The Community Snapshots Project

Capturing Health System Change

Orange County, Calif.
1995

Overview

range County is an increasingly ethnically diverse region of southern California, and the income of its residents covers the extremes of wealth and poverty. It is a politically conservative stronghold with a government that has been more dedicated to fostering growth and development than to providing public and social services. The county’s recent bankruptcy is bringing even greater pressure to publicly funded programs, especially those including health care, that are less popular with the voting public.

The health care market has high managed care penetration. According to some estimates, only 5 percent of commercially insured patients have traditional indemnity insurance; possibly 66 percent of people with employer-based insurance are enrolled in health maintenance organizations (HMOs). For the one in nine residents who are Medicaid beneficiaries, the county recently embarked on an ambitious plan, CalOPTIMA, that will enroll all of them in managed care plans offered by either HMOs or provider plans that CalOPTIMA calls physician-hospital consortia (PHCs).

Purchasers, health plans, and providers are not highly concentrated at the local level, and there is no local leadership for the health care market. The county’s employers are still trying to organize themselves into a health insurance purchasing coalition that can negotiate with the 10 HMOs and numerous preferred provider organizations (PPOs) and indemnity carriers competing for market share. On the provider side, a clearly excessive number of hospitals operate without any dominant systems, many medical groups and Individual Practice Associations (IPAs) compete for capitated enrollees, and community health centers are deeply divided.

Within this fast-moving and decentralized market, the balance of economic power has shifted sharply away from providers to favor purchasers and health plans. This is because providers have excess capacity and the mostly nonprofit, locally based providers are negotiating with insurers that are larger, have greater resources, and have less at stake in the negotiations. As a result, hospitals, medical groups, and IPAs have been unable to differentiate themselves from competing providers by demonstrating quality differences and have seen their revenues stagnate or decrease. Even medical groups known for their pioneering emphasis on capitated managed care and sophisticated physician compensation systems find themselves scrambling to maintain and expand market share.

The county’s new CalOPTIMA program moved approximately 180,000 of its Aid to Families with Dependent Children (AFDC) population into managed care in October 1995, with other categories of Medicaid recipients to follow in February and April 1996. This program has the potential to expand greatly the number of health plans and providers available to Medicaid patients. However, there are concerns about the program’s impact on the county’s traditional and safety net providers and its implications for the financing and delivery of care to the indigents left outside the program. These concerns remain despite efforts to favor the traditional safety providers during the transition.