Why are insurers buying physician groups?

In recent months, insurers' purchases of physician groups and management companies have drawn a lot of media attention. But in truth, this activity by a few large health plans represents only a small portion of insurance companies' efforts to transform the delivery of health care. Judging by conversations with executives of several leading plans, it appears that their main goal is to persuade and enable provider organizations — whether led by physicians or hospitals — to take on progressively more responsibility for the cost of care.

Paul Ginsburg, president of the Center for Studying Health System Change, predicts that insurer-provider collaboration on accountable care organizations and bundled payments is going to be a major trend. Secondarily, he says, some plans are buying physician groups to hedge their bets in case hospitals can't build successful ACOs. These moves constitute "a strategy to preserve an alternative to hospitals leading the effort."

Steven Shortell, dean of the University of California Berkeley School of Public Health, says that insurer purchases of providers are just one tool in the health plans' toolkit. "It's in targeted markets with targeted physician practices," he points out. "I think we'll see some more of them, but it's not going to be spreading like wildfire across the country anytime soon."

In southern California, where some of the purchases have occurred, the insurers are jockeying with hospitals and physician groups for bargaining power, notes Wells Shoemaker, M.D., medical director of the California Association of Physician Groups. As consolidation of providers and insurers grows, he says, hospitals, physician groups and health plans all are increasingly nervous about being outmaneuvered.

But, on a national level, the insurance companies insist that traditional rate negotiations must be replaced by a collaborative, long-term approach to solving the health care cost crisis. In this new scenario, they maintain, providers will have to recognize that the size of the health care pie is finite and figure out how to use those resources more efficiently.

"The activity you'll see more of is contracting over ACOs and bundled payments, where insurers and providers are still on different sides but devise something that has an upside for both sides and run with it," Ginsburg notes. "In that arrangement, the providers are going to be drawing on some of the insurer skill sets."

Several carriers already are giving health care organizations claims data, analytics and the kinds of tools their actuaries use to predict which patients are most likely to get sick. Some plans are putting care coordinators in physician offices and supplying them with data on which patients need preventive or chronic care services. More startling, some insurers say they're willing to show providers how much they charge their customers and what their profit margins are.

"Instead of fighting over margins, we're going to be sharing margins," forecasts Todd Cozzens, CEO of Optum Accountable Care Solutions, which is part of OptumHealth, a subsidiary of UnitedHealth Group. "It's going to be opening up our books to each other. It's going to be transparent."

Suspicious Minds

Considering the adversarial relationships that providers and insurers have had in the past, it will be hard for many hospitals to believe the plans really want to work with them. Moreover, the insurers' focus on partnering with physician groups — which will be the fulcrum of ACOs — may arouse suspicions of their motives in the context of bargaining power. However, the plans say they will collaborate with health care systems that have the same vision that they do.

"Our approach is to partner with physicians and other organizations to help improve quality, affordability and patient satisfaction," says Wendy Sherry, vice president of product development for CIGNA. If a hospital system also is trying to achieve this "triple aim" with the help of primary care doctors, she says, CIGNA will support that system's effort to become an accountable care organization. But the hospital has to accept the fact that it may lose revenue in the process, she adds.

One organization that has made that leap of faith is Norton Healthcare in Louisville, Ky. The five-hospital system is working with Humana in an ACO pilot that involves its own and Humana's employees. The health plan is providing claims data to help Norton measure its performance, fill care gaps and track patients' health care outside of the Norton system. Humana also is supplying actuarial data to predict costs and health education tools to engage patients in self-management.

After Norton gets some ACO experience and finishes rolling out its electronic health record, it would like to offer its network to local companies, either through Humana or other payers, says Steven Heilman, M.D., vice president and chief medical information officer of Norton. Area employers, he says, want providers to offer high-quality care at a predictable price. "People want their costs to be contained, and not to continue increasing the way they have been."

Spreading the California Gospel

During the first great wave of managed care in the 1990s, insurers tried to impose the cost-control techniques of California HMOs on the rest of the country. Providers and patients outside of California rebelled, and the experiment was a massive failure. So this time around, the insurers are taking a different approach, stressing quality improvement and trying to meet providers where they are in each market. But some companies are still trying to capture the secret sauce of California managed care and export it to other states.

In essence, that's why WellPoint and Optum recently acquired physician organizations in southern California. WellPoint bought CareMore, a multispecialty clinic and insurance company with 26 offices in the Los Angeles area, because of its expertise in managing seniors with chronic conditions, says Colin Drozdowski, vice president of provider engagement and contracting for WellPoint. CareMore's model "actively engages these patients" and emphasizes primary care in conjunction with a judicious use of specialists, he notes.

WellPoint believes that CareMore "can be exported to other parts of the country and serve as a model for how care should be delivered — initially to the senior population, but potentially to a broader range of customers," Drozdowski says. While WellPoint's Anthem subsidiaries will open some of these clinics, the company is willing to develop CareMore centers with local provider partners.

Similarly, Optum bought Orange County's Monarch HealthCare and two smaller IPAs to learn how to manage financial risk. "If we're going to talk about being an expert in everything you need to do to manage risk, including analytics, care management and care redesign, that expertise rings fairly hollow unless we've done it ourselves," Cozzens says. "So we'd like to understand the best practices and the best examples in the industry of providers who have taken on risk and managed it. We're going to institutionalize those best practices and enable other entities — mostly private partnerships between health systems and physician groups or payer groups — to deploy these practices."

Optum also controls medical management companies in Arizona and Texas, and sister company UnitedHealthcare acquired a multispecialty group in Nevada in 2008 as part of its purchase of Sierra Health & Life, a smaller insurance firm. But Cozzens dismisses speculation that Optum — a subsidiary of UnitedHealth Group, but not an insurer itself — plans to expand much further in this direction.

"There isn't enough money in the world for us to acquire provider groups at that scale," he says.

Late in 2010, Humana purchased Concentra, which provides occupational care and other medical services at more than 300 stand-alone clinics and 240 work-site facilities. The move appears to represent a diversification of its business and a way to increase members' access to care, rather than a return to Humana's staff-model HMOs. Humana did not respond to requests for comment.

Sherry denies reports that CIGNA has expanded its Phoenix medical group, which it has owned for several years. Asked whether CIGNA plans further acquisitions, she says, "It's not part of our current ACO strategy. Our current approach is to collaborate and partner."

Other health plans say they have no interest in buying providers. Charles Kennedy, chief executive of Aetna's accountable care solutions unit, says it's a mistake to go into competition with a health plan's other providers. Also, he notes, "the capital requirements to acquire these medical groups and delivery systems are massive." And, from the viewpoint of forming ACOs, Kennedy adds, "a more effective way is to collaborate with providers around the deployment of technology and information systems."

The only plan that has shown interest in acquiring a hospital system is Highmark, which is in discussions to buy West Penn Allegheny Health System in Pennsylvania. But the acquisition seems aimed mainly at preserving members' access to care and helping Highmark cope with the market power of the University of Pittsburgh Medical Center.

The Evolutionary Road to ACOs

These provider purchases can be viewed as one arrow in the quivers of a few insurers' efforts to spur health care organizations to become ACOs. While the major plans also are funding patient-centered medical homes and other care coordination initiatives that fall short of full-blown ACOs, their strategies are all aimed at prompting providers to become more efficient and take increasing amounts of risk.

In this respect, the insurance companies are paralleling the approach of the Centers for Medicare & Medicaid Services, which will launch its shared-savings program for ACOs this month, but won't ask providers to take downside risk for another three years. CMS has a Pioneer ACO program for advanced organizations that are ready to move faster, and insurers are offering full-risk contracts to some providers; but both Medicare and private payers favor a go-slow approach that emphasizes learning rather than an immediate risk transfer.

One reason for this caution is the lesson of 1990s-style managed care: What works in California may not work elsewhere, at least not right away. "California already has large risk-bearing entities that are accustomed to managing large populations," WellPoint's Drozdowski points out. "In most other areas of the country, providers aren't really looking at managing populations; they manage a particular episode or a particular patient at a point in time. So to jump to a full-blown ACO in a market where they aren't prepared isn't wise."

Narrow Networks Rebound

Aetna is taking a somewhat more aggressive approach. While it has announced ACO contracts with only two provider organizations, it is in discussions with 130 health care systems and physician groups, Kennedy says.

Aetna's preferred strategy is to turn ACOs into narrow networks that it can sell under their own names as private-label plans. If the ACOs lower costs, Aetna can charge less for these products, inducing employees to enroll in them. Citing Heartland Health Care, a provider in St. Joseph, Mo., that has accepted such a deal, Kennedy says, "As they become more efficient and lower their medical cost structure, they get to keep the vast majority of those savings."

Until an ACO has at least 10,000 members in a private-label plan, he adds, the arrangement won't go beyond gain-sharing. "As we grow the business in terms of the number of members, it transitions to a full upside and downside risk model."

Carilion Clinic, which includes eight hospitals and 600 physicians, is Aetna's other ACO pioneer. The Roanoke, Va., system is wary of launching a private-label plan under its own name, but it's trying some co-branded plans under the Aetna Whole Health moniker.

The issue, according to Donald Lorton, Carilion's executive vice president and chief financial officer, is that the market still demands freedom of choice for patients. So Carilion doesn't want to require patients to stay in its network. All it requires is that they choose a primary care physician in the ACO; they can see any specialist they want. Despite its resultant inability to control out-of-network costs, Carilion is taking downside risk from Aetna because it believes it will do better financially than it would on gain-sharing alone. The organization also hopes to grow its market share, Lorton says.

Aetna isn't the only insurer promoting narrow networks based on ACOs. United and Optum are also, and CIGNA has a private-label plan with Houston's Kelsey-Seybold Clinic.

Building Mini-Kaisers

Back in California, where it all started, Blue Shield of California has been running an ACO pilot for two years on behalf of CalPERS, the state retirement system. Its partners in this Sacramento-based endeavor are Hill Physicians, a big IPA, and Catholic Healthcare West. All three parties share the financial risk equally.

In 2010, CalPERS' health care costs in Sacramento actually fell 2 percent, says Paul Markovich, chief operating officer of Blue Shield of California; yet Hill and CHW came out financially whole because they shared in the savings.

Blue Shield is now moving ahead with four similar ACOs, two in San Francisco, one in Modesto and one in Orange County. Each ACO includes a medical group or IPA and a hospital system. The San Francisco ACOs started up in July. One of them partners Hill Physicians with CHW and the University of California San Francisco Medical Center. In the other Bay area ACO, the Brown & Toland IPA is combined with California Pacific Medical Center.

Although the providers compete, the Blues sees no problem working with both. It won't share competitive information between the rival ACOs, Markovich says, "But they get to see how we price and what profit we make or don't make, and they see the [cost] experience of the group. They know we have a 2 percent [profit] pledge, and they know that if we do better than expected, we'll give back to the community."

Ken Terry is a freelance writer in Sheffield, Mass.

Where Do Hospitals Stand?

Outside of California and a few other areas of the country, hospitals remain the best-organized part of the health care delivery system. Therefore, they're better positioned to form ACOs than are physician groups. But observers say hospitals are still divided over whether they want to change that much or change at all.

What hospitals need to understand, says University of California Berkeley's Steve Shortell, is that "the game is changing. It's no longer about optimizing their inpatient margins. To the extent we move toward capitation and bundled payment, it's about the 'total care margin.' That means hospitals have to engage their doctors and the entire continuum of care much differently than they have in the past."

The tricky part, he says, is that the change in financial incentives will not come all at once; it will happen over a number of years. Hospitals must decide whether they have deep enough pockets to be early movers in this game and start changing how they deliver care while much of their revenue is still being paid the old-fashioned way.

"This is about the total care margin, being willing to leave some money on the table and suffer some losses," Shortell says. "Maybe you overestimated your ability to manage those patients and take financial risk, but you've got enough reserves to see it through."

On the other hand, he points out, "You could wait too long. Maybe you have 30 percent of your revenue under the new payment model and you're still saying, 'I'm not going to do anything differently.' But your competitors out there could eat your lunch. It depends on the pace of change across the country in the private sector as well as how fast CMS moves on its payment changes."

Either way, he notes, health care providers soon will have to face the music. "Health costs are now 18 percent of GDP. With the big deficit and the economy and what's happening on the global scene, unless there's some bending of the cost curve, the end game is going to be draconian cuts across the board for hospitals and doctors."

EXECUTIVE CORNER

Cooperation Is Key

Hospitals must stop thinking in terms of maximizing admissions and procedures as the industry moves toward accountable care and bundled payments. They should focus on the "total care margin," cooperating with physicians and other providers to protect their bottom lines. — Steven Shortell, dean of the University of California Berkeley School of Public Health

The ACO Risk

"The ACO is probably a negative sum game for hospitals unless they can capture market share from their competitors. Under 50/50 gain-sharing, every dollar a hospital saves comes off its top line as revenue. And variable costs aren't that great in the hospital business. So, if you take a dollar off your revenue and replace it with 50 cents in gain-sharing, you're probably losing money in that transaction." — Donald Lorton, executive vice president and CFO, Carilion, explaining why Carilion wants to take on downside risk

Using Their Data Tools

Organizations that want to become ACOs will need sophisticated population management tools. Health plans can provide the tools, which they developed to manage underwriting risk. They can help providers do risk stratification and identify the people who need targeted case management. — Wells Shoemaker, M.D., medical director, California Association of Physician Groups

Insurers Won't Wait

"You'll see us develop closer ties with some providers, and then you're going to see some providers who aren't doing business with us at all right now, because they're in the status quo neighborhood. These people are under the illusion that there are unlimited funds for health care … in the long run, we're not going to tolerate it. We're going to be separating those that are interested in the new world and those that aren't." — Paul Markovich, COO, Blue Shield of California partners