North Coast Journal

March 1995 - COVER STORY

The health care revolution


by Lisa Ladd-Wilson


The sound of "managed care" kicking at the door of the Redwood Curtain has sent North Coast doctors and other health-care providers scurrying in unprecedented ways. Within the last year:

- Physicians have united under a for-profit corporation to negotiate with health maintenance organizations, or HMOs, and, it is hoped, prevent a potentially devastating competition for patients

- Representatives from hospitals, clinics, the Public Health Department and physicians have been meeting since June 30 to develop a community-based HMO

- Several medical practices have joined a rival, out-of-the-area corporation of physicians, causing a serious rift among local doctors But perhaps the biggest change is that many people in the medical community - including physicians - are no longer warning against managed care but are publicly embracing its arrival.

"There is general agreement that (managed care) will be beneficial to our community," said Dr. Phil Wagner, a Eureka physician speaking for the Humboldt-Del Norte Medical Society. "How you get there from here is what's a little controversial."


Managed Care Is?

Managed care is a catch-all term that's difficult to nail down because, as the American Medical Association points out, it's a concept that's still evolving. At its most basic level, however, managed care is a health insurance plan that offers customers a specific network of health-care services.

These services are accessible only through a primary care physician (usually a general/family practice doctor), who must authorize all other services - such as referrals to specialists, physical therapy, prescriptions - or else the insurance won't pay for it. The primary care physician thus "manages" each patient's health care. He/she is the hub of the wheel that feeds into the spokes, and he/she has a complete record of every test ordered, every drug prescribed.

That physician - often called a "gatekeeper" - also manages the cost of each patient's care, and his/her contract with the insurance company contains incentives to control those costs: Under managed care the physician stands to make more money by keeping costs down. The reverse is also true: He/she stands to make less money by ordering lots of tests, referring patients to specialists and generally increasing the cost of care. Most people are familiar with managed care through HMOs, and the most familiar HMO is Kaiser Permanente. Kaiser is a consolidated health-care network that rolls administration, physicians and hospitals into one, tightly controlled organization. People insured through Kaiser see physicians employed by Kaiser and enter hospitals owned by Kaiser.

Health Net is another HMO, and the fourth largest in the country (Kaiser is the biggest). Health Net doesn't employ its own physicians, but instead contracts with independent physicians and hospitals to provide care for its customers.

Most customers are enrolled in an HMO through an employer's health insurance plan, where they receive a list of area primary care physicians who have contracted with the HMO.

For the patient, HMOs can make obtaining medical care simpler. For one thing, there may be no deductible; secondly, if you stick to listed services, you may not have to put out any cash of your own. Of course, that means no long waits for a reimbursement check from the insurance company. (A growing trend in HMOs, however, is to require patients to pay a small fee - $5 or $10 - each time they visit their HMO-listed primary care physician.)

Most non-HMO insurance plans reimburse patients a percentage of the fee charged after a patient meets the annual deductible. For example, the insurance might pay 80 percent, and the patient must pay the remaining 20 percent. Under this "fee for service" system, the doctors, or other health-care providers, are paid in full for their services.

HMOs, on the other hand, often contract with doctors under a system called "capitation" (derived from "per capita"). Under capitation, a primary care physician receives a negotiated fee - say, $50 - per HMO client per month, whether the client is seen or not.

That sounds good, since a healthy client in this example can net a physician $600 a year without ever making an appointment. However, a very ill client may incur much more than $50 worth of services in a month. In HMO terms, this puts the physician "at risk."

HMOs can contract with individual doctors or physician groups, the latter of which may include specialists. Separate agreements may be forged with hospitals, pharmacies, therapists, chiropractors, etc. However, the primary care physician remains the gatekeeper from whom all these other services receive their business.

It's this "supporting player" role that often makes HMOs unattractive to specialist physicians, who are accustomed to a higher niche - financially and otherwise - in the medical community than general practice doctors.

From Big City to Humboldt County

Until recently, HMOs have concentrated on enrolling clients in urban areas, since that's where the big employers are found. Larger populations also reduce the risk involved in managed care: more people mean a higher ratio of healthy to unhealthy clients.

As the urban areas have become saturated with HMOs vying for clients, however, rural communities have grown more attractive to managed care organizations. This is especially true in California, according to a report commissioned by the Humboldt-Del Norte Medical Society, because this state is exploring using private HMOs to manage care for MediCal recipients.

Health Net already is in Humboldt County, although it is functioning here under a fee-for-service system; another HMO, CaliforniaCare (Blue Cross), has established itself in Del Norte through its contract with Pelican Bay Prison.

The coming of HMOs isn't a sudden shock for the local medical community. According to Patrick Okey, director of the Humboldt-Del Norte Foundation for Medical Care, the physician community in particular has been preparing for it for years.

The Humboldt-Del Norte Medical Society created the foundation in the 1960s to represent both doctors and patients in negotiating "PPO" contracts with insurance companies. "Preferred provider organizations" are similar to HMOs in that clients receive discounts for using services from a list of "preferred providers" - doctors, therapists, pharmacies. Humboldt County employees, for example, are insured under the foundation's PPO system.

The foundation recruited Okey as director a little over two years ago in part, Okey said, because he had helped physicians in Lake and Mendocino counties deal with HMOs.

"Managed care is the biggest change (in health care) in this country for a long, long time. It's probably the biggest change since Medicare was created," Okey said, and the doctors here wanted to be armed and ready for the revolution.


A Community United

Definitions of managed care used to be fairly negative, especially among physicians, and generally sounded like this: Doctors lose autonomy and are forced to weigh costs against patient health, making them less a physician and more an accountant. Meanwhile, patients are no longer able to choose their own doctor, and worry that beneficial tests and X-rays aren't being ordered because the doctor wants to save money.

That was when managed care was only a possibility; now that it's a reality, definitions have changed.

"It is essential to conceptually redefine managed care from `Something that someone from the outside does to me,' to `A process that involves managing patients, referrals, admissions,'" recommends a report by the American Medical Association. "This conceptual redefinition places the primary responsibility for clinical decision-making exactly where it belongs: with the physician." This redefinition has been embraced by many North Coast doctors, according to Okey and Phil Wagner. Almost everyone agrees that health costs have spiraled out of control and something needs to be done.

It's that word - control - that's spurring big changes in local health care. In January, the Humboldt-Del Norte Medical Society invited Dr. Bruce Amundson of Seattle to Eureka to discuss HMOs. Amundson echoed the newer view of managed care as an opportunity, but warned: When the HMOs come to town, don't let them dictate the terms of your community's health care. Unite as one force, and tell the HMOs what the community will accept from them. Why?

- HMOs usually contract with a limited number of physicians, whose income depends upon their number of HMO clients (capitation). The competition to sign up HMO clients can lead to "raids" on other physicians' patients, creating animosity and possibly forcing some doctors out of business.

- HMO headquarters will be located out of the area, and Amundson said that means a minimum of 15-25 percent of the money they make here will be sent there to pay for executive salaries, administration, advertising.

- Out-of-area HMOs won't have the best interests of this community as their top priority, and may not be sympathetic to an area's special needs. So local physicians, through the Humboldt-Del Norte Foundation for Medical Care, have united under the Humboldt-Del Norte Independent Practice Association.

This IPA, as it's called, will negotiate contracts with HMOs. And since all area physicians have been invited to join the IPA as shareholders, any HMO contracts with the IPA presumably will include all physicians. No picking and choosing by the HMO, no kill-or-be-killed competition among physicians.

And because the IPA is locally owned, goes conventional wisdom, it will dictate terms of health coverage that are beneficial to the community. The Humboldt-Del Norte Independent Practice Association was incorporated Dec. 28, Okey said; invitations to buy shares were sent to all physicians in January

"They must reply in 30 days to buy in," Okey said. "Then we'll have a body of shareholders to form a board of directors. Structurally, it's in place." But the united front has been shattered already, because another IPA has entered the picture - Superior California Primary Care Network, or SCPCN, referred to phonetically as "Skipcan."


A Serious Rift

SCPCN is a regional IPA which represents doctors from Northern California counties, including Siskiyou, Shasta, Sonoma, Tehama, Butte and Napa. SCPCN often enters new territory by calling local hospitals and offices, inquiring as to which primary care physicians are "the best" in the community. In early 1994, SCPCN made contact with Dr. Leo Leer, a general practice physician operating solo in Eureka.

Leer is credited - for good or bad - with leading a group of local physicians to join SCPCN: Doctors at Arcata Family Medical Group and Eureka Family Practice (which Leer has joined) are now members. This is seen by many in the medical community as a defection, a blow to the united front that's believed to be so critical right now.

"It's been a surprise to me," Leer said of the hostile reaction from colleagues.

After Dr. Ed Olsgard of Eureka Family Practice joined SCPCN, he was removed from the Humboldt-Del Norte IPA's interim board of directors. Leer says he's been the target of rumors suggesting "nefarious" motivations on his part, which he denies.

Leer moved to Humboldt County in 1992 from the Los Angeles/San Bernardino area.

"I saw the negative effects of HMOs coming in and forming their own thing," he said. "I saw the need to be pro-active locally many months ago." But Leer thought efforts toward forming the local IPA were moving too slowly and in the wrong direction.

Because managed care is driven by the primary care physician (a term that usually includes family and general practice doctors, general internists, pediatricians, and often obstetrics and gynecology doctors), an IPA must be primary-care driven if it expects to negotiate successfully with HMOs, Leer said. And at first the Humboldt-Del Norte Independent Practice Association was set up that way.

But the specialist doctors wanted more power, say Leer and others, and the IPA agreed, placing more specialists on its interim board. The Humboldt-Del Norte IPA also will not capitate its physicians. It will receive a capitated fee from the HMOs, but it will pay physicians under a fee-for-service system. The physicians therefore will not be "at risk" financing except for a "bonus" at year's end. SCPCN, Leer said, capitates its physicians.

"This flies in the face of the whole concept," Leer said. "IPAs of this nature have been found to fail."

Okey acknowledges there are differences between SCPCN and the Humboldt-Del Norte IPA.

"The IPA here wants to represents all physicians, and therein lies our primary difference," he said. "We want the specialists to be involved, even though they won't be care coordinators."

The Humboldt-Del Norte IPA is concerned, Okey said, that such differences in philosophy between the two IPAs pose "potential disruptions" in relationships between doctors in this area, and maybe even for patients. Leer doesn't think so. SCPCN and the Humboldt-Del Norte IPA don't have to be rivals, he said, and being a member of SCPCN doesn't preclude him from also joining the local IPA.

Critics of SCPCN say it is elitist; that it goes into a community and picks only "the best" primary care physicians, creating an atmosphere of competitive hostility. Leer says SCPCN isn't as rigid as all that, but he also questions whether the accusation is so terrible.

"Not all physicians can practice efficiently in a managed care environment, and not all of them deserve to," he said. "It's a lot easier to keep bad apples out early." And it apparently is true that the Humboldt-Del Norte IPA at least considered excluding some physicians from its invitations to join - physicians who have demonstrated difficulties functioning under the medical foundation's PPO. (In the end, no one was excluded, according to IPA board member Dr. Robert Caneday.)

Leer believes the local IPA sacrificed effectiveness for the sake of harmony among local doctors. If that's true, his belief that the IPA will fail is supported somewhat by a report on managed care published by the American Medical Association:

"Some IPAs were founded by physicians for the primary purpose of preserving the status quo, rather than for the purpose of maximizing value. For obvious reasons, such an organization proved to be of limited value in a health care market demanding change."

The Humboldt-Del Norte Medical Society does not have an official position on the local IPA, according to Phil Wagner, but it rather has functioned as an informational source.

"Our only position taken is that doctors must understand that managed care is coming into the area. If it's done properly, it can be beneficial to patients and doctors," he said.


Other Views, ideas

The formation of the Humboldt-Del Norte IPA isn't the only local response to the sound of HMO footsteps. The June 30th Group, meeting since that date in 1994, has an even more ambitious plan - forming a community-based HMO.

An HMO "takes 25 cents of every dollar it makes out of the community," Dr. Ann Lindsay said. "If we could locally administer a health plan, I think we could do better than that. We could keep the money in the community, keep decisions about the types of services available in the community."

The June 30th Group spun off from a county-appointed committee studying access to health care. It includes representatives from the hospitals, the medical society, area clinics, the Humboldt-Del Norte IPA and public health (which Lindsay represents). They hope to work with the business community to formulate a community health plan.

"We look at this as a tremendous opportunity to give much better, quality care to people around here," Lindsay said. "We can focus on people who have the highest needs, and give them support with a family health team - patient educator, public health nurse, psychologist, home health ..."

The dangers inherent in an outside HMO dictating Humboldt's health care are similar to Trinidad's experiences with its Chevron gasoline station, Lindsay said: "The out-of-area corporate guys closed it down" because it wasn't profiting them enough. The fact that it profited Trinidad was irrelevant.

"We want to be in a situation where those kinds of decisions are made locally, so this doesn't happen to a hospital in Arcata, or a clinic in Southern Humboldt," Lindsay said.

Robert Caneday, a general surgeon in Fortuna, has offered an even more finely tailored idea - the Humboldt-Del Norte Regional Health Plan. It endorses the June 30th Group's community HMO but suggests using it as an administrative arm only. It would collect insurance premiums and distribute revenues to four community service areas: Crescent City, Arcata-McKinleyville, Eureka, and Fortuna-Garberville.

Each area would form its own board of directors, made up of health care providers and citizens, which would decide how to contract with physicians, hospitals and others.

"The community takes care of its own resources," Caneday said, and asks, who else knows what it most needs?

A community plan like this would shrink the "risk pool," creating a potentially low ratio of healthy-to-unhealthy clients. But Caneday doesn't think it's a fatal problem, especially if MediCal and Medicare patients are allowed to join.

And even though he's a specialist, Caneday said his plan would have a strong primary-care base. By the very nature of managed care, "Specialists have nothing to offer an HMO," he said. And that requires an "incredible change of thinking" for specialists and hospitals.

Caneday agrees with Leer that "not everyone will be able to play" when managed care comes to town. Doctors who overuse laboratories and radiological tests may be forced out. Still, he thinks the Humboldt-Del Norte IPA "did the intelligent thing" by giving 50 percent of its board seats to specialists and moving ahead to incorporation.

Despite the wrangling and the fears and the many, many meetings all prompted by the HMOs knocking at the door, the local consensus seems to be: This is a good thing for Humboldt and Del Norte counties.

For the average citizen, Okey said, managed health care should mean lower out-of-pocket costs and insurance premiums:

"At least they won't increase like they did in the '80s," he said. "People will have to be more of a savvy participant in their health care decisions, and I think that's better."

For the medical community: "Marvelous things have happened in the last six months," Okey said. "People have been getting together who have never gotten together before."

For the doctors specifically: "It's a mixed bag," he said. "If they're close to retirement, they might say, `I don't need this. I'll just quit now.' If they're young, they have to get on it, (and) I see a lot of excitement."

"I feel very privileged to be involved in the process as a public health practitioner, because most health care delivery overlooks public health," said Ann Lindsay. "I see organizations like the community health plan and the IPA as an opportunity to turn managed care into a positive experience, and it really does promote practicing preventive care and avoiding problems, rather than taking care of them after they crop up."

"The bottom line is our patients and the care we give them," said Leer. "If we're not able to survive (in a managed care system), then obviously we're not going to be able to care for them at all."


The Rosenberg Report

Last September the independent corporation of Rosenberg & Associates of Point Richmond, Calif., released "Health Care Resources in Humboldt and Del Norte Counties." This study was commissioned by the Humboldt-Del Norte Medical Society to "review managed care and networking opportunities as potential tools to reorganize the health care delivery system within the two counties."

The report made two recommendations: that Humboldt County physicians form two "group practices without walls," also called GPWWS - one for primary care physicians, one for specialists - as well as merge its clinics. These groups should unite under a medical services organization (MSO).

After this has been established, the three should develop a physician-hospital-clinic organization (PHCO); Del Norte County providers should form a PHCO to negotiate for managed care contracts, both private and MediCal.

Other findings in the report (some of which are disputed by the medical society):

- The two-county area has "an excess" of both primary care physicians (general and family practice doctors, general internists, pediatricians and ob/gyn doctors) and orthopedic surgeons

- Alternative practitioners (mid-level practitioners as well as chiropractors, nurse midwives, acupuncturists) play a large role in health care in the area and should be included when developing a health care plan

- Independent pharmacies (those not associated with a chain) will have trouble surviving in a managed-care environment unless they also "network."

- Any plan that includes providers uniting as one group may raise anti-trust issues. The state Legislature should be contacted for help in resolving such problems (State Sen. Mike Thompson has been working with the Humboldt-Del Norte IPA).

- Physician practices employ a high number of support staff (clerical, billing), and these jobs would be "significantly reduce[d]" in a managed-care/networking system

- All area physicians said relationships in the physician community are "exceptionally good," but some physicians said they were concerned that the two Eureka hospitals' relationship had changed recently from cooperative to competitive.


A glossary of health care terms:



A set dollar amount that you or your employer pays to a health maintenance organization (HMO), regardless of how much you use (or don't use) the services offered by the HMO's providers.



A list of prescription medicines an HMO will cover. Sometimes newer and more expensive drugs will not be covered by an HMO policy, and it will suggest other, less costly drugs be used instead.



Health maintenance organization. A "prepaid" or "capitated" insurance plan in which individuals or their employers pay a fixed monthly fee for services, rather than a separate charge for each visit or service.


Managed care:

A medical delivery system that attempts to manage the quality and cost of medical services that individuals receive. Most managed care systems offer HMOs and PPOs that individuals are encouraged to use for their health care services. Some managed care plans attempt to improve health quality by emphasizing prevention of disease.


Mid-level practitioner:

A nurse practitioner or family nurse practitioner (FNP).



Preferred provider organization. Individuals or employers receive discount rates if they use health care services from a selected group of providers.


Primary care:

Physicians who are not specialists. Often included are family and general practice doctors, pediatricians, general internists and obstetrics/gynecology doctors.



A health professional who provides health care services: physician, hospital, nurse practitioner, physical therapist, etc.



Physicians who are not primary care doctors and who specialize in a given field. Included are surgeons, neurologists, cardiologists, etc.


Stop loss:

An insurance policy obtained by the provider through another agent (not the HMO) that becomes effective when a seriously ill patient's care reaches a maximum. This separate "crisis" policy insures that a provider will not go bankrupt if an unusually large number of patients develop high-care illnesses such as AIDS.



A percentage of capitation set aside by the provider (i.e., a group practice or, as planned locally, the Humboldt-Del Norte Independent Practice Association). At year's end this money would be divvied up and paid out to physicians as a "bonus." The withhold also can be used to offset any losses incurred that year. This serves as one of several incentives for physicians to manage care effectively and efficiently.


Sources: Health ResponseAbility Systems; California Medical Association

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