This Trend Note highlights some of the findings of California Managed Care Review 2001, a new report that was released last month. The California HealthCare Foundation commissioned this report to provide a variety of audiences with an objective analysis of market issues and trends and a set of data that will help inform future debates about health policy.
Copies of the report in PDF format can be downloaded at no cost from the Foundation's web site: http://www.chcf.org/view.cfm?section=Business%20Of%20Health%20Care&itemID=4321
Overview of Findings Below are some characteristics of the California market at the end of the 1990s and directions in which the market seems to be moving in 2001. The full report includes 72 pages of charts, data tables and analysis. 1. Risk avoidance. In what is called the California delegated model, it is common for health plans to transfer significant functions, including medical management and claims processing, to provider organizations along with the capitation payments. The HMO functions as a marketing organization. While such arrangements were common around the country by the mid-1990s, they existed on a much larger scale in California. That is still the case, but health plans, provider organizations, and employers are increasingly seeking to avoid risk.
In the late 1990s, physician groups found that they could easily lose money under capitation arrangements. That was especially true in a competitive environment where aggressive pricing or low increases in government program payments held down premium revenue (of which they received a percentage) but where medical costs were increasing rapidly.
Employers, seeking more predictability and stability for their health benefit costs, have shown increasing interest in health benefit plans that require additional cost-sharing by employees and in the still somewhat uncharted notion of defined contribution plans.
Health plans and hospitals also are trying to limit their exposure to risk. By 1999, several health plans were putting more emphasis on PPO plans and administration of self-funded employer group plans. Several hospital systems ended their global capitation HMO contracts in 1999 and 2000 and replaced those with arrangements in which they are paid per diem rates or by other methods. At the same time, some of the hospitals that started their own HMOs have decided to get out of that part of the insurance business.
2. Slower HMO enrollment. Enrollment in California HMOs grew steadily in the 1990s, increasing from about 15.9 million in 1995 to 20.6 million in 1999. All major lines of business - commercial, Medicare and Medicaid - grew as employers, seniors and federal and state governments embraced managed care as the solution to the increased cost of health care.
However, HMO enrollment has generally stopped growing in California (as well as other states) in 2000, reflecting changes in employer and consumer preferences and developments in the Medicare and Medi-Cal programs. After a period of low premium increases, employers are now facing several years of significantly higher increases and will be looking at their options. They are asking, "If the HMOs can't hold down utilization and costs, then what good are they?"
Enrollment in Medicare HMOs has leveled off and may even decline as more HMOs exit certain service areas or from the program entirely. In the case of Medi-Cal, HMO enrollment has declined as the overall number of Medi-Cal beneficiaries continues to drop. Many of these people may now be employed, but not necessarily in jobs that provide health benefits.
Some health plan companies have adapted well to these changes and offer a broad portfolio of products and plan designs, including self-insured PPO plans, to employers. Some other companies are still largely dependent on a single line of business or lack the different skill sets and infrastructure to succeed in a changing market.
3. Hospitals push back. As managed care plans gained economic strength in the 1990s, hospitals sought to compete through growth. There is a good deal of emphasis in California on gaining size in order to match the economic power of competitors or suppliers. Hospitals consolidated organizationally into a small number of systems. The concentration is strongest in northern California and in San Diego, less pronounced in the Los Angeles area.
Gaining size, while necessary, has usually been insufficient to enable California hospitals to achieve significant clinical integration. Still, their joint contracting strategies for managed care have enabled them to secure better payments and contract terms.
4. Physicians adrift. To participate in the delegated model, physicians formed a variety of organizations in the 1980s and 1990s. Some are closely integrated, with physicians pooling their assets and receiving salaries. Those organizations represent the physicians exclusively in all their managed care contracts. On the other hand, many organizations are much looser, made up of many individual clinics. They were formed largely to accept capitation contracts and give the doctors access to those patients.
In the last two years, there have been numerous reports of physician organizations going bankrupt, sometimes on a spectacular scale. Some of them were built on a financial model that now appears very shaky. New state standards for reserves and financial management will likely force some physician organizations to fold or combine with stronger groups.