Health maintenance organizations formed in the 1970s offer an early example of coupling the financing and delivery of health services on a large scale. They were presented as an alternative to fee-based medicine, providing care through its own clinicians and facilities on a capitation basis – a predefined amount of salary per member, per month.
But HMOs have failed, in part due to increased competition from preferred provider organization plans, an inability to meet employer demands for experience premiums, and a lack of group-specific data on the cost, use and quality, the researchers said.
“The jury is still out on which providers acquired insurance weapons,” said Tim Gary, healthcare attorney for Dickinson Wright and CEO of Crux Strategies. “One side or the other wins, either the financiers or the medical providers dominate. It’s usually not a good mix. It’s as if the left brain and the right brain operate with a huge disparity of information.
The HMO model largely failed as it attempted to control costs by restricting access to care, which angered doctors and patients, industry watchers said. Payviders are bound to repeat these mistakes if the incentives are not aligned, they warned.
“In many cases, the terms of business-to-business contracts are misaligned,” said Melissa Smith, executive vice president of consulting and professional services at HealthMine. She has worked in the provider and insurance industries. “In a good situation, these contracts will be written on capitation or other value-based terms. But I’m shocked at how often these incentives are loosely constructed at best. I did not expect these self-inflicted cross-organizational limitations to persist for so long.
Practice management companies backed by private capital offered another alternative to fee-for-service medicine. MPCs would acquire physicians and achieve cost savings through economies of scale.
In many cases, physicians would receive upfront payment for their practice and obtain long-term contracts in exchange for a distribution of income after taking into account overhead costs. Physicians in private practice have been attracted by access to capital, buyouts of their practice capital, and reduced administrative burden, with PPMs handling finances, IT integration, and revenue cycle management.
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But those models failed largely because of execution, rather than a flawed business model, experts said. They overpaid doctors and grew too quickly, failed to incentivize doctors enough, overstated economies of scale and struggled to keep pace with HMOs, observers said.
“There are horror stories from the 80s and 90s, with providers that got into risk-based reimbursement models that didn’t work,” Gary said. “They cut back on care, which no one was happy about. But if you hire the right people and analyze the actuarial data, you might have a reasonable chance of success.
Hospital systems trying to integrate health plans have the best chance because they are used to living across multiple disciplines, he added.
Meanwhile, the drivers of consolidation aren’t going away, experts said. Competition, increased regulatory scrutiny and reimbursement cuts will likely spur more vertical integration, industry watchers said.
“Vertical integration has the potential to bring significant benefits to consumers,” said Susan Manning, senior managing director at FTI Consulting. “It all comes back to what we expect from health systems.”