'DETERMINANTS
OF HMO SUCCESS

 

Capital Area

Community
Health Plan

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TSAI BN PENNSYIVANEA

 

 

 

 

Lifeguard

 

U.S. DEPOS

MAR 1 ¢ 1986
'' 

 
''DETERMINANTS OF HMO SUCCESS

 

 

By

Peter D. Fox
LuAnn Heinen
Lewin and Associates, Inc.

Richard J. Steele
Birch & Davis Associates, Inc.

Prepared for the
Office of Health Maintenance Organizations
U.S. Public Health Service

Contract No: BHMORD-240-83-0095
Project Officer: Beth Roy
January 1986

 
''This report is submitted pursuant to Contract No. 240-83-0095. The
total dollar amount of this competitively awarded contract was $429,172, of
which $128,878 was subcontracted to Lewin and Associates, Inc. Personnel
responsible for the content and preparation of the report are identified on

the preceding page.
''TABLE OF CONTENTS

Page

PREFACE 2... cc ccc cece cece e cence ee eenecees ii
EXECUTIVE SUMMARY i i wsddccieaec cccees ov seueseeeesunwerncupenen iv
IT. INTRODUCTION ........... 0... ce eee eee cece eee 1
II. STUDY DESIGN 2.2... 0..eccceccecceccecceccccccecceceeses 4
A. Definition of Success and Selection of HMOs ........ 4
B. Overview of the HMOs Studied ....................0.. 5
Ce. Site VUSIES ceaasevwwiad i pandas s nemnmuesnuwwwsuumunvay 9
Ill. EXTERNAL SUCCESS FACTORS ...................0...0 ee eee 10
IV. MARKETING AND CONSUMER RELATIONS ....................... 14
A. Introduction ........ ccc ccc ccc eee eee ene es 14
B. Marketing ........ cece ec cece eee cece een eens 15
C. Consumer Relations .......... ccc cece ccc eee eee 24
Vv. PROVIDER RELATIONS ........... 2... eee eee eee eee eee 28
A. Introduction ....... cece cc cece cece eee e eens 28
B. Physicians and Hospitals ..... eee eee ee eee eee eens 29

C. Provider Reimbursement: Risk Sharing and
Financial Incentives ......... ccc ccc eee eee ee eee 36
D. Utilization Management ............. 0. cc cece eee 42
Ee Quality ASSUPANGE .icwacd creme wuwees cucuneervames 48
VI. CORPORATE PHILOSOPHY AND MANAGEMENT .................... 51
As IMbPOMUCLION « .seadssscnunswumoe sv cvauweewuwnsseruee 51
B. Overall Leadership ......... cc cee eee eee 51
C. Strategic Management ............ cece cece eee eee 54
D. Management Execution ......... 0... ccc cee cece eee 56
VII. CONCLUSION cic ccan cn mnaes convene enseee WKS e ese REDE SEER MS 58

APPENDIX A: OVERVIEW OF PREVIOUS RESEARCH .................... A-1
''11

PREFACE

In September 1983, the Office of Health Maintenance Organizations in the
U.S. Public Health Service awarded a contract to Birch & Davis Associates,
Inc. to identify factors associated with particularly successful HMOs. The
primary method of approach adopted for the project was a series of eight case
studies documenting the best practices of successful HMOs. These case studies
have been published as an appendix volume to this report.

In November 1984, Lewin and Associates was asked to assist Birch & Davis
Associates, Inc. by conducting some of the case studies and to take the lead
in writing a synthesis of the findings. This final report on Determinants of
HMO Success thus integrates the case studies and attempts to distill the core
qualities shared by successful HMOs.

The study benefited tremendously from the support and guidance of Beth
Roy, Director, Division of Qualification, Office of Health Maintenance
Organizations, U.S. Public Health Service. Ms. Roy's creative insights,
participation in several of the site visits, and careful reading of earlier
drafts contributed enormously to this report. Above all, her vision of what

the study could accomplish was a source of inspiration.

We are also indebted to the members of the study's Advisory Board, each
of whom devoted time and energy to ensuring the accuracy and usefulness of the
study's final products. Several of them also hosted site visits. We would

note the contributions of:

6 Harris Berman. M.D.
Executive Director
Matthew Thornton Health Plan. Inc.

a

re oe a

a ee
''e Richard Cannon
Frecutive ‘ice President
Harvard Community Health Plan

e Dorothy Emerson-0'Neil]
Executive Vice President
Lifeguard HMO

e Jack Shelton
Manager, Employee Insurance Department
Ford Motor Company

8 Fred Wasserman
Chairman
Maxicare Health Plans, Inc.

e Jeffrey Weiner, M.D.
Executive Vice President, Medical Delivery Systems
U.S. Health Care Systems, Inc.

We also acknowledge the special assistance of Kenneth Linde, Vice
President and Chief Operating Officer, Eastern Division, Whittaker Health
Services, Inc. Mr. Linde played a key role in the development and early
management of this project in his former capacity as Director of Qualification
in the Office of HMOs.

In addition, the Group Health Association of America performed a review
of the literature as background for the study, and Laura Morlock, Ph.D., of

Johns Hopkins University made early methodological contributions.

Finally, we are grateful to the eight plans who participated in the
project. Each of them hosted us for several days and also reviewed drafts of
both this report and the case studies of their own plans. Their willingness
to make major time investments and to be open with us made this study

possible.
''iv

EXECUTIVE SUMMARY

I. INTRODUCTION

This report seeks to identify factors that characterize successful HMOs.
It is based principally on a series of case studies of eight HMOs, selected
because they have a history of enrollment growth and superior financial
performance and are generally well regarded for the services that they
deliver. The plans were also selected to reflect a mix of different health

delivery models. and organizational types. The specific plans studied are:

e Bay Pacific Health Plan, San Bruno, CA.

e Capital Area Community Health Plan, Latham, NY.

e Harvard Community Health Plan (HCHP) Boston, MA.

e@ HMO of Pennsylvania (HMO-PA), Blue Bell, PA.

e@ Lifeguard HMO, Campbell, CA.

@ Maxicare of Southern California, Los Angeles, CA.

@ Rhode Island Group Health Association (RIGHA), Providence, RI.

@ SHARE of Minnesota, Bloomington, MN.

The primary focus of the report is on how the plans manage themselves.

Whether certain factors in the external environment have facilitated success
is also examined.
''II. EXTERNAL FACTORS

Findings regarding external factors include the following:

e Early market entry allowed a number of the plans to achieve a strong
position in the marketplace, particularly as many employers will not
offer more than the two HMOs required by federal law.

@ The socioeconomic characteristics of the plan's service area do not
correlate highly with success.

e Growth is facilitated by high physician supply relative to
population and by high hospital utilization rates.

Overall, however, these external factors do relatively little to explain
success. Rather, it is the plan's strategy and how that strategy is executed

that account for growth and financial performance.

IIIT. MARKETING AND CONSUMER RELATIONS

The HMOs studied exhibit a commitment to being accepted in the
marketplace. This entails continuously monitoring customer preferences and
adapting the product to meet new challenges and opportunities. As examples,
the plans have widely dispersed delivery sites, some of which were established
to meet the needs of individual employer groups; they pay attention to the
physical appearance of physicians' offices and take steps to assure that
patients are treated promptly and courteously; and many are introducing
greater flexibility in their benefit packages to respond to employer

preferences.

The plans have adopted aggressive growth strategies and are knowledgable
about their marketplaces. Medium and large employer groups (and, for some,
Taft-Hartley trust funds) are the mainstays of the plans; all serve the
Medicare population or intend to do so. Some have also identified small

employers as target markets.
''vi

The plans display well managed approaches to marketing, as evidenced by:

highly professional sales staffs,

e careful selection of advertising messages,
e a carefully planned approach to employers, and

e attention to the servicing of employers that agree to offer the
plan.

The HMOs also have a strong consumer orientation and are conscious of
word-of-mouth by enrollees as the most important form of advertising. As a
result, they try to ensure that prospective enrollees understand the plan and
how it operates and that, once enrolled, members remain satisfied. Two
aspects of the consumer relations function are striking: (1) the level of
investment in both consumer relations staff and sophisticated telephone
systems at some plans and (2) the attention paid by top management to feedback

from consumers.

IV. PROVIDER RELATIONS

Relations with physicians, and to a lesser extent hospitals, are the
crux of an HMO delivery system. All plans need accessible, high quality
physicians who are able to manage utilization and control costs. The plans
employ various strategies to bring physicians close to the organization so

that they internalize the competitive goals of the HMO.

Careful selection of primary care physicians is important to most of the
plans, although recruitment objectives vary. Selection criteria include their
academic credentials, their desire to maintain an active hospital practice, a
clear understanding of prepaid practice, and the appearance and location of
the office. Most plans also emphasize the need for strong physician leaders
who are respected by their peers to broker the relationship between "rank and
file" physicians and management. Every plan has one or more physicians in top
management positions who communicate the ideas and concerns of physicians to

management as well as business needs to physicians.
''Reimbursement is another major aspect of provider relations. The
financial incentives embodied in the reimbursement system are designed to
complement other methods of utilization control. The commonality among
successful HMOs is not a particular set of incentives but rather = an
appropriate mix of approaches to cost management. The physician incentives in
our sample of HMOs include fee-for-service (Lifeguard, Bay Pacific); neutral
or weak incentives (HCHP, RIGHA, Capital Area); medical group at partial risk
(Maxicare, SHARE); and individual physician at partial risk (HMO-PA).
Historically, hospitals have not assumed risk, although four of the plans have
placed selected hospitals at risk and several predict that this will

increasingly be the trend.

To control utilization, HMOs generally have strong administrative
controls and/or strong incentive programs. However, some plans attempt to
balance the two while others, usually staff models, tend to have few controls
or incentives. The range of utilization management mechanisms includes direct
administrative controls (e.g., pre-authorization), financial as well as non-
financial incentives, and education and feedback for physicians, including

peer review.

Finally, all plans articulate a concern for quality. Quality assurance
assumes various forms and usually is defined broadly to include access to care
as well as the appropriateness of services rendered. Quality assurance and

utilization management are closely related at most plans.

V. CORPORATE PHILOSOPHY AND LEADERSHIP

The HMOs studied exhibit a tangible, if at times difficult to describe,
corporate culture. Elements of this culture include the view that work is
fun; a sense of optimism and confidence that problems can be overcome; a drive
to excel; a self-image that they are the best; and a "win-win" attitude that
success depends on satisfied constituencies, most notably, employers,

employees, physicians, and plan staff.
''viii

Senior management also display an ability to integrate the various
functions of the plan and balance potentially competing objectives, such as
the need to be efficient but also to deliver high quality services, the need
to foster enrollee and physician satisfaction, and the need to sequence growth
to achieve a balance between the demand for both medical and Support services
and the availability of these services. The plans also exhibit an ability to
adjust management styles as the organization grows. Finally, the importance
of strong systems of communication among staff and with enrollees and
providers is evident.

In addition to addressing strategic issues, close attention is paid to
day-to-day management, including financial management, data processing and
information systems, and staff development and training.

VI. CONCLUSION

Even sharper skills will be required to manage an HMO in the future as a
result of increasing competition among HMOs and from other managed health care
Systems. The plans that are most likely to thrive will:

@ have a management team that is innovative, strategically oriented,
and able to integrate the various functions of the organization;

@ be in close touch with the marketplace and able to respond quickly
to changes, including offering a broader range of products and
marketing to new populations, such as small businesses, individuals
not associated with groups, and Medicare beneficiaries;

e find ways to cement loyalties with employers and employees so that
they are not competing only on the basis of price; and

@ maintain good relations with physicians, such as through a
compensation structure that is perceived as fair, good two-way
Systems of communication, and a recognition of physicians’ need for
a degree of clinical independence.
''I. INTRODUCTION

HMO enrollment rose at an unprecedented rate of 24.9 percent between
July 1984 and June 1985, reaching 18.9 million, more than double the June 1980
enrollment of 9.1 million. ! Enrollment growth has also exceeded 10 percent in
each of seven of the last eight years, an enviable track record by any
standard. Furthermore, the financial bottom line of both for-profit and

nonprofit HMOs has never been healthier.

As is true in any sector of the economy, however, some HMOs have
performed better than others, and a small handful have become fm selvente”
Furthermore, while the growth is so great that it is stressing the management
capacities of many plans, competition among HMOs is intensifying, suggesting
the need for even sharper decision making. As a result, the Office of Health
Maintenance Organizations in the U.S. Public Health Service has sought to
understand better the reasons why some HMOs have been particularly successful.
One stimulus for this effort was the widely read book, In Search of
Excellence. °

 

 

 

: InterStudy, National HMO Census 1982 and The HMO Summary: June 1985
(Excelsior, MN: InterStudy, 1983 and 1985).

x Since 1973, approximately 30 HMOs have ceased operations or merged with
another organization for financial reasons. (Source: Office of Health
Maintenance Organizations, U.S. Public Health Service).

2

Thomas J. Peters and Robert H. Waterman, Jr., In Search of Excellence (New
York: Warner Books, Inc., 1982).
''This report represents an effort to identify factors that characterize
successful HMOs. It offers an overview of some of the areas that are of
concern to plans and are viewed as key to their success. It also describes
specific management principles and practices as well as examples of how these
practices and principles are articulated.

The primary approach used was a series of eight case studies of
individual plans, specifically:

e Bay Pacific Health Plan, San Bruno, CA.

e Capital Area Community Health Plan, Latham, NY.

e Harvard Community Health Plan (HCHP), Boston, MA.

@ HMO of Pennsylvania (HMO-PA), Blue Bell, PA.

e Lifeguard HMO, Campbell, CA.

@ Maxicare of Southern California, Los Angeles, CA.

e Rhode Island Group Health Association (RIGHA), Providence, RI.

@ SHARE of Minnesota, Bloomington, MN.
The case study reports are available in an appendix volume. They provide an
in-depth picture of how each plan is structured and how it deals with some of

the fundamental issues that all plans must address, such as provider and

consumer relations, reimbursement, marketing, and general management.

Two caveats are in order. First, our intent is primarily to understand
factors leading to success as reported by HMO representatives. Although our
own perspectives are reflected, we have not attempted to perform an
independent assessment or audit of the organization's performance. Our

interview protocol included questions about weaknesses, problems, and
''mistakes, but we did not talk to enrollees, competitors, employers, or others
who might inject greater notes of skepticism. Nonetheless, by understanding
and articulating the best practices of successful HMOs, we believe that we can

assist others who might endeavor to follow in their footsteps.

Second, some have suggested that the major determinant of success may be
charismatic leadership or superior management generically, characteristics
that cannot readily be measured. However, leadership qualities alone, vaguely
defined, do not generate success; they simply create fertile environments that
facilitate it. Leaders must take concrete steps, make specific decisions, and

institute policies and structures that are observable.

Midway through the study, Business Week had a cover story on the book,
4

In Search of Excellence, that was entitled "OOPS". It reported that a
significant number of companies cited in that book as paragons of excellence
had performed poorly in the year following its publication. Robert Waterman,
one of the authors, in a letter to the editor of Business Week commented

that:°

We never tried to find, nor expected to find, formulas for success.
With only a couple of exceptions, we have no regrets about our
choice of companies. All were well-regarded by informed observers
of the business scene. All had outperformed their industry for 20
years on a variety of financial measures. But fine athletes age,
industries mature and decline, and long runs on Broadway eventually
end. Anyone who believes in formulas for success, or forever
excellence, is nuts.

It is possible that some of the HMOs in our sample may be on next year's
HMO "OOPS" list. Nonetheless, the authors of this report believe that the
HMOs studied are doing certain things right that others will benefit from
knowing about.

 

"Who's Excellent Now?" Business Week, Nov. 5, 1984, pp. 76-78.

Business Week, November 26, 1984, page 9.
''Ii. STUDY DESIGN

A. DEFINITION OF SUCCESS AND SELECTION OF HMOs

Like beauty, success is in the eye of the beholder. Therefore, no
attempt was made to impose a rigid definition of success in selecting our
sample. Rather, we sought to identify companies that were considered to be
outstanding among their peers and that have a demonstrated record of market
acceptance and excellent financial performance. With the small sample of
eight HMO companies, it was not possible to represent the industry as a whole
nor to include all the outstanding companies, although we did strive for a
broad representation of types of delivery systems, a mix of for-profits and

nonprofits, and both national and local companies.

As a first step in the selection process, it was decided to limit the
sample to HMOs that have achieved success in the relatively recent past (15
years or less). This was because we viewed the primary audience of the study
as HMO managers and board members in new plans or those approaching critical
growth stages. The HMOs that were excluded were formed in a very different
environment and therefore were not necessarily representative of the
characteristics that lead to success in today's more competitive marketplace.
Also excluded were HMOs with less than 25,000 members as of January 1984 as
well as those that had been operational for less than 5 years because we
wanted to study mature plans and observe how they grew, overcame obstacles,
and stayed viable.

The financial criteria were intended to identify companies that are not

only considered outstanding in the eyes of industry leaders but also excelled
''in terms of the bottom line. Consequently, four measures of viability that
were considered the most significant ratios in the 1983 Investor's Guide To
Health Maintenance Organizations were adopted. We also used the data base

from that study, which included four years of statistics on the nation's 60
largest HMOs.

The selection criteria were:

e Average annual enrollment growth rate.
e Return on sales. After-tax net income divided by premium revenue.

e Operating margin. Premium revenue less benefit expenditures,
divided by premium revenue.

e The ratio of general and administrative expenses to total expenses.

To be included in our study, an HMO must have ranked above the average for at
least three of the four years and showed a trend of improving results. Thus,
the HMO must have had a demonstrated record of enrollment growth and good
financial performance.

The final step was to select HMOs representing a good mix of different
service delivery models and organizational types from the group that met the
above criteria. We also had to accept the reality that participation was
voluntary on the part of the HMOs, and given the considerable demands of
hosting a site visit team, some were just too busy being successful to spare
the time to be studied.

B. OVERVIEW OF THE HMOs STUDIED

The eight HMOs studied, all of which are federally qualified, include
two networks, three IPAs, and three staff models. They are located in six
''-6-

different states (three plans are in California). Three are part of
multistate HMO firms. Also, three are for-profit and five are nonprofit,

although one nonprofit is operated by a for-profit management firm.

Bay Pacific Health Plan is a for-profit IPA model HMO that serves San
Mateo, San Francisco, and Marin counties in California at the time of our site
visit. The plan has since expanded into Contra Costa and Alameda counties,
thus effectively blanketing the San Francisco Bay area. It was originally
nonprofit and was started in 1979 by about 200 physicians and four hospitals
in San Mateo County to counter the loss of market share to Kaiser Health Plan.
It subsequently formed separate IPAs in San Francisco and Marin counties.
Membership has now reached 60,000, and the number of participating physicians
(both primary care providers and specialists) has reached 1,800. Bay Pacific
management formed a for-profit partnership in 1983 to create reserves and
secure capital for expansion of the HMO. In late 1984, Bay Pacific Health
Corporation, a publicly held, for-profit corporation was formed and
immediately acquired the partnership and the health plan.

Capital Area Community Health Plan is a nonprofit HMO that serves about
83,000 members in the Albany region of upstate New York, southwestern Vermont,
and western Massachusetts. Founded in 1977 as a pure staff model, Capital
Area has entered into contracts with fee-for-service medical groups in some of
the areas into which it has expanded; it also has established HMOs in three
small communities in western Massachusetts as joint ventures with the
community hospitals there. The plan was started in large part from a convic-
tion that HMOs can function successfully in rural areas, and several of its
delivery sites are clinics staffed by two to three primary care physicians in
small communities in New York and Vermont. The medical staff consists of 70
full-time and 20 part-time physicians in New York and Vermont; the
Massachusetts joint ventures involve 26 primary care physicians and 70
specialists affiliated with the participating hospitals.
''Harvard Community Health Plan (HCHP) is a nonprofit staff model HMO in
Boston with over 200,000 members. The plan was initiated by Harvard Medical
School in 1969 and operates as an independent corporation. It has eight
health centers, with two more under development, and serves five counties in
greater Boston. The plan employs nearly 300 salaried physicians and almost
200 mid-level providers. It uses its own hospital for some non-tertiary
services and contracts with 14 other hospitals. A large proportion of

admissions are to hospitals that are affiliated with Harvard University.

HMO of Pennsylvania (HMO-PA) is a proprietary IPA model plan that is
owned and operated by U.S. Health Care Systems, Inc. (USHCSI). USHCSI was
established as a holding company subsequent to the initial success of HMO-PA
and operates HMOs in four states. Founded in 1977, HMO-PA now has 340,000
enrollees ‘and serves seven counties in the Philadelphia and Allentown areas.
The plan was one of the first IPAs in the country to successfully capitate
individual primary care physicians (PCPs). It capitates 560 PCPs for most
services. Also, each PCP has targets for hospital and specialty care and
faces strong financial incentives to be judicious in the use of referral and

inpatient care. HMO-PA contracts with 3,800 specialists and 62 hospitals.

Lifeguard HMO in Campbell, CA, is a nonprofit IPA with 80,000 members.
It grew out of the foundation for medical care in Santa Clara county and
became operational in 1979. Headquartered in the "Silicon Valley" area around
San Jose, it contracts with about 2,000 physicians of all specialties in four
counties south and east of San Francisco. Physicians are paid fee-for-
service, with 15 percent withheld from the maximum amount allowed by the fee
schedule to cover budget overruns. Any overruns are shared collectively among
all participating physicians in proportion to their contribution to the
withhold pool. Fourteen contracted hospitals are used for inpatient care.
Excess utilization is addressed largely through effective prior authorization
and concurrent review programs for inpatient care and a_ sophisticated

ambulatory claims review system.
''- 8-

Maxicare California is the original plan of Maxicare Health Plans. Inc.
It started as a nonprofit HMO in 1973 but changed to for-profit status in

1980. Headquartered in Los Angeles, Maxicare California serves 245,000

 

members from seven counties in southern California from Santa Barbara to San
Diego. A network model, the plan contracts with over 30 medical groups and
more than 50 community hospitals. It also operates its own hospital. Groups,
most of which are multispecialty, are capitated for physician services,
including referral care. The plan is at risk for hospital services but shares
any surpluses fifty-fifty with the medical group that generated them. It also
has a new and different arrangement with 15 high cost hospitals under which
the hospitals and their medical staffs are capitated for almost all services,

while Maxicare provides administrative, marketing, and out-of-area services.

Rhode Island Group Health Association (RIGHA) is a nonprofit, staff
model plan that is headquartered in Providence and serves about 60,000 members
in Rhode Island and southern Massachusetts. The plan was founded in 1971.
Its labor origins created a strong community base, which the plan continues to
cultivate. The plan employs over 60 salaried primary care physicians and
specialists and also contracts with additional specialists. It has three
health centers, and additional sites are under development. About 75 percent
of RIGHA's admissions are to hospitals affiliated with Brown University.

SHARE-Minnesota is nonprofit. network model HMO serving slightly more
than 127,000 people in seven counties surrounding Minneapolis and St. Paul,
Minnesota. It started as a staff model in 1974; the medical group that
comprises the original medical staff has 65 physicians at six locations. More
recently, the HMO has entered into contracts with 25 group practices in areas
not previously served by SHARE-Minnesota; the 175 physicians in these groups
now serve 55,000 of the members. The HMO also has contracts with 250
consulting specialists. In 1974 the senior management of SHARE-Minnesota
formed SHARE Development Corporation. a for-profit entity that provides
management services to SHARE-Minnesota under contract and has also established
wholly owned, for-profit HMOs in several other states. In 1985 SHARE
Development Company became part of United HealthCare Corporation, another
large HMO firm, through an exchange of stock.
''C. SITE VISITS

The field work for the project consisted of site visits to eight HMOs,
conducted between June 1984 and July 1985. Staff from Birch & Davis
Associates, Inc. visited Bay Pacific, SHARE, and Capital Area, while staff
from Lewin and Associates, Inc. visited HMO-PA, RIGHA, Lifeguard, and
Maxicare. HCHP was a joint effort, with one staff member from each firm

involved.

Materials were collected from the HMOs beforehand. Typically, the
annual report, resumes of top staff, marketing materials, a member handbook,
the benefit package, provider contracts, and financial statements were

reviewed before the site visit.

In most instances, a two-person team spent three days at each site.
Interviews were set up by the HMO, using guidelines supplied by the site visit
team. The goal was to interview as many top managers as possible, including
one or more board members, and to meet with operational staff in various
functional areas (marketing, finance, provider relations, member services,

etc.).

An interview guide helped structure the discussions but was not rigidly
adhered to. The intent of the visits was to understand success through plan
managers' eyes and to observe management style and corporate culture as well
as actual practices and innovations. Seeing the marketing presentation to an
employer or a group of Medicare beneficiaries, visiting HMO health centers and
hospitals, and observing how the various functions related to one another was
especially valuable.

The products of the site visits are individual case studies of each plan
published in the appendix volume to this report. They were reviewed by the
HMOs in draft form to ensure accuracy and prevent the release of confidential

information.
''- 10 -

III. EXTERNAL SUCCESS FACTORS

The major focus of this report -- reflected in Chapters IV-VI -- is on
the internal operations of the HMOs studied. Nonetheless, various factors in
the external environment are generally viewed as facilitating success. This
chapter discusses how some of the HMOs in our study appear to have been
influenced by selected factors, including early market entry, the demographics
of their respective communities, the structure of the local insurance
industry, and provider supply factors. For a review of literature related to
internal and external success factors in HMOs, see the Research Appendix to
this report.

In_most of the HMOs we studied, early entry contributed to growth and
protected market share. Lifeguard, for example, was the first IPA with a
broad physician base in Santa Clara county, CA, as was Bay Pacific in San
Mateo county immediately to the north, although Kaiser, a group model HMO, has
been in the market for a number of years. Many believe that Kaiser stimulates
IPA development as a competitive response on the part of fee-for-service
physicians and also educates the communities it serves about prepayment.
Although concerned about new and potentially formidable competitors, Dorothy
Emerson, Executive Vice President of Lifeguard, commented that "We have the

product (i.e., the broad physician network) and they don't."

Similarly, RIGHA and HCHP were the first in their respective communities
and were able to establish themselves before facing tough competition. As the
initial entrants, they could make some mistakes along the way in a more
forgiving milieu than today's. However, HCHP has had difficulty penetrating
the suburbs because of its historical reliance on expensive teaching
hospitals. As a result, it now relies more heavily on community hospitals,
allowing it to reduce premiums for suburban residents. Capital Area remains

the only HMO in Albany and the rural counties that surround it.
''-11-

Several plans in Los Angeles long predated the formation of Maxicare,
but Maxicare was the first to be federally qualified and it moved aggressively
both to create a broad provider network and to mandate employers under Title
XIII of the Public Health Service Act. Similarly HMO-PA, now the largest IPA
in the nation, was not the first in the Philadelphia area, which prevailing
wisdom in industry circles held was inhospitable to HMO growth. However,
Leonard Abramson, its President, described the perspective that Philadelphia
was a difficult market to crack as "the prevailing excuse," and the plan
became the first to establish a broad provider network and market
aggressively. Thus, neither Maxicare nor HMO-PA were the first in their
communities, and their success resulted from a willingness to capitalize on
opportunities in the face of what must have at the time appeared to be long
odds. The theme of being opportunity-focused is further developed in Chapter
VI; the major point is that success resulted from a combination of the

presence of opportunities and the ability to capitalize upon them.

Finally, SHARE, during its rapid growth phase in the late 1970s, faced
considerable competition from larger, well established plans. It was,
however, the first to be federally qualified and made extensive use of the

federal mandate in marketing to employers.

Early market entry in some cases was facilitated by the availability of
federal funding under Title XIII. Between 1975 and 1980, all eight plans
received either grants or loans from the Office of HMOs or its predecessor
agency, both in the U.S. Department of Health and Human Services. Six plans
(all but Bay Pacific and Lifeguard) were grant recipients. Capital Area and
HCHP received grant funding in excess of $2 million each, while the other four
received amounts that ranged between $312,000 and $1.6 million. In addition,
six plans (all but HCHP and Maxicare) obtained loans ranging from $747,000 in
the case of Lifeguard to $2.5 million for HMO-PA.

Demographic and socioeconomic factors did little to explain the success

of the HMOs studied. Even where these variables were statistically
''-12-

Significant in the quantitative analyses summarized in the appendix, the
relationships were typically weak. There are a number of reasons for this
lack of explanatory power. First, each of the HMOs encompasses a broad
geographic area that includes populations with differing income and education
levels. Other factors that have been hypothesized to affect HMO growth, such
as unemployment, can change over time. For example, both the Boston and the
Los Angeles areas have been through cycles of unemployment over the last
decade, although they are now doing well because of their high technology and
defense industry base. Population growth and the presence of multispecialty
group practices have also been viewed as conducive to HMO growth, yet both
HMO-PA and Capital Area have thrived in communities that Jack these

characteristics.

The structure of indemnity insurance exerted an influence on growth, but
not_a dominant one. Lifeguard executives feel that the prevalence of self-
insurance in their area hurts them because the HMO in effect competes with the
employer and because self-insured employers often have limited benefits,

thereby resulting in large premium contributions for employees who elect the
HMO.

The presence of a Blue Cross plan that pays hospitals considerably below
full charges (often by 20 percent or more) can be a more formidable threat.
RIGHA has handled the problem by contracting with the Rhode Island Blue Cross
plan for claims processing, thereby allowing the HMO to pay hospitals at the
lower rates. Now that the plan is larger, it is reassessing this arrangement.
HMO-PA initially overcame the price disadvantage by introducing physician
reimbursement incentives and instituting tight controls on inpatient care ina

community with high utilization. As it grew, its purchasing power increased,
. and it is now able to negotiate reimbursement levels that approximate those
paid by the local Blue Cross plan. On the other hand, because most Blue Cross

plans cover many services in full, i.e., without patient cost sharing, they
''= [3 =

tend to charge high premiums. This creates a protective “price umbrella" for
the HMO, an umbrella that is beginning to offer less protection with the
increased market penetration of HMOs and other alternative delivery systems

that are now competing against one another.

The provider structure in the service areas of the HMOs appeared to
facilitate growth. All but one of the plans are in communities with high
physician supply. (The exception is Capital Area, which has adopted serving
rural areas aS one of its missions.) Certainly for the physicians associated
with the five IPA or network models studied, the desire to protect patient
volume stimulated participation in the plan and generated a willingness to
accept its philosophy and operating procedures. Hospital utilization is also
high in the service areas of the plans, except for the three plans located in
California where utilization is generally below the national average,
reflecting perhaps the long-standing presence of Kaiser and Ross-Loos (now
part of CIGNA).

Clearly, the changes in the cost containment environment nationally,
combined with the supportive role of government, have created a fertile soil
for HMO growth. However, what emerges on balance is that external factors do
little to explain why the HMOs studied have been particularly successful.
Rather, it is the way in which these plans have cultivated the soil, the
subject of the next three chapters, that has made the difference.
''- 14 -

IV. MARKETING AND CONSUMER RELATIONS

A. INTRODUCTION

Health care is a service industry, and all of the HMOs studied exhibited
strong and explicit service-oriented values. These values assume increasing

importance as competition intensifies.

Service begins with the initial approach to employers. Federally
qualified HMOs have an advantage that is enjoyed by few other services or
products -- i.e., the mandate in Title XIII of the Public Health Service Act

that employers offer HMOs (under defined circumstances) -- and several of the
HMOs studied (e.g., Maxicare, SHARE, HMO-PA) have aggressively used the
federal mandate. However, Title XIII is intended only to foster fair

marketplace competition; it does not require that anyone enroll] or, once

enrolled, remain with the plan.

As a result, the HMO needs to be responsive to the marketplace in at
least three ways. First, it must persuade the employer that the firm and the
employees will benefit, since employer attitudes, including the willingness to
allow the marketing staff access to employees, have a strong bearing on
ultimate enrollment. Second, it must persuade employees to enroll. Third, it
must keep its customers satisfied after the sale. As a representative of HMO-
PA said to us, word-of-mouth is the most important form of advertising. As a
result, the HMOs studied actively service employers after the sale and make it
easy for members to access the system, have questions answered, and bring
problems to the plan's attention. Employer and member relations efforts not
only solve individual problems but also constitute sources of feedback on both
the performance of individual providers and the acceptability of plan
practices.
''- 15 -
This chapter first discusses marketing, then consumer relations.
B. MARKETING

The marketing of any product entails paying attention to product design,
promotion, pricing, and selling or distribution. HMOs are no different from
any other enterprise in this regard. However, it is how they conduct these

functions that is of interest.
1. In Touch with the Marketplace

All of the HMOs studied exhibit a commitment to being accepted in the
marketplace. This entails a continuous process of obtaining information on
customer preferences and adapting the product to meet new challenges and

opportunities.

All of the HMOs make conscious efforts to have dispersed delivery sites
throughout their service areas. For Bay Pacific and Lifeguard, reliance on
fee-for-service physicians in the community ensured broad physician
participation from the start. Others, however, have had to make more
conscious efforts. For example, RIGHA, a staff mode? that until recently
delivered ambulatory services at a single location, is opening up roughly two
sites a year to ring the city of Providence, RI. HCHP, which currently has
eight health centers, is committed to two more and is planning for an
additional five. HMO-PA actively recruits primary care physicians in targeted
locations around Philadelphia to avoid gaps in its delivery network. One
function of the marketing staff at SHARE is to identify areas where medical

groups should be recruited.

Maxicare solicited the participation of new group practices in the
Palmdale and Lancaster areas in the desert, remote from their Los Angeles
base, principally to serve employees of Rockwell International. Capital Area
in Albany has expanded to 16 centers in upstate New York, Vermont, and western

Massachusetts. Bay Pacific expanded from its original service area of San
''- 16 -

Mateo County, CA, to San Francisco and Marin counties by establishing new IPAs
and iS now expanding throughout northern California. These expansions reflect
more than simply seeking to attract new employer groups; they also represent
an effort to match the residence and commute patterns of their existing

groups.

Achieving this dispersion of sites often entails adopting new modes of
delivery, in some cases modifying long-held traditions, particularly in the
case of staff models. Capital Area, a staff model, developed a series of
small satellites with as few as three primary care doctors in rural areas of
upstate New York. It then progressed to affiliating with multispecialty group
practices under risk contracts and to creating joint ventures with smal]
community hospitals. HCHP performs careful site selection studies and also
contracts with some community physicians on a capitated basis to provide
specialty services in its health centers. Maxicare, traditionally a network
model that contracts with multispeciality groups, has started to capitate
hospitals and their medical staffs to achieve greater penetration in parts of
Los Angeles. That program, as well as a Similar but more limited program at
HMO-PA, was designed to protect the HMO financially by shifting virtually all
of the financial risk to providers, thereby making it feasible to contract

with some high profile hospitals that may also be expensive.

There are many other examples of how HMOs respond to consumers. The
physical appearance of the office is important, and many of the plans pay
attention to office decor and patient flow. Maxicare and HMO-PA both assess
the attractiveness of the medical offices of physicians prior to contracting
with them.

RIGHA asks that enrollees sign up with a primary care physician, who
serves as case manager, although it does not rigidly enforce the requirement
and, indeed. has provisions for walk-in services. Managing the costs of
referral care was a consideration in instituting this policy, but another
objective was to dispel the clinic image for marketing purposes by emphasizing

that each enrollee has a personal physician.
''-17 -

Some employers have complained about inflexibility in HMO benefit
packages. Maxicare has made an effort to enhance employer choice by creating
a menu of benefit package options in terms of services covered and copayment

levels in order to offer employers choices.

Several of the HMOs (e.g., Maxicare, Capital Area, and HMO-PA) have also
emphasized wellness programs as a marketing tool, and Maxicare offers free
classes -- e.g., smoking cessation, weight reduction, and stress management --
to all employees of some of its employer groups, not just those who enroll in
the plan. This differentiates them from the competition, emphasizes their
commitment to wellness, and makes enrollment attractive to employees that are

not currently members.

Finally, several of the HMOs we visited are developing related products,
such as PPOs or utilization review services, that draw on the plans' provider
networks and cost management skills. SHARE is developing a PPO product, and
Bay Pacific, through its new PPO subsidiary, intends to market an array of
products in response to changing demands of group purchasers. Maxicare has
created a subsidiary, HealthCare Alternatives, to perform utilization review
for large employers, although it has only a limited number of contracts.
Maxicare also recently purchased an insurance company. USHCSI, the parent
company of HMO-PA, has announced plans to undertake a series of joint
ventures, including HMO and PPO development, with Lincoln National Insurance
Company. These relationships with insurers also enable the plans to develop
hybrid HMO-PPO products. Both RIGHA and Lifeguard are considering whether to
market commercially their utilization review and HMO management computer
software packages. HCHP, a staff model, is learning about IPA management
through Managed Care, a for-profit firm which was started by the plan and
involved the movement of four senior staff to the new firm. Lifeguard has
also formed an IPA management firm, IPA-USA.

The next few years are likely to witness more aggressive moves into new

product lines. Meanwhile, in the current rapid growth environment, the plans
''- 18 -

are by and large concentrating their energies on expanding enrollment,
including in many instances creating a multi-state presence, rather than
diluting management talent by developing new -- albeit closely related --
product lines.

The HMOs studied know their marketplace, have made conscious decisions
regarding the populations they wish to attract, and have aggressive growth
strategies. All of the HMOs target large employers, both public and private.
Lifeguard focuses only on firms with more than 100 employees and will
generally not accept firms with fewer than 50. All of the plans enrol] union-
management Taft-Hartley trust funds, although Lifeguard and Maxicare have not
made them a high priority. In contrast, RIGHA, reflecting in part the strong
role that labor leaders have played as founders and board members, has a
specialist whose major function is to market to unions, and HCHP is increasing
its efforts to penetrate the Taft-Hartley market.

Not all of the HMOs accept employers with under 25 employees or market
to individual enrollees other than those covered by Medicare. However, HCHP
now targets these small groups, and SHARE has actively marketed to nongroup
enrollees. RIGHA accepts individual enrollees (subject to a medical screen)
and finds this group to be financially profitable. Capital Area from its
inception has enrolled groups with as few as four employees; in rural areas,

it accepts individual enrollees.

All of the plans were at the very least seriously considering entering
into a Medicare risk contract. The most aggressive historically has been
SHARE, which ranks second in the country with 35,000 Medicare members, most of
whom enrolled under the demonstration contract that preceded the 1982 Medicare
amendments. Maxicare signed a risk contract in California after a successful
experience in Illinois. Although some plans have hesitated to enter the
Medicare market, the desire to grow in the face of heightened competition
makes it inevitable that most will do so. Similarly, the small group and
nongroup enrollment is likely to become more attractive as the larger groups

become saturated.
''- 19 -

All of the plans have underwriting standards, similar to those that
indemnity carriers apply before covering small employers. These standards
determine the groups that the HMO will not actively market to because the
financial risks are viewed as excessive, such as industries that have
histories of heavy use of health services. Some HMOs also avoid firms where
the employer contributions to premiums are such that employees face a high

differential if they join the HMO, potentially leading to adverse selection.

Finally, some of the plans express the desire not to oversell and
recognize that HMO enrollment is not for everyone. This concern creates
stresses in how to reward the sales force. HMO-PA and Maxicare discourage
overpromising by tightly structuring the sales presentations of their
marketing representatives. Other HMOs pay their marketing representatives’
straight salary and avoid commissions (or, alternatively, keep the commissions
low), consciously accepting the reduced motivation to produce new enrollment.
There is also concern that high bonuses can result in sales representatives’
withholding information needed by the underwriting department to identify high
risk groups that should be denied coverage. (HMO-PA and Bay Pacific seek to

avoid this problem by keeping the underwriting and sales functions separate. )

Lifeguard, for example, avoids sales commissions and reports that it
does not want the sales force to come across as "too salesy." RIGHA recently
introduced bonuses, but they are low, and HCHP introduced a group bonus for
the entire marketing staff if membership growth targets are met, reasoning
that individual bonuses generate excessively strong incentives. In contrast,
HMO-PA, Bay Pacific, and SHARE establish quotas and compensate their sales

force primarily through commissions.

2. A Carefully Structured Approach to Employers and Employees

Most of the HMOs have a highly organized and well managed approach to
selling that leaves little to chance. Marketing representatives are assigned

to geographic territories. Some plans (e.g., HMO-PA) use a separate staff to
''- 20 -

identify sales prospects, thus allowing the marketing representatives to sel]
rather than conduct research on whom to approach. Employer contacts are
Synchronized with the organization's open enrollment or contract renewal
periods, and protocols to follow-up after both the initial contact and the
Sale are well developed. Also, some of the plans, such as HMO-PA and
Maxicare, rely on computers to manage and track the marketing process,
starting with the development of a list of initial prospects and running
through to the point of sale.

Many of the plans -- e.g., Maxicare and HMO-PA -- has a standard sales
pitch that emphasizes the uniqueness of the product and assures that a
Consistent set of messages is delivered. Lifeguard, although less rigid in
its approach, establishes themes that the marketing representatives rehearse
while in training. Several of the plans -- e.g., HCHP, RIGHA, Maxicare --
emphasize quality of care, in part to differentiate their plans from the
competition. Other messages delivered by the plans stress wellness, having
one's own physicians, comprehensiveness of coverage, low and predictable out-
of-pocket expenses, the lack of claims forms, and (particularly in the case of

IPAs such as Lifeguard and Bay Pacific) access to a broad provider network.

Several plans alter their approaches in selling to nongrour enrollees.
SHARE has a substantial and highly successful telephone marketing effort to
attract individual and Medicare enrollment, and HCHP has done the same for its
Medicare program. To generate Medicare enrollment, Maxicare and Bay Pacific

sponsor community meetings at hospitals, senior citizens centers, and so
forth.

The professionalism of the sales force was notable in all of the plans.
Maxicare’ hires only college graduates and describes their typical
representative as "enthusiastic, smart, and career oriented." All of the
plans have training programs. Some of these are mostly on-the-job, whereas

others are highly formalized, with lengthy sales manuals, role playing by
''- 21 -

trainees, and regular quizzes. The training programs address both how the
plan functions, such as through briefings from managers of the major
departments, and how to approach employers and employees. Some of the plans
send marketing representatives to sales technique classes conducted by the
Group Health Association of America and modeled after the highly successful
courses first developed by the Xerox Corporation.

Advertising campaigns, principally on television and radio and in
newspapers, have become critical in gaining popular recognition and making the
names of the plans household words. Several of the HMOs (Maxicare, HMO-PA,
SHARE) have been the first to advertise heavily in their respective markets.
The plans also carefully select their advertising messages and symbols. As
with the sales presentations of the marketing representatives, the advertising
messages include comprehensiveness of coverage, lack of claims’ forms,
convenient access to services, having a personal physician, superior quality
of care, and the philosophical commitment to wellness and _ prevention.
Maxicare intentionally does not mention the term "HMO" in its advertising;
instead, given the limited information that can be conveyed, it stresses what
the plan does for its enrollees.

Use is also made of slogans and symbols which emphasize that the plans
care about the health of their members. The heart is the symbol of Lifeguard,
and their slogan is, "Lifeguard keeps you well." Bay Pacific's is "Your
Partner in Good Health." HMO-PA uses a red apple on all of its advertising
and brochures. Its sales representatives wear bright red blazers, the same
blazers used by the actors in the television commercials, thereby achieving
consistency in all communications. They also distribute apples at their
initial presentations to employees. SHARE features the slogan, "There's so
much more to SHARE."

The post-sale servicing of employers is recognized as important by all
the plans. In some plans, such as Maxicare and HMO-PA, the marketing
representatives fulfill this function. Maxicare also has standards for the

minimum number of callbacks, which vary by group size, that should be made to
''= 22 «

each employer. This regular process of staying in touch is designed to spot
problems before they become severe and to give employers the sense that they
have someone to cal.] upon. Other plans -- such as SHARE, RIGHA, HCHP, Capital
Area, and Bay Pacific -- have separate staffs for servicing employers,
although in some cases they are located within the marketing department.
These plans reason that post-sale servicing requires different skills than
marketing and also want to ensure that the employers receive adequate

attention.

The sales force may also be a source of information for product
improvements. For example, a Hughes Helicopter benefits manager informed a
Maxicare marketing representative of discontent with the alcohol and drug

abuse services, and the plan took measures to correct the situation.

3. Pricing Strategies

The HMOs differ in their pricing policies. Several -- including
Maxicare, Bay Pacific, RIGHA, Lifeguard, and HCHP -- set premiums above those
of their HMO competitors, and in marketing have successfully emphasized
quality of care and/or access. Others seek to be the lowest priced in the
community, or nearly so. Importantly, they all know what it costs on a per
member basis to provide services, and they make sure that premiums are
sufficient. Should those premiums exceed what the marketplace permits, they
will reexamine their costs in order to bring revenues and expenses into an
acceptable relationship to one another.

Almost all of the plans are feeling more intense price competition than
before and have reacted by keeping premium increases below their historic
levels. This reflects both competition from HMOs and cost management

initiatives among indemnity plans. In its budgeting process for the
''- 23 -

current year, HCHP has made restraining costs a major priority, and RIGHA was
forced by the presence of a new IPA competitor to reduce its annual rate of
premium increase to 3 percent in 1985, compared to 14 percent in 1981 and 1982
and 9 percent in 1983.! In addition to restraining premium increases, Bay
Pacific is introducing multiple benefit programs that allow the employer to

elect higher cost sharing in return for lower premiums.

Another tactic for remaining price competitive is to vary premiums in
geographically distinct market areas. For example, HCHP introduced a
separate, lower premium structure in the suburbs surrounding Boston because a
premium structure reflecting the use of expensive downtown teaching hospitals

placed it at a competitive disadvantage in those communities.

Interestingly, none of the HMOs we visited have availed themselves of
the full flexibility in premium setting -- known as "community rating by
class" -- that federal law permits. Community rating by class entails varying
the rates charged each group to reflect objective factors, such as enrollee
age and type of industry. Some argue that this flexibility allows HMOs to

approximate the experience rating practices of indemnity insurers.

Instead, the plans use strict community rating, with some minor
variations. One plan President said, tongue-in-cheek, that HMOs are not
sophisticated enough to do anything more complex. More to the point, strict
community rating has the advantage of simplicity in an era of rapid expansion.
Pricing is facilitated, and the large actuarial and underwriting staffs that
characterize the typical insurance company are avoided. Also, complex rating
structures can leave the plans more vulnerable to having to negotiate premiums
with employers. However, several HMOs said that they are reassessing their
premium setting practices in the face of increasing competition, which may

force them to adopt more refined pricing mechanisms.

 

Some of this reduction reflects lower rates of inflation in the economy
as a whole, but not all of it by any means, and RIGHA is assessing
whether the marketplace will sustain even 3 percent increases.
''- 24 -

C. CONSUMER RELATIONS

Health care is an emotional product, and although quality is difficult
for consumers to assess, the way they are treated by an organization is not.
The member services or consumer relations department is an important link
between the HMO and its ultimate customer. It is a vehicle for answerina
consumer questions and a vital source of feedback to plan management on
providers' performance. The department is used by some plans to track
problems and/or find aspects of the health plan that are problematic or -
confusing to members. By using consumer relations in this way, the plan is
often able to turn a complaint into a positive interaction, i.e., the
opportunity to serve an individual member or improve the plan. Word of mouth
is a powerful marketing tool; hence, satisfied customers are a valuable asset,

particularly in an era of increased competition.

1. Investment of Resources in People and Systems

One characteristic of many plans is that they have not stinted on
resources, but instead have hired sufficient staff, and have developed
training programs, job requirements, and performance standards to ensure a
high level of customer service.

Maxicare, for example, hires only college graduates as consumer affairs
representatives, all of whom participate in a formal, three-week training
program. Maxicare has one representative for approximately every 8,000
members, which is a relatively high staffing ratio compared to other plans.
HMO-PA trains specialized complaint researchers in areas such as enrol] |ment
and claims, where problems typically occur; the plan has also developed
Consistent answers to commonly asked questions, which are circulated in memo

form to all staff who encounter the public.

The telephone is a major tool of consumer relations, and a number of

plans have been innovative in its use. While not part of consumer affairs,
''- 25 -

HMO-PA's telephone marketing staff perform a customer service by calling all
new members to welcome them to the plan and answer any questions. HMO-PA has
invested in computerized telephone systems, similar to those used by airlines,
which automatically record caller waiting times and divert calls to available
representatives. Lifeguard is investigating the possibility of installing an
automated response center that would allow members to call for taped answers

to their questions at any time of the day or night.

As another example of the investment in consumer relations, Bay Pacific
annually queries its entire enrollment through a membership satisfaction
survey, the results of which are reflected in changes in benefits or plan
operations. It has also instituted a program of calling members in selected
accounts 90 days prior to open enrollment to discuss satisfaction with the
HMO.

2. Strong Service Orientation

Managers want to make it easy for members to reach not only the consumer
affairs department but also physicians and nurses throughout the plan. The
HMOs have devised creative ways of ensuring member access and improving

service.

HMO-PA makes regular, unannounced checks on primary care physicians by
calling their offices on weekends and in the evening; if the response time is
over 30 minutes on two attempts, the physician is informed that he or she is
in violation of plan standards and may ultimately be disciplined. The plan
also requires that physicians have beeper systems that enable them to be
contacted when they are away from the office. HCHP regularly conducts checks
to see how quickly phones are answered at various locations throughout the
plan. Lifeguard consumer representatives give their names and invite members
to call back with any further problems they may encounter; in addition, calls

are divided alphabetically to promote continuity.
''-~ 26 -

A number of plans actively encourage the airing of complaints because
they want to know if members are unhappy. To facilitate the grievance
process, both Maxicare and HMO-PA provide members with forms so that letter
writing iS unnecessary. Maxicare and Capital Area have representatives onsite
at several locations to improve access for members, allow face-to-face
contact, and defuse problems early. Maxicare consumer representatives can
authorize payment of claims up to $100 for walk-in or telephone problems,
which the plan believes contributes to the morale of representatives as wel]
as to member satisfaction.

3. Information from Consumer Relations as a Source of Feedback

Consumer relations can be a significant source of feedback to management
on plan performance. In addition to solving problems and answering questions
as they arise, consumer relations staff serve as a source of information to
the plan as a whole. Many HMOs have formal or informal procedures to classify
the nature of calls, report this information to other managers, and follow up
with corrective strategies.

RIGHA incorporates input from consumer complaints into its quality
assurance process; it has, for example, redesigned its telephone appointment
system in response to complaints about access. Lifeguard uses member
complaints as one source of information about possibly inappropriate care by
physicians. The plan's consumer relations staff views itself as the hub of a
wheel, performing an integrative function across all departments. HMO-PA uses
consumer relations to determine where problems exist in the health service
delivery system; it tracks all complaints by category, disseminates the
results, and makes adjustments accordingly. If new members are unhappy with
the HMO's lock-in, for example, the sales pitch of marketing reps will be re-
examined. HMO-PA also surveys a sample of patients from each primary care
physician's panel as part of the annual recertification process described in
Chapter V. HCHP surveys a sample of its members every two months, tabulates

about 20 measures of member satisfaction separately for each health center,
''4

- 27 -

and watches trends closely. One change it made in response to member feedback
was to increase monitoring of telephone calls in order to catch problems early
and reduce waiting times. Member preference for small health centers has also

been a factor in the plan's moving to smaller centers.

4. Attention from Top Management

As described above, many HMOs prepare summary reports for management
describing the types of calls received from members. These reports often
receive top-level attention. For example, RIGHA's medical director personally
reviews most complaints, and the CEO of USHCSI (the parent company) frequently
visits the HMO-PA member services department. The CEO of Bay Pacific receives
a monthly summary of complaints, and the board receives a quarterly summary.
Maxicare's President also receives a monthly summary of all complaints,
classified by type of problem, and the regional medical director sees all
medically related complaints. This senior management focus is another
guarantee that the HMO will be both responsive to member needs and able to
adjust to the market.
''= B& «

V. PROVIDER RELATIONS

A. INTRODUCTION

In addition to having effective cost management, successful HMOs need a
good product in the form of accessible, high quality physicians. Physicians
are largely responsible for an HMO's reputation in the community, and how they
are selected, organized, and paid help define the HMO. All health plans need
a strategy for bringing physicians close to the organization and for involving
them in the business so that they internalize the competitive goals of the
plan. A combination of "psychology and behavior modification,” in the words
of one executive, is the most effective method. Physician leaders and
managers play a major role in implementing this strategy by brokering the
relationship between physicians and the plan. The nature of physician
relations, and therefore the task of physician leaders, is different in staff
model plans which "make" their product by delivering services through their
own employees and in IPAs which “buy" it through contracting.

HMOs face a natural tension arising from their dual role as providers of
care and insurers who are financially at risk, yet the HMOs in our study
display the ability to balance the requirements of service delivery and cost
management. The utilization of services can be controlled in a number of
ways. One strategy is to select physicians with efficient practice patterns;
however, the plans report that their ability to do this is limited. Rather,
they rely on a combination of the following three strategies:

@ Financial incentives.
e Administrative controls over service utilization.

e@ The fostering of behavioral change among physicians through
education and the promotion of an organizational culture.
''ly «

- 29 -

Most plans pursue more than one of these strategies. However, there are
variations by model type, and IPAs will rarely be able to instill an
organizational culture that is as strong as that of a closed panel plan.
Similarly, the use of financial incentives may clash with the culture of staff
models such as RIGHA and HCHP but be more acceptable in a proprietary network

that contracts with independent physicians or medical groups.

A common feature of all _the plans is the recognition of a need for
communication and education. Of particular concern is physician understanding
of utilization statistics. Physicians must be cognizant of the impact of high
utilization, including excess referrals to specialists and use of lab and x-
ray services, on cost. This holds true even in plans where the physicians are
heavily at risk, such as HMO-PA and SHARE, because physicians who are losing
money are not likely to stay with the plan or continue providing high quality
care. However, communication must be two-way, and many of the plans rely on
clinicians for information about what is happening in the delivery system or

in the local competitive environment.
This chapter discusses four aspects of HMO provider relations:
e the role of physicians and hospitals, mest notably how they are

selected and the nature of their relationship to the HMO;

@ provider reimbursement, focusing on risk sharing and financial
incentives;

e utilization control; and

quality assurance.

B. PHYSICIANS AND HOSPITALS

For all of the HMOs studied, relations with physicians are the starting
point for the delivery system. In most of them, primary care physicians are
especially critical. At HCHP and RIGHA, hospitals are also an integral part
of the plan, while at HMO-PA they are viewed more as contractors. Other plans

fall in between on this spectrum.
''- 30 -

The way physicians are selected, the leadership role they assume, their
involvement in plan management, and the nature of hospital relationships are
highlighted in this section.

1. Physician Selection

The process of selecting physicians is important to most of the plans we
visited, although some have more structured approaches than others. The
process is always somewhat subjective, and self-selection by physicians occurs
as well. Reflecting the increase in supply of recent years, all of the HMOs
face a buyers' market for physician services and can afford to be selective.
However, this was not always the case; both HMO-PA and Capital Area, for

example, encountered recruiting difficulties in their early years.

HMOs that do select physicians carefully look for different attributes
and establish their recruitment criteria accordingly. Some look for knowledge
and understanding of prepaid group practice. RIGHA, for example, requires
physician candidates to interview twice at the plan so that their knowledge
and attitudes about HMOs can be fully explored; it also conducts careful

reference checks. HCHP pays particular attention to academic background and

ability to obtain privileges at prestigious teaching hospitals. Others
require board eligibility and review credentials but are more concerned with
the location, accessibility, and aesthetic appeal of the office. Maxicare
California recruits high quality medical groups with strong reputations in the
community; lengthy applications are required, and every facility must pass a
pre-contract review that includes two site visits. Maxicare says it seriously

reviews fewer than one in ten applications received.

HMO-PA believes that selecting physicians carefully initially is easier
than terminating poor performers later. The plan especially seeks to recruit
primary care physicians with an active hospital practice because in its
experience these physicians are more confident of their medical skills and
therefore make fewer referrals than those without a significant hospital
practice. HMO-PA also visits the office of each applicant to examine

See
''- 31 -

recordkeeping, appointment scheduling, and physical appearance; the plan will
not, for example, hire a physician who schedules more than five or six
intermediate visits per hour. In addition, one of the HMO's medical directors
interviews each applicant. One purpose of the interview is to assess the
applicant's attitude; for example, the plan prefers to reject physicians who
are angry about HMO development but feel they must join only to protect their
practice. HMO-PA denies 20 to 40 percent of primary care physician
applicants, and those accepted are on conditional status for the first two
years. SHARE, Capital Area, HCHP, and Bay Pacific also place new physicians
on probation for an initial period.

Although some plans feel they cannot survive without careful physician
selection, this is not umiversally true. As is more typical of provider-
Sponsored IPAs, Lifeguard and Bay Pacific will accept any physician who is a
member of the local medical society in good standing. Although membership is
now closed, Lifeguard previously accepted physicians on a first come, first
served basis. One of Bay Pacific's IPAs now charges a $3,000 participation

fee and has a waiting list.

The IPA type of HMO serves a marketing function for physicians and can
become an ongoing source of revenues, a fact that the plans stress in
recruiting. However, according to one plan executive, it takes two years
before a physician fully embraces the HMO, understands its operating

principles, and realizes what it can do for his or her practice.

2. Physicians in Leadership Roles

One or more physicians typically are key members of the management team.
In addition, other physicians who have longevity with the plan, sit on the
board, or are widely respected by their peers are often solicited by
management for advice and for their ability to lead other physicians. Most of
the plans believe that a highly placed and visible physician, usually the
medical director, is important so that "rank and file” physicians can interact

with one of their own. Physicians are generally more integrated into
''~ 37 ~

management at all levels in group and staff models. In physician or hospital
sponsored IPAs and networks, physicians often play a dominant role in
policymaking, although not necessarily in daily management activities. In
entrepreneurial plans, there is a tendency for authority to be vested in a
management team that includes one or more physicians but has more non-

physician input.

Some of the qualities sought in physician leaders include: a practicing
primary care physician who commands the respect of his or her peers, an
understanding of the HMO business and the competitive environment, a
philosophic view that some controls on medical practice make sense, and a
readiness to confront their colleagues about their practice patterns. Some
plans report difficulty in finding physicians who are willing to confront
other physicians with utilization issues.

The plans all have physician leaders who serve as interpreters and
educators for both physicians and management. The position is a brokering one
to some extent, since the most effective physician leaders are those who can
communicate physician ideas and concerns to management and business needs to
physicians. Highlighting the importance of communication, several plans
report that physicians and nurses are the source of most innovation, such as

new ways of reducing utilization.

Physician managers must walk a fine line, and at SHARE and HCHP several
reported that they are sometimes seen by fellow physicians as co-opted.
Maintaining credibility as a physician is one reason some plans strongly
encourage managers and medical directors to continue their clinical practices.
At HCHP, it is unspoken policy that every physician with management
responsibilities, including the medical director, sees patients. In most of
the plans, physician leadership (and its strength as perceived by other plan
physicians) is important in recruiting new medical staff as well as in
negotiating payment issues and other policies. Such leaders also act as
troubleshooters, initiating contact and discussion with physicians who become

restless or disillusioned with the plan.
''- 33 -

At some of the HMOs, clinicians often have different objectives from
managers, further underscoring the need for physician leadership. In most
cases, the rewards for individual physicians are different from those for
managers. For example, physicians generally do not relish growth. Yet from
the viewpoint of most managers and investors, a growing organization is a
healthy one. Growth in a staff model can mean more crowding for physicians,
tighter scheduling, and slower service from ancillary providers. In an IPA,
growth can have a positive effect if the result is greater patient volume, but
it can also generate greater competition if more physicians are recruited.
Similar goal disparities can arise on other issues, ranging from benef it
package design (patient need as perceived by physicians versus market demand
as perceived by managers) to hospital selection (convenience to physicians
versus cost to plan). A successful physician leader accepts the need to

mediate and communicate among the various parties.

The plans understand that physicians are trained to be highly
individualistic and self-reliant; they are not easily herded. In addition,
the expectations most physicians developed in the course of their training --
in terms of both income and practice style -- are often at variance with the
reality of medical practice today. As a result, plans need a strategy for
bringing physicians close to the organization so that they can accept and
internalize its goals. The strategies employed by the plans range from giving
physicians full line authority for managing health centers as at  HCHP,
described below, to a combination of psychology (communication, education,
physician support) and behavior modification (financial rewards for good
performance) at HMO-PA.

HCHP has consciously strengthened its commitment to physician managers
and invests heavily in training. Several physicians in high administrative
positions have attended executive training programs at Harvard and Stanford
business schools at the plan's expense. Also, in addition to a planwide

medical director (one of two senior executives who share responsibility for
''- 34 -

overall plan management with the president), each of the eight health center
directors is a physician who has line responsibility for all health center
functions. This unusual practice is expensive and reflects commitment to the
concept of physician responsibility and accountability.

At both RIGHA and Capital Area, also staff models, the executive
director and the medical director have a close working relationship and are
often perceived as equals. In rural centers, Capital Area's medical directors
fulfill the executive director role as well and have complete authority for
operations. At RIGHA, each health center is run jointly by an associate

medical director and an associate administrator.

At Lifeguard and Bay Pacific, both provider-based IPAs, physicians are
heavily represented on the board, and the President of Lifeguard is a
physician. However, the day-to-day management is in the hands of non-
physicians. At both HMO-PA and Maxicare, one of the top decision makers is a
physician, but the physician perspective tends not to dominate HMO policy.

3. Valued Physician Relationships

Regardless of the role that physicians play in decision-making, the HMOs
view _a "win-win" relationship as critical. Several of the plans said that
keeping physicians happy contributes to member satisfaction. The plans also
recognize that physicians can potentially leave and take patients with them.
Thus, processes are in place for responding to physician needs and complaints
that are analogous to the consumer relations function. The open panel
(network and IPA) plans tend to invest staff and resources in provider
relations and treat physicians as they would clients. In staff models, where
most physicians are employees rather than contractors, physicians are treated
more as colleagues than as clients. In these plans, responsiveness to
physicians can be observed in the form of shared authority and physician

involvement in decision processes.

Some plans concern themselves mostly with primary care physicians,

making a distinction between them and specialists. The most dramatic example
''« 35 «

in our study is HMO-PA, where primary care physicians are financially at risk
for primary care and are responsible for coordinating all other medical
services. The plan is both more careful in selecting these physicians and

more concerned that they be comfortable with the plan.

IPAs such as HMO-PA and Bay Pacific employ staff who train physicians’
office employees to help them relate to the HMO. At HMO-PA, for example,
physicians and their office managers are taught how to organize an HMO
practice, including how to complete encounter forms and read utilization
statistics. HMO-PA also helps primary care physicians recruit new associates
and upgrade their telephone systems as needed. As another example, the
medical groups with which Maxicare contracts are heavily at risk, but the plan
offers assistance on such matters as how to compensate individual physicians

within the group and how to conduct utilization review and quality assurance.

Compensation is an integral part of good relations with physicians.
Under risk-Sharing agreements, physicians are typically well compensated if
the plan's financial objectives are met (e.g., HMO-PA, Maxicare, SHARE). A
number of plans stated that they try to ensure at least the equivalent of fee-
for-service income for primary care physicians, even before any bonuses are
paid. Similarly, Lifeguard's approach to maintaining good relations with
physicians is to pay reasonable fees and to pay promptly, usually within three

to five days.

4. Hospital Relationships

The HMOs we visited exhibited various attitudes towards their relations
with hospitals, reflecting in part differing perspectives regarding the

importance of hospital affiliations in marketing and physician recruitment.

HMO-PA believes that a hospital's location and willingness to negotiate
on price are most important; the company often identifies hospitals it wants
to affiliate with and then accepts applications only from physicians with

privileges at those hospitals. Hospital relationships, however, are not part
''- 36 -

of the plan's marketing strategy. Lifeguard views hospitals as secondary to
physicians in terms of patient satisfaction; neither plan markets its hospital
affiliations or believes the use of teaching hospitals is important, except to
recruit desirable physicians.

However, hospitals are becoming more important players in some markets.
especially when they assume financial risk. Maxicare is attempting to attract
members who have not previously joined an HMO because of the limited physician
and hospital choice. It recently began to capitate 15 high profile hospitals
in southern California. Along with their medical staffs, these hospitals will
accept risk for most aspects of patient care. Since many of the hospitals are
expensive, Maxicare can afford to contract with them only because they are

willing to accept financial risk.

Two of the staff model plans in the study have historically used
teaching hospitals extensively. RIGHA uses teaching hospitals affiliated with
Brown University almost exclusively and views this relationship as important
for marketing, consumer relations, and physician recruitment. HCHP's reliance
on university hospitals is a long-standing tradition and part of the plan's
identity. The plan also uses its own hospital for many nontertiary services
and, concomitant with its expansion to the suburbs, has contracted with
community hospitals near its suburban health centers. HCHP recently decided
to solidify its relationship with one Harvard teaching hospital, the Brigham
and Women's Hospital, at which all plan physicians at health centers using the
Brigham will have admitting privileges. Deeply discounted rates have been
negotiated for secondary care that roughly equal costs in HCHP's own hospital.

C. PROVIDER REIMBURSEMENT: RISK SHARING AND FINANCIAL
INCENTIVES

The HMOs in this study are able to operate successfully with different
types of payment systems. Staff models such as RIGHA and HCHP tend to make

less use of financial incentives than many IPA and network plans. Provider-
''= 37 -

based IPAs such as Lifeguard are less inclined to institute risk-sharing than
entrepreneurial, investor-owned plans such as HMO-PA, SHARE, and Maxicare.
Most important is that financial incentives and other methods of utilization
control (discussed in Section D below) are designed jointly; the commonality
among successful plans is not a particular set of incentives but rather a
carefully constructed model] that represents an appropriate mix of approaches

to cost management.

At first it might appear that capitating providers or otherwise
requiring them to bear a high degree of risk would allow the HMO to adopt a
relaxed attitude toward utilization management. However, such is not the case
for two reasons. First, if the providers fare poorly they are prone to have
negative attitudes toward HMO patients, thereby damaging member relations, and
may ultimately cease to participate. Second, they are likely to place
pressure on the plan for increased payment levels. The latter is particularly
a concern when individual services, such as pharmacy and radiology, are
capitated and then are regarded almost as free goods by referring physicians.
Thus, the HMOs in our study that have placed providers at risk have a tangible
"win-win" philosophy under which they retain responsibility for the success of
participating providers.

In our sample of HMOs, the incentives faced by physicians can be
categorized as:

e fee-for-service;

neutral (lack of incentives);
@ medical group at partial risk; or
@ individual physician at partial risk.

Hospitals are typically not at risk. However, competitive pressures are

resulting in greater interest on the part of hospitals in contracting with
''- 38 «

HMOs, including a growing desire to accept risk. In some plans we studied
individual hospitals are partially at risk (such as through a withhold from
charges), at risk for certain diagnoses (per case payment), or fully at risk
(capitated).

1. Fee-for-Service Incentives

Many IPAs pay physicians fee-for-service. Typically a percentage is
withheld, but this in itself does not constitute a meaningful incentive to
control utilization because the ultimate payment of the amounts withheld is
based on the performance of the plan as a whole and not on that of any one
doctor. Consequently, other measures to track and control] utilization are
necessary.

Lifeguard is an example of a plan that pays fee-for-service. Fifteen
percent of allowable fees are withheld to cover potential HMO budget overruns
and are typically returned to physicians at six-month intervals. Some
hospitals with which Lifeguard contracts are also subject to a risk withhold;
these funds become part of the same pool as the physician withholds and are
later returned to the provider if overall plan financial performance permits.

No bonuses above 100 percent of allowable charges are generated.

Although Bay Pacific capitates its IPAs for physician. services,
individual physicians are paid negotiated fees, subject to a risk withhold of
20 percent for services provided in a hospital and 10 percent for those
provided in a physician's office. Costs above the projected budgets for out-
of-plan referrals, ancillary services, and a portion of hospital care are
charged against this risk pool. At the end of the year, the remainder is
distributed to IPA member physicians. However, under the plan's Medicare risk
contract, individual hospitals and their medical staffs receive a single
capitation payment.
''- 39 -

This method of payment, adopted by Lifeguard and Bay Pacific, serves to
remind providers that they are not assured of full compensation if health
services costs are excessive overall. However, the collective incentive to
conserve is more than offset by the individual incentive to provide services
and be reimbursed on a fee-for-service basis. To counter this, Lifeguard and
Bay Pacific have instituted tight utilization control mechanisms. The primary
care physician serves as case manager and must authorize all referrals. The
plan also has pre-authorization for inpatient admissions and for many other
procedures and services, strong concurrent review, and a _ sophisticated,
computerized claims review system that results in regular scrutiny of

physician practice profiles.
2. Neutral Incentives

Most staff model plans pay physicians a straight salary, which has the
effect of removing any fee-for-service incentive. Some plans also award

bonuses based on planwide or health center performance.

At RIGHA, HCHP, and Capital Area, all staff models, most physicians are
salaried and do not face direct financial incentives to alter patterns of
care. However, there are other motivations for controlling utilization.
Budgets are carefully monitored at the department level, and managers
disseminate utilization statistics. Indirect incentives exist since funds for
salary increases and bonuses (HCHP and Capital Area) depend on a positive
bottom line. However, careful selection of physicians and physician loyalty
to the plan are clearly more important than these incentives. In addition,
staff model plans create an environment where interaction with peers and the
availability of many specialists on-site allow for more informal discussion of

cases and, perhaps, fewer referrals.

This neutral incentive system does not encourage greater productivity.

since compensation is not directly affected by the volume of services
''- 40 -

provided. As a result, HCHP is experimenting with a new payment mechanism
that provides incentives to improve productivity. Primary care physicians
will be paid 85 percent of the normal Salary for their specialty and

seniority, with additional compensation accruing as a function of panel size.
3. Medical Group Incentives

Incentives at the medical group level involve placing groups of
physicians at risk in varying degrees. The groups must then develop an
internal strategy for physician recruitment, payment, and utilization
controls. For example, SHARE places physician group practices at risk for
both physician and inpatient services. In the first three years of a group's
contract, they share surpluses equally with the plan; after that, 100 percent
of the hospital budget surplus is returned to the group. Maxicare capitates
its groups for physician services. For hospital services, it establishes
expenditure targets for each group and shares fifty-fifty in any surpluses but
fully absorbs losses. All of these arrangements include stop-loss provisions
that limit the financial risk associated with very expensive individual
patients.

4. Individualized Incentives

Perhaps the strongest form of individual physician incentives is
capitation of primary care physicians combined with incentives to minimize use
of specialists and inpatient care. Specialists, either individually or in
small groups, are also capitated by some plans.

HMO-PA offers good examples of both. It capitates small primary care
offices (usually one to five physicians) for primary care services and places
them at risk for most of the cost of specialist referral services. Targets
are set for specialty services, and any surplus relative to the target is paid

in full to the primary care physician. Should the primary care physician face
''« #1 «

a loss, it is shared among all participating physicians. However, primary
care physicians are not at risk for radiology (other than simple x-rays),
laboratory, and mental health, which the HMO capitates separately. Individual
primary care physicians also share hospital surpluses (relative to a target)
equally with the HMO, while the HMO is at risk for hospital deficits.

To create countervailing pressures to assure that enrollees receive
appropriate services, HMO-PA has carefully designed mechanisms for auditing
primary care physician practices and soliciting consumer feedback. The plan
audits every doctor's office annually, which includes examining utilization
Statistics for evidence of underutilization and reviewing any complaints filed
against the office. Underutilization is detected principally through an
analysis of encounter forms that physicians are required to complete for each
patient visit. Finally, the plan makes physicians aware that patients can

"vote with their feet" and switch physicians if they are dissatisfied.
5. Hospitals and Other Providers at Risk

HMOs usually reimburse hospitals on a negotiated per diem or discounted
charge basis. Two of the plans in this study, HCHP and Maxicare, each own a
small hospital that they use for some secondary services and, in the case of
HCHP, urgent and after-hours care. However, even in these plans a majority of

hospital services are provided by community hospitals under contract.

Increasingly, HMOs are seeking to put hospitals at risk for all or some
part of their services. Four of the plans have arrangements with selected
hospitals to transfer financial risk. In some cases, the plans would not
elect to use certain high cost hospitals if capitation were not the mode of
payment. The fact that so many well regarded but expensive community and
teaching hospitals are willing to accept risk also reflects heightened
marketplace pressures.
''7 a

Maxicare's "Project Window" in southern California is the most ambitious
attempt at hospital capitation. Fifteen prestigious teaching hospitals and
their medical staffs (not known for conservative utilization patterns) are
fully capitated for all physician and hospital services, excluding out-of-area
coverage and selected other items. HMO-PA has also capitated two Philadelphia
teaching institutions, a move initially prompted by the high utilization
patterns of the associated medical faculty. HMO-PA has further innovated by
paying some hospitals on a per case basis; for eleven procedures that account
for between 40 and 50 percent of admissions, the HMO has developed its own
prospective payment system. The plan has, for example, achieved significant
Savings on admissions for normal delivery and open heart Surgery. Capital
Area has entered into joint ventures with three smal] community hospitals in
which the hospitals are at risk for inpatient costs. Bay Pacific has risk
contracts with all the hospitals it uses in San Francisco and San Mateo.

Maxicare and HMO-PA also capitate community pharmacies. HMO-PA limits
the pharmacy's risk by guaranteeing the acquisition costs of drugs, should
those costs exceed the agreed-upon capitation levels. At Maxicare, pharmacies
are at full risk for prescriptions, but the plan provides them with
considerable assistance to help lower cost factors. It also monitors drug
utilization, focusing on high cost drugs, and educates physicians about cost-
effective prescribing patterns.

D. UTILIZATION MANAGEMENT

Utilization controls are structured to be consistent with financial
incentives and other organizational characteristics. In general, HMOs have
strong administrative controls on utilization and/or Strong incentive
programs. Some of the plans we studied believe that both are needed. RIGHA
and HCHP, however, have few controls or incentives and instead rely on
physician selection, ongoing education efforts, and a strong organizational
culture to maintain efficient utilization patterns. The range of utilization
management mechanisms, many of which are used in various combinations, include
direct administrative controls, other incentives and deterrents (financial and

nonfinancial), education and feedback for physicians, and peer review.
''- 43 -

1. Direct Controls

Many HMOs impose procedural requirements with which providers and
patients must comply. One of the most common is pre-authorization for all
elective inpatient admissions. Pre-authorization may also be required for
ambulatory services such as CT scans, home health care, or costly drug
therapies. Bay Pacific, Lifeguard, and Maxicare all require pre-author ization
for elective hospital admission. HMO-PA requires notification but does not
itself authorize admissions. Although it believes that preventing
inappropriate admissions is crucial, it prefers to give physicians the
incentive to hospitalize appropriately and avoid the role of granting or

denying authorization.

Second, many HMOs will not authorize hospital admissions for procedures
that can be performed on an outpatient basis. Ambulatory surgery rules tel]
providers that an HMO expects particular procedures and surgeries (e.g.,
cataract removal or hemorrhoidectomy) to be performed in an outpatient setting
unless special circumstances dictate otherwise. Both Lifeguard and HMO-PA

have such a requirement.

Lifeguard will not authorize certain surgical procedures (e.g.,
hysterectomies for women under age 35) without a mandatory second opinion from
a consulting specialist that it selects. As part of its agreement with
providers, some HMOs (Lifeguard, HMO-PA, Maxicare, Bay Pacific) specify that
pre-admission testing be performed on an outpatient basis or on the day of
surgery. Bay Pacific reports that 95 percent of its admissions are on the day
of surgery. Lifeguard and HMO-PA have rules prohibiting weekend admissions in

non-emergency situations.

Finally, the companion to hospital pre-authorization is inpatient
concurrent review, which is conducted aggressively by some plans (Lifeguard,

Bay Pacific, Maxicare) and less aggressively by others (HMO-PA, RIGHA, HCHP,
''- 44 -

SHARE, Capital Area). Still, every plan in the study devotes some resources
to monitoring inpatient care. At Lifeguard and Bay Pacific, the status of
every hospitalized member is reviewed daily by UR nurses who are in telephone
contact with the hospital nursing and discharge planning staff. At Maxicare
in southern California, length of stay estimates are reviewed at least every
three days by UR nurses who do both onsite chart review and telephone
monitoring. At other plans, only selected diagnoses are routinely monitored
(e.g., those with the potential for discharge to home care). HMO-PA, for
instance, targets concurrent review activities on patients who have been in
the hospital beyond a reasonable time and on diagnoses that appear

questionable or have potential for alternative care, such as back pain.
2. Other Incentives and Deterrents

Other incentives and barriers may also affect both physician practice
patterns and the care-seeking behavior of members. With the exception of the
“gatekeeper” system, in many of the examples cited below the incentive or
barrier has minimal effect in itself and must be assessed not in isolation but
in conjunction with other plan features.

A common way of controlling excess utilization is through the
"gatekeeper," or case manager, model in which a primary care physician must
authorize all specialty referrals and hospital admissions. Lifeguard, HMO-PA,
SHARE, and Capital Area all use this approach. RIGHA has a modified
gatekeeper system in which members can self-refer for selected specialty
services, specifically, dermatology, mental health, and gynecology. At HCHP,
primary care physicians must authorize specialty referrals, but specialists
may hospitalize patients without authorization from the primary care
physician.

Some HMOs do not allow physicians extra time in their schedules for

hospital rounds, creating an incentive not to hospitalize because it is more
''- 45 -

convenient for physicians to see patients in the clinic. Similarly,
physicians may be deterred from making referrals in “marginal” cases when
procedural barriers such as having to complete a form are required. (HCHP,
Bay Pacific, and HMO-PA require written referrals.) In addition, the
knowledge that referrals become part of individual utilization profiles, as at
Lifeguard, may constitute a deterrent (particularly if such profiles are used

in performance evaluation).

HMOs have also adopted copayments selectively to control member demand
for some services, avoid adverse selection, and keep premiums competitive.
For example, copayments for mental health and emergency room services can be
$20 per visit or more, although copayments for most visits are lower (under
$10). Some plans also limit the number of ambulatory services they will cover
per year. For example, Lifeguard specifies that it will pay for only one
complete physical annually, and virtually all plans limit the number of
outpatient mental health visits. Finally, long waiting times for specialists,

whether intentional or not, are another type of barrier.

HMOs are increasingly providing members and in some cases physicians
with incentives for early discharge, particularly for maternity care. For
example:

e For normal delivery, HMO-PA gives mothers discharged within two days
both a check for $75 and a home visit from a pediatric nurse
practitioner.

e HCHP is pilot testing programs to provide new mothers with home
visits from homemaker aides and nurse practitioners.

In addition, HMO-PA gives the obstetrician and pediatrician smal] payments for
early discharge. It also pays physicians a case management fee of up to $300
per patient for supervising the delivery of home health services.

Finally, many plans provide members with services not in the benefit
package on a case-by-case basis when such services (e.g., a homemaker aide)

could substitute for more expensive institutional care.
''= £6 «
3. Education and Feedback for (and from) Physicians
Communication with physicians has three main purposes:

e To inform physicians about the competitive environment faced by the
plan.

@ To provide physicians with information about their own utilization
patterns and about cost-saving alternative treatment modes.

e To solicit physician input on all HMO matters: new programs to
reduce utilization, ideas for improving service to members, tips on
what the competition is doing, information on the type of
contracting arrangements that hospitals seek, and so forth.

The last point is less immediately obvious, but most plans believe that it is
critical. -HMO-PA cited examples of how feedback from physicians has enabled
the plan to improve its systems, e.g., by designing a better encounter form

and providing enrollees with plastic membership cards.

The plans approach communication differently. Maxicare in southern
California has quarterly dinner meetings for participating physicians with
speakers on topics related to quality and utilization management; between 70
and 80 percent of medical groups are represented at least once each year. At
RIGHA, all staff physicians and dentists belong to an association that meets
frequently. Both SHARE and Capital Area have regular departmental and medical
Staff meetings. Maxicare and RIGHA have pharmacy newsletters with updates on
generic drugs and cost-effective prescribing patterns, e.g., when to treat
acne with Accutane, a costly drug with side effects. Bay Pacific requires
each new physician to attend an orientation meeting and publishes quarterly

newsletters directed at IPA physicians.

The extent to which plans focus on individual physician practice
patterns varies, but many plans believe that such an emphasis is important in
changing physician behavior. At HMO-PA, practice statistics are provided to
each primary care physician office. Assistance on how to use and interpret

the reports is also offered. Each month, primary care physicians receive data
''-_ 47 -

on their number of office visits, specialty referrals, hospital admissions,
and hospital days per thousand, all in comparison to the HMO-PA average.
Physicians also receive lists of vendors with whom the plan has negotiated

special rates for specific procedures (e.g., home care services).

Lifeguard has an impressive ability to identify physicians with
inefficient utilization patterns through its automated ambulatory claims
review system. The plan's feedback to physicians is mostly in the form of
letters questioning a particular pattern of utilization. Participating
physicians soon learn that the services they provide are incorporated into

profiles, against which the necessity of future services will be evaluated.

HCHP has traditionally evaluated utilization and performance at the
health ‘center level, although it intends to assess practice patterns of
individual primary care physicians. Maxicare gives its groups in southern
California data on their utilization patterns each month. These reports,
discussed by the medical group's utilization review committee, contain group-
level data on hospital utilization and also case- or physician-specific data

when pertinent.

An HMO medical staff, physician group, or IPA may engage in regular peer
review. This can involve medical record review, discussion of difficult
cases, development of standards or protocols of care, and so on. At staff
model plans like HCHP and RIGHA, where opportunities exist for physician
interaction and socialization, peer review is largely informal. Some medical
groups -- such as Maxicare's largest, the Hawthorne Community Medical Group --
have established traditions of peer review which are maintained in the HMO
setting. In general, peer review, like quality assurance, tends to be more
formal in an IPA for logistical reasons. As described above, Lifeguard has
successfully created a peer review system in an IPA model plan whose

physicians are widely dispersed.
''- 48 -

E. QUALITY ASSURANCE

All plans articulate a concern for quality; however, their endeavors
assume various forms. Quality Assurance (QA) is easier in staff model plans
because they have their own medical records, access to clinicians is easier,
and physicians' salaries are reviewed and determined by the plan. IPAs are
more inspection-oriented in their QA efforts, incur higher costs because
physicians and records are not maintained centrally, and may create greater
resentment because the intervention is more formalized. QA traditionally-
centers on clinical process issues, largely assessed through retrospective
review of medical records. Most HMOs have expanded their definition of QA to
encompass member access to care, typically measured in terms of waiting times
for appointments. HCHP, as described below, has broadened its view of quality
to include many other aspects of health service delivery as well.

At RIGHA, under well defined procedures for quality assessment, each
department identifies its own areas of weakness through consultation with
various staff members, such as clinicians, consumer relations staff, and the
medical director. Corrective strategies are then formulated and approved by
the Board of Directors. Lifeguard believes that quality of care is encouraged
by emphasizing the physician-patient relationship and paying physicians on a
fee-for-service basis, thereby avoiding incentives to underserve. Maxicare's
QA coordinators work with its physician groups in conducting medical care
evaluations and other studies. They encourage these groups to adopt
recognized professional standards (e.g., Mayo Clinic standards for adult
physicals and American Academy of Pediatrics standards for children) and then
evaluate the groups accordingly, mostly through annual chart audits. At
SHARE, a QA committee chaired by a nurse practitioner examines complaints,

periodic member surveys, medical audits, and chart reviews.

HMO-PA's philosophy towards QA _ is market-driven; it views a well

staffed, sophisticated consumer relations department as an ideal way to
''- 49 -

identify delivery system problems. In addition to the grievance process,
consumers can highlight problems by changing physicians. HMO-PA's annual
process of recertifying physicians' offices includes surveys of member
satisfaction as well as a review of telephone response time, number of
grievances filed, physical appearance of office, and practice statistics.
Also, a very large hospital or specialty referral bonus will generate a close

examination of referral patterns to ensure appropriate use of consultants.

HCHP's approach is broader than the traditional. It views the quality
audit function as analogous to that of the internal audit, and it reports
directly to the plan's top management. HCHP's Vice President for Quality
Measurement is charged with developing measures of quality performance that
are quantifiable, the equivalent of financial statements for financial
performance. These measures include traditional health outcome indicators
(e.g., perinatal complication rates) and measures of technical process (e.g.,
steps taken when a patient presents with acute chest pain). They also address
access, defined as the ability to contact the plan easily via telephone,
acceptable appointment and waiting room times, availability of after-hours and
emergency care, and ease of referral to specialty consults. In the future,
the plan hopes to assess continuity, coordination, and interpersonal elements
of care. It also views staff morale as important in assuring quality, as well
as characteristics of the physical environment, such as the privacy and

dignity afforded patients.

Broadly, HCHP's goal is to establish norms of practice (e.g., by
specialty or for a particular diagnosis) and then to reduce the variance from
those agreed-upon norms. Where standards of care are clearcut, the plan
attempts to monitor adherence. For example, its widely acclaimed automated
medical records system serves to prompt clinicians, reminding them of patients
who need follow-up care (e.g., abnormal Pap smear results) or who are at risk
(e.g., patients taking lithium or rubella negative women who need immunization

against German measles). Printed reminders are sent to clinicians to inform
''- 50 -

them that action has not been taken or that a checkup is due. However, HCHP
has decided not to perform one traditional QA effort -- routine medical record
or chart reviews -- because it believes there are other, more direct, methods
of measuring and promoting quality.

Quality assurance and utilization control are closely related at most
plans, although at HCHP the two functions are discrete. At Lifeguard, the
same committee of physicians reviews both quality and utilization issues. At
Maxicare, QA nurses report to the Director of Utilization Control, and the
plan seeks to combine these two functions as much as possible. RIGHA has a QA
process that is not formally linked to utilization control; however, in many

instances the problems addressed through this process are utilization-related.
''- 51 -

VI. CORPORATE PHILOSOPHY AND MANAGEMENT

A. INTRODUCTION

Management can be conceptualized as entailing three functions. The
first is the leadership function. This includes having a vision of the
organization's future, creating a corporate culture, and communicating how
each person's day-to-day activities contribute to the organization's mission.
The second is the actualization of that vision and culture in terms of
management decisions. The third relates to the specifics of implementation on
a daily basis. This includes attention to personnel issues, cash flow,
administrative support systems, deadlines, data processing. public relations,
and so. forth. Lack of attention to, and improper execution of, these
seemingly mundane functions are the downfall of many small, growth-oriented

companies.

B. OVERALL LEADERSHIP

The HMOs in our study all exhibit a tangible, if at times difficult to
describe, corporate culture. One important aspect is the belief that work is
fun, a belief that is facilitated by rapid growth, which fosters opportunities
for advancement and for the assumption of new and = stimulating
responsibilities. One way Maxicare maintains on-the-job excitement is by
assigning projects to senior and middle management staff that are outside of
their usual areas of expertise. This also helps develop a cadre of people who
are knowledgeable across the plan. RIGHA seeks to create a caring environment
in which employees feel responsible for each others’ successes. It also
promotes the philosophy that nobody is expected to know everything, and
therefore individuals should solicit help from others. Lifeguard also seeks

to create an environment that encourages staff to seek help from each other.
''- 52 -

Concern with quality of care is part of the culture at many plans.
RIGHA and HCHP, both staff models, have gone to great lengths to instill the
culture that, although costs matter, quality of care is primary. At Maxicare,
an outside corporate director said that quality of care is the greatest

concern of the board and is discussed at every meeting.

All_of the plans exuge_a_ sense of optimism and convey high eneray
levels. They believe that they are the best in the business, can overcome
problems, and can adapt to changing environments. Although seemingly trite,
the drive to excel is strong. One executive at HCHP stated that the plan is
"the most achievement-oriented organization I've ever known." Another
commented that "every evening, half of the executive parking lot is full."
RIGHA operationalizes this attitude in its careful physician selection
processes, quality assurance programs, and reliance on Brown University
affiliated teaching hospitals. HCHP custom designs each new health center to
avoid "cookie cutter" architecture, which might be more economical. HMO-PA
has made major computer system changes virtually every year, and the systems
staff are in close touch with top management and constantly strive to improve
their products.

Leadership starts at the top, with the board of directors. However, the
role of the boards varies significantly among the plans, reflecting
differences in plan origins, the personalities of board members and senior
management, the distribution of ownership, and so forth. The board at RIGHA,
for example, is instrumental in setting the tone of the organization and
ensuring accountability of top management. However, a CEO that the board
respects has also proved to be important. The full board meets regularly and
also has four standing committees, responsible for: (1) finance and
management, (2) corporate planning, (3) consumer relations, and (4)
professional relations. At the other end of the spectrum, the most important
players on the board of HMO-PA and its parent corporation, USHCSI, are the
plan's senior management, and the outsiders on the board principally serve an

advisory function.
''- 53 -

The directors of HCHP and SHARE act as sounding boards for long-term
plans. The HCHP board includes several prominent individuals from the medical
community and the community at large, adding to the plan's image. Its
functions include approving budgets, capital expenditures in excess of
$300,000, and all leases and major contracts. The SHARE board was

instrumental in helping the plan raise capital for expansion purposes.

The boards in several plans help bring outside perspectives. For
example, Maxicare said that physicians on the boards of their individual plans
articulate the provider perspective and also give physicians a sense of
participation in policy setting. At the corporate level, one board member, an
executive with Universal Studios with no formal background in health, has been
a business confidant of the CEO for many years. At Lifeguard, the Director of
Personnel and Compensation of Hewlett-Packard, a large electronics firm,
provides assistance on personnel, management, and long-range planning issues

and also reflects the attitudes of a large employer.

Another important aspect of leadership are the personality and abilities
of the chief executive officer (CEO). Two traits stand out. The first is
entrepreneurial drive. As discussed in Chapter III, many of the plans were
first in their communities, and the spirit of innovation persists today.
Maxicare, SHARE, and USHCSI (the parent company of HMO-PA) are all multi-state
organizations and are expanding rapidly. Also, Maxicare has innovated in
creating a national accounts program as part of an effort to become accepted
as a national brand name. This enables an employer to sign a single contract
for coverage at multiple locations, obtain identical benefits, and receive a
single bill. Chapter IV on marketing presents other examples. of
entrepreneurship, e.g., how SHARE made aggressive moves to attract Medicare
and other nongroup enrollees, how SHARE and Maxicare were the first in their
communities to be federally qualified and avail themselves of the federal
mandate, and how all of the plans have sought to expand their provider

networks.
''- 54 -

Another trait is the longevity of both the CEO and much of the
management team. Maxicare, HMO-PA, Lifeguard, Bay Pacific, Capital Area, and
SHARE are still run by their founders, and many of the senior management have
been with the plan from its inception or shortly thereafter, reflecting both
the exciting environment and the opportunities for advancement. Many
businesses falter as they grow because the skills necessary to be innovative
at the start differ from those required to manage a large organization.
Clearly, the leaders of the plans in our study have met that challenge.

C. STRATEGIC MANAGEMENT

All of the HMOs can be characterized as having an ability to integrate
the various functions, such as marketing, finance, provider relations, and
‘Claims processing, and also display what Dr. Fred Wasserman, CEO of Maxicare,
describes as “organizational balance." Achieving organizational balance has
been critical in light of the growth that the plans have experienced.

Examples of organizational balance include:

@ designing the utilization review system to focus on problems that
might be created by the financial incentives that the physicians
face,

@ assuring that delivery capacity is expanding rapidly enough to meet
the demands created by enrollment growth,

@ not losing sight of quality considerations in the drive to reduce
costs,

e carefully planning which functions to centralize and which to
decentralize, and

@ adjusting management styles and practices as the number of employees
grows.

All_of the HMOs have had to decide how much to centralize the various
functions of the plans, particularly the multi-state corporations that oversee
several plans. The tendency of several of these corporations has, by and
large, been to centralize. Maxicare, for example, which has plans in 12

states:
''- 55 -

@ processes claims and maintains its enrollment/billing files at a
single location;

e sets all of its rates from the corporate headquarters; and

e exerts strong corporate supervision over the marketing function,
with the plan marketing directors (with the exception of the
California plan) reporting to the marketing director for the
corporation rather than the executive director of the individual
plan.

This centralization facilitates control over the plans during a time of rapid
expansion, relieves the individual plan executive directors of the burden of
having to hire and supervise people with certain technical skills (e.g., data
processing and actuarial), and maintains consistency in the product from the
employers’ and consumers' perspectives. At the same time, most HMOs allow
considerable autonomy in the delivery of medical services, preferring to rely
either on financial incentives (e.g., SHARE, Maxicare, HMO-PA) or on a shared
value structure (RIGHA, HCHP).

Another characteristic is strong systems of internal communication
within the organization, which both promotes a shared value structure and
achieves coordination in day-to-day decision making. Maxicare makes extensive
use of electronic mail, which the CEO feels not only speeds and enhances
communication but also allows the organization to function with fewer layers.
Both Maxicare and HMO-PA have created systems to assure that consumer
grievances are communicated to top management. HMO-PA avoids detailed job
descriptions and promotes the attitude, especially among senior management,
that anyone on the staff is available to help anyone else. RIGHA and
Lifeguard promote the view that there is no such thing as a dumb question,
thereby encouraging staff who face new situations to approach others for help.
RIGHA has frequent staff meetings and retreats that, from a narrow efficiency
perspective, might seem excessive. (On the other hand, Maxicare minimizes the
number of formal meetings.) In addition, all of the plans express a strong
belief in participative management, although there are differences in styles

among the plans, and some are more hierarchical than others.
''- 56 -

The ease of communication also facilitates an ability to act quickly in
response to both marketplace opportunities and internal threats. For example,
Maxicare and SHARE were the first HMOs to use the federal dual choice mandate
in their respective communities, and Maxicare submitted its request for
qualification even before the application forms were designed. One executive
at Maxicare commented that by the time most organizations finished planning,
it had already taken action.

D. MANAGEMENT EXECUTION

The day-to-day aspects of management receive scant attention in either
the business or lay literature. Best selling books are written about
differing corporate and leadership styles, and corporate intrigue is a topic
of novels and television shows. Nobody to our knowledge has produced even a
third-rate soap opera about such matters as personnel development, accounts
receivables management, the investment of cash assets, or the updating of
computer systems. Yet, when these functions are not performed properly, the
resulting drama can be considerable.

Many of the plans invest heavily in training programs, most of which are
internally developed. Those for marketing representatives were described in
Chapter IV. Both HMO-PA and Maxicare also have extensive training programs
for member services (consumer affairs) representatives. Maxicare, for
example, devotes two full weeks to classroom and one to on-the-job training.
HMO-PA also has a program to train provider relations staff. HCHP sends
physician managers to executive training courses at top business schools. In
addition, several of the plans, including SHARE, HCHP, Bay Pacific, and
Capital Area, regularly hold management retreats, in part as a training
device.

The plans also pay close attention to financial management, assuring
that bills are rendered on time and that cash reserves are immediately
invested, mostly in safe short-term instruments. The plans have different

philosophies on speed of claims payment. At one extreme, Lifeguard seeks to
''- 67 =

process most “clean claims," i.e., those that are complete and do not raise
any utilization or other questions, within a few days in order to maintain
good relations with physicians. Another plan was delaying payment by Six
weeks at the time of the visit, but only because their growth had exceeded
their computer capacity, and they were actively working to achieve a three-to-

four week payment cycle.

One problem that has plagued many plans that have found themselves in
financial difficulty is “incurred but not reported" (IBNR) claims, i.e.,
claims for services that a provider has rendered but for which a bill has yet
to be submitted. All of the plans feel that they have good control on IBNR
claims. Costs for services that are prior authorized, such as hospital, can
be estimated with some accuracy, and historical patterns are analyzed to
estimate other IBNR claims.

All of the plans pay attention to data processing and information
systems. Maxicare has created a separate computer systems and software
development subsidiary. All Maxicare executives have computer terminals on
their desks, and the corporation has more than 900 terminals, of which some
600 are in southern California for use by the local plan and by the corporate
offices. Lifeguard is able to process most claims within 48 hours, and
staying current on data entry is viewed as key to having effective ambulatory
utilization review, at which they excel. HMO-PA has developed a comprehensive
approach to information systems that starts with a prospect list of employers
for marketing representatives to contact for the first time. Once an emp loyer
agrees to offer the plan, the prospects file is transformed into the group and
enrollment file for purposes of billing, issuing enrollment cards, handling of
enrollee inquiries, statistical analyses, and so forth. The data files are
carefully designed so that each relates to the others. RIGHA, jointly with an
outside vendor, has developed software packages for managing staff model HMOs;

they are considering marketing these software packages to other plans.
''- 58 -

VII. CONCLUSION

Some have suggested, only partly in jest, that managing an HMO to at
least break even used to be easy. Only a few simple practices had to be
followed. First, utilization review or reimbursement incentives needed to be
sufficiently effective that hospital use was kept 20 to 30 percent lower than
that in fee-for-service plans, not a difficult task in most communities.
Second, adequate controls were needed on incurred but not reported (IBNR)
claims. Third, common sense had to be exercised in marketing; since until a
few years ago there were likely to be at most one or two other HMOs in the
community, one could activate the Title XIII dual choice requirements to have
access to employees and obtain sufficient penetration to break even. Fourth,
good relations with physicians were important, not a big challenge once the
physicians realized that the HMO had a positive effect on their incomes and
“work hours.

This list might be supplemented by a few other guidelines that could be
followed by anyone with decent management instincts, reasonable interpersonal
skills, and an understanding of health services delivery and financing.
Indeed, one of the CEOs with whom we met wisecracked that his plan's success

in the current growth environment did not require great talent.

In actuality, managing an HMO is not easy, and sharper skills are
required today than was true even five years ago, almost a different era in
light of the veritable revolution that is occurring in health care financing
and delivery. By the same token, even sharper skills are likely to be needed
in the future. Although HMO growth is rapid and shows no signs of abating,
individual HMO marketplaces are becoming more crowded, and not all of the
''- 59 -

competitors are likely to survive. As illustration, until about two years ago
New Orleans was the last city of its size not to have an HMO; today, at least
six HMOs are competing with one another. The Chicago area, hardly a hotbed of
activity until recently, now has more than 20 HMOs in various stages of
development or operation, and numerous PPOs are being formed. Several of the
HMOs we visited for this study report competition from new entrants to the
market, in one case forcing the plan to keep annual premium increases

considerably below historic levels.

In addition, employers and insurance carriers are increasingly placing
restraints on the fee-for-service system, thereby reducing the utilization
differentials that HMOs can achieve. In doing so, they are often emulating
the approaches that HMOs have originated and refined over time. Primary among
these is utilization review, which has sparked the emergence of firms that
perform preadmission and concurrent review nationally by telephone. Also,
indemnity carriers and employers are beginning to negotiate prices with
hospitals and other providers. They are also adopting plan design changes and
taking other steps to shift the locus of care from inpatient to ambulatory
settings. Finally, some large corporations, such as Owens-Illinois in Toledo
and Zenith in Chicago, have created patient advisory services to steer
employees to efficient providers. Although the impact of these cost
management efforts has not been systematically studied, some dramatic results
have been reported. For example, some large corporations report reductions at
selected locations in rates of inpatient utilization by indemnity plan

enrollees that have exceeded 30 percent. !

 

Webber A., and Goldbeck, W.G., “Utilization Review." In Fox, P.D.;
Goldbeck, W.G.; and Spies, J.J. Health Care Cost Management: Private
Sector Initiatives. (Ann Arbor: Health Administration Press, 1984).
''- 60 -

This study represents a snapshot of a small sample of highly successful
HMOs at a particular point in time. One can only speculate as to how the
findings will differ if this study is repeated in a few years. Nonetheless,
some core characteristics that are likely to contribute to success in a less

forgiving environment can be distilled from the plans studied.

Superior management will become even more essential. The plans that
thrive will have leaders who are innovative and are capable of rapidly turning
threats into opportunities. They will also be able to integrate the various
functions of the plan, such as by Synchronizing the utilization contro]
mechanisms with the financial incentives, assuring that delivery capacity is
expanded consistent with enrollment growth, and not losing sight of quality of

care considerations in the interests of constraining costs.

Related to the traits of flexibility and creativity is the need to stay
apprised of a marketplace that is changing at an accelerated rate. This
entails both constantly redesigning products and adding to the range of
products. For example, some HMOs are responding to the threat of PPO growth
by using the HMO's provider network and cost management skills to develop
their own PPO product, thereby appealing to consumers' desire for free choice
of providers. Staying in touch with the marketplace also requires an ability
to differentiate the plan in the face of larger numbers of competing plans,
effective communication programs with employers and prospective enrollees, and
a skillfully designed and professionally conducted sales effort. It will also
entail marketing to new populations, most notably Medicare enrollees, smal]
businesses, and in some states Medicaid beneficiaries.

The successful plans will also respond to the needs of employers and
enrollees. Employers are increasingly demanding data on performance and
greater flexibility in HMOs premium setting practices. The HMOs may also have

to be more flexible in tailoring benefit package options.

Having satisfied enrollees is a prerequisite to continued growth, and

the successful plans will find ways to cement consumer loyalties and
''- BI -

differentiate themselves from the competition so that they are not competing
only on the basis of price. One aspect of building loyalties entails having
an accessible network of providers who are consumer-oriented and offer high
quality care. Staff and group (closed panel) model HMOs, in particular, will
need increasingly to network with fee-for-service providers to improve
accessibility. The plans will also have mechanisms for identifying employee
problems early, dealing with them promptly, and taking steps to reduce their
reoccurrence.

Finally, good relations with physicians, particularly those who deliver
primary care, are essential, especially in situations where most participating
physicians contract with several plans and can urge patients to shift from one
alternative delivery system to another. Furthermore, with the proliferation
of HMOs, physicians will increasingly "shop" for HMOs and be more selective in
their contractual arrangements. Fostering good relationships will entail good
communication; reimbursement mechanisms and amounts that are perceived as
fair; assistance in patient management, such as by advising on good office
management practices and by making available comparative data on utilization
patterns; a balance between the need for adequate utilization controls and the
avoidance of paper work and procedural burdens; and a recognition of the

physician's desire for a sense of clinical independence.

An HMO has three principal "stakeholders:" the enrollees, the
physicians, and the plan itself, as represented by both the owners or board
members and by the employees. An impressive feature of all of the plans we
visited was their "win-win" attitude that all three must gain from the
relationship. This attitude, along with their talented and highly energetic

management and staff, will stand the plans in good stead in future years.
''''APPENDIX A

OVERVIEW OF PREVIOUS RESEARCH

There is a Sizable body of literature relevant to HMO success and
performance. The types of literature include general work on excellence or
success in business, excellence in health care organizations,! the performance
of HMOs in terms of utilization and cost contra, attempts to differentiate
between successful and unsuccessful HMOs®, and various case studies of
particular HMOs. These case Studies focus on indicators of financial
performance’ and documentations of HMO failures,” successes”, and

turnarounds’.

This section primarily addresses success factors internal to the
organization, although selected studies of external factors such as market
demographics and the nature of the competition are also reported. Moreover,
this chapter is largely restricted to a discussion of factors that various
authors postulate are related to HMO success or failure. Thus, works dealing

with general management and case studies of individual HMOs are not reviewed.

1. Internal Success Factors

8 In a comprehensive review of the literature

Luft and Trauner, 1981.
through 1981, Luft and Trauner synthesized the descriptive studies on factors

affecting HMO performance. They grouped the studies into six internal
''A-2

management categories, plus the external environment. The following are the

authors' major findings from the literature:

e Sponsorship and goals. These reflect the attitudes and orientation
of the professional staff. Lack of sufficient commitment to the HMO
principle has been cited as a cause for failure in some IPAs.
Consumer involvement and for-profit or nonprofit status appear to
have no consistent effect.

@ Organizational and administrative structure. Low administrative
costs in relation to HMO revenues may be more important than overall
growth in enrollment. There is great variation in the time required
to break-even and in enrollment size at breakeven. IPAs are less
costly to develop than group/staff models. Inadequate manager ial
experience has consistently been related to failure. Ultimate
Success is contingent upon establishing effective controls over
utilization.

e Methods of paying the physicians. Risk-sharing agreements whereby
physicians share in the HMO's financial gains and losses can improve
performance. HMOs may be adversely affected when physicians in the
plan continue to treat fee-for-service patients because physicians
may (1) shift costs from their own patients to the HMO and (2) be
less responsive to HMO patients.

e Physician staffing. An HMO's success is directly related to its
ability to recruit a cadre of physicians who are committed to
practicing cost-conscious medicine. HMOs that start operations with
a full range of specialists and too few primary care physicians are
at a competitive disadvantage. Sudden and unexpected enrollment
growth can create significant staffing difficulties.

e Control of hospital services. HMOs that control their own hospital]
reap the benefits of saving physician and consultant time, avoid
duplicating equipment and personnel, and exert more control of
admissions, discharges, and bed allocation. However, to fill a
hospital requires large enrollment in a densely populated area. The
alternative is to contract with hospitals and negotiate rates. An
HMO may have the best opportunity for negotiating discounts with
hospitals that have excess bed capacity. On the other hand, it may
choose to forego the discount and use a facility with a high
occupancy rate in which pressure for space has created efficient
patterns of utilization.
''A-3

e Marketing of services. Six components of a successful HMO marketing
program are: evaluation of enrollment prospects in specific groups,
determination of appropriate premiums and benefit packages based
upon knowledge of the competitive environment, development of
presentations for key health benefits personal and union officials,
production of marketing materials, servicing of existing accounts,

and knowledge of the competitive environment. HMOs need a clear
marketing strategy that is understood and accepted by HMO management
and the medical staff. Overselling may lead to unrealistic

expectations by members that can hamper efficient use of HMOs staff
and facilities.

Strumpf and Garramone, 1976.? The authors found two internal factors

contributing to success, a nucleus of committed physicians and sufficient
start-up capital. They cite three reasons for failure: lack of commitment by
the sponsoring organization, lack of appropriate management structure or
expertise, and over ly optimistic projections of market penetration, usually a
function of ignorance of consumer and provider barriers to acceptance.

Wasserman, 1976, 1°

In his doctoral dissertation, the author studied six
successful plans and 12 failures. Factors correlating with success included a
lower ratio of administrative staff to enrollees, incentives to control
hospital utilization, and “organizational balance", a quality Wasserman
defined as the ability to integrate across functions and to understand the
consequences and implications of management decisions on all other parts of
the organization. Attributes of failed HMOs were higher administrative
expenses, more emphasis on the profit motive and greater use of proprietary
hospitals, less emphasis on quality, less group orientation among physician
staff, less incentive to control hospital use, and greater dependency on state
Medicaid contracts.

General Accounting Office, 1978. !! GAO evaluated 14 federally qualified
HMOs for compliance with the requirements of the 1973 HMO Act. The findings
showed most plans in compliance, although GAO expressed concern about the
ability of some of the HMOs to achieve financial independence within five
''A-4

years. Specifically, GAO was pessimistic about the long-term financial
independence of six plans and concerned about another three. It concluded
that HMOs depending heavily on health care resources in the fee-for-service
sector lack control over a significant portion of their costs (although
utilization is controlled, the decision-making of managers is not). Second,
an _HMO's pricing strategy is as important as cost control (underpricing
services to be competitive can cause long-term problems). Third, effective
Management_is critical for HMO success.
Jugovan & Blair, Inc., 1979.!¢
to the federal government by 40 qualified HMOs. Their purpose was to identify

Jurgovan & Blair studied data submitted

and rank factors that both characterize successful HMOs and can discriminate
between successful and struggling or failed plans. They tracked four
categories of expense as a percent of revenue (total, administrative, medical,
and hospital); hospital statistics (days per 1,000, discharge rate, average
length of stay); and deficit per member per month. They found that low
administrative expense as a percent of revenue was the variable most

correlated with HMO success or failure.

Touche Ross & Co., 1982 (updated in 1983) .13 The Investor's Guide to
HMOs describes trends in the HMO industry geared to potential investors. The

 

Study highlights four key elements of successful HMOs: market acceptance
(noted as the most important factor), effective relationships with physicians,
established cost controls, and capable board and top management. The study
also includes information on the financial characteristics of HMOs. , including
capital needs. It profiles three HMOs, two of which are included in the
present study: Maxicare and U.S. Health Care Systems (HMO of Pennyslvania).

14 The authors state that "HMOs don't have

to fail," although the difficulties of managing physicians, instituting fiscal

Harrison and Kimberly, 1982.
''A-5

controls and appropriate management information systems, and managing growth
and change have resulted in HMO failures. Three common deficiencies cited by
the authors are lack of management skills, lack of understanding of the HMO

environment, and lack of ability to manage change.

2. External Success Factors

The role of external factors has been addressed in case studies of both
market (typically, metropolitan) areas and of individual HMOs as well as
through econometric (statistical) analyses. Luft and Trauner!? in their
review of the literature prior to 1981 found evidence to support the role of
certain external factors in promoting or impeding HMO development. They
reported that:

@ Local medical community resistance can slow HMO growth.

e Restrictive state laws appear to no longer impair HMO development,
although federal requirements for a broad benefit package and
community rating may place some plans at a competitive disadvantage.

e@ HMOs seem to have developed first in areas characterized by a large,
dense, and growing population, especially where that population was
relatively affluent, unionized, liberal, and covered by health
insurance.

@ The local health insurance market, particularly community norms for
the number of health plan options offered and the level of employer
or union contribution, can have a major impact on HMOs.

Various regression analyses have also been performed. Goldberg and
Greenberg found HMO growth to be related to such variables as high and rapidly
growing hospital costs, population mobility, and a high percent of physicians
in group practice. !® Another study, by Morrisey and Ashby, found HMO
enrollment to be negatively related to the percent of physicians aged 45 to 64
and positively related to per capita income. ?? It also found market share to
be negatively related to the percent of the population under age 14, the

percent over 65, the percent female, and the percent nonwhite.
''A-6

As part of a review performed in 1983 by Lewin and Associates, Over,
Watt, and Roenigk identified the following as some of the variables found in
case studies to impact favorably on HMO growth: 18

e Favorable business and physician attitudes.

e A high growth area with mobile, especially young, populations not
having strong physician relationships.

e Large employers with well paid employees.
e Low levels of unionization.

@ High medical costs as well as high ratios of physicians and beds to
population.

Building upon earlier research, Over, Watt, and Roenigk, who modeled

group/staff and IPA enrollment separately, found the following:

e IPAs were commonly formed as a competitive response to group or
staff models HMOs.

e@ HMOs tended to form in areas of high population density. However,
IPA market share (as opposed to the likelihood of formation) tended
to be lower in high population density areas than group/staff
models. Also, although HMOs tended to form in areas with higher
numbers of recent immigrants, their market share, unexpectedly, was
lower.

e Levels of physician and hospital supply affected IPA but not
group/staff market share.
''10

11

A-7

NOTES TO APPENDIX

Stephen M. Shortell, "High-Performing HealthCare Organizations:
Guidelines for the Pursuit of Excellence," Hospital and Health Services
Administration (July/August 1985): 7-35.

Harold S. Luft, Health Maintenance Organizations: Dimensions of
Performance (New York: John Wiley & Sons, 1981).

See notes 10-12.

Touche Ross & Company, Investor's Guide to Health Maintenance
Organizations (Washington, D.C.: Government Printing Office, 1982) and
The 1983 Investor's Guide to Health Maintenance Organizations
(Washington, D.C.: Government Printing Office, 1983).

See, for example, American Association of Foundations for Medical Care,
ChoiceCare Health Services (Washington, D.C.: Government Printing
Office, 1981).

See, for example, American Association of Foundations for Medical Care,
Physicians Association of Clackamas County; CompreCare: United
Healthcare (Washington, D.C.: Government Printing Office, 1980).

Staff of Physicians Health Plan, The Physicians Health Plan of
Minnesota: A Case Study of Utilization Controls in an IPA (unpublished

paper supported by the Office of Health Maintenance Organizations,
1980).

Harold S. Luft and Joan B. Trauner, The Operations and Performance of
Health Maintenance Organizations: A Synthesis of Findings From Health
Service Research (San Francisco: Institute for Health Policy Studies,
1981).

George B. Strumpf and Marie A. Garramone, "Why Some HMOs Develop
Slowly," Public Health Reports 91 (November/December 1976): 496-503.

Fred W. Wasserman, Health Maintenance Organizations: Determinants of
Failure or Success (Doctoral Dissertation: University of California-Los
Angeles, 1976).

U.S. General Accounting Office, Can Health Maintenance Organizations Be
Successful? An Analysis of 14 Federally Qualified HMOs (Washington,
D.C.: GAO, 1978).
''12

13

14

15

16

17

18

A-8
Jurgovan & Blair, Inc., Health Maintenance Organization Viability
(Rockville, MD.: JBI, 1979).
Touche Ross & Company, op. cit.

Deborah Harrison and John Kimberly, “HMOs Don't Have to Fail," Harvard
Business Review 60 (July/August 1982): 115-124.

Luft and Trauner. See note 8.

Lawrence G. Goldberg and Warren Greenberg, "Determinants of HMO
Enrollment and Growth," Health Services Research 16 (Winter 1981): 421-
438.

Michael W. Morrisey and Cynthia S. Ashby, "An Empirical Analysis of HMO
Market Share," Inquiry 19 (Summer 1982): 136-149.

A. Mead Over, Jr., J. Michael Watt, and Dale Roenigk, Private Sector

Health Care Initiatives: Market Area Characteristics Analysis.
Prepared for the Office of the Assistant Secretary for Planning and
Evaluation, DHHS, Contract #HHS-100-82-0031. (Washington, D.C.: Lewin
and Associates, Inc., 1983).

& U.S. Government Printing Office: 1986—491-350/47715
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