need for IPA physicians torefer HMO members to nonparticipating phy-sicians to obtain services. In addition, broadphysician participation can help make the IPAmodel HMO more attractive to potential HMOmembers.

IPA model HMOs usually follow one of twodifferent methods of establishing relation-ships with their IPAs. In the first method, theHMO contracts with an IPA that has been in-dependently established by communityphysicians. These types of IPAs often havecontracts with more than one HMO on anonexclusive basis. In the second method,the HMO works with community physiciansto create an IPA and to recruit physicians toparticipate in it. The HMO’s contract withthese types of IPAs is usually on an exclusivebasis because of the HMO’s leading role informing the IPA.

IPAs may be formed as large community-wide entities where physicians can partici-pate without regard to the hospital withwhich they are affiliated. Alternatively, IPAsmay be hospital-based and formed so thatonly physicians from one or two hospitals areeligible to participate in the IPA.

Most, though not all HMOs, compensatetheir IPAs on an all-inclusive physician capita-tion basis to provide services to the HMO’smembers. The IPA then compensates its par-ticipating physicians on either a fee-for-servicebasis or a combination of fee-for-service andcapitation. In the fee-for-service variation,

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IPAs pay all their participating physicians on the basis of a fee schedule, and the IPAwithholds a portion of each payment for in-centive and risk-sharing purposes.

Under the primary care capitation ap-proach, IPAs pay their participating primarycare physicians on a capitation basis andpay their specialist physicians on the basis of a fee schedule. The IPA may withhold aportion of both the capitation and fee-for-service payments for risk-sharing and incen-tive purposes.

IPA model HMOs overcome the disadvan-tages associated with staff, group, and net-work model HMOs. They require less capitalto establish and operate. In addition, theycan provide a broad choice of participatingphysicians who practice in their private of-fices. As a result, IPA model HMOs offer mar-keting advantages in comparison to the staffand group model plans.

There are two major disadvantages of IPAmodel HMOs from the HMO’s perspective.First, the development of an IPA creates anorganized forum for physicians to negotiateas a group with the HMO. The organized fo-rum of an IPA can help its physician mem-bers achieve some of the negotiating benefitsof belonging to a group practice. Unlike thesituation with a group practice, however, indi-vidual members of an IPA retain their abilityto negotiate and contract directly with man-aged care plans. Because of their acceptanceof combined risk through capitation pay-ments, IPAs are generally immune from an-titrust restrictions on group activities byphysicians as long as they do not prevent orprohibit their member physicians from par-ticipating directly with an HMO.

Second, the process of utilization manage-ment can be more difficult in an IPA modelHMO than it is in staff and group modelplans because physicians remain individualpractitioners with little sense of being a partof the HMO. As a result, IPA model HMOsmay devote more administrative resources tomanaging inpatient and outpatient utilizationthan their staff and group model counter-parts do. Notwithstanding this historical dis-


advantage, many IPA model HMOs haveovercome the challenge and succeeded inmanaging utilization at least as well as theirclosed panel counterparts.

Direct Contract ModelAs the name implies, direct contract modelHMOs contract directly with individual physi-cians to provide physician services to theirmembers. With the exception of their directcontractual relationship with participatingphysicians, direct contract model HMOs aresimilar to IPA model plans. Direct contractingis the most common type of HMO model.

It is also common for this type of modelalso to be referred to as an IPA, despite thelack of the legal entity of an IPA. It is not theintent of this chapter, or this book, to prose-lytize purity of terminology. If individualswish to refer to this as an IPA, that’s theirbusiness. But the reader should be aware ofthe differences because the presence or ab-sence of an actual IPA has an effect on theHMO and its management needs.

Direct contract model HMOs attempt to re-cruit broad panels of community physiciansto provide physician services as participatingproviders. These HMOs usually recruit bothprimary care and specialist physicians andtypically use a primary care case manage-ment approach (also known as a gatekeepersystem).

Like IPA model plans, direct contractmodel HMOs compensate their physicianson either a fee-for-service basis or a primarycare capitation basis. Primary care capitationhistorically was more commonly used by di-rect contract model HMOs because it helpslimit the financial risk assumed by theHMO.* Unlike IPA model HMOs, direct con-

*As is noted in Chapter 6, many health planshave moved away from primary care capitation inrecent years. Although there are several reasonsfor this change, one of the most compelling rea-sons has been the need to get accurate encounterreporting from physicians for quality measure-ment purposes; fee-for-service reimbursement fa-cilitates such reporting.

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tract model HMOs retain most of the finan-cial risk for providing physician services; IPAmodel plans transfer this risk to their IPAs.

Direct contract model HMOs have most ofthe same advantages as IPA model HMOs. Inaddition, direct model HMOs eliminate thepotential of a physician bargaining unit bycontracting directly with individual physi-cians. This contracting model reduces thepossibility of mass termination of physicianparticipation agreements.

Direct contract model HMOs have severaldisadvantages. First, the HMO may assumeadditional financial risk for physician servicesrelative to an IPA model HMO, as noted ear-lier. This additional risk exposure can be ex-pensive if primary care physicians generateexcessive referrals to specialist physicians.

Second, it can be more difficult and time-consuming for a direct contract model HMOto recruit physicians and manage the networkbecause it lacks the physician leadership in-herent in an IPA model plan. It is more diffi-cult for nonphysicians to recruit physicians, asseveral direct contract model HMOs discov-ered in their attempts to expand into newmarkets. This disadvantage is now primarilyof historical interest only because there is littleor no new HMO market expansion anymore.

Finally, utilization management may bemore difficult in direct contract model HMOsbecause all contact with physicians is on anindividual basis and there may be little incen-tive for physicians to participate in the utiliza-tion management programs.

Mixed ModelAs the term describes, many HMOs or MCOsare actually mixes of different model types. Itis far more common for closed panel types ofMCOs to add open panel components totheir health plan than the reverse, but thereare examples of large open panel HMOsadding a staff model component through acontract with an IDS, for example.

Open Access HMOThe oxymoronic term open access HMO is anHMO that does not use a PCP or “gatekeeper”


approach to managing access and utilization.In other words, though licensed as an HMO,there is no requirement at all to go through aPCP to access a specialist. It is common forthe copayment to be different (ie, lower tosee a PCP, higher to see a specialist), andthere may be other mild economic incentivesto use PCPs preferentially, but it is notrequired.

In this regard, they bear some resem-blance to PPOs, except that a PPO may notdifferentiate copayment or co-insurancebased on specialty type, though many cer-tainly do. Open access plans may also putthe physicians at some level of financial riskfor medical costs, as discussed in Chapter 6.Last, these types of plans reportedly dependheavily on their ability to create meaningfulphysician practice profiles to allow medicalmanagers to focus on problem areas (seeChapter 16).

Open access HMOs are not as common asPCP-based HMOs. Many were created andthen failed in the 1970s and 1980s. How-ever, new ones appeared in the late 1990sand appear to be reasonably successful. It isfair to say that the environment that physi-cians practice in at the present is substan-tially different from that of 1980, but it isnot clear if that is the reason these newopen access plans appear to be succeeding.Nevertheless, by the early-2000s, most HMOsthat were going to become open access haddone so.

Self-Insured and Experience-RatedHealth Maintenance Organizations

Historically, HMOs offered community-ratedpremiums to all employers and individualswho enrolled for HMO coverage. The federalHMO Act (no longer in force) originally man-dated community rating for all HMOs thatdecided to pursue federal qualification. Manystates had similar requirements.

Community rating was eventually ex-panded to include rating by class, where pre-mium rates for an individual employer groupcould be adjusted prospectively on the basis

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of demographic characteristics that wereassociated with utilization differences. Suchcharacteristics often included the age andsex distributions of the employer’s workforceand the standard industrial classification ofthe employer.

Although community rating by class pro-vided HMOs with some flexibility to offermore attractive rates to selected employergroups, many employers continued to be-lieve that their group-specific experiencewould be better than the rates offered byHMOs. Some HMOs developed self-insuredor experience-rated options in response tothe needs expressed by these employers.

Under a typical self-insured benefit option,an HMO receives a fixed monthly payment tocover administrative services (and profit) andvariable payments that are based on the ac-tual or incurred expenses made by the HMOfor health services. There is usually a settle-ment process at the end of a specified period,during which a final payment is calculated (ei-ther to the HMO by the employer or to theemployer by the HMO). Variations in the pay-ment arrangement exist and are similar instructure to the different forms of self-fundedinsurance programs.

Under experience-rated benefit options, anHMO receives monthly premium paymentsmuch as it would under traditional premium-based plans. There typically is a settlementprocess where the employer is credited withsome portion (or all) of the actual utilizationand cost of its group to arrive at a final pre-mium rate. Refunds or additional paymentsare then calculated and made to the appro-priate party.

The HMO regulations of some states pre-clude HMOs from offering self-insured or ex-perience-rated benefit plans. HMOs avoidthese prohibitions by incorporating relatedcorporate entities that use the HMO’s negoti-ated provider agreements, management sys-tems, utilization protocols, and personnel toservice the self-insured line of business.

Rating methodologies are discussed inChapter 25.


CONSUMER-DIRECTED HEALTH PLANS

CDHPs combine a high-deductible insuranceplan with some form of pre-tax savings ac-count. They are often associated with a PPOnetwork as well. At its most basic, healthcare costs are paid first from the pre-tax ac-count and when that is exhausted, any addi-tional costs up to the deductible are paidout-of-pocket by the member (this gap issometimes referred to as a bridge or, lesscharitably, as a doughnut hole). Preventiveservices are usually covered outside of thissystem, however. The definition of preven-tive services is not uniform among plansponsors. Any funds left over in the savingsaccount may roll over to be used in followingyears as needed.

There are two basic forms of CDHPs: com-mercial CDHPs that use Health Reimburse-ment Accounts (HRAs) and plans associatedwith Health Savings Accounts (HSAs). HSAswere created as part of the MedicareModernization Act and are a more rigid formof CDHP in how they are constructed, withguidance provided by the Treasury Depart-ment (because the HSA is funded with pre-tax dollars), including such definitions aswhat constitutes preventive care. Commer-cial CDHPs and their associated HRAs arealso subject to Treasury Department regula-tion, but that applies only to the HRA itself,while the plan design is otherwise more flexi-ble, subject to state insurance regulations or,in the case of self-funded business underERISA (see Chapter 31), the Labor Depart-ment. As a practical matter, the differencesare not especially important to understand-ing the basics of CDHPs for purposes of thisoverview.

An example of a simplistic schematic of aCDHP is illustrated in Figure 2–2.

CDHPs are not considered managed healthcare plans by some who consider them asmore akin to simpler indemnity-type insur-ance plans from the past. This is because ofthe presence of a high-deductible health in-surance policy as the primary product, with

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new benefits in the form of preventive ser-vices combined with new pre-tax fund-ing mechanisms for at least a portion of thecosts. Furthermore, one of the primary ten-ets behind CDHPs is that the consumer hasbecome shielded by traditional managedcare plans as to how much health reallycosts; in other words, consumers have cometo believe that an office visit really onlycosts $10 or that a sophisticated diagnostictest only costs $20. The CDHP is thereforeconstructed to make cost a factor in con-sumer decision making through the use ofboth the pre-tax fund and the bridge, withthe CDHP providing information to con-sumers to help them make decisions basedon cost and quality of services. Becauseconsumerism and aspects of CDHPs are dis-cussed in greater detail in Chapter 20, themethod of providing that information willnot be discussed here.

Consumer-Directed Health Plans 35

CDHPs have not entirely shed all aspectsof managed health care, however. Most areassociated with a PPO to provide the value ofthe negotiated discount to the consumer.From the provider viewpoint, this is a mixedblessing at best because providers may findthat it is difficult to collect all of the moneyowed to them when they must bill the mem-ber directly. Integrating the functions of theHRAs or HSAs through debit cards, and evenfinding ways of providing a credit facility soas to improve the provider’s ability to collectwhat it is due, is a major focus of effort at thetime of publication and is discussed furtherin Chapter 20.

Simply integrating with an existing PPO isthe most common but not the only aspect ofmanaged care that CDHPs retain. Integrationof medical management into the new plandesigns remains an evolving aspect as well,particularly with CDHPs offered by the larger

100% after out-of-pocket maximum

In-network insurance90% / 10%

Out-ofnetwork

insurance70% / 30%

Member responsibility “insurance gap”(also known as “bridge” or “doughnut hole”)

(example $500)

HRA/HSA Funded(Example $1,000)

Preventive S

ervices–100%

AnnualInsurance

Deductible

Figure 2–2 Example of Basic Construct of a CDHP

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and more established companies. Diseasemanagement (DM; see Chapter 10) and casemanagement (CM; see Chapter 11) are mostfrequently applied because a small propor-tion of the population accounts for a dispro-portionately high percentage of medicalcosts. In those cases, medical costs canquickly move past the pre-tax fund and thebridge and trigger the high-deductible insur-ance, where focus on managing chronic dis-ease is exactly the same as it is for any othertype of managed health care plan. Havingsaid that, how a CDHP applies DM in theearly stages of a chronic disease, when costsare still applicable to the pre-tax fund and thebridge, is still evolving.

INTEGRATED HEALTH CARE DELIVERY SYSTEMS*

There are myriad types of IDSs, and some ofthe more common forms are discussedbriefly in this chapter. At the very least, anIDS represents providers coming together insome type of legal structure for purposes ofmanaging health care and contracting withhealth plans such as HMOs, PPOs, or healthinsurance companies. The IPA as discussedearlier is an IDS, and some IDSs combine dif-ferent types of providers as well. The com-mon denominator, however, is the physician;many types of organizations can exist inhealth care for purposes of managing healthcare and contracting with health plans thatdo not involve physicians (eg, a multifacilityhospital system with affiliated ancillary ser-vices), but unless there is a significant physi-cian component (specifically, physicians otherthan the paid hospital staff), it would not beconsidered an IDS.


Although neither this chapter nor this bookfocus on creating and operating an IDS, it isworthwhile to have at least a passing ac-quaintance with them. The most commonIDSs are briefly described as follows.

Independent Practice Association

IPAs have been discussed earlier and that dis-cussion will not be repeated here.

Physician Practice Management Companies

Physician practice management companies(PPMCs) arrived on the integration scene inthe mid-1990s. PPMCs may in some ways beviewed as variants in management servicesorganizations, but unlike the MSO, PPMCsare physician only. In other words, there is noinvolvement by the hospital. PPMCs wereusually publicly traded companies as well,placing great pressure on the need to reportpositive earnings.

Most major PPMCs have failed—either go-ing through bankruptcy or exiting the bus-iness altogether, though a few do remain inexistence. Several reasons contributed totheir failure. One common problem was de-creased productivity because the PPMCspurchased physician practices only to findthat once the physician had “cashed out” hisor her practice, there was no longer suffi-cient incentive for the physician to be highlyproductive. PPMCs also found that there wasin fact little profit margin to be had in prac-tices in which the primary cost was for com-pensation, despite small improvements inpractice overhead costs as a result of econo-mies of scale. Last, many PPMCs enteredinto full-risk capitation arrangements withHMOs and found themselves unable tomanage them profitably. Since the failuresof the late 1990s, there has been little PPMCactivity other than some specialty PPMCsthat are part of an approach to highly spe-cialized care management (eg, pediatric in-tensive care.

*Portions of this section were adapted fromChapter 4: “Integrated Health Care DeliverySystems,” by Peter R. Kongstvedt, David W.Plocher, and Jean Stanford. The Managed HealthCare Handbook, 4th ed. New York, NY: AspenPublishers, 2000.

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Group Practice Without Walls

The group practice without walls (GPWW),also known as the clinic without walls, is astep toward greater integration of physicianservices. The GPWW does not require theparticipation of a hospital and, indeed, is of-ten formed as a vehicle for physicians toorganize without being dependent on a hos-pital for services or support. In some cases,GPWW formation has occurred to leveragenegotiating strength not only with MCOs butwith hospitals as well.

The GPWW is composed of private prac-tice physicians who agree to aggregate theirpractices into a single legal entity, but thephysicians continue to practice medicine intheir independent locations. In other words,the physicians appear to be independentfrom the view of their patients, but from theview of a contracting entity (usually an MCO)they are a single group. This is differentiatedfrom the for-profit, physician-only MSOs de-scribed later by two salient features: first, theGPWW is owned solely by the memberphysicians and not by any outside investors,and second, the GPWW is a legal merging ofall assets of the physicians’ practices ratherthan the acquisition of only the tangible as-sets (as is often the case in an MSO).

To be considered a medical group, thephysicians must have their personal incomeaffected by the performance of the group asa whole. Although an IPA will place a definedportion of a physician’s income at risk (thatportion related to the managed care contractheld by the IPA), the group’s income fromany source has an effect on the physician’sincome and on profit sharing in the group;that being said, it is common in this modelfor an individual physician’s income to be af-fected most by individual productivity.

The GPWW is owned by the memberphysicians, and governance is by the physi-cians. The GPWW may contract with an out-side organization to provide business supportservices. Office support services are gener-ally provided through the group, although as

Integrated Health Care Delivery Systems 37

a practical matter the practicing physiciansmay notice little difference in what they areused to receiving.

The GPWW model continues to exist inmarkets with a sufficient amount of full-riskcapitation or other strongly managed healthcare. Full-risk capitation may still represent asignificant amount of revenue in such mar-kets, but even when capitation is for the di-rect services only, the GPWW can potentiallyachieve enhanced revenues through pay-for-performance programs which will be dis-cussed further in Chapter 8. Outside of suchmarkets, however, the GPWW model is muchless common.

Physician-Hospital Organizations

The physician-hospital organization (PHO) isan entity that, at a minimum, allows a hospi-tal and its physicians to negotiate with third-party payers. PHOs may do little more thanprovide for such a negotiating vehicle, al-though this could raise the risk of antitrust.PHOs may actively manage the relationshipbetween the providers and MCOs, or theymay provide more services, to the pointwhere they may more aptly be consideredMSOs (see discussion later).

PHOs often formed as a reaction to marketforces from managed care. PHOs are consid-ered the easiest type of vertically integratedsystem to develop (although they are not ac-tually that easy, at least if done well). Theyalso are a vehicle to provide some integrationwhile preserving the independence and au-tonomy of the physicians.

By definition, a PHO requires the participa-tion of a hospital and at least some portion ofthe admitting physicians. In the mid-1990s,PHOs were formed primarily as a defensemechanism to deal with an increase in man-aged care contracting activity. Even then, itwas not uncommon for the same physicianswho join the PHO already to be under con-tract with one or more managed care plans.Since then, fewer PHOs were created, thoughexisting ones continue to operate.

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In its weakest form, the PHO is considereda messenger model. This means that the PHOanalyzes the terms and conditions offered byan MCO and transmits its analysis and thecontract to each physician, who then decideson an individual basis whether to participate.

In its simplest and more common version,the participating physicians and the hospitaldevelop model contract terms and reimburse-ment levels and use those terms to negotiatewith MCOs. The PHO usually has a limitedamount of time to negotiate the contract suc-cessfully (eg, 90 days). If that time limit passes,then the participating physicians are free tocontract directly with the MCO; if the PHO suc-cessfully reaches an agreement with the MCO,then the physicians agree to be bound bythose terms. The contract is still between thephysician and the MCO and between the hos-pital and the MCO. In some cases, the contractbetween the physicians and the MCO is rela-tively brief and may reference a contract be-tween the PHO and the MCO.

The reader should note that the “PO” por-tion of a PHO may be a different model en-tirely. As an example, a GPWW or an IPAcould represent the physician portion of thePHO, although most commonly the physi-cians remain independent and contract indi-vidually with the PHO.

One final note concerning PHOs and othertypes of physician organizations: the FederalTrade Commission (FTC) has toughened itsscrutiny of such organizations during the lastfew years. Physician organizations that arenot paid on a capitation basis, and that do notaccept substantial financial risk through someother mechanism, now find it much more dif-ficult to operate within the FTC’s antitrustsafety zone. Although it is beyond the scopeof this introductory chapter, those interestedin physician organizations are urged to con-sult with competent antitrust counsel duringthe formation and operational stages.*


Management Services Organizations

An MSO represents the evolution of the PHOinto an entity that provides more services tothe physicians. Not only does the MSO pro-vide a vehicle for negotiating with MCOs, butit also provides additional services to supportthe physicians’ practices. The physician, how-ever, usually remains an independent privatepractitioner. The MSO is based around one ormore hospitals.

In its simplest form, the MSO operates as aservice bureau, providing basic practice sup-port services to member physicians. Theseservices include such activities as billing andcollection, administrative support in certainareas, electronic data interchange (such aselectronic billing), and other services. Re-cently, existing MSOs are being consideredas excellent vehicles to provide the electronicbackbone for the electronic medical recordand other forms of electronic connectivity(see Chapter 17).

The physician can remain an independentpractitioner, under no legal obligation to usethe services of the hospital on an exclusivebasis. The MSO must receive compensationfrom the physician at fair market value, orthe hospital and physician could incur legalproblems. The MSO should, through econo-mies of scale as well as good management,be able to provide those services at a reason-able rate.

An MSO may also be considerably broaderin scope. In addition to providing all the ser-vices described earlier, the MSO may actuallypurchase many of the assets of the physi-cian’s practice; for example, the MSO maypurchase the physician’s office space or of-fice equipment (at fair market value). TheMSO can employ the office support staff ofthe physician as well. MSOs can further in-corporate functions such as quality manage-ment, utilization management (UM), providerrelations, member services, and even claimsprocessing in those markets where there issignificant full-risk capitation. This form ofMSO is usually constructed as a unique busi-ness entity, separate from a PHO.

*Interested readers may also want to review thefull FTC’s opinion in the Matter of North TexasSpecialty Physicians and other resources on thisrecent case.

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The MSO does not always have directcontracts with health plans for two reasons:many plans insist on having the provider bethe contracting agent, and many states willnot allow health plans (especially HMOs) tohave contracts with any entity that does nothave the power to bind the provider. Thephysician may remain an independent pri-vate practitioner under no contractual oblig-ation to use the hospital on an exclusivebasis.

Foundation Model

A foundation model IDS is one in which ahospital creates a not-for-profit foundationand actually purchases physicians’ practices(both tangible and intangible assets) and putsthose practices into the foundation. Thismodel usually occurs when, for some legalreason (eg, the hospital is a not-for-profit en-tity that cannot own a for-profit subsidiary, orthere is a state law against the corporatepractice of medicine), the hospital cannotemploy the physicians directly or use hospi-tal funds to purchase the practices directly. Itmust be noted that to qualify for and main-tain its not-for-profit status, the foundationmust prove that it provides substantial com-munity benefit.

A second form of foundation model doesnot involve a hospital. In that model, thefoundation is an entity that exists on its ownand contracts for services with a medicalgroup and a hospital. On a historical note, inthe early days of HMOs many open paneltypes of plans that were not formed as IPAswere formed as foundations; the foundationheld the HMO license and contracted withone or more IPAs and hospitals for services.

The foundation itself is governed by aboard that is not dominated by either thehospital or the physicians (in fact, physiciansmay represent no more than 20% of theboard) and includes lay members. The foun-dation owns and manages the practices, butthe physicians become members of a med-ical group that, in turn, has an exclusive con-tract for services with the foundation; in

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other words, the foundation is the onlysource of revenue to the medical group. Thephysicians have contracts with the medicalgroup that are long term and contain non-compete clauses.

Although the physicians are in an indepen-dent group, and the foundation is also inde-pendent from the hospital, the relationship infact is close among all members of the triad.The medical group, however, retains a signifi-cant measure of autonomy regarding its ownbusiness affairs, and the foundation has nocontrol over certain aspects, such as individ-ual physician compensation.

Provider-Sponsored Organization

Provider-sponsored organization (PSO) is aterm used to describe a cooperative ventureof a group of providers who control an inte-grated provider system engaged in both de-livery and financing of health care services.PSOs were part of the federal BalancedBudget Act of 1997 and were created so as toallow provider organizations to contract di-rectly with Medicare on an at-risk basis for allmedical services, bypassing existing Medi-care HMOs (called Medicare�Choice at thattime, and Medicare Advantage now) entirely.Though PSO activity was focused on theMedicare population, it could theoreticallyhave expanded to include commercial andMedicaid initiatives as well. As a grand ex-periment, however, it failed miserably.

Providers found to their detriment that tak-ing on full risk for the health care costs of theelderly involved more than taking the moneyand providing the services. In other words,“cutting out the middleman” in the form ofbypassing experienced Medicare HMOs wasa fast route to deep financial losses. Medicalcosts were made up of more than the ser-vices delivered by members of the PSO; con-siderable expense was also associated withcare delivered by non-PSO providers, med-ical technology costs, and so forth. Further-more, many PSOs tried to maintain existingfee-for-service reimbursement or otherwisefailed to spread the financial risk sufficiently.

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Last, PSOs found it difficult in many cases topractice the type of care management thatwas required to keep costs under control be-cause the providers themselves rebelled atsuch constraints.

The failure of so many PSOs when theywere first introduced meant that they essen-tially disappeared from the managed carelandscape. Medicare still has provisions forhow PSOs may accept risk for Medicaremembers, and it is possible that there maybe a cautious reappearance of them, particu-larly in light of the new acuity-based pre-mium payment being implemented (seeChapter 26).

CONCLUSION

Managed care is on a continuum, with anumber of plan types offering an array offeatures that vary in their abilities to bal-ance access to care, cost, quality control,benefit design, and flexibility, and the rise


and, evolution of integrated health care de-livery systems has paralleled the industry.During the last two decades, managed carehas gone from being a relatively small partof the health care system synonymous with“alternative delivery system” to being amainstream manner in which employer-insured individuals obtain their care. Man-aged care organizations will continue toevolve, with features from one type of planappearing in others and new features con-tinually being developed. As consolidationin the marketplace continues, it will blur thelines further. The recent appearance of newdesigns such as consumer-directed healthplans makes taxonomy an even greaterchallenge than it was before. And althoughthere is no one single definition of the termmanaged care that has endured in the pastor will survive into the future, the basictenets of managed health care will continueto evolve in pace with market demands andrequirements.

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