CHALLENGES AND OPPORTUNITIES
FOR PREPAID GROUP PRACTICE
Academy Health
June 6, 2004
Professor James C. Robinson
University of California, Berkeley
OVERVIEW

Peeling the onion of the model
 Market
framework
 Vertical
integration
 Capitation
payment
 Multispecialty

group practice
What is the emerging model?
Prepaid Group Practice as Solution to
Woes of Health Care System?



Long tradition of criticism of
organizational fragmentation, excessive
specialization, lack of costconsciousness
Convergence of ideas and interests
brought together advocates of market
incentives, group practice, prepayment,
organizational integration
The new American health care system?
The Elements of the New Jerusalem
 Four
key components of the model of a
market-oriented, organizationally
integrated, cost-conscious health system
1. Group practice v. physician cottage industry
2. Capitation v. fee-for-service
3. Vertical integration v. any-willing-provider
4. Cost-conscious choice v. paternalism
Strange Detours on the Road to the
New Jerusalem

The market and polity seemed to be
moving towards the new model, but now
seem to be moving away from it




From managed competition to single
sourcing
From vertical integration to broad networks
From capitation to fee-for-service
From multi-specialty to solo/specialty
practice
Explaining the Detour

Peel the onion from the outside in:
4. Managed competition, cost-conscious choice
3. Vertical integration, insurers and MDs
2. Capitation payment
1. Multi-specialty group practice
4. Challenges to Managed
Competition: Large Firms

Large employers abandon cost-conscious
multiple choice by employees
 Administrative
costs of multiple plans
 Fears of adverse selection
 Complications of fixed dollar contributions
 Insurers develop total replacement metaproducts that include multiple network (HMO,
PPO) and benefit (high/med/low) options
Challenges to Managed Competition:
Small Firms

Small firms never offered multiple choice

Purchasing alliances never got going
 No
incentives to create nonprofit alliances
 Large
employers and labor unions don’t want to
pool risk with small firms
 Brokers

are important intermediaries
Small firms want simplicity, economy
Challenges to Managed Competition:
Government
Tax law subsidizes costly plan designs
 Failure to expand FEHBP model
 Medicare: good regulator, dumb purchaser

 Overpay

then underpay then overpay then…
Tricare, some Medicaid programs adopt
single vendor model rather than multiple
choice model
3. Challenges to Vertical Integration:
Different Markets
Health care markets are small, local
 Insurance markets are regional, national

 Difficult
to sell narrow-network products
Vertical integration accentuates internal
organizational politics, undermines
performance incentives for each unit
 Successful examples have longstanding
culture and market position

Challenges to Vertical Integration:
Industry Life Cycles
Many industries begin with innovative
technologies and organizational forms, then
evolve from vertical integration towards
non-exclusive (market contract) relations
 Early PGPs needed to integrate
insurance/financing with delivery
 Maturation of industry eliminated this
imperative, permitted market contracting

2. Challenges to Capitation:
Complicated Incentives

Difficulties in developing measures and
methods to deal with well-known problems
 Risk
selection and risk adjustment
 Quality and quality measurement
Public perception that incentives to undertreat are worse than incentives to over-treat
 Irony of success is slowing costs in 1990s
undermined constituency for cost control

Challenges to Capitation:
Weak Physician Governance

Capitation requires sophisticated physician
entities to reap benefits, avoid problems
 Financial
management
 Information technology
 Strong governance and leadership
 Adequate scale for spreading risk

With important exceptions, physician
organizations were incapable of this
1. Challenges to Group Practice:
Incentives for Productivity
Attenuation of individual incentives for
productivity (free-rider) as physicians move
from self-employment to employment
 Traditional solo practice is for-profit firm
where every dollar saved is a dollar earned
 Productivity problems grow as the practice
grows, especially across multiple sites

Challenges to Group Practice:
Organizational Politics
Physicians distrust government, insurers,
hospitals, and other physicians
 Multi-specialty groups must mediate
professional rivalries, relative income
concerns of primary care, specialists
 This is especially a problem when medical
group is linked to (owned by) a hospital
 War of all against all

What is the Emerging Model?
1. New market/policy framework?
 What is consumerism in health
insurance?
2. New insurer-provider relationships?
 What are “efficient networks”?
3. New payment methods?
 What is “episode of care” pricing?
4. New forms of physician organization?