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MARKETWATCHProvider Organizations At Risk: A Profile Of Major Risk-Bearing Intermediaries, 1999
Provider organizations have evolved to function as intermediaries between managed care plans and individual providers. These organizations assume much financial risk and care management responsibilities. We profile the characteristics of these organizations in markets across the country. The data, taken from a 1999 telephone survey of sixty-four entities in twenty markets and from interviews conducted during site visits to four markets, highlight the youth of many of these organizations, the large financial risk and functional responsibilities they bear, and the mixed views they hold about the health plans they contract with in terms of their willingness to delegate the authority, support, and collaboration that accompany risk. Policymakers need to evaluate what this means for oversight of managed care.
With the growth of managed care and market competition, a diverse set of largely provider affiliated organizations has emerged to mediate risk and care management responsibility between managed care organizations and individual providers.1 Emerging evidence shows that some of these organizations are under duress and that others have actually failed.2 Policymakers need to know more about the organizations that assume financial risk so that they can better gauge both the possible advantages and the potential risks that stem from this marketplace development and what they might do to encourage the former and protect against the latter. This paper provides a nationwide look at the characteristics of these organizations, the responsibilities they bear, and how they perceive their responsibilities and their future role in the arrangements they have assumed with health plans.
We present data from a 1999 survey of "intermediate entities" that hold large at-risk contracts with health maintenance organizations (HMOs). We surveyed HMOs nationwide to learn whether they had any arrangements with providers in which they contract through some other organization such as an independent practice association (IPA) or physician-hospital organization (PHO). Those that did were asked about any contracting involving global capitation, professional services capitation, or hospital capitation. Global capitation was defined as arrangements in which all or most of the risk for professional and hospital services is transferred to an entity that assumes that risk. Professional services capitation was defined as contracts with entities at risk for all or most professional services, including primary and specialty physician care and related professional care (such as specialty referrals, nonphysician providers, and related laboratory and radiology services). Hospital services capitation was defined as contracts with entities at risk specifically for hospital services, including arrangements covering all or most inpatient services for all or some of the plans’ enrollees. Surveyed plans with one or more of the above types of contracts were asked for contact information for the largest entities with which they contracted. The data from intermediate entities illustrate practices of major actors in the market and are not valid statistical estimates of prevailing practices nationwide. Because some plans were reluctant to provide contact information, citing the proprietary nature of the data, we obtained names from only thirty-three of ninety-one plans for which the information was relevant. However, we obtained names of eighty organizations, seventy-one of which were eligible and sixty-four of which completed the survey and represent sixty-five contracts.3 We were able to contact at least one intermediate entity in each of the twenty markets studied. Further, these entities tend to contract with others in the market: More than two-thirds had other contracts of this type, mostly with similar terms.4 All interviews were conducted between August 1999 and January 2000. The structured survey instrument captured information on the specific contract between the intermediate entity and the contracting health plan that provided the entity’s contact information. We also conducted three-day site visits to four of the twenty study markets between August and November 1999. The visits involved interviews with multiple stakeholders and placed major emphasis on the relationship between the health plan and intermediate intermediate entity and between the entity and the provider. However, we did not review financial reports or other sources of administrative data that might confirm or refute what the survey found.
Entities’ age and sponsorship. Intermediate entities of the type we surveyed usually are provider-sponsored organizations; those that weren’t noted a high degree of provider involvement in the legal entity (Exhibit 1  ). Eighty percent were provider sponsored, typically by a physician group, an integrated delivery system (IDS), or, less frequently, a PHO. For-profit private ownership or nonprofit status were about equally dominant, with few organizations being publicly traded. Consistent with the provider basis of the organizations, 64 percent of the surveyed entities said that they built their provider network around a particular provider system, although only 22 percent did so exclusively; 41 percent included other providers. When networks were built around particular provider systems, they most commonly included only a subset of system providers (39 percent, versus 25 percent that automatically included all system providers).
For the most part, intermediate entities were young, although about one-fifth were first established before 1970. Only 47 percent existed in 1990, and 21 percent were established in 1995 or later. More than half (56 percent) had undergone some changes in their structure since their formation. Nearly a quarter had operated under the current organizational structure for two years or less, and half for five years or less. The entities’ youth reflects their purpose and history. While the organizations typically perform multiple functions, 42 percent said that their most important rationale was risk-contracting. Across all entities, 67 percent said that they were formed to improve negotiating power or leverage with health plans. Seventy-eight percent said that their formation was intended to protect market share. Entities with goals related to negotiating and protection reported that they have realized those goals to some extent, although they were as likely to characterize the extent of their achievements as "moderate" as they were to call them "great." Intermediate entities with professional services risk contracts were more likely to be older and to have originally been formed to provide health care. They also were more likely to be located in California, which probably reflects both the greater maturity of the California market and the state’s statutory restrictions against entities’ bearing risk for services they do not provide.
Health system participation.
The surveyed entities accounted for 2.7 million persons in global risk contracts and 6.3 million under professional services risk contracts. This represents a substantial share of what we estimate to be the total covered lives in health plans. In the sixty markets from which our sample was drawn, we estimate that there were 8.2 million lives under global risk and 16.2 million in professional services risk contracts in 1999. Although a quarter of the intermediate entities in our survey refused to or could not provide annual operating revenue data, most appear relatively large (Exhibit 2
To gain some insight into organizational capacity to manage risk, we asked about management staffing, since having people on board with set responsibilities seemed a bare minimum that was feasible to ask about in a brief survey having other objectives. Our limited measures revealed that 91 percent of entities had a chief executive officer and 97 percent had a medical director, and that most had a chief financial officer (74 percent) and a chief information officer (65 percent). This indicates that the entities were established corporations with discrete managerial and financial functions.
Financial risk sharing.
The benefits covered under both global and professional services risk contracts were relatively comprehensive and consistent with the definitions used to identify them (Exhibit 3
Professional services risk contracts covered a narrower range of benefits (although wider than we expected). Under such contracts, organizations are typically at risk for physician visits for primary and specialty care both in and out of the hospital. Most were also at risk for in-and out-of-area emergency care. Somewhat more than half covered behavioral health care; only 17 percent were at risk for pharmaceuticals. While we expected that facility costs would not be included in these contracts on a risk basis, one-third of the entities said that acute inpatient facility charges were included, and about the same share said that they covered skilled nursing and home health care. It is possible that these terms involve limited risk as a means of providing some incentives for entities to encourage cost-consciousness among providers. We also asked organizations whether the reference contract that led to their selection included any sharing of risk between the intermediate entity and the health plan for enrollees’ hospital or institutional expenses. Sixty-one percent said yes. Most typically, risk for hospital services was split with the health plan on a fixed percentage basis, usually half and half. Consistent with the more limited risk, organizations under a professional services contract were paid a lower share of the premium (most commonly 25–49 percent, with a median of 40 percent). At the same time, professional services contracts were less likely to include provisions to limit risk further, with just under a third using none of the risk limit forms discussed in our survey. To provide contracted-for benefits, intermediate entities with risk contracts established provider networks. Size varied from a low of 55 to a high of 6,500 physicians, with a median of 500 and mean of 1,105. On average, networks had about two-fifths to one-half fewer primary care physicians as specialists (the ratio between the two is 0.46). While the most common arrangements were with individual physicians or small groups of physicians (including salaried staff physicians), 59 percent contracted with large physician groups, 38 percent with an IPA, and 27 percent with a PHO or IDS. Thus, the intermediate entity often was not the final link to all of the individual providers in its network but rather the source of a contract with an additional intermediate entity layer. Capitation was the most common form of payment to individual primary care physicians in 69 percent of global risk organizations and 50 percent of professional risk organizations; salaried arrangements were relatively common, particularly among professional risk organizations (36 percent). Specialists, however, were typically paid fee-for-service in both types of arrangements. Although this paper focuses on commercial risk-sharing contracts, we also identified the use of Medicare risk-sharing contracts. Of the reference contracts used for the surveyed entities, 23 percent covered only the traditional HMO product, 14 percent Medicare only, and 62 percent both. For the most part, entities that had both commercial and Medicare contracts used the same provider networks and were similarly structured. Where there were differences, they tended to reflect unique features of the Medicare program. In addition, when practices diverged by line of business, Medicare networks tended to be smaller.
Responsibilities delegated.
Under both global and professional services risk contracts, the health plan delegated considerable responsibility to the intermediate entity (Exhibit 4
Some of our findings proved to be counterintuitive. Although we expected more delegation of responsibility under global rather than professional services risk contracts, the opposite was true. Perhaps some plans, in return for sharing greater risk, seek to impose additional conditions by delegating less. The finding probably also reflects the professional services risk contracts in the mature California market with established physician groups. The other disparity involves the large share of entities noting delegated responsibility for quality assurance. This finding, which conflicts with the health plan data from our study showing that the responsibility for quality assurance was less prevalent, may reflect shared responsibility and the different way that health plans and intermediate entities perceive it or portray their arrangements to the outside world, including regulatory and accrediting bodies.5 Satisfaction with referring contracts. The evolving relationships between HMOs and their providers, especially those on which HMOs rely heavily, are likely to be important to the future viability and performance of managed care. To develop a better understanding of these relationships and their implications, we asked entities about perceived adequacy of payments, about perceived adequacy of other important dimensions of the relationship, and about any likely future change in the relationship with the reference plan that led to their selection.
In terms of payment, fewer than 5 percent of entities said that payments were "adequate." Most commonly, respondents characterized payments as "somewhat adequate" rather than "not adequate." By contrast, the entities showed great variation in their perceptions of the adequacy of other major arrangements with the referring health plan. We initiated the study with the premise that delegation of risk and responsibility need to be commensurate with one another and that the relationship between health plans and intermediate entities is important to how well managed care works. Accordingly, we asked each entity to rate the adequacy of its arrangements with the referring health plan on a ten-point scale where 10 means "very adequate" and 1 means "not adequate" (Exhibit 5
Perceptions varied widely for each of the four aspects. Slightly more than half of entities gave top scores to adequacy of authority. Fewer entities had a similarly positive view of other aspects of the relationship: 33 percent scored support and collaboration at 8 or higher, 24 percent scored delivery of covered lives at 8 or higher, and 22 percent scored support for patient management at 8 or higher. Given that our survey, to the best of our knowledge, is the first to ask questions about the HMO/provider entity relationship, the appropriate benchmark is not immediately apparent. If we assume that a score of 4 or below indicates great dissatisfaction, then 31 percent were greatly dissatisfied with the referring plan’s support and collaboration, 27 percent felt similarly about the plan’s ability to deliver projected covered lives, 25 percent felt that way about support for patient management, and 20 percent were displeased by the delegation of sufficient authority to match risk. To determine what contributes to dissatisfaction, we made inquiries of plans that gave low scores to the various aspects of the relationship. The responses seem to suggest that problems occur when risk is shared in the absence of equivalent authority and support, when communications are poor or lacking, when entities perceive that health plans provide little value added in return, when clinical issues are not addressed by medical staff, when relationships between plans and entities are adversarial rather than collaborative, when system infrastructure is weak and data are absent or of poor quality, and when turnover and other organizational changes in the health plan divert attention from operational issues.7 The same themes appear to cut across at least three of the four dimensions queried. The fourth dimension—concern about whether the plan is marketing its product(s) to provide enough covered lives—may be measuring a more distinct concept that is tied to differences between planning forecasts and experience. Even here, poor communication, lack of data, and the absence of cooperation seem to underlie many problems as entities described them. Clearly, more study is needed. Although perceptions varied, most intermediate entities seemed fixed on a path that will support continuation of the current contracting arrangement. More than half said that they were likely to continue with the traditional contract, and nearly a third said that they probably would do so. The results provide little evidence of a wholesale flight from today’s dominant arrangements, although there may be some reduction in the amount of risk some entities bear. Twenty-two percent (24 percent of global risk entities and 19 percent of professional services risk entities) said that capitation arrangements with the health plan were likely to change; 60 percent expected that the change would result in about the same scope and amount of risk as the current contract; and 9 percent expected more risk and 29 percent less. Only 22 percent of organizations expected less future business with the plan. Mean satisfaction scores were higher, on average, for entities certain that they would continue their contracts, those that expected capitation arrangements to stay the same, and those that expected to keep the same or more risk and also the same or more business with the plan (data not shown). The survey provides no evidence that intermediate entities with contracts covering both commercial and Medicare lines of business view Medicare payments as more or less adequate than those for commercial plans, although Medicare perceptions tended to be more intense (in both directions). Entities were also slightly less likely to say that they would definitely or probably continue their Medicare versus their commercial contract (81 compared with 87 percent). Most strikingly, seven of the eight plans that said no to continuing the Medicare contract said a definite "no," whereas entities were about evenly split between those definitely and probably not planning to continue their contract for commercial products.8 Lack of direct contracting with purchasers. We found little evidence that the organizations are likely to enter into direct contractual arrangements with purchasers (such as employers and unions). Some private payers, including the Minneapolis based Minneapolis based Buyers Health Care Action Group (BHCAG), have promoted such contracting. Congress also encouraged it for Medicare+ Choice plans under the Balanced Budget Act (BBA) of 1997. While 31 percent of the entities in our survey operated with direct contracts, just under half of them said that they bear any risk in these arrangements. Thus, only slightly more than 10 percent of the entities surveyed contracted directly with purchasers on a risk basis. The number of covered lives in these arrangements was small; they ranged from 2,000 to 50,000 and totaled 129,600, a figure far smaller than the risk based enrollment associated with health plans. Asked the reasons for entering into direct contracting arrangements, all seven respondents agreed that it gave them the opportunity to manage care and to retain the generated savings. Six also said that it keeps health plans from exercising complete control. Few said that they entered into such arrangements because they were required to do so or because they were explicitly organized to assume the associated risk. Among intermediate entities, 86 percent envisioned entering into more risk-based contracting in the future through health plans rather than directly with purchasers (12 percent, with one entity not sure). And while half had considered the Medicare provider-sponsored organization (PSO) option, none had applied and only one was in the process of developing an application. Barriers to the PSO option include Medicare’s administrative requirements, which provide little advantage over a pure HMO product, as well as concerns related to the perceived ability to manage risk, the potential for adverse selection, the market viability of the product, and fear of competing with HMOs. Discussion And Implications The intermediate entities included in our survey tended to be provider sponsored and relatively new. The organizations were broadly distributed and varied widely in scale, history, and other features. The entities themselves, especially recently formed ones, viewed improved negotiating power (or leverage with health plans) and the protection of market share as important goals behind their formation, and they perceived the arrangements to have brought them some success. Interviews during site visits confirmed the conclusion that providers view the formation of risk bearing entities as a way of wresting control away from health plans. As one observer commented, "Control is more important to us than money," although enhanced control presumably enhances access to more money. Most of the risk-based contracts involve a great deal of sharing of both financial risk and responsibility. While satisfaction with the arrangements varies, little evidence suggests that there will be major change in the role of the organizations as risk-bearing entities, although entities’ experiences differ. Interviewees viewed the arrangements as a mix of positive and negative experiences. From a positive perspective, some noted the potential for cost control and for reducing day-to-day operational friction with providers, such as that typical around utilization review. review. Risk-based arrangements may also inhibit providers from pursuing their own HMO license. In addition, such arrangements can reduce bureaucratic haggling and bring increased autonomy, although providers may not perceive that they are fully compensated for the added responsibilities delegated to them. Some types of arrangements can even help to limit the friction across provider types by developing more cohesion and collaboration through integrated delivery systems. On the negative side, health plans in some markets revealed that some entities were experiencing serious financial problems. In fact, they may be forced to merge with larger physician groups if they are to survive; some will not survive at all. Some entities also sensed mounting tension between themselves and hospital sponsors/partners that may refuse to participate in global or split capitation out of concern over payment adequacy and fairness. Particularly in some less developed markets, problems may be fundamental: Contracting entities have failed to manage costs or have suffered adverse selection and subsequently withdrew in the face of sizable losses. In these markets in particular, some observers questioned whether provider organizations will ever become proficient in insurance functions —managing risk and utilization in particular were questionable. Operational implications. Although our focus here rests on one party—the intermediate entity—the findings suggest that tensions exist between health plans and the intermediate entities. Both mean and median scores suggest that many entities believe that there is room for improvement in their partnerships with health plans, although some entities had much more positive views than others. Reasons for dissatisfaction suggest that better communication and partnerships can lead to improvement. Yet the tensions were real. By going "one level down" to the intermediate entity, we reached organizations that were more directly tied to individual providers than health plans were, although additional layers may mediate the relationship. The added layers of such a structure can be expensive. Also, intermediate entities can be pulled in competing directions by health plans and providers, each of which has different financial and organizational interests. These tensions can be constructive if they help to mediate divergent objectives and create an appropriate balance, but only if all parties recognize the inherent conflicts and tensions. Policy implications. The organizations described here have assumed significant responsibilities and financial risk. Traditionally, the scope of regulation has focused on the health plan that directly bears risk from the purchaser. It has not extended beyond the health plan to other subcomponents of the plan that may be independent organizations delegated substantial financial risk and functional responsibility. Yet the transfer of risk is large, many risk-bearing organizations are new, and some have encountered financial problems. As health plan substructures develop, there is a legitimate role for oversight and regulation of risk-bearing intermediate organizations. How best to accomplish this is the critical question, particularly in today’s environment, in which private market forces are the preferred policy option. The complex structures that have emerged pose challenges to effective regulation, so that it simultaneously provides needed consumer protection from risks of insolvency and poorly performing organizations but does not stifle innovation.
Marsha Gold is a senior fellow at Mathematica Policy Research (MPR) in Washington, D.C. Robert Hurley is an associate professor at the Medical College of Virginia, Virginia Commonwealth University, in Richmond. Timothy Lake is a health researcher at MPR. The research on which this paper is based was funded by the Medicare Payment Advisory Commission (MedPAC). All views expressed in this paper are those of the authors only and do not necessarily represent positions of MedPAC or the institutions of the authors. The authors are indebted to Sally Waltman, Michael Sinclair, Natalie Justh, and Felita Buckner of Mathematica Policy Research. Randall Brown provided valuable comments on earlier drafts as did various members of the expert panel established for this work. We also acknowledge the efforts of Sarah Thomas, David Glass, Murray Ross, and Lu Zawistowich of MedPAC. We are indebted to the health plans and intermediate entities that participated in the survey.
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