Center for Studying Health System Change

iven the relatively stable array of health plans and health care providers and the apparent satisfaction of purchasers with price and quality, this market does not seem headed for substantial changes in prices, quality or access. The Basic Health Plan expanded access to health insurance among the poor, and Medicaid managed care has streamlined access to care (and reportedly improved the quality of care) among Seattle’s Medicaid-eligible population. Although purchasers are generally satisfied with costs, the introduction of the Selections product by Regence Washington Health and price-driven selective contracting in Medicaid managed care suggest that more emphasis will be placed on controlling costs. Informants are almost unanimously convinced, however, that the stable array of not-for-profit hospitals and physician groups ensures that quality will not be sacrificed as a result.

Informants remain concerned about the possible entry of for-profit national managed care companies or hospital chains, despite little evidence that such changes are on the horizon. They are concerned that intensive price competition from national HMOs with substantial cash reserves could make local plans less viable, and that they would reward greater exclusivity from physicians and hospitals in order to bolster their position in the market. Recent experiences with PacifiCare in the Medicare market and QualMed in the commercial HMO market were cited as evidence that the entrance of for-profit entities could further challenge existing providers and plans. PacifiCare eliminated premiums for its Medicare risk product, which drove an already strapped Group Health to do the same. While informants mentioned several specific HMOs that have been interested in the Seattle market, they also cited others that were not able to price products low enough to be competitive.

The dominance of Group Health Cooperative in the HMO market may continue to be challenged by existing plans and new entrants. The merger of Group Health and Kaiser Permanente appears, however, to strengthen Group Health Cooperative’s position by providing the assets needed to bolster its marketing and management infrastructures. Respondents suggested that this merger may drive other plans to pursue similar, strong affiliations on a local or regional basis.

Prices could play a much more important role in the future. First, respondents anticipate that federal policy may result in increases to AAPCC, which would make Seattle’s Medicare risk market more attractive. For example, Regence Washington Health and Premera (Seattle’s two Blues plans) have indicated a desire to introduce Medicare products. Outside entrants (in addition to PacifiCare and QualMed) may find the market more viable as well. These entrants could leverage their new position into commercial lines and accelerate price-driven competition. Moreover, continuation of the Regence Selections product and adoption by other plans of similar practice profiling techniques could continue to make costs a primary concern of physicians and hospitals. Respondents also suggested that adoption of price-based criteria for Medicaid selective contracting has already had spillover effects on health care costs for commercial products. Continuation of selective contracting in the Healthy Options program could reduce prices for physician and hospital services further. Declining prices in the Healthy Options program could hurt providers that cross-subsidize care for the uninsured with Medicaid and other revenue sources.

In one possible future scenario, physicians will seek an increased role and prominence as the market corrects for an oversupply of physicians, and the remaining physician groups become more competitive. Physicians likely will continue to pursue risk-based contracting, and they could become powerful enough that they do not need to align with hospitals.

A key trend underlying physician strategies -- and borne out by some purchasers -- is the increased use of direct contracting. Direct contracting is being spurred by physician consolidation, eagerness to share risk and employers’ desire to bypass third-party plans and brokers. As a result, plans in this market may evolve into "administrative service" entities, focused chiefly on providing marketing, enrollment and claims processing services. Ultimately, this may lead physicians, hospitals and plans to concentrate on their core business and rely on contractual relationships, rather than ownership. For example, physicians will become more responsible for primary care and access to specialty care, hospitals will provide acute and ambulatory surgical care and health plans will become administrative entities rather than risk-bearing entities.

Seattle has seen steady but not disruptive change, largely propelled by a few important precipitating events. Although some re-evaluation is inevitable, respondents generally are upbeat about the future. They are satisfied with the prices and quality offered by Seattle’s health system, and they believe that the long-standing and cooperative relationships among Seattle’s dominant health system actors will continue to ensure quality health care.