Center for Studying Health System Change

he title of our next session is "Jockeying for Position: Specialist Responses to Health System Change." The phrase "jockeying for position" is stolen from the work of Michael Porter, who writes and talks about strategy from the Harvard Business School, and he uses this phrase to talk about how different companies or firms try to find a way to generate a competitive advantage in their field, and that is, some way in which to sustain profit over a long period of time.

Actually, I think the phrase pretty well describes what we’re going to talk about in terms of specialists and how they’re functioning in local markets. They really are jockeying for position, trying to seek out some way to maintain their incomes in the face of mounting managed care pressures.

We know what those pressures are. We know that specialists control a substantial amount of spending, health care spending in the United States. Exactly how much we’re not sure, but we know through their decisions they control a large portion of the bucks. And we know that the pressure that has been building on specialists’ incomes over the past five to ten years is very real.

Again, the exact amount that managed care activity has--the exact amount of pressure that that has created for specialists’ income is difficult to determine, but it’s very real. It’s certainly very real when you talk to specialists and specialist group managers on our site visits.

To organize the--is there something that can be done with that light there?

I direct you to your slide in the book.

To try to organize your thinking about what’s going on with specialists, I want to focus today on a couple of relations that specialists have within health care markets that are very important.

The first is their relationship with managed care plans. Obviously, this is important to specialists because managed care plans provide patients and then income, of course. The old dotted line from hospitals to that relationship suggests that hospitals have attempted to sort of get in the middle of that relationship over the past few years by creating things like PHOs that connect specialists and hospitals together for managed care contracting.

The other set of relationships historically has been, you know, more important, the bedrock of--the ability of specialists to generate incomes has been relationships with hospitals. The hospitals are the specialists’ workshop. What the hospitals do has an enormous effect on the ability of specialists to generate income.

We’re going to focus on those two sets of relationships.

It’s important to note that as you think across these 12 markets, there are really three--and you look at this little scheme here, there are three kinds of submarkets that will affect the relationships between specialists and managed care plans and specialists and hospitals, and that is, managed care plans compete with each other in these markets, and the kinds of contracts and relationships they have with specialists depend in part on how competitive that market is.

Hospitals compete with each other for patients, and the kind of relationships they have with specialists then depends partly on what the nature of that hospital market looks like. And then, of course, specialists compete with each other for patients as well.

So in thinking about the specialist submarket, the situation as we found it when we did our site visits was, first of all, there was a distinct change in the managed care market which had bolstered the ability of specialists to negotiate with managed care plans, and that is, the consumer demand for broad networks translated through their employers, through the managed care plans, gave the specialists some negotiating power or increased negotiating power that they hadn’t had in the early 1990s.

But there were a number of competitive disadvantages that specialists faced. One was that in all markets but one, all of our respondents agreed that there was an oversupply of specialists. And then you’d press them and say, well, are there any specialty areas where there isn’t an oversupply of specialists? And sometimes they would say, well, maybe this one. But, you know, it was pretty generally accepted that there was an oversupply of specialists, except for Greenville. In Greenville, everybody suggested that there was not an oversupply of specialists. And, in fact, the quantitative data that we have on physicians’ locations in the United States support that very dramatically. Greenville has the lowest specialists per capita of any of our 12 sites.

There are also what I call exit barriers. Once you’ve established a specialty practice in a community, it’s hard to pick up and leave. It’s really built around long-term development of this practice and set of relationships. And where would you go, anyway? If there’s a general oversupply in all communities, it’s not like there’s some wonderful place specialists could go where they’re needed. So they really are kind of locked in to their existing relationships.

There’s still relatively limited organization of specialists despite the sorts of comments about IPAs and PHOs and so forth. The core building blocks of the specialist market in communities is still the solo and small number--you know, three-, four-, five-person practice. And there’s often little differentiation. What I mean by that is in the minds of consumers, in most markets for most specialists, specialists are interchangeable, and they don’t demand a specialist. They ask their primary care physician. The primary care physician refers them to a specialist, but in most cases, there’s little differentiation among specialists.

We also found different kinds of specialist organizations that existed in these markets, and Paul and Jeff have talked about this already. There are some that are hospital-centered organizations, particularly in markets where academic medical centers are strong. Boston is a good example, Syracuse, Little Rock. Here, one of the ways that specialists come together in some kind of an organizational form to deal with managed care plans is through collaborations with hospitals. There are also the multi-specialty kinds of contracting vehicles that Paul talked about, and I won’t say anything more about those.

There are single-specialty IPAs that we’ll talk about in a moment. These are not particularly common in our markets, but they’re relatively new and developing.

And then there are the single-specialty group practices, smaller in size than the other organizations but obviously more prevalent.

Then, finally, in some of our markets, there are large brand-name specialty-driven organizations: Cleveland Clinic in Cleveland, Mayo Clinic in Phoenix, Virginia Mason in Seattle. These are large multi-specialty groups that have developed into what you could call integrated health care systems. They sometimes own hospitals, own primary care practices, and so forth.

Now, as you look across particularly the first three kinds of organizations, if you’re a specialist, you’re probably in all of those submarkets. There’s a market where there’s an academic medical center, or you may be in a PHO. You may be in a single-specialty IPA. You may be in a multi-specialty IPA. You’re in lots of different kinds of organizations that give you some flexibility in contracting with managed care plans.

The key specialist strategies focus on redefining relationships with managed care plans and redefining relationships with hospitals. Trying to increase bargaining power with health plans, trying to counteract what specialists feel is the erosion of their reimbursement from these health plans over time, and then attempting to create organizations that capture larger percentages of income or portions of income that have traditionally gone to hospitals. So if you think of that diagram and those two relationships, trying to increase the reimbursement from managed care plans and trying to grab a hold of some of that income and profits that have gone to hospitals historically and bringing them directly to specialists. And we’re going to talk about the kinds of strategies that specialists have adopted and then how they played out in practice.

Talking about increasing bargaining power with managed care plans, there are three things that were obvious in our site visits: trying to increase your size and presence of your core building block specialty group by merging with other single-specialty groups. So if you have a three-person specialty group in cardiology and there is a five-person specialty group in cardiology, merge, you have an eight-person specialty group in cardiology, and you hope by doing that strategically that you can negotiate better rates with health plans. And we’ll talk about the strategic part of that as we move along here.

Trying to establish contracting and negotiating vehicles vis-a-vis the single-specialty IPAs and joining multi-specialty IPAs. And then trying to appeal directly to consumers by enhancing your name brand in the community. Trying to create a demand for you, your particular specialty group, as opposed to other specialty groups, so that managed care organizations can’t think of offering a broad provider network in your community without having your specialty group be part of it.

In terms of trying to capture additional revenue, we saw several different kinds of strategies that specialists have been pursuing. One is trying to establish free-standing surgical centers or hospitals to capture revenue that had traditionally gone from health plans to hospitals, sort of diverting some of it to specialists.

Negotiating joint ventures with hospitals and other concessions that involve specialist ownership, so that instead of your income stream coming from your reimbursement for services, you know, there’s only--we can ask Jeff about this, but he can tell us that there’s a limit to how much money you can make by selling your time. So specialists have a limit on how much money they can make by selling their time, so trying to get an equity position in some other enterprise so that you can augment your income through the profits of that enterprise instead of just selling your time is a way that specialists in some communities are trying to react to managed care pressures on reimbursements.

Then trying to secure exclusive long-term kinds of affiliations with hospitals so that the hospitals reconfigure themselves in a way that will allow you to earn more income.

So the effectiveness of these strategies to date. We have found that several single-specialty groups have been able to achieve significant size and presence in local markets, and I’ll just give you an example. Indianapolis is a market that, by our data, has 32 percent more specialists than the national average. There’s a medical school there, and they just turn out a lot of specialists there.

Between our site visits, mergers occurred in specialty groups involving sports medicine, neurology, urology, OB-GYN, and orthopedics. This is all within a two-year period, and it’s not single mergers in these areas, but often multiple mergers in these specialty areas.

Two cardiology groups merged. They now have a single-specialty group there consisting of 87 cardiologists, and they own 52 primary care physician practices as feeder practices for the cardiology group. And they think they’re the biggest cardiology group in the United States. I have no idea whether that’s true or not, but that was something that they told us.

Creating viable alternatives to hospital-based care has really been to us the most fascinating thing that’s been going on in the specialist submarket. This has happened in two ways. First of all, the specialist group-owned ambulatory care, ambulatory surgery centers have been proliferating in some of our sites. In seven of the 12 markets, our respondents noted significant growth in the number of these centers.

Cleveland was probably the most dramatic. Between the two years that we visited Cleveland, the number of these free-standing surgery centers went from seven to 12.

Now, what’s the ownership of these? We tried to trace down the ownership of these ambulatory surgery centers, and it gets kind of difficult. It depends on whether you think Cleveland Clinic is now a hospital organization or a specialty group. I think it’s still a specialty group that owns hospitals. Most of these organizations in that case in Cleveland would have been formed by specialty groups, three or four of them, by our count, by the Cleveland Clinic, but the others by individual single-practice specialty groups.

The notion behind these is that you’re going to secure contracts with managed care organizations and they’ll send patients to your ambulatory surgery center. This hasn’t always been a successful strategy for the specialists that have formed these groups.

In Little Rock, the new ambulatory surgery centers have really been unable to secure managed care contracts. GM has said they don’t want their employees using these centers, and Blue Cross reportedly won’t contract with them. So it hasn’t been an easy road. This is a strategy that hasn’t clearly been successful, but it’s been very interesting to watch.

Another strategy that’s maybe even more interesting to watch is the creation of heart hospitals in some of our markets. Little Rock is a case where there were four new ambulatory surgery centers under construction when we visited there. Under construction when we visited there. That’s not a huge metropolitan area. And also the Arkansas Heart Hospital had just been established in Little Rock. They were a group of cardiologists associated with the hospital that wanted the hospital to invest more money in developing an infrastructure that would support their practice. The hospital said no, we have other priorities that are more important for us, and so these heart surgeons contracted with or joint-ventured with a group called MedCath, which is in North Carolina, that came in and built a heart hospital, separate from the regular hospital, where only heart surgery is done. MedCath reportedly has 51 percent of the ownership and the heart surgeons have 49 percent of the ownership.

Again, the success of this in the long run isn’t clear. So far the revenues for that heart hospital have been coming from Medicare, and they haven’t been able to secure managed care contracts.

Phoenix also has a heart hospital, Arizona Heart Hospital, the same arrangement. MedCath is the joint-venture partner. A couple of prominent heart surgeons in Phoenix partnered with MedCath to do this.

MedCath also approached a suburban hospital in Phoenix. There, the heart surgeons turned it around and went to their hospital and said, "We are going to go with MedCath, and we are going to build a heart hospital unless you do something." That hospital then joint-ventured with the cardiologists to build a separate heart hospital on the same campus of that hospital organization with part ownership on the part of the physicians.

Another group of specialists in Phoenix tried the same thing with their hospital, and that hospital has a relatively protected geographic area. In other words, there are not a lot of competitive hospitals. There are not any competitive hospitals in that geographic part of Phoenix.

That hospital said, "Well, thank you for the opportunity, but we do not think we will do that with you." There were not any other options for those cardiologists. So they are still with that hospital.

So, to sort of circle back, this is a case of where specialists are trying to generate other sources of income to replace lost reimbursements for managed care plans.

With respect to direct vehicles for contracting with managed care plans, we saw limited numbers of single-specialty IPAs. Relatively few of our sites were these important factors in the market.

Phoenix was an exception. There was an entrepreneur in Phoenix who had helped physicians put together three single-specialty IPAs, one in cardiology, one in general surgery, and the other in orthopedic surgery. The cardiology IPA has a contract with one of the managed care plans for 175,000 covered lives. So what the managed care plan does is it capitates the single-specialty IPA. The single-specialty IPA delivers services to all members for cardiology care.

We talked about antitrust issues. They are very careful to try to limit the number of participating specialists to about 30 or 31 percent of the specialists in the market in Phoenix. That raises the issue, of course, in a time of demand for broad networks and access to large numbers of physicians, whether that is going to continue to be an attractive model.

Paul also mentioned the complexity of multi-specialty intermediaries like PPMCs and PHOs. We have really seen in many of the markets that we have visited that PHOs have declined in importance, and the story that we are told is this. From the specialist’s point of view, you are looking at the contract with the managed care plan to the PHO and you are saying, "Gee, there is a lot of that contract that gets used for administrative purposes," and it seems like those people in the administrative areas are employees of the hospital.

So, really what the hospital is doing, they are taking out dollars that could have come to us and they put it into hospital administration, and we do not think that is right. We do not like that, but from the hospital’s point of view, they are saying, "Gee, this is not working out as well as we thought it would because we thought it was a way of tying our physicians to us, through managed care contracts," but the physicians, they want relatively high reimbursements for their services as part of the PHO.

In fact, in order to keep them participating in the PHO, we have to give them relatively high reimbursements. So we are getting lower reimbursements for hospital care than we think we can get by contracting directly with managed care organizations. So you have both partners thinking, "You know, we think we can do better if we are not part of this PHO."

So we have seen PHOs financially collapse or just basically becoming relatively unimportant as contracting vehicles for specialists.

As we look forward in the specialist market, what sorts of trends are going to affect what happens in the future? We think there are some favorable environmental transfer specialists. Certainly, the decline of gate-keeping, the emphasis in some large managed care organizations on direct access to specialists.

The demand for broad networks does not seem to be diminishing. Some plans seem to be backing off of care management that would involve dealing directly with specialists, and then there is an interest on the part of hospitals in developing these kinds of equity arrangements with specialists, to lock in their physician groups.

From the standpoint of specialists, these are important favorable trends. There are also some negative trends as well. Over and over again, we were told that specialists were reimbursed on a fee schedule and that that fee schedule was related to Medicare fees, and there was a percentage of Medicare fees. So it was always the Medicare fee schedule minus something, and how much the minus was depended on the relative negotiating power of the specialists vis-a-vis the managed care plans.

As Medicare bumps down Medicare fee schedules, the specialists get a double hit. They get less reimbursement from Medicare, and they get less reimbursement for managed care plans, who tie their own reimbursement to those Medicare fee schedules. There is a lot of concern about that.

The only community in which the tie to Medicare fees was not in a negative direction was Greenville, and this was the community that was identified as not having an oversupply of specialists. In that community, it was reported to us that managed care reimbursements to specialists were at more than the Medicare fee schedule.

Certainly, a negative trend, as Paul has already pointed out, is the difficulty in farming and sustaining physician-based organizations, like single- and multi-specialty IPAs as negotiating vehicles with health plans. We do not know how that is going to turn out.

Then, of course, what is the response of employers going to be as they see the premiums for health plans increasing over the next few years, and how is that going to trickle down to specialty care?

The issues to track in the specialist area, I think there are four that are kind of interesting. One is this attempt to create single-specialty monopolies in geographic submarkets.

I am going to say a little bit about this because this really escapes the radar screen of antitrust. What you are talking about here is health plans having to create broad networks of specialists to satisfy the demands of employers and consumers. That means if you are going to market to employers, especially larger employers, you need to have specialty care coverage in all parts of your city, all parts of your market area.

You have got to cover Southeast Phoenix and Northeast Phoenix. You have got to cover north of Austin and south of Austin. If you are single specialty, you do not need to form a single-specialty group that includes all of the specialists in a given market area to have market power. If you did that, you would get antitrust attention.

What you do need to do to have market power is if you can get everybody, say, in the southeast part of the city together in one group and my managed care plans have to negotiate with you because they have to have that specialty covered in your area of the city, then you have created a geographic submarket monopoly, in other words, an area where you have market power and it is going to fly under the radar of antitrust. We see this happening in most of our communities.

These mergers among single-specialty groups are very strategic. They are not sort of get together. They are very strategic, trying to create more bargaining power with managed care plans.

Competing rather than partnering with hospitals, we were very surprised by the degree to which this is going on. We did not capture this. It did not appear in our initial round of site visits. So we did not focus on it. When we went back, it was very clear that it was an important part of what is going on in these markets.

On this emphasis on physician leadership that Paul mentioned earlier and then finally the pursuit of brand-name differentiation, I am a little surprised historically that physicians have not been quicker to try to establish a brand name for themselves, particularly specialty groups.

We see direct marketing to consumers now by drug companies trying to create brand awareness that will get translated back to physicians. It would be interesting as we move forward in the future to see whether specialty groups try this same sort of direct marketing approach to consumers, trying to create brand-name recognition that will translate into better and stronger bargaining power with health plans.

Of course, how will all of this affect consumers? Will specialists succeed in differentiating themselves, and will they succeed in creating submarket monopolies? And if so, what is going to happen to price, what is going to happen to consumer choice, and ultimately, what is going to happen to quality of care?

I think that what is happening in the specialty market is a really interesting part of this sort of churning that Paul describes is going on in health care markets right now, and you see a lot of variation across the 12 markets. They are starting at different places. So specialists start with different degrees of market power, and they are choosing to exercise it in different ways. It is very hard to predict exactly where this is all heading.

Thank you.

[Applause.]

DR. GINSBURG: Response by Marsha Gold.

MS. GOLD: Good morning.

My perspective is really someone who studies markets, but then tries to translate that back into what some of the policy issues are, what some of the challenges are in an operational sense, and so I am going to take perspective in talking about Jon’s paper.

I was really excited to see that the center had focussed on specialty care, and really, it is always a pleasure to hear Jon talk about some of this analysis. I think it is a really important topic that has really not been studied very much.

Basically, those of us who have been looking at physician contracting with managed care and the financial incentives, a lot of the research has focussed on primary care for the most part, and we do not know very much about specialty care, although we have started to learn that, but the dollars are in specialty care. That is where the costs are. So it is very important that we start to understand more about what is happening in the specialist market.

The other thing that is happening--and, Jon, I think this might explain why you see specialists competing with hospitals now more than in the past--care is moving out of the hospital setting. It is certainly not inpatient anymore. It may or may not be hospital-based.

I would guess that that has to give the specialty physicians a little more clout because they can build a new hard hospital or they can do a freestanding center, and so that changes the dynamics some. So it increases the importance of knowing about specialty care.

One of the things that I think is really interesting is that we know so little and there are so many specialists, and they have different reaches. We are in the middle of a study for the Medicare Payment Advisory Commission, and one of the things we are trying to look at is how physicians are paid and we are trying to look at specialty care, but when we got into it, people said, "Well, you can look at this specialist." David knows you can look at that specialist. You could not. You could only keep people on the phone so long. So we had to make certain decisions as to what we looked at and what we did not.

One of the things that this type of study, I think, can do is really help us focus on what are the most important kinds of specialty arrangements to look at, where is it happening, among which specialists, and all the reset. So it is really important.

In terms of the policy implications of the changes that Jon was talking about, I would like to focus on two that I think really come out of the findings as to what is going on in the community. The first is sort of what all this organization or not organization where it is happening or capitation means at the specialty side, and the second is what that means about the relationship between primary care and specialty care. So let me start with the organization and capitation.

What Jon has, I think, described--and I am not sure how you would characterize the magnitude of the activity. That is one of the things that is hard with this qualitative work. It is sort of getting a sense of how deep it goes and things like that, but what he has described is sort of pieces of specialists contracting with hospitals or health plans to take on certain responsibilities, and I think if you think about that at least conceptually, there are both advantages and disadvantages to that type of structure.

Starting with the disadvantages first, potentially it adds to administrative costs and fragmentation of care because each piece has to do its own negotiation. That obviously reduces the dollars that are available to care and could hurt people. If people are trying to figure out how to negotiate the system, that could make it harder for them to know where to go because they do not have a specialist. They have a whole person, and they may use several specialists.

There also is the potential for cream-skimming. In markets, people are trying to get a market niche. So to what extent are people trying to pull of cases that are less expense, like the heart hospitals? What is the impact somewhere else down the line? Where does disease management fit in all this? So those are sort of the concerns, I think, from a public policy perspective because of the distributional effect,s how is our money spent and what is available to support what.

You also have an ability through that organization to enhance some of the care delivery. There are some specialists that really are very people-focussed and population-based. So you have mental health, you have some cardiology, radiology, and pathology. Those deal with sort of a more integrate set of conditions, and to the extent you can use the contracting mechanism, the health plan really can both get into potentially some really quality contracting with providers that make a lot of sense and also impose some standards and things like that.

The second advantage, I think, as specialists get more organized, it give you the ability to engage with the primary care physicians and a debate as to what is the appropriate way medicine should be practiced. That is something I think Bob Berenson when he was running a health plan commented on a lot, and he would talk about sort of if you could capitate the specialists and leave the primary care physicians in fee-for-service, you give them an incentive to talk to each other about what the primary care physician should handle and what the specialist should handle.

So I think that there are both risks in some of the structural changes and there are opportunities, and one of the harder things is to get enough beneath the surface to be able to sort out what is happening at a sufficient level to be able to interpret it in terms of those risks and opportunities.

The second area of interest is sort of what this says about the role of specialists versus primary care physicians or how it affects it really, I should say.

When managed care started out, it started out as a very primary care-focussed activity. There was a medical home. You had the primary care physician, but medicine is becoming more complex, and we have also seen a movement to looser networks. So, as medicine gets complex, how much should the specialist really get involved, and you see things like hospitalists. As you get some of these contracting arrangements with specialists, is there a way and opportunity for that to create a tension that is creative between what the primary care physician is going and what the specialists are doing?

The other point about that is there is a big variation across markets, and when you are thinking about some of these contracting arrangements, I think it is important to keep in mind that the infrastructure of physician practice is different. So the submarket that Jon talked about there is different.

In studies we have done of markets of Medicare managed care, we looked, for example, at New York City and Portland. New York City, it is all very specialty-oriented, very teaching hospital-based. Everyone wants to go to the specialist, and they know which one, in which hospital.

In Portland, Oregon, it is much more primary care-focussed, and if you look at the statistics there, you will see that.

In other markets, it may be specialist-focussed, but not so much the name recognition of the hospital, and so those characteristics of the infrastructure and the way physicians practice are going to influence what contracting opportunities are possible, what role the specialists are going to play, and the big problem is there is very little data that helps us differentiate among markets that vary on those characteristics.

The final point, then, to leave with this is a question I have. We sort of describe markets, but one of the questions is where does the patient fit in this, and these are sort of structural arrangements and they are contracting arrangements and they affect the flow of funds, but they also have a potential to affect how care is delivered.

So, if I am a patient, what does that mean about how I access care? If I am a physician or I am multiple physicians, how does that affect how I coordinate care for people? So I think linking the structural changes, they are tools.

We talked earlier in response to Paul’s paper about how you get the system to work together, and as medicine gets complex, one of the questions is how do you make it be a system rather than a series of parts. These contracting arrangements with specialists are interesting because they have an ability either to help sort of pull it out into pieces, or it also has an ability to start creating an infrastructure that can help care get delivered.

Unfortunately, I am not sure there has been enough emphasis because all the change having been done so fast on the care side of it as there has been on just the contracting and structural side of it.

DR. GINSBURG: Thank you, Marsha.

[Applause.]

DR. GINSBURG: Let me get our discussion going with a question to Jon or anyone else who is talking about the resistance by insurers in many of the sites to the ambulatory surgical facilities.

What strikes me is that the notion that we do not want all of these extra sites of care available because that will stimulate use seems like the thinking that was very prominent in the 1970’s, and it seems somewhat outside of the box of the thinking of the 1990’s where you think of the plans and you say that is great, they are opening up all these ASCs, we will get to compete with each other and we will get a very low price. Do you have any thoughts about that, Jon?

DR. CHRISTIANSON: Yes. One thought about it is that some of that pressure is coming from hospitals, and it seems to be the most effective in markets.

Paul talked about earlier, we have some sites that are relatively small markets that basically have a couple of hospital systems operating in them now, and if the health plans want to deliver hospital care, they have to contract with those hospitals. So, when those hospitals say, "You know, we do not think you should contract with this new ambulatory surgery center because it is going to proliferate services and increase costs in the long run," the implicit threat behind that is "And you need us because we are the hospital in down, you have to contract with us." So you see that kind of resistance playing out in those smaller markets, and you do not really see it in some of the larger markets in that way.

DR. GINSBURG: Thanks.

DR. O’NEIL: Jon, any partnerships, though, between plans and specialty physicians and the creation of those, particularly around the creation of centers of excellence and branding those as a part of the marketing ploy on the part of the plan?

DR. CHRISTIANSON: We did not see that in the markets that we studied.

DR. GOLDSMITH: Jon, your comment about single-specialty groups focussing on geographic submarkets is prescient because I see that going on in primary care as well. Instead of forming 150-person primary care physician group that tries to stretch across an entire metropolitan area and take on a lot of the overhead characteristics of the small hospital, I am seeing in some places like San Diego 5-person family practice groups that have half or two-thirds of the primary care in an attractive neighborhood, making alliances with other 5-person groups and having 60 people that you have to contract with or you cannot penetrate the 10 most attractive neighborhoods in that market. Those folks are getting leverage without the dis-economies of scale and coordination that you get by creating some type of massive entity with a lot of overhead.

DR. CHRISTIANSON: Yes, exactly. I think it makes a lot of sense from their point of view, but I think it is also important to realize that this really is a strategy that is created by a consumer demand for a certain kind of product and the effect that has, then, on what managed care plans have to do in terms of setting up networks. That is what creates this opportunity for these single-specialty groups to carve out these submarket monopoly positions, and they are reacting to that opportunity. So I think that sort of cause and effect is what is really fascinating to me about this process.

DR. GINSBURG: Yes. That is a very good comment because, in general terms, you would say consumers’ demand for broad networks is weakening the power of health plans to negotiate with providers, and that is really a very specific way that it can happen.

DR. GOLDSMITH: You kind of wonder whether it is really going to change. I look at how hard organizations like Kaiser and Group Health are struggling even to break even, let alone to create a product that has any qualitative advantage over that broad network. So I think we may be, for better or for worse, stuck with that broad network framework for quite some time.

DR. CHRISTIANSON: We did see some cases where specialists have tried to create community-wide presence, maybe like the old model where you would think if we were a single-specialty group that had offices all over town, then we would get the sole contract with the managed care companies, but that does not seem to be a strategy that has worked and in fact we just do not see that happening in these markets.

DR. GINSBURG: Questions from the audience?

DR. GLICK: My name is Henry Glick, and I am a practicing obstetrician/gynecologist for 37 years and vice president of Medical Affairs of Baptist Health Systems which is one of the largest health centers in South Florida.

I have a tremendous frustration because I can recognize how critical it is to study health system change. We know the question, and what I want to know, which is difficult, is the answer.

I can tell you what has happened in South Florida. If you review the health care studies in 1997, I believe we had 64-percent penetration of managed care. Probably, my practice is 95-percent penetration of managed care.

The hospital system, which has been one of the most successful systems, has 1,800 physicians, has now 4 hospitals, and for the first time this year is losing a significant amount of money.

What is the answer? We participate in the advisory board, which is a think-tank in Washington which suggested the PHO, which was not successful. Then we formed an IPA of 800 physicians, which was totally a disaster because, when somebody talks about hurting cats, you cannot have 800 physicians hurting and establish a risk model or fully capitated model.

Five years ago, what would have been totally impossible because of the economics of the condition--I formed 2 years ago a single-specialty group OB/GYN practice that managed 80 percent of all the OB/GYN care of Baptist, South Miami, and Mercy Hospital, which are the significant hospitals. It was almost totally impossible.

Our obstetric fee, 5 years ago, was $3,500, and it was racheted down to 12-, 13-, $1,100. With this single-specialty group, which I thought was one of the biggest in the country--and it would only have happened because of the economic conditions at that time--were able to successfully negotiate contracts with managed care for maybe 18-, 19-, 100 or $2,000, and that is just an example for obstetrics.

In the meantime, we formed a diagnostic center. We formed a partnership with a group called Medisphere out of Nashville, Tennessee,and the point I wanted to make--two points. One of them is that, unfortunately, what has happened in medicine--and I sort of relate it to business--if you make $100,000 in your business and all of a sudden the next year you make $22,000 or $18,000, what do you do to increase your income? You find more ways to make money.

When you talk about diagnostic centers or you talk about procedures and increased technology and pharmacy costs, everyone, unfortunately, in medicine is trying to make more money. I have practiced for a long time, and that is the perspective that I have.

So what I am asking is that sometimes I tell the chief and the CEO of our hospital--you know, he sees it from the skybox. I see it from the plane floor. With your view of the future, it is easy to talk about all the things, the IPAs, the PHOs, but I want to know substantially. A single-payer system, isn’t that a good idea?

[Laughter, applause.]

DR. GLICK: I hate to say this because I know there is probably 99-percent consultants in the room. Somebody told me that if somebody gave you watch and they would tell you what time it is--

[Laughter.]

DR. GLICK: With all due respect--and the last thing I am going to say is I heard Dr. Ijamhopen who was the founder of managed care make this statement at a meeting a year and a half ago at a conference. He says when he had the idea of managed care, it was with a focus on cost and quality. I do not have to tell you, it is a focus on cost, and there is no regard for quality. I am sorry, but that is why.

[Applause.]

DR. GINSBURG: I think you brought up a lot of important things. I think people on our panel will have responses.

DR. GOLDSMITH: I do not own a watch myself.

[Laughter.]

DR. GOLDSMITH: So, if you ask me what time it is, I have got to borrow one from Jon Christianson.

A single-payer system would certainly put a floor under your income and would reduce a lot of your uncertainty, but we have not had a very good record as a country in managing things that we declare to be public goods. Maybe there is going to be a big groundswell of support for it. I do not know.

As to your question of what needs to be done, the thing that is really scary to me is that you look at different subspecialty groups or different obstetrical groups, different hospitals, there may be a four- or five-fold variation in your risk of being killed by using one of those groups, depending on who they are.

Obviously, the way managed care is configured now, you would think that managed care plans would have quality screens so that the open-heart programs that were killing 1 out of every 6 or 1 out of every 7 of their patients simply did not get paid, but they would get sued if they did that and there is all sorts of problems with actually setting an empirical standard for patient safety.

So what I think a lot of these managed care plans are going to do for their second act is begin--and there will be a hail of dead cats when they do it--publishing the comparative performance information as well as comparative cost information of the different elements in their provider networks and letting people see where the risk and cost is and maybe creating payment structures so that if your obstetrical group is able to reduce complications and produce really good results for a given price, then people will not have to pay anything out of pocket if they visit you.

So I think the innovation is going to have to begin in major part on the health plan end in changing this paradigm that everybody in their network has an entitlement to be paid and the illusion that, of course, everybody is doing a great job. We know that both of those things are not sustainable.

So I see the health plans coming back with information and feeding a lot of it to consumers directly through the internet, bypassing the employer in Washington and all the rest of it. I think that it is becoming accountable for the quality and for a higher standard of patient safety where I see the health plans in our health system needing to go.

The structures that get you there, I think we are besotted with structures. It is like find a structure. All those other guys are doing it. Let’s be exactly like them. I think we have got to discipline ourselves to stop doing that.

DR. GINSBURG: Jon?

DR. CHRISTIANSON: I do not have much to add to that. I would just say that the comments you heard here are the kinds of comments obviously that fed into this talk today because he really touched on everything that we were hearing in our interviews in terms of how frustrated the specialists are feeling about how do we respond to this kind of market change, what do we do.

I guess the other thing I would just sort of throw out on the table, the question presumes a solution. The question presumes that somehow if we look hard enough, we are going to find a model or we are going to find an approach that is going to be able to accomplish all of the things that we want to accomplish in our health care system, most of which are contradictory.

I think the health care system will evolve in the best of worlds, much the way Jeff describes it, but I think it is very difficult to predict how any system will evolve when in effect you are asking the system to do contradictory things.

DR. GINSBURG: Let me just make a final comment. One thing where health care differs from a lot of other industries is that in other industries, if a company is losing money because they cannot get price for their product that measures up to their cost, they either perceive a way they are pretty confident of, of lowering their costs or they get out of the business and go and do something else.

One of the phenomenons of health care is that we have non-profit hospitals that they have no incentive to leave until they actually have to close their doors. So, in a sense, you do not have those exits that, in a sense, can hasten those adjustments. I think in physicians, they have trained in medicine and they are not about to leave and do something else.

DR. CHRISTIANSON: And as I said in the talk, there also is an enormous inertia in terms of moving to a different location. So exiting a market is tough for specialists. So you have both of these phenomena going on, too.

DR. GINSBURG: So, to the degree that some of the pain is due to oversupply, hospitals and physicians, it is going to take a much longer period, and maybe a lot more suffering and attempts to do things that do not work, I think the cost of this notion of health care. This is why I think you hear more from physicians about single-payer system. That probably is their short-run way out of this, but it is not necessarily good for society.

We are running late. The woman at that second microphone has been up for a while.

MS. SEVERONI: Thank you.

My name is Ellen Severoni, and I am president of California Health Decisions, which is a non-profit public involvement organization in California.

I wanted to pick up on Ms. Gold’s point where you said clearly where is the patient in all of this. From my perspective, the past 15 years, I have listened to well over 100,000 people talk to me about their concerns with the health care system. What I see reflected in the system that we have today is no real structure-sorry, Joe--but a real structure or process for bonding the patient and the physician as the center point of the interaction or the provider, let’s say if you want to talk in broader terms.

I do not see structures or processes in place, for instance, that allow for health plans and medical groups to contract for the benefit of the patient. There is no structure in place, at least in California, for health plans and employers and medical groups to work together on quality improvement.

My organization has formed some of those kinds of projects with specific plans, providers, and employers to do that, and as soon as we the consumer organization try to extricate ourselves from that work, the projects fall apart. What the players tell us is there is really no incentive. There is no structure in place that allows for that communication other than the contracting period. So that, what we have are patients that literally, I think, feel like we are getting creamed all the time because who can survive these kinds of, I think, very-driven-by-greed and self-interest kinds of contracts which I understand in the business sense, but now that we are talking about provision of health care services or provision of information to people who need it--

So do you see on the horizon any of those structures? I mean, even single payer seems to me to be a tactic that would try to force us to communicate with one another, but if we are going to continue with a market-based system, how would we put into place some of those structures or incent the institutions to focus in on the benefit of the patient or improving quality

DR. GOLDSMITH: I think the patient completely disappeared in this process. I think the patient was thought of in terms of blocks of hundred-thousand lives, you know, that I am acquiring lives by buying your physician group or I am acquiring lives by merging with this other health plan. I think the individual patient was completely lost in this process.

The individual patient’s reponse to this loss of focus on their needs has been to completely bypass the existing health care system and use the internet to try and get answers to their questions. That is really what the internet revolution in Medicine is about. It is about people confronting this increasingly arrogant corporate delivery system and insurance system and saying I am not getting the solutions to my problems that I need out of these corporations or organizations. So I am going to go directly to the information sources, and I am going to talk to my fellow patients and see if we can work it out that way.

That is not an optimal solution, is it? We have invested hundreds of billions of dollars in creating this medical infrastructure that people do not feel is meeting their needs.

MS. SEVERONI: And the value of the information on the internet, how do I know what I am getting so I can begin driving--

DR. GOLDSMITH: A major commercial opportunity, I can assure you.

[Laughter.]

DR. GINSBURG: We could discuss that for a long time.

MS. GOLD: I like the internet.

I wanted to sort of make two points. One is that while it is appealing, I think, to think about going back to the old Marcus Welby-type arrangement of the doctor and the patient, one of the things that I think is challenging in putting the patient back in here is that medicine is changed. The issue is it is not just a doctor. It is probably multiple doctors. It is other providers. It may be the internet. It may be other ways.

Yet, for an organization, what is the models of putting the patient back in and having the patient feel a loyalty or feel a commitment or feel a communication when medicine itself has changed? That becomes important.

The second is, I think, a comment on some of the changes in the health systems that people are talking about here, which is that it becomes really harder to implement those kinds of changes when you are emerging, consolidating, and things because it is disruptive. I think you just spend all your time.

I do not know how you do an information system when one day you are doing it for one company, another day you are doing it for another, and Aetna is merging with Pru and they each have different systems and if you are a patient the name of your place changes. So I think that is sort of an under-appreciated fallout of some of this, but I do not think we would ever go back to the same model.

So the question is: If you look at this from the patient’s point of view, what are the different models and what are the more realistically based ways of connecting the patient in this? I am not dealing with your financial questions because those are sort of a different level.

DR. GINSBURG: Good. Thank you.

This was lively. We have got a schedule, though. Let’s carve some time off our break. Let’s take a break now and be back in 7 minutes and start the final segment.

[Recess taken at 10:48 a.m.]