Center for Studying Health System Change

ach of the three major insurers and health plans intends to expand the geographic breadth of the employers it serves and of its provider networks as a key component of its long-term competitive strategy. As noted earlier, large and mid-size employers view favorably those health insurance products with large, geographically dispersed provider networks. These products are more likely to ensure their goals of minimizing benefits administration costs and maximizing their purchasing power by contracting with one insurer or health plan to serve their entire New England work force. Also, as the level of HMO penetration has reached what may be the saturation point among the commercial population in the Boston area, geographic expansion into new markets, along with new Medicare business, is viewed as a means to continue increasing enrollment.

So far, the Boston market is dominated by three not-for-profit firms that have local origins but now serve much of the Northeast region: Harvard Pilgrim Health Plan, Tufts Associated Health Plan and Blue Cross and Blue Shield of Massachusetts.

Harvard Pilgrim Health Plan (HPHP) is a predominantly IPA model that serves people in seven Northeastern states. It was formed in 1995 as a result of the merger of a Boston-based plan, Harvard Community Health Plan, one of the oldest and most highly regarded group/staff-model health plans in the country, and Pilgrim Health Plan, an IPA-model plan serving northern Massachusetts. In its decision to merge with Pilgrim Health Plan, Harvard Community Health Plan was forced to choose between remaining competitive within the insurance market by pursuing flexible, nonexclusive provider contracting arrangements (i.e., offering employers and consumers managed care products with broad geographic coverage and maximum choice of providers in any given local market) and its historical commitment to a vertically integrated financing and delivery system.

Subsequent to the site visit, HPHP physicians sought a spinoff of the staff-model component, which had experienced productivity problems and was viewed as having limited growth capabilities. As of January 1997, HPHP reorganized its 14 staff-model health centers, which employ 600 physicians and 3,500 other employees, into an independent, not-for-profit multispecialty group practice.¹⁰ The new group’s contract with HPHP provides for:

• a degree of financial risk-sharing between HPHP and the group practice;

• a commitment on the part of the plan to increase membership at the centers; and

• a requirement that the group’s internal medicine physicians and pediatricians exclusively serve HPHP for two years (other specialists are free to contract with competing health plans).

If HPHP enrollment at the centers fails to achieve targeted increases by 1999, the new group practice is free to provide both primary care and specialty services to other health plans.

Tufts Associated Health Plan, an IPA model, also has expanded rapidly in recent years through steady growth in its provider network; it now serves enrollees in Massachusetts, New Hampshire and Maine. With a strong reputation as provider-friendly and well-managed, Tufts is positioned to increase its market share, especially in the Medicare population. Under a franchise arrangement with PacifiCare in California, Tufts has introduced to the New England area a highly successful Medicare product from the West Coast known as Secure Horizons.

Unlike HPHP and Tufts, which appear to have adapted quite successfully to new market dynamics, the third major player in the Massachusetts insurance market, Blue Cross and Blue Shield of Massachusetts (BCBSM), is in a difficult position. Although BCBSM still accounts for about 12 percent of the Massachu-setts insured market, it faces serious managerial and financial problems. As the largest indemnity insurer in the state, BCBSM had the greatest transition to make as the market shifted toward managed care products. BCBSM currently offers HMO products in Massachusetts, Rhode Island and New Hampshire through two health plans, HMO Blue and Bay State Health Care.

BCBSM has experienced a great deal of senior management turnover and has suffered serious financial losses. In its weak position, BCBSM is viewed by many as the most likely takeover target for an outside company. As a result of 1995 and 1996 financial losses, BCBSM was forced to make sudden, mid-year downward adjustments in hospital payment rates, and most recently, to lay off hundreds of employees and decrease employee benefits. Some of the insurer’s financial difficulties stem from losses on individual and small-group policies, which BCBSM must provide as the states designated insurer of last resort. But recent legislative changes requiring all insurers and HMOs to serve this high-risk segment of the market will help to level the playing field. BCBSM also was forced to pay penalties and to freeze enrollment in its successful Medicare risk product, when it was found to have submitted fraudulent documents to the Health Care Financing Administration.

Attempts by national, for-profit firms, including United Healthcare and U.S. Healthcare, to enter the market have had limited success. These companies have confronted difficulty in securing contracts with physicians due to strong preferences in the local medical community to work with local plans, which purportedly treat physicians more as partners. Consequently, outside companies also have faced an uphill battle in selling their products to employers and consumers, who place a very high value on broad choice of providers.

Although outside firms have been unsuccessful in capturing local market share to any significant degree, the fact that they have knocked on the door has played an important role in shaping the strategies of the indigenous plans. Local plans recognize that their long-term survival depends on their ability to offer products that are competitive with those of national companies in terms of price, benefits, quality and service. They fear that if employers and consumers perceive too great a difference between their products and those offered by potential market entrants for any of these characteristics, they will be more receptive to the overtures of national firms.