Who needs the middleman? - third-party players in the doctor-patient relationship

Business & Health, Annual, 1997 by Alicia Ault Barnett

The more things change, the more they stay the same," seems to be the apt platitude to describe the health care marketplace of 1997. The latest addition to the array of options for employers that offer health benefits is the provider-sponsored organization (PSO). Set up and managed by hospitals and/or doctors, PSOs hold out the delectable promise that they will cut out the middleman -- the insurance carrier.

In theory, contracting directly with PSOs could translate into lower administrative and premium costs and higher quality care. In practice, it might attach employers to underregulated and possibly underfunded entities with little risk-bearing experience.

Most PSOs lack track records and have little quality data or proof of ability to manage utilization. They stand on somewhat shaky regulatory ground as well, because enforcers are having trouble defining them. Should PSOs be licensed as insurers or left to their own devices?

As a result, not many employers have ventured into this uncharted territory, and the daring few that have signed contracts have been reluctant to eliminate all the functions of the middleman. Many still pay a third party administrator (TPA) or a health plan to process claims, provide customer service and collect quality data.

That doesn't surprise Peter Kongstvedt, MD, a partner with Ernst & Young's Washington, D.C., office. Providers and payers may dream about cutting out the middleman, he says, "but all you can do is replace him," because there are "absolutely necessary administrative functions," such as managing billing, enrollment, benefits tracking and financial management. "I don't know that providers and purchasers can do any better than the so-called middleman," agrees Dennis Bush, senior vice president with the MEDSTAT Group.

For at least the next five years, "there are advantages that middlemen bring to the table," adds Ken Berkowitz of the Towers Perrin office in Miami. TPAs, and managed care organizations (MCOs) in particular, he says, are skilled in account and customer servicing and can offer sophisticated information systems. Most of them can make the daunting prospect of administering to the needs of several hundred or several thousand employees a lot less complex, and Berkowitz concludes, "Administrative simplicity still sells in the employer segment."

So even though the name of the provider and the form of the delivery system may have changed, the basic shape of the financial structure remains constant. Employers are not transferring financial risk to these PSOs, and many are struggling with the implications of making the physician more directly accountable for meeting quality and budget targets.

Still, employers say that PSOs are injecting competition into their markets. In Minneapolis, for example, which was on the verge of domination by a few MCOs, the Buyers Health Care Action Group (BHCAG) thinks its encouragement of PSOs -- through an experimental program just getting under way in 1997 -- may keep the market from stagnating. BHCAG, which last year purchased health care for 100,000 workers, put out a request for proposal, asking providers to align in "Care Systems" to bid on coverage. Of the 19 systems that responded, 15 qualified for the 1997-98 plan year, says BHCAG executive director Steve Wetzell. "We've given them a customer and brought them to the front of the marketplace."

Providers: Driven by fear

But employers rarely have that much clout. In most areas, physicians and hospitals are organizing not to serve a new customer, but to fend off encroaching MCOs. "Without question, it's purely reactionary in some places," says Kongstvedt, "and if it's not providing value to the marketplace, the market won't respond positively."

Physicians want to hold on to their incomes and have more say over their destinies. In starting their own organizations, they hope to eliminate the insurance broker standing between them and patients.

Hospitals are losing on all fronts. Inpatient costs still eat up a large portion of the health care dollar, but admissions are declining and MCOs increasingly determine hospitals' futures. Thus, they, too, are looking for a way to get back in the driver's seat.

The scenario varies and often depends on what institution is dominating the local market -- hospital, HMO or physician. Not surprisingly, most PSOs are hospital-based. In Ernst & Young's most recent annual report on these entities, hospitals were the principal owners of 76 percent of the 200 systems surveyed. Most are located in hospital-centered states, such as Florida, Indiana, New York, Pennsylvania and Texas. Second-tier states include Arizona, California, Massachusetts, Michigan and New Jersey.

Such hospital-driven organizations have existed for decades, but their growing direct acceptance of risk and premiums -- without being licensed as insurers -- and the explosion in physician-driven enterprises have pricked up the ears of the managed care industry.

According to Tom Hodapp, an analyst with the investment banking firm Robertson Stephens & Co., just seven years ago, physicians didn't feel enough pain to change their structures. Now, there's no escaping the need to consolidate their practices to win managed care or, eventually, employer contracts.