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HMO Development: Threat or Opportunity for Hospitals?
Published online by Cambridge University Press: 24 February 2021
Abstract
Many hospitals presently find themselves at a vulnerable stage in their development. The increased efficacy of antibiotics, together with the population's increased life span and decreasing birth rate, have reduced the need for the kind of acute inpatient care that hospitals traditionally have provided. Moreover, hospitals now are feeling pressure from federal and state regulatory agencies to eliminate approximately 20 percent of the nation's acute-care beds. Concurrent with the population's changing health needs and with the increasing regulatory pressure from government, the acute-care hospital also must contend with the advent of a rival medical care delivery organization—the health maintenance organization (HMO)—whose primary goal is to provide quality medical services in a costefficient manner. One of the most important ways in which HMOs contain costs is by attempting to reduce significantly the rate of hospitalization of their members, an approach that threatens the very livelihood of some hospitals.
The authors describe five alternative strategies that hospitals can adopt to meet the potential threat of HMOs—filibustering, passive acceptance, direct sponsorship, accommodation, or strong support. They maintain that the latter of these strategies, strong support, places hospitals in the most favorable position to convert the threat of HMO development into an opportunity to build a mutually beneficial relationship.
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- Copyright © American Society of Law, Medicine and Ethics and Boston University 1980
References
1 Gibson, & Fisher, , National Health Expenditures, Fiscal Year 1977, 41 Soc. SECURITY BULL. 3, 20 (1978).Google Scholar
2 Of air hospitals, 5.6 percent are federal, and 11.7 percent are nonfederal psychiatric, tuberculosis, or long-term hospitals. CAMBRIDGE RESEARCH INSTITUTE, U.S. DEP“T OF COMMERCE, TRENDS AFFECTING THE U.S. HEALTH CARE SYSTEM 295, DHEW PUB. NO. HRA 76-14503(1976).
3 AM. HOSPITAL ASS'N, GUIDE TO THE HEALTH CARE FIELD A-9 (ed. 1978).
4 The Hill-Burton Act, 42 U.S.C. § 291 (a)-(o) (1976), made available substantial funding for hospital beds and facilities; these funds eventually led hospitals'to develop more beds than the market demanded. During the period from 1947 to 1974, the Act authorized disbursement of more than $4.1 billion in grant funds and $1 billion in loans, which financed 496,000 beds—40 percent of the nation's present supply of nonfederal, shortterm hospital beds. AMERICAN HOSPITAL ASS'N, GUIDE TO THE HEALTH CARE FIELD V (ed. 1978).
5 The HMO Act of 1973, 42 U.S.C. § 300e (1976), combines in one bill the Republican interest in spurring cost-efficiency through market forces, and the Democratic interest in providing comprehensive health care benefits. To stimulate HMO development, the Act offers grants, loans, and loan guarantees to qualifying HMOs in various stages of development.
6 In its criteria for determining eligibility for federal funds, the federal HMO Act specifies three basic organizational models of HMOs—staff, group, and IPA. 42 U.S.C. § 300e-l (4)-(6) (1976). The first two types, commonly referred to as closed-panel HMOs, have centralized organizational structures, and tend to deliver patient care within their own clinics or health centers. In contrast, the IPA-HMO is a decentralized organization in which physicians deliver services in their private offices instead of in HMO, facilities.
There has been considerable discussion on the relative merits of closed- and open-panel HMOs. Studies indicate that the former are more efficient in controlling unnecessary hospitalization. Many IPA proponents argue, however, that IPA-HMOs will predominate in the long run, due to their greater geographic accessibility, greater physician acceptability, and lower fixed costs (for example, they do not need to establish their own health centers). More extensive research on the characteristics of subscribers and of physicians who join each model will be necessary to permit a conclusive answer to this question. In any case, regardless of the relative cost efficiencies of the two models, research suggests that both are more efficient than the fee-for-service system.
7 In an apparent effort to minimize loss of their subscribers to HMO competition, some insurance carriers have established HMOs of their own. If such a carrier is reluctant to establish a fully independent HMO board of directors, however, the carrier's HMO will not qualify for federal support under the federal HMO Act. Nonetheless, such an HMO may be licensed under analogous state laws. See, e.g., ILL. ANN. STAT. ch. Ill 1/2 (Smith Hurd Supp. 1979); MASS. GEN. LAWS ANN. ch. 176G §§ 1-17 (West Supp. 1977); N.C. GEN. STAT. ch. 57B §§ 1-25 (Michie Supp. 1979).
8 Luft, , How Do Health Maintenance Organizations Achieve Their ‘Savings’?, 298 NEW ENGLAND J. MED. 1336 (1978).CrossRefGoogle Scholar Luft attributes most of the cost differences between HMOs and conventional insurance to HMO hospitalization rates, which tend to be 10 to 40 percent lower than those of conventionally insured populations. Id. at 1340-41. Unfortunately, Luft finds the data inconclusive as to whether this reduction in hospitalization is due to reduction in unnecessary—as opposed to noridiscretionary—admissions. Id. at 1342. However, a review of the literature comparing the quality of health care in HMOs with that of traditional fee-for-service medicine indicates that the majority of methodologically sound studies find HMO care at least equal to that of non-HMO providers. Cunningham, & Williamson, , How Does the Quality of Health Care in HMOs Compare to That in Other Settings, 1 GROUP HEALTH J. 4 (1980).Google Scholar
9 Arthur D. Little, Inc., A Summary of Activities and a Strategy Paper for a Massachusetts Hospital 16 (Sept. 1978) (unpublished study).
10 Id.
11 FTC BUREAU OF COMPETITION, MEDICAL PARTICIPATION IN CONTROL OF BLUE SHIELD AND CERTAIN OTHER OPEN-PANEL MEDICAL PREPAYMENT PLANS (1979). Replications of this study at additional geographic sites are necessary in order to determine with greater precision the impact of HMOs on the fee-for-service system.
12 According to HEW, national enrollment in HMOs increased 10 percent between 1978 and 1979, and 18 percent between 1977 and 1978. The total number of prepaid plans increased 23 percent during 1978, and 10 percent during 1979. National HMO, Enrollment Hits 8226,053 in 1979, 21 GROUP HEALTH NEWS 1,1 (1980).Google Scholar
13 Hospitals tend to define themselves from within, despite the intense regulatory pressure applied by state and federal agencies. The purpose of such regulation is not to change the essential nature of the industry, but rather to subject some of its financial, decisions to government review. Thus, certificate-of-need programs require hospitals to demonstrate need for additional capital expenditures through the appropriate regulatory processes. Such programs have closed few hospitals and have left the nature of the industry basically unaltered; consequently, there is a continuing debate over whether the certificate-of-need process has reduced or—through the addition of regulation—increased hospital expenditures. In fact, economists have shown that regulation actually serves to protect existing institutions, from competition and from the results of their own cost-inefficiency, thereby dampening internal changes that might otherwise be compelled by the competitive pressure of an unregulated market. See, e.g., Noll, The Consequences of Public Utility Regulation of Hospitals, in NAT'L ACAD. OF. SCIENCES, INST. OF, MEDICINE, CONTROLS ON HEALTH CARE 25 (1975); and Altman & Eichenholz, Inflation in the Health Industry—Causes and Cures, in HEALTH, A VICTIM OR CAUSE OF INFLATION? 7 (M. Zubkoff ed. 1976).
14 Commentary, Schweiker Looks to HMOs to Deliver on Their Promise, 2 HMO Focus 2 (1979).Google Scholar
15 Biblo, The Relationship of the Medical Director to the Lay Administrative Officer, in MEDICAL DIRECTORS DIV., GROUP HEALTH ASS'N OF AMERICA, I PROCEEDINGS OF THE MEDICAL DIRECTOR EDUC. CONFERENCE 64 (1976). It is noteworthy that physicians tend to be more integrated into the overall organization when they are part of a group or staff-model HMO—a centralized HMO in which physicians practice in a health care center. In contrast, IPA physicians may identify less with the organizational goals of the HMO because many of their patients are not HMO members. Even IPA physicians must commit themselves to some extent to the HMO's goals, or it may very well fail. For a detailed discussion of IPA-HMOs, see Egdahl, Taft, Friedland & Linde, The Potential of Organizations of Fee-for-Service Physicians for Achieving Significant Decreases in Hospitalization, 186 ANN. SURC. 388 (1977).
16 Reimbursement of HMO physicians may take three forms: salary; fee-for-service; or capitation. The first reimbursement method—salary—is used by staff-model HMOs, in which physicians are direct employees of the HMO. The second method—fee-for-service—is characteristic of IPAs, which contract with individual solo practitioners for medical services. The third method—capitation—may be used by any of the three types of HMOs. For example, in addition to its salaried physicians, a staff HMO may contract with specialists, paying them a capitation fee (or per capita amount per member) to provide specialty services to its membership. Similarly, in a group-practice HMO, such as the Kaiser-Permanente Medical Program, the HMO may pay a physician group—such as a partnership—a capitation fee for each HMO member for whom the group is medically responsible. Finally, an IPA-HMO may agree to pay solo practitioners a capitation fees for each HMO member they treat.
17 A hospital's house staff is composed of recent medical school graduates who, in essence, are doing their practicum and gaining clinical experience that they did not receive during their academic training. Depending on which year of clinical experience they are completing, house staff also are referred to as interns, residents, or fellows.
In most teaching hospitals, the writing of patients’ diagnostic and treatment orders is the prerogative of the house staff, not of the admitting physician. Consequently, private physicians can retain control of the hospital care rendered to their patients primarily by persuading the house staff to follow their recommendations. Where differences of opinion arise between admitting physicians and house staff, relations between them can become extremely strained. Such conflicts parallel those created by the incompatibility between the HMO physicians’ need to cut costs and the house staff's need to gain clinical experience.
18 For example, assume that a hospital is reimbursed by the following mix of payors: Blue Cross, 50 percent; Medicare, 20 percent; Medicaid, 20 percent; and self-paying patients or patients covered by commercial insurance, 10 percent. In this situation, eliminating $100 in costs would realize an actual saving of only $10 for the hospital, since all payors except commercially insured or self-paying patients would reduce their reimbursements to reflect the hospital's reduced costs.
19 The same financial incentives that promote inefficiency in hospitals and efficiency in HMOs influence the extent to which each organization is willing to assume responsibility for medical education. For example, teaching hospitals are willing to support medical education, because they can recover most of their educational costs through patient revenue. Thus, the patient may pay $500 for an appendectomy at a community hospital and $900 for the same procedure at a teaching hospital. Although a portion of this additional cost may reflect differences in the two hospitals’ construction costs or levels of technology, a substantial part of this sum probably is due to medical education expenses. In contrast, most HMOs cannot recover their costs in this manner, since they must operate within a fixed budget. As a result, only the nation's few long-established, financially secure HMOs are able to assume significant financial responsibility for training young physicians. Thus, the growth of HMOs highlights the need for a national policy to determine who should bear the financial burden of medical education—patients with traditional forms of insurance coverage, or society as a whole.
20 For a discussion of such tactics and of HMOs that succeeded in overcoming them, see W. MACCOLL, GROUP PRACTICE AND PREPAYMENT OF MEDICAL CARE (1966). For discussion of a case dealing with the legality of such tactics, see note 21 infra.
21 In 1937, when the Group Health Association of Washington, D.C., was first organized, the American Medical Association responded by restricting GHA physicians’ hospital privileges and by threatening them with loss of AMA membership. The Antitrust Division of the Justice Department then secured an indictment against the Association for violating the antitrust laws. United States v. American Medical Ass'n, 28 F. Supp. 752 (D.D.C. 1939), cert, denied, 308 U.S. 599 (1939).
22 Internal HEW document circulated privately to author by staff member (Jan. 6, 1978).
23 For a more detailed explanation of IPA-HMOs, see note 6 supra.
24 Conversation with Dale Thomas, President, American Health Management & Consulting Corp. (Sept. 1979).
25 42 U.S.C.A. § 300e-5(b)(4)-(7) (West 1974).
26 42 U.S.C.A.§300(c)(6)(Westl974).
27 See, e.g., Bates v. State Bar of Ariz., 433 U.S. 350 (1977) (lawyers); Bolton v. Kansas State Bd. of Healing Arts, 473 F. Supp.728 (D. Kan. 1979) (chiropractors).
28 For examples of federal interest in encouraging competition, see FTC REPORT, supra note 7; the hospital cost-containment bill, S. 1391, 95th Cong., 1st Sess., 123 CONG. REC. 6394 (1977); and a proposal to exempt HMOs from certain requirements of the certificate-of-need program, S. 544, 96th Cong., 1st Sess., 125 CONG. REC. 2050 (1979).
29 Reece, , Financial Squeeze on Hospitals: Implications for Practicing Physicians, 60 MINN. MED. 5, 5-8 (1977).Google Scholar
30 MASS. HOSPITAL ASS'N, REPORT OF THE TASK FORCE ON HEALTH MAINTENANCE ORGANIZATIONS (1978).
31 HOUSE COMM. ON INTERSTATE & FOREIGN COMMERCE, A DISCURSIVE DICTIONARY OF HEALTH CARE 78 (1976), defines the hospital as “an institution whose primary function is to provide inpatient services, diagnostic and therapeutic, for a variety of medical conditions, both surgical and non-surgical.”
32 See note 18 supra and accompanying text.
33 Greater Delaware Valley Health Care, Inc. contracts with three IPAs, each composed of physicians from the medical staff of an affiliated hospital. Under these agreements, complex formulae allocate year-end savings or deficits between the IPA and its affiliated hospital. Consequently, both the participating IPA's physicians and its affiliated hospital accept financial risk. Greater Delaware Valley Health Care, Inc., Radnor, Pa. Background (1977) (unpublished study).
34 When President Carter submitted his now defunct hospital cost-containment bill to the 96th Congress in March, 1979, it exempted hospitals with 75 percent of their patients enrolled in qualified HMOs from the mandatory cost control program. Note, 2 HMO Focus 5, 5 (1979).