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Health maintenance organizations for British Columbia : are they feasible? Hessey, Lynda Dianne 1985

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HEALTH MAINTENANCE ORGANIZATIONS FOR BRITISH COLUMBIA: ARE THEY FEASIBLE? By LYNDA DIANNE HESSEY B.Sc.N. University of Windsor, 1968 A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE DEGREE OF MASTER OF SCIENCE (Health Services Planning and Administration) i n THE FACULTY OF GRADUATE STUDIES DEPARTMENT OF HEALTH CARE AND EPIDEMIOLOGY FACULTY OF MEDICINE We accept t h i s thesis as conforming to the required standard THE UNIVERSITY OF BRITISH COLUMBIA September 1985 (c) Lynda Dianne Hessey, 1985 In presenting t h i s thesis i n p a r t i a l f u l f i l m e n t of the requirements for an advanced degree at the University of B r i t i s h Columbia, I agree that the Library s h a l l make i t f r e e l y available for reference and study. I further agree that permission for extensive copying of t h i s thesis for scholarly purposes may be granted by the head of my department or by h i s or her representatives. I t i s understood that copying or publication of t h i s thesis for f i n a n c i a l gain s h a l l not be allowed without my written permission. Department of j-Ual-rh Court. <xr\o{ £p'i<A erotology The University of B r i t i s h Columbia 1956 Main Mall Vancouver, Canada V6T 1Y3 Date OtJU-buU/if /985~ - i i -ABSTRACT This policy/planning thesis takes the format of a hypothetical study done for the Senior Assistant Deputy Minister i n the B.C. M i n i s t r y of Health. The M i n i s t r y had shown i n t e r e s t i n r e s t r u c t u r i n g as a means of s e t t i n g some boundaries on an open-ended medical care system i n order to reduce expenditures for health care s e r v i c e s . Because the c l i e n t s ' s p e c i f i c i n t e r e s t was i n the American health maintenance organization (HMO) model, the study was concerned with the f e a s i b i l i t y of introducing t h i s model i n t o the health care structures of B.C. The problem s i t u a t i o n of increasing expenditures for health care services i n B.C. was described and relevant systems involved i n the s i t u a t i o n were i d e n t i f i e d as: the Ministry of Health, the medical profession and h o s p i t a l s . The unique perspectives of each system were described so t h e i r implications for the f e a s i b i l i t y of an HMO model could be assessed. The HMO model, i n the American context, was analyzed according to i t s generic elements and variant c h a r a c t e r i s t i c s . In addition, the p o l i c y process of developing and implementing the HMO strategy was described. The HMO was found to be a highly complex organization that integrates f i n a n c i a l mechanisms and service d e l i v e r y . Evidence reviewed about i t s performance indicated that HMOs are a l e s s expensive means of providing care than fee for service p r a c t i c e , that h o s p i t a l i z a t i o n rates range from 20 to 40% lower and are the primary source of HMO cost saving and that enrollees probably receive comparable q u a l i t y care. The p u b l i c l y funded health insurance system presents a primary obstacle to adopting t h i s model to a Canadian s e t t i n g because of weakened f i n a n c i a l - i i i -incentives for competition. The p r i n c i p l e s upheld by the program also hamper e n r o l l i n g a fixed population which i s a basic HMO element. To implement a n HMO model i n B.C., considerable r e s t r u c t u r i n g of f i n a n c i a l systems would be necessary to r e d i r e c t funds to a n HMO so that i t could be at f i n a n c i a l r i s k f o r providing h o s p i t a l and medical services to an enrolled population. In reviewing some p o l i c y options, i t was apparent that an HMO model would be most e a s i l y adapted to B.C. within the context of p u b l i c l y funded competition i n medical care p r a c t i c e . However, there did not appear to be s u f f i c i e n t support from relevant constituencies for such a comprehensive approach. But a consensus was evident i n support of an HMO p i l o t project i n order to assess more f u l l y f e a s i b i l i t y problems, to b u i l d support for the concept and to evaluate i t s e f f e c t i v e n e s s . - iv -TABLE OF CONTENTS Page ABSTRACT i i TABLE OF CONTENTS iv LIST OF TABLES v i i i LIST OF FIGURES ix LIST OF ABBREVIATIONS x PREFACE x i ACKNOWLEDGEMENTS x i i CHAPTER 1 RESEARCH FOCUS 1 Purpose 1 Context 1 Research Question 5 Objectives 5 Format 5 Methodology 6 2 RESEARCH DESIGN 9 Roles 9 Problem Solving Process 10 Environment 13 Outcome 14 Limitations 15 Scope 15 SECTION I: STAGES 1 AMD 2 ASSESSING THE PROBLEM SITUATION CHAPTER 3 THE CLIENT 19 The C l i e n t As Problem Owner 20 The C l i e n t as Decision Taker 21 Basic Assumptions 22 - V 4 PROBLEMS OF THE HEALTH CARE SYSTEM IN B.C. - MINISTRY OF HEALTH PERSPECTIVE 25 General Context 26 Hospital Services 29 Po l i c y Response to Expenditures For Hospital Services 35 Physician Services 36 Po l i c y Responses to Expenditures For Physician Services 43 Problem Situation 45 SECTION II: STAGE 3 IDENTIFYING RELEVANT SYSTEMS 5 SYSTEMS RELEVANT TO THE PROBLEM SITUATION IN B.C. 48 The Medic'al Profession System 48 The Hospital System 57 The B.C. Minis t r y of Health System 64 SECTION,III: STAGE 4 MODEL BUILDING PART A: UNDERSTANDING THE HMO MODEL 6 THE HMO MODEL 77 Introduction 77 Problems of D e f i n i t i o n 79 Generic Elements 80 Relationships Between Generic Elements 80 Risk Pooling 81 Risk Transfer 83 Risk Management 87 Management Control 91 Comparable Canadian Models 93 7 VARIANT CHARACTERISTICS: SPONSORSHIP 99 Introduction 99 Sponsorship 101 Consumer Sponsorship 104 Industry/Union Sponsorship 106 Physician Sponsorship 109 Hospital Sponsorship 116 Insurance Company Sponsorship 120 Canadian Experience with Sponsorship 122 - v i -8 VARIANT CHARACTERISTICS: PHYSICIAN ORGANIZATION AND METHOD OF PAYMENT 129 Staff Model 130 Group Practice Contract 136 Individual Practice Associations 147 Canadian Experience with Alternate Forms of Physician Organization 156 9 VARIANT CHARACTERISTICS: ARRANGEMENTS FOR HOSPITAL SERVICESI64 Hospital Ownership 165 Medical S t a f f P r i v i l e g e s 167 Contractual Agreements 169 Canadian Hospitals and Al t e r n a t i v e Primary Care Structures 175 10 EVIDENCE OF HMO PERFORMANCE 179 HMO Cost Savings 180 Enrolled Population Factors 183 Physician Factors 194 Hospital Factors 198 Organizational Factors 200 Summary 201 Evidence of Performance of Alternate Forms of Medical Care Practice in Canada 203 11 THE HMO STRATEGY AND AMERICAN HEALTH POLICY 213 Pre-1970 Identifying the Need for Restructuring 214 1970-1974 Developing Legitimacy for Restructuring 217 1974-1980 Problems of F e a s i b i l i t y of Restructuring 226 The Future of HMOs in the 1980's 236 Canadian Health P o l i c y : Restructuring Experience 238 PART B: ACCOMMODATING THE HMO MODEL 12 THE HMO MODEL AMD THE HEALTH CARE STRUCTURES OF B.C. 253 Contractual R e s p o n s i b i l i t y 254 Enrolled Population 255 F i n a n c i a l Risk 257 Sponsorship 258 Physician Organization and Method of Payment 261 Arrangements for Hospital Care 263 Summary 266 - v i i -SECTION IV; STAGE 5 GENERATION OF DEBATE 13 AN HMO MODEL FOR THE HEALTH CARE PROBLEMS OF B.C.? 270 Review of the Current Problem Situation i n B.C. 270 Increased Regulation 272 Introduction of Market Forces 273 Increased P l u r a l i s t Choice 276 Appropriateness of the HMO Model for B.C. 280 SECTION V: STAGES 6 AND 7 FEASIBLE AND DESIRABLE CHANGES 14 PERSPECTIVES ON FEASIBILITY OF AN HMO MODEL FOR B.C. 284 The B.C. Ministry of Health System 284 The Medical Profession System 291 The Hospital System 294 Conclusions 297 Recommendations 298 APPENDICES 301 BIBLIOGRAPHY 308 - v i i i -LIST OF TABLES Table Page 1. Health Care Expenditures Per Capita, Canada, and 27 Provinces Relative to Canada 1960-1982 2. Hospital and Physician Expenditures per Capita, Canada 28 and B r i t i s h Columbia Relative to Canada 1960 - 1982 3. Summary of Hospital Programs Expenditures 1976/77 to 1982/83 30 4. Average Annual Growth Rates, Number of Hospitals and Bed 31 Capacity, Canada and B r i t i s h Columbia 1946 - 1982/83 5. Number of Approved Bed Complement by Type of Bed i n 32 B r i t i s h Columbia, 1976 to 1984/85 6. Average Annual Rates of Change i n Cost Per Patient Day 33 Adults and Children, Public General and A l l i e d Special Hospitals Canada and B r i t i s h Columbia 1956 to 1983 7. Hospital U t i l i z a t i o n Per 1000 Population Canada Relative to 35 B r i t i s h Columbia 1971 to 1982/83 8. Medical Services Commission Summary of Expenditures - 37 1972/73 to 1982/83 9. Population per Active C i v i l i a n Physician, Canada and B r i t i s h 38 Columbia, Physician: Population Ratio Relative to Canada 1960 - 1983 10. Physicians' Fee Indices, Canada and B r i t i s h Columbia 1960 - 1983 40 11. Per Capita Apparent U t i l i z a t i o n of Physician Services, Adjusted 42 for L i s t Fee D i f f e r e n t i a l s , Canada and B r i t i s h Columbia 12. B.C. Physician Fee Schedule Changes 1970 - 1985 44 13. HMO A f f i l i a t i o n Factors Considered by the Hospital 172 14. Hospital A f f i l i a t i o n Factors Considered by the HMO 174 - ix -LIST OF FIGURES Figure Page 1. Health Expenditures as Percentages of Gross National Products 3 2. Summary of "Soft" Systems Methodology 11 3. B.C. M i n i s t r y of Health Organizational Chart, 1983 23 4. Relationship Between the Generic Elements of an HMO 81 5. HMO Insurer - Provider Relationship 87 6. An Example of a F i n a n c i a l Planning Process in an HMO 92 7. Range of Structural V a r i a t i o n in HMOs 100 8. The Comprehensive FMC Model 113 9. The HMO Contracts with the IPA for the Provision of Medical Care Services 113 10 The IPA-HMO Model Recognized by the HMO Act 113 11. L i f e - C y c l e Concept of HMOs 170 12. HMO Enrolment Growth 1978-83 235a 13. A Possible Continuum of Medical Care Services Under a Competitive Plan 277 14. The Current Continuum of Medical Care Services in B.C. 278 - x -LIST OF ABBREVIATIONS ADM Assistant Deputy Minister AMA American Medical Association BCMA British Columbia Medical Association CHC community health centre CHRHC community human resources and health centre (British Columbia) CLSC local community health and social service centre (Quebec) DHEW Department of Health, Education and Welfare (United States) FFS fee for service FMC foundation for medical care GHA Sault Ste. Marie and District Group Health Association GHAA Group Health Association of America GHC Group Health Co-operative of Puget Sound (Seattle, Washington) GNP gross national product HIP Health Insurance Plan of Greater New York HMO health maintenance organization HSO health service organization IPA individual practice association MOH Ministry of Health MSP Medical Services Plan NDP New Democratic Party OHIP Ontario Health Insurance Plan PGP prepaid group practice PREFACE My interest in the fea s i b i l i t y of health maintenance organizations (HMO) for B.C. as a thesis topic arose out of a discussion that I had with Paul Pallan, Director of Policy and Planning in the B.C. Ministry of Health. Due to cost constraint policies, he indicated that the Ministry was under some pressure from the Treasury Board to find lower cost alternatives in funding health care services. In light of this, the senior Assistant Deputy Minister, at that time, had expressed some interest in the HMO model, since he felt that this might be a strategy for improving the Ministry's negotiating position with the B.C. Medical Association. About the same time, some other tangential events transpired which added fuel to the Ministry's interest in an HMO model. Fi r s t , the CU & C Health Services Society financed the development of the Mount Pleasant Community Health Centre which opened in A p r i l , 1983 with the goal of providing a competitive alternative to traditional fee-for-service medical care practice. Later that year, a Vancouver-based consulting firm submitted to the senior Assistant Deputy Minister a proposal for a feasi b i l i t y study on HMOs for the province (this was rejected by the Ministry). Following in the spring of 1984, this same firm sponsored a conference on HMOs for senior health administrators from the western provinces, at the Group Health Co-operative of Puget Sound, in Seattle, Washington. From the sequence of events, both inside and outside of the Ministry, i t seemed to me that, perhaps, a more in depth examination of the issue of HMOs for B.C., would indeed be timely. ACKNOWLEDGEMENTS The preparation of this thesis has benefited from the generous assistance of numerous people who deserve recognition. F i r s t , I owe a great deal of thanks to Joan Milling, Executive Director of York Community Services, Toronto, Ontario for stimulating my interest in community health centres and allowing me the freedom for professional growth that led me to the Health Services Planning and Administration Program. Next, I owe gratitude to my thesis committee for faithfully piloting the development of this thesis. Particular thanks are extended to Anne Crichton for chairing the committee and for her support as mentor and friend throughout the process. Also, thanks to Morris Barer, and Carolyn Tuohy, Department of P o l i t i c a l Science, University of Toronto, both of whom have contributed very valuable advice. Appreciation is extended as well to staff of the B.C. Ministry of Health who co-operated with interviews and offered other assistance in specific areas. In addition, many others gave of their time for interviews and are individually acknowledged in Appendix A. Also, the many, many hours of typing done by Irene Korosec contributed significantly to preparation of this thesis. Finally, I would like to extend thanks to other unmentioned members of faculty, colleagues, and friends in the Department of Health Care and Epidemiology who have in various ways a l l had input into this effort. - 1 -CHAPTER 1 RESEARCH FOCUS PURPOSE The purpose o f t h i s t h e s i s i s to i d e n t i f y the i s s u e s a s s o c i a t e d with the a d a p t a t i o n o f the American h e a l t h maintenance o r g a n i z a t i o n (HMO) to the p u b l i c l y funded h e a l t h c a r e s t r u c t u r e s o f B r i t i s h Columbia. I t i s hoped t h a t i d e n t i f i c a t i o n o f the i s s u e s may l e a d to a b e t t e r u n d e r s t a n d i n g o f the p o t e n t i a l v a l u e o f t h i s model as a s t r a t e g y f o r r e s t r u c t u r i n g m e d i c a l care s e r v i c e s i n the p r o v i n c e with the i n t e n t i o n o f a c h i e v i n g g r e a t e r economy. CONTEXT Since the l a t e 1960's, d i s c u s s i o n s o f r e s t r u c t u r i n g the h e a l t h c a r e system by means o f a l t e r n a t i v e forms o f m e d i c a l c a r e p r a c t i c e have been a r e c u r r e n t theme i n Canada. The r e s t r u c t u r i n g d i s c u s s i o n i s a s s o c i a t e d w i t h b r i n g i n g i n c r e a s e d a d m i n i s t r a t i v e r a t i o n a l i t y to b ear on the u t i l i z a t i o n o f h e a l t h c a r e r e s o u r c e s , t h e r e b y a c h i e v i n g g r e a t e r economy through improved e f f i c i e n c y and e f f e c t i v e n e s s . D e s p i t e the r a t i o n a l i t y o f the r e s t r u c t u r i n g paradigm, i t has had minimal i n f l u e n c e i n the e v o l u t i o n o f Canadian h e a l t h c a r e s e r v i c e s . D r i f t i n g towards more r a t i o n a l h e a l t h c a r e p o l i c i e s , f e d e r a l governments i n the e a r l y 1970's p r o v i d e d a s i g n i f i c a n t impetus towards r e s t r u c t u r i n g . In Canada, the impetus was the Community H e a l t h C e n t r e P r o j e c t , whereas i n the U n i t e d S t a t e s , i t was the HMO s t r a t e g y . Both i n i t i a t i v e s arose at the time o f an e x p a n s i o n a r y p e r i o d i n h e a l t h s e r v i c e s , where c o s t c o n t r o l was b e i n g r e c o g n i z e d i n c r e a s i n g l y as a c r i t i c a l i s s u e . S i m i l a r l y , both approaches were based on the principle of prepaid group practice (PGP) which linked the payment mechanism for health care with responsibility for service delivery thus altering the economic incentives for physicians associated with fee for service (FFS) practice. Accessibility to comprehensive health care services, emphasis on prevention as a focus of care rather than illness and consumer participation in the delivery of health care services were also characteristic of these new models. Despite similarities, the two approaches had vastly different outcomes in their respective countries. I n i t i a l enthusiasm for the community health centre (CHC) in Canada was short-lived^. Some provinces such as British Columbia, Ontario, Quebec and Saskatchewan took up the challenge but, the number of centres developed was too small to have anything but a negligible impact on restructuring except in Quebec. However, throughout the 1970's in Canada, the percentage of gross national product (GNP) attributed to health care expenditures remained 2 relatively stable in the 7 to 7 1/2% range as shown in figure 1. A perceived urgency for change, therefore did not appear evident as " s i t on the 3 l i d " policies of tighter f i s c a l control masked any cost c r i s i s . Quite a different scenario was experienced in the United States, where the percentage of GNP accounting for health care expenditures rose to almost 10% (n.2). Thus, i t was out of the anxiety generated by an apparent health care cost c r i s i s that the HMO strategy was conceived and, after a shaky start, HMO development has continued to increase, the major attraction being i t s cost containment potential. Health maintenance organizations have now achieved sufficient status to be recognized as part of the mainstream of the American 4 health care system . Because there is now greater concern about cost - 3 -Figure 1 Health Expenditures as Percentages of Gross National Products, Canada and United States, 1960-1982. 1981 and 1982 for Canada Are Provisional, / UNITED STATES CANADA I I I I I I I 1 I I 1 I I I I I | | 1 9 6 0 1965 1 970 ,975 YEAR i — T 1980 1962 Source: Health and Welfare Canada, National Health Expenditures 1970-1982, P o l i c y , Planning and Information D i v i s i o n , Ottawa: Department: of National Health and Welfare, p.9. - 4 -control i n Canada, i t would seem that there may be lessons i n understanding the HMO model and the po l i c y process that led to i t s implementation and growth. The Canadian health care context has changed dramatically since the time of the Community Health Centre Project. The percentage of GNP going to health care expenditures rose to 8.4% in 1982^. Complicated further by economic recession and slow recovery, health care services have been subjected to contractionary measures. Cost containment now seems to take precedence over a c c e s s i b i l i t y as an objective of the system. Since economic necessity has prompted c e r t a i n i n s t i t u t i o n a l r estructuring in h o s p i t a l s , perhaps the time i s ripe again to consider the restructuring of medical care services? The potential of the HMO model for cost control and restructuring for greater e f f i c i e n c y would seem to make i t s f e a s i b i l i t y worth exploring for Canada. For a v a r i e t y of reasons, circumstances in B.C. would appear to favour an exploration of f e a s i b i l i t y of the HMO model. F i r s t , senior l e v e l M i n i s t r y of Health (MOH) s t a f f have expressed s p e c i f i c i n t e r e s t in HMOs, in r e l a t i o n to . . 6 problems encountered by the Ministry . Second, the general economic r e s t r a i n t p o l i c i e s of the S o c i a l Credit government would suggest receptiveness to e f f i c i e n t and cost conscious models of d e l i v e r i n g health care. F i n a l l y , in the past, B.C. has had some experience i n the r e a l i t i e s of introducing alternate forms of health care delivery with the community human resource and health centres (CHRHC). These p a r t i c u l a r circumstances i n B.C., plus the present context of health care services in Canada, have led to the formulation of the following research question to be addressed by t h i s study. - 5 -RESEARCH QUESTION Is i t feasible and desirable for the Ministry of Health to consider the introduction of health maintenance organizations into the health care structures of B r i t i s h Columbia as an alternative to t r a d i t i o n a l fee for service medical  care practice? OBJECTIVES 1. To determine the appropriateness of the HMO model as a strategy for change in the health care structures of B.C. 2. To identify the obstacles and supports within the existing health care structures in B.C. that might i n h i b i t or f a c i l i t a t e the adoptation of an HMO model. 3. To establish the modifications in the existing health care structures of B.C. necessary to f a c i l i t a t e change towards the introduction of an adjusted HMO model. FORMAT The format of th i s thesis w i l l be a policy/planning study, presented as a documentary analysis, using secondary sources of data including l i t e r a t u r e reviews and interviews with key informants. In accordance with t h i s approach, the assumption w i l l be made that the senior Assistant Deputy Minister (ADM) in the health Ministry has commissioned a study to explore the f e a s i b i l i t y of introducing HMOs into the health care structures of B.C. The senior ADM, therefore, w i l l become the ' c l i e n t ' to whom the study i s directed, thus focusing on the MOH perspective. - 6 -In the course of this study, i t was not possible to interview the senior ADM, although many attempts were made to do so. Therefore, the views of the senior ADM expressed here are those reflected by staff working in close association with him and were consistent among several staff. Furthermore, the senior ADM was promoted to Deputy Minister before the completion of the study. Since data from MOH interviews had been collected prior to this change, i t was decided to continue to consider the senior ADM as the client. The former Executive Director of Policy, Planning and Legislation eventually f i l l e d the ADM position responsible for management operations. Because he had been inter-viewed, support was provided for not making the client the Deputy Minister. METHODOLOGY The subject matter of fe a s i b i l i t y and desirability of organizational change in the health care structures of B.C. is beset by interwoven complexities and p o l i t i c a l implications which make the problem situation highly variable. As a result, scientific research focusing on hypothesis testing and the collection of hard data would be problematic and narrow considerably the focus of the study. In order to meet the above objectives, Checkland's "soft" systems methodology, which has been developed for application in complex situations^, w i l l provide the methodological framework and will be described in Chapter 2. The sequence of stages specified by that model will be the basis for division of individual sections of the study. As well, the description of each stage of the methodology will include references to specific chapters. Within a variable and complex situation, this framework appears to - 7 -f a c i l i t a t e the i d e n t i f i c a t i o n of relevant issues so that the f e a s i b i l i t y and d e s i r a b i l i t y of an a l t e r n a t i v e structure can be r a t i o n a l l y evaluated. - 8 -FOOTNOTES 1. See for example, John E.F. Hastings, "Community Health Centres - Wnat's Happened Since the Hastings Report? Neither Sweet Nor Sour" paper presented at the Nineteenth Annual Refresher Course: Issues in Community Health, Faculty of Medicine, Un i v e r s i t y of Toronto, March 7, 1978, and Joanne E. Eschauzier "CHC's - Looking to the Future", Perception 7 (January/February 1984):30-31. 2. Health and Welfare Canada, National Health Expenditures in Canada 1970-1982, (Ottawa: Department of National Health and Welfare, P o l i c y , Planning and Information D i v i s i o n ) , p. 8. 3. Robert G. Evans, "Health Care in Canada: Patterns of Funding and Regulation", Journal of Health P o l i t i c s , P o l i c y and Law, 8 (Spring 1983) :34. ' ' ~ 4. Health Maintenance Organization Industry, Ten Year Report 1973-1983: A History of Achievement, A Future With Promise, p. 6. 5. Refer to note 2, Health and Welfare Canada, National Health Expenditures. See also a discussion in Morris L. Barer and Robert G. Evans, "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System", paper prepared for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, 26-31 August 1984. This sheds some l i g h t on the sudden upward s h i f t in the percentage of the Canadian GNP going to health care expenditures in 1982. Some of the increase may be related to a drop in t o t a l GNP as a r e s u l t of recession. While the GNP was f a l l i n g , however, health spending was increasing. I f health spending were to be "recession-adjusted", the r a t i o of health expenditures to GNP for 1982 f a l l s to about 7.84 to 7.86%. This suggests the importance of recession in the r a t i o but indicates that i t would s t i l l remain higher than the previous year. 6. Interview with Paul Pa l l a n , Director of P o l i c y , B.C. Min i s t r y of Health, V i c t o r i a , December 3, 1984. 7. Peter Checkland, Systems Thinking, Systems P r a c t i c e , (Chichester: John Wiley and Sons, 1981) ' - 9 -CHAPTER 2 RESEARCH DESIGN The " s o f t " systems methodology as outlined by Checkland w i l l provide the basic framework for the s t u d y T h i s methodology i s e s s e n t i a l l y a problem-solving approach, developed for application in complex situ a t i o n s where problems are evident but unstructured, and elusive of e x p l i c i t d e f i n i t i o n without over s i m p l i f i c a t i o n . Checkland proceeds from the premise that these are not problems as such, but rather problem situ a t i o n s that arise in human a c t i v i t y systems. The contexts of such systems are so vulnerable to numerous influences that the passage of time always modifies the perception of the problem. Hence, the methodology o f f e r s a set of methodologic p r i n c i p l e s that define the roles of key actors, delineate stages of a problem-solving process, and account for various perspectives and environmental constraints impinging on the problem s i t u a t i o n . These p r i n c i p l e s are to be reduced to a method uniquely t a i l o r e d to the p a r t i c u l a r problem s i t u a t i o n . A general description of the methodology and i t s a p plication to t h i s study follows. ROLES At the outset, Checkland defines the key roles that he considers pertinent in using the methodology. The f i r s t r o l e , that of the " c l i e n t " , i s the person commissioning the study because he wants to know or do something. The i m p l i c i t assumption i s that t h i s person may cause something to happen as a r e s u l t of the study. Second, the "decision taker" role in a human a c t i v i t y system possesses the power to a l t e r organizational arrangements and to decide resource a l l o c a t i o n within the system. F i n a l l y , the t h i r d r o l e i s that of "problem owner" who has an unease about the s i t u a t i o n , which he may be unable to a r t i c u l a t e in a precise - 10 -way, and who wishes something would be done about i t . These roles could be f i l l e d by i n d i v i d u a l s , groups or organizations. One i n d i v i d u a l , for example, could f i l l more than one of the r o l e s . Also, there could be more than one "problem owner" in the s i t u a t i o n and likewise more than one "decision taker". PROBLEM SOLVING PROCESS The stages of the problem solving approach are i l l u s t r a t e d in f i g u r e 2. While t h i s represents a chronological sequence, work can star t at any stage as long as the r e l a t i o n s h i p s between stages are respected. Stages 1,2,5, 6 and 7 are r e a l world a c t i v i t i e s , n e c e s s a r i l y involving people in the problem s i t u a t i o n , whereas, stages 3,4,4a and 4b are "systems thinking" a c t i v i t i e s that attempt to unravel and understand the r e a l world complexity of the problem. This study w i l l follow the chronological order of the stages. Stages 1 and 2: These are the expression phases of t h i s problem-solving approach, where an attempt i s made to construct the r i c h e s t possible picture not of the problem but of the s i t u a t i o n in which the problem i s perceived. The elements of slow-to-change structures and continually changing process are i d e n t i f i e d in the s i t u a t i o n . Then an impression i s formulated of how structure and process r e l a t e to each other in the p a r t i c u l a r climate of that s i t u a t i o n . Section I i s concerned with these stages and attempts to assess the problem s i t u a t i o n experienced by the MOH. Chapter 3 i d e n t i f i e s the c l i e n t s perspective and h i s roles in the s i t u a t i o n . Chapter 4 presents data on expenditures and i d e n t i f i e s current problems related to the structure of the health care system. Figure '2-Summary of "Soft" Systems Methodology 1 The problem situation • unstructured 7. Action to improve the problem situation Feasible.desirable changes Peter Checkland, Systems Thinking, Systems Practice, Chichester: 1981, p.163. - 12 -Stage 3: This involves developing root d e f i n i t i o n s of systems that appear to be relevant to the problem. The objective i s to get a c a r e f u l l y phrased e x p l i c i t statement of the nature of each system. The choice of systems w i l l represent a p a r t i c u l a r outlook on the problem s i t u a t i o n . The purpose of c a r e f u l l y naming the systems i s both to make the outlook e x p l i c i t and to provide a base from which the implications of taking that view can be developed. Section II pertains to stage 3 and chapter 5 i d e n t i f i e s and describes the systems in B.C. relevant to the problem s i t u a t i o n i d e n t i f i e d in section I. Each system i s described according to six c r i t e r i a outlined l a t e r in t h i s chapter. Stage 4: This consists of building conceptual models of the human a c t i v i t y systems named in the root d e f i n i t i o n s . The d e f i n i t i o n i s an account of what the system i s , while the conceptual model i s an account of the a c t i v i t i e s the system must encompass in order to be congruent with the d e f i n i t i o n . Stage 4a involves checking the model developed for any fundamental d e f i c i e n c i e s and Stage 4b modifies or transforms the model into a form t a i l o r e d to the pa r t i c u l a r s i t u a t i o n at hand. Normally in the use of t h i s methodology, a conceptual model for change evolves from the process of describing the problem s i t u a t i o n and i d e n t i f y i n g re-levant systems. In t h i s case, the model for change has been s p e c i f i e d by the c l i e n t and does not evolve from that process. Section III part A includes chap-ters 6 to 11 and describes the HMO model and i t s p o l i c y development in the American context. Since that model has not evolved from the analysis of the B.C. problem s i t u a t i o n , emphasis w i l l be placed on stage 4b in section I I I part B which i s concerned with modifications of the model to f i t the p a r t i c u l a r s i t u a t i o n in B.C. - 13 -Chapter 12 addresses the accommodations l i k e l y to be necessary for adapting the HMO model to B.C. Stage 5: Here the process returns to the r e a l world, where the model i s set against the perceptions of the problem s i t u a t i o n and serves to generate debate among concerned people. Since the views of the world, on which d i f f e r e n t key people i n the s i t u a t i o n base t h e i r actions, may well be incomplete, the debate may r e s u l t in generating c o n f l i c t as well as promoting consensus. Section IV covers stage 5 and attempts to rai s e issues that may stimulate debate about the HMO model. Chapter 13 looks at policy a l t e r n a t i v e s and whether the HMO model would be appropriate for B.C. Stage 6: An attempt i s made to bring a resolution to the debate and define possible changes that could be made, provided that the changes meet two c r i t e r i a simultaneously. They must be agreeably desirable to people in the problem s i t u a t i o n and they must be f e a s i b l e , given p r e v a i l i n g attitudes and power structures with regard to the hi s t o r y of the s p e c i f i c s i t u a t i o n . Stage 7: Based on the desirable and feas i b l e changes that emerge from stage 6, s p e c i f i c actions l i k e l y to improve the problem s i t u a t i o n are formulated. Stages 6 and 7 are discussed in chapter 14 which looks at the d i f f e r e n t perspectives of relevant systems on the f e a s i b i l i t y and d e s i r a b i l i t y of an HMO model for B.C. Then, conclusions and recommendations for change are offe r e d . ENVIRONMENT The crux of the methodology l i e s in stage 3, where the decision to choose ce r t a i n systems as relevant to the problem s i t u a t i o n introduces l i m i t a t i o n s into - 14 -the problem-solving process. The choice and definition of these systems is 2 extremely c r i t i c a l because they represent the "bounded rationality" of the environment of the problem situation. Checkland and his colleagues developed a checklist of six elements that they considered an essential guide to the formulation of a root definition for each system (n.l p.224). 1. Who are the customers or beneficiaries of the system? 2. Who are the actors performing the main activity of the system? 3. What is the transformation process of the system? 4. What is the Weltanschauung or perspective that makes the system meaningfu 5. Who owns the system or has ultimate power? 6. What are the environmental constraints impinging on the system? OUTCOME The outcome of using this methodology is not a prescriptive technique which, when applied, yields a particular kind of result. Rather, the "soft" systems methodology is a problem-solving approach which uses systems ideas in the construction of frameworks applicable to complex situations. The result i the orchestration of a structured debate which facilitates a decision to take action to modify the situation, in the knowledge that this will not lead, in general, to the problem being solved but to a new situation where the process can begin again. The unique value of this methodology, is that i t teases out different world images that influence the perceptions of the problem situation and examines their implications for change in the problem situation. - 15 -' LIMITATIONS Since the central concern of this study is f e a s i b i l i t y , the allowance that the "soft" systems methodology makes for the incorporation of multiple perspectives causes i t to be especially suitable. However, by placing emphasis on means, a systems approach may be less attentive to ends or goals. For example, the means might be attempting to f a c i l i t a t e the achievement of inappropriate goals. A systems approach, also may tend to de-emphasize conflict and the relative power of groups to influence circumstances by stressing maintenance and adaptability of systems. Furthermore, this approach is inclined to neglect the strategic behaviour of groups, thus making i t d i f f i c u l t to hypothesize what their behaviour might be over a period of time. While the "soft" systems methodology provides a good overall framework for the investigation of this research question, i t will be necessary, at various points in the study, to complement the framework by the introduction of other paradigms or models to strengthen analyses, particularly those concerned with legitimacy. SCOPE The scope of this study with respect to fe a s i b i l i t y is limited to the perspective of the B.C. Ministry of Health. It is acknowledged that there w i l l be other perspectives on the f e a s i b i l i t y of the HMO model, such as those of the medical profession. Other perspectives, however, will be assessed in relation to the Ministry's perspective and not independent of i t . Because this study involves the adaptation of an American model of health care delivery to a Canadian setting, i t is important to place some boundaries on the range of differences between the two countries, relevant to an assessment of - 16 -f e a s i b i l i t y . Thus, the study w i l l l i m i t the i d e n t i f i c a t i o n of differences to those s p e c i f i c a l l y r elated to the HMO model and t h e i r implications for Canada. For example, differences i n the economic approach to health care have major impact for f e a s i b i l i t y i n Canada, whereas differences i n p o l i t i c a l structure and process, while germane to HMO po l i c y development, are less c r i t i c a l i n terms of the f e a s i b i l i t y of HMOs in Canada. In spite of conspicuous differences between the two health care systems, there are areas of commonality evident concerning HMOs. With the goal of ne u t r a l i z i n g d i f f e r e n c e s , within reason, the study w i l l s t r i v e to i d e n t i f y and accentuate the areas of commonality i n order to gain a more r e a l i s t i c assessment of f e a s i b i l i t y . - 17 -FOOTNOTES 1. Peter Checkland, Systems Thinking, Systems Practice , (Chichester: John Wiley and Sons, 1981). " 2. John Friedmann, "A Conceptual Model for the Analysis of Planning Behavior", in A Reader in Planning Theory, ed. Andreas Faludi (Oxford: Pergamon Press" 1973), p.345. - 18 -SKCTTOH I: STAGES 1 AMD 2 ASSESSING THE PROBLEM SITPATIOH The intention of Stages 1 and 2 - the problem expression phases of the methodology i s to gain the ri c h e s t possible picture of the problem si t u a t i o n without imposing a p a r t i c u l a r structure. Such a picture f a c i l i t a t e s the sele c t i o n of viewpoints or perspectives from which further study w i l l lead to relevant problem solving. Choices of perspectives, then, can be made in the f u l l knowledge that an array of perspectives i s possible, but that there may be v a r i a t i o n in the degree of insight that each could o f f e r to the problem s i t u a t i o n . With t h i s in mind, the role of the c l i e n t and h i s reasons for the study w i l l be reviewed. Then, an in v e s t i g a t i o n of the problems of the health care system of B.C., as experienced by the Mi n i s t r y , w i l l be made using data from interviews with ministry and government s t a f f , presentations by ministry s t a f f and available documented material on health care expenditures. - 19 -CHAPTER 3 THE CLIENT As noted e a r l i e r , the s e n i o r ADM i n the B.C. h e a l t h M i n i s t r y has been assumed to be the c l i e n t f o r the purposes o f t h i s s t u d y . I t i s important to u nderstand t h i s r o l e not o n l y i n the c o n t e x t o f the MOH, but a l s o i n the b r o a d e r c o n t e x t o f the p r o v i n c i a l government. The r e t u r n o f the S o c i a l C r e d i t p a r t y to power i n 1975 s i g n a l l e d a s h i f t to a more c o r p o r a t e i d e o l o g y o f government. A C a b i n e t committee s t r u c t u r e was implemented t h a t e s t a b l i s h e d p l a n n i n g and c o n t r o l a g e n c i e s at C a b i n e t l e v e l . The most important o f t h ese was the T r e a s u r y Board, which was r e s p o n s i b l e f o r e x p e n d i t u r e p l a n n i n g and the management o f government o p e r a t i o n s . The c o r p o r a t e v a l u e s and o b j e c t i v e s which pervaded the C a b i n e t and T r e a s u r y Board had been p r e v i o u s l y e x t e r n a l to the h e a l t h M i n i s t r y * . However, p e n e t r a t i o n o f these v a l u e s i n t o h e a l t h was accomplished by the s e l e c t i o n o f s e n i o r s t a f f . S e n i o r p o s i t i o n s i n the MOH were f i l l e d by p r o f e s s i o n a l managers who, by v i r t u e o f t h e i r e d u c a t i o n , e x p e r i e n c e and p e r s o n a l p h i l o s o p h i e s , were s t r o n g l y o r i e n t e d towards the s u p p l y s i d e dynamics o f c o n s e r v a t i s m , r a t i o n i n g and c o n t r o l ( n . l p.33). The T r e a s u r y Board had to approve a l l e x p e n d i t u r e s so the MOH c o u l d no l o n g e r d e c i d e i t s own p r i o r i t i e s . As a r e s u l t , the new managers appeared t o de-emphasize " h e a l t h " i n f a v o u r o f c o s t - c o n t r o l o b j e c t i v e s ( n . l p.34). The o l d network o f m e d i c a l l y - o r i e n t e d b u r e a u c r a t s faded, with i t s p h i l o s o p h y o f demand s i d e e x p a n s i o n and development o f the h e a l t h c a r e d e l i v e r y system ( n . l p.33). A new network o f s e n i o r managers emerged who were a l i g n e d with the c o r p o r a t e o b j e c t i v e s o f government as a whole, and not h e a l t h i n p a r t i c u l a r . S i m i l a r l y , p o l i t i c a l i n f l u e n c e permeated the s e l e c t i o n o f s e n i o r - 20 -level staff, fac i l i t a t i n g the creation of new power structures with a strong 2 allegiance to the government as a "team" approach . Given this context, i t would follow that the senior ADM in the health Ministry is supportive of the ideology and policies of the Social Credit party as well as the corporate objectives of government. In addition, i t should be noted that the Minister, the Deputy Minister, the senior ADM and the Executive Director of Policy, Planning and Legislation a l l moved simultaneously to the MOH from the Ministry of Consumer Affairs. This is indicative of the government stance of consistent f i s c a l constraint and corporate management policies across ministries, with no exception being made for any peculiarities in health. THE CLIENT AS PROBLEM OWNER The commissioning of this study would suggest that the senior ADM was convinced that government as a purchaser of health care services should be involved in health planning. Likewise, i t implies that the client perceives himself as a "problem owner" who has a sense of discomfort about a situation. In this case, the unease appears to originate from a mismatch of expectations placed on the senior ADM. On one side, the Treasury Board is exerting pressure for the constraint of health care expenditures and the development of new 3 efficient lower cost alternatives . On the other side, professionals, institutions, interest groups and consumers are demanding that the MOH increase expenditures for higher salaries and the expansion and/or maintenance of existing services. The senior ADM is caught in the crossfire between these conflicting sets of expectations. While needing to gain administrative control over expenditures, he is deterred by an open-ended medical care system. - 21 -His interest in the HMO model, therefore, stems from an effort to find a solution that could meet the expectations of the Treasury Board yet satisfy demands on the Ministry. The introduction of publicly funded health insurance increased the awareness of the provincial government of the costs of health care services and the inadequacies of the structures of the traditional health care system for delivering efficient services. The CHC movement had been one approach to reforming the health care system through restructuring. The NDP government in B.C. had made some efforts toward restructuring with introduction of the CHRHCs. This concept, however, never gained legitimacy as an alternative form of health care delivery with the MOH or with health care providers, despite 4 some evidence of cost reduction . So when the Treasury Board began encouraging the exploration of lower cost alternatives in health care delivery, this option was dismissed in general by MOH staff interviewed as having been a "social experiment""'. Consensus was evident among those interviewed that, i f feasible, the HMO would be the model of choice now because of it s potential for better allocation of resources and improved efficiency. THE CLIENT AS DECISION TAKER The senior level of the client's position qualifies him for the role of "decision taker" as well as "problem owner". The senior ADM has ready access to both the Minister and the Deputy Minister who, because of p o l i t i c a l influence, are likely to be supportive of his views. These linkages would be strategically important for gaining support in the Cabinet and in the Treasury Board for any structural change in the health care system. At a more practical level, the - 22 -senior ADM has direct responsibility for management operations within the Ministry. As well, the other ADM positions, which are responsible for preventa-tive medicine, community care and institutional services, have a reporting relationship to the senior ADM as figure 3 illustrates. Should the HMO model prove to be a feasible strategy for restructuring in the B.C. health care system, the senior ADM as "decision taker" would be in a pivotal position to be crucially influential in implementing any structural change. BASIC ASSUMPTIONS The selection of the HMO model by the client, as the reason for this investigation, implies two assumptions: that the HMO model is worthy of consideration in the B.C. context, and that the model is perceived as a possible solution to some of the problems experienced by the Ministry, as a result of the current structures of medical care practice. The f i r s t assumption will be discussed in section III part A, where the goal will be to gain an understanding of the HMO model and the associated policy development of an HMO strategy for restructuring in the United States. The second assumption will be addressed in chapter 4, which will outline the problems of expenditures for health care experienced by the MOH as a result of the open ended medical care system. Figure 3 B r i t i s h Columbia Ministry of Health Organizational Chart, 1983 MINISTER Forensic Psychiatric Services Commission Senior Assistant Deputy Minister Management Operations T Directoi Legal Exec. Director Financial Services Exec. Director Personnel Services Exec. Director Systems Exec. Director Policy, Planning and Legislation Director Management Services Exec. Director Supply and Services Exec. Director Medical Services Plan Assistant D.M. Preventive Services Exec. Director Health Promotion AuliUnC D.M. Vancouver Bureau Director Public Health Inspection Director Dental Health Services Assistant D.M. Community Care Servicer Provincial Health Officer Director Public Health Nursing Director Vital Statistics Director Epidemiology Exec. Director Forensic Psychiatric Services Assistant D.M. Institutional Services Exec. Director Mental Health Services Exec. Director Alcohol and Drug Programs Exec. Director Hospital Programs Director Speech and Hearing Exec. Director Emergency Health Services Exec. Director Continuing Care Source: Adapted from B r i t i s h Columbia Ministry of Health Annual Report, 1983. - 24 -FOOTNOTES 1. A Collection of Occasional Papers, "Health Policy Making in B.C. - A Sudden Shift in Perception", Health Management Forum (Autumn 1982):35. Presentation by Paul Pallan, Director of Policy, B.C. Ministry of Health at a continuing education workshop "Downsizing: Policy Implications For Health Administrators", University of British Columbia, Vancouver, November 16, 1984. 3. Interview with Andy Robinson, Treasury Board Analyst, Ministry of Finance, Victoria, December 3, 1984. 4. Report of the Audit Committee as quoted in Clague et a l . , Reforming Human  Services: The Experience of the Community Resources Board of B.C. (Vancouver: University of British Columbia Press, 1984), p. 165. 5. Interview with Chris Lovelace, Executive Director, Policy, Planning Legislation, B.C. Ministry of Health, Victoria, December 3, 1984. and - 25 -CHAPTER 4 PROBLEMS OF THE HEALTH CARE SYSTEM IN B.C. - MINISTRY OF HEALTH PERSPECTIVE As identified in the last chapter, a central concern of the senior ADM is gaining administrative control over expenditures for health care. The dilemma confronting the client is the issue of overfunding of health care services as perceived by Treasury Board and the issue of underfunding of health care services as perceived by professionals, institutions, interest groups and consumers. Beneath the rhetoric about whether expenditures are too high or too low are more fundamental issues of ideology, values and objectives. The rhetoric becomes further complicated by the structures of the health care system, particularly the open-ended structures of the medical care system which place no finite limits on expenditures. Given the complexity of the situation, focusing on expenditure data alone is unlikely to be sufficient to resolve the dilemma but i t may be useful in identifying and clarifying specific problem areas. The intent of the following discussion is to u t i l i z e some available data relevant to expenditures in order to identify problem areas associated with an open-ended medical care system. While emphasis will be on provincial expenditures, certain national data have been used which offer a perspective on B.C.'s performance in the broader Canadian context. The major contributors to health care expenditures in B.C. are physician and hospital services, although expenditure levels in each area are dependent on a variety of factors. Some factors most likely to have significance within an open-ended medical care structure have been selected for discussion and include: quantities of available resources, prices of services and utilization of services. - 26 -Furthermore, an attempt w i l l be made to l i n k ministry p o l i c i e s to expenditure patterns in these areas in order to gain some assessment of the influence of p o l i c y on expenditures. GENERAL CONTEXT Since the introduction of p u b l i c l y funded health insurance, governments have become sen s i t i z e d to the costs of health care services as a r e s u l t of increased expenditures. The amount of p r o v i n c i a l gross domestic product going to health care expenditures in B.C. increased from 5.9% in 1961 to 7.5% in 1981*. Within that amount s h i f t s in the proportion of expenditures for h o s p i t a l and physician services have occurred. In 1961, 1.6% went for h o s p i t a l services; by 1981 an increase to 2.7% had occurred ( n . l ) . In contrast, 1.2% in 1961 accounted for physician services with a s l i g h t increase to 1.3% in 1971 but that amount remained stable to 1981 ( n . l ) . The s h i f t in the proportion of expenditures h i g h l i g h t s the association between increased t o t a l expenditures and expenditures for h o s p i t a l services. Nationally, a trend towards the narrowing of differences between provinces in per capita spending on health care has been evident since 1960 as table 1 i l l u s t r a t e s . From the mid 1970's u n t i l 1981, B.C.'s spending was consistently higher than the national average. Other provinces, with the exception of Alberta, Manitoba, and Nova Scotia, have held t h e i r per capita spending below the national average which suggests s i g n i f i c a n t l y weaker cost control measures in B.C. as well as in these provinces. When expenditures are broken down into the components of per capita expenditures for h o s p i t a l services and physician services, a d i f f e r e n t picture emerges as table 2 shows. Table 1 Health Care Expenditures Per Capita, Canada, and Provinces Relative to Canada 1960-1982 Y e a r C a n a d a i B . C . X A l t a % Sask % Man % Ont % Que % N.B. % N.S. y. PEI % Nf Id % I960 120. 34 1 14 .4 105 5 107 .2 104 .8 1 12 3 85 .2 88 5 83 6 80 . 7 57 4 1965 170 85 99 .5 106 4 97 .2 100 .7 1 10 . 1 93 9 82 . 2 89 .4 74 .9 63 6 1970 293 .37 98 8 103. 7- 86 4 102 .3 109 9 96 8 78 . 1 84. 9 80 4 63 5 197 1 329 86 96 .9 100. 4 86 .6 100 .0 109 0 99 . 4 79 2 85 .0 79. 6 64 1 1975 544 .79 102 .5 100. 4 91 9 97 .5 103 .7 101 6 79 3 91 .3 7B 9 75 7 1976 6 1 5 . 12 102 .3 99 . 3 93 8 100 1 103 .3 101 . 4 77 .4 93 .3 78 . 3 78 .9 1978 726 34 105 .5 100. 1 92 . 7 99 7 103 .6 98 3 82 . 1 93 8 82 .4 86 .9 1 1980 921 42 109 .0 1 10 5 91 6 lOO 0 98 6 99 5 84 2 94 .2 97 1 85 1981 1.057. 58 109 .5 109. 4 96 0 103 6 98 4 97 . 6 89 6 97 .6 90 . 6 86 0 ^ 1982 1.220. 18 107 .4 1 13 . 9 95 .7 101 9 98 5 95 6 92 8 103 .8 89 2 87 • T 1 A v e r a g e A n n u a l G r o w t h R a t e s (X) 1960 -65 7 .26 4 .33 1 9 6 5 - 7 0 11.42 11.25 1970- 75 13.18 14.01 1975 -80 11.08 12.46 1980-62 15 .08 14.23 1960 -82 1 1 . 1 0 10.79 1971 - 82 12 .63 13.69 7.44 5.18 6 . 4 0 10.85 8 .83 11.78 12.45 14.58 12 .10 13.23 11.01 11.65 16.83 17.62 10.16 11.49 10.53 10.96 13.93 13.66 12.82 6 .82 9 .37 5 . 7 0 11.38 12.09 10.28 11.87 14.28 13.52 9 .97 10.62 12.42 15.02 12.80 20 .81 10.44 11.69 11.35 11.60 12.23 14.26 8.71 5 .68 9.48 10.27 1 3 . 0 0 11.37 14.84 12.75 17.23 11.78 15 .79 13.71 20.BO 10.29 16.82 12 .20 11.61 13.26 14.69 1 3 . 8 0 15.88 Source: MorrisM. Barer and Robert G. Evans. "Riding North on a South-Bound Horse?" Expenditures, Prices, U t i l i z a t i o n and Incomes i n 'the Canadian Health Care System" A paper presented f or the Health Policy Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. - 28 -Table 2 Hospital and Physician Expenditures per Capita, Canada and B r i t i s h Columbia Relative to Canada 1960 - 1982 I 'f Hospital Physician Expenditures Expenditures v Yaar C an ad a B.C. Canada B.C. $ % % 1960 46.62 114.3 19.82 142.6 1965 72.89 91.8 27.70 122.8 1970 132.00 87.5 48.81 119.1 1971 146.02 85.0 57.91 107.7 1975 245.41 97.3 84.22 117.1 1976 285.49 91.3 91.37 125.4 1978 317.98 92.5 108.10 124.1 1980 394.05 97.0 136.46 123.0 1981 440.13 98.1 153.53 128.4 1982 505.71 95.7 179.02 134.0 Average Annual Growth Rates (%) 1960-1965 9.35 4.67 6.92 3.78 1965-1970 12.61 11.54 12.00 11.30 1970-1975 13.20 15.62 11.53 11.15 1975-1980 9.93 9.87 10.13 11.23 1980-1982 13.29 12.50 14.54 19.54 1960-1982 11.44 10.55 10.52 10.21 1971-1982 11.96 13.17 10.80 13.03 Source: Adapted from Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System". A paper presented for the Health Po l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. - 29 -After s t a r t i n g in an above average position in 1960, B.C. has remained consistently below the national average in h o s p i t a l spending. Per capita expenditures for physician services, in contrast, show dramatically d i f f e r e n t trends. In 1960, B.C. physician costs were an amazing 42.6% above the national average whereas by 1971 they had f a l l e n to 7.7% above average. Since that time, B.C. physicians seem to have circumvented pressures to contain physician costs exercised elsewhere in the country. By 1982, per capita expenditures for physician services in B.C. had returned to the highest position for any province at 34% above the national average. Thus, i t appears that the costs of physician services have been a major force d r i v i n g up health care expenditures in B.C. faster than in the rest of the country. HOSPITAL SERVICES Although B.C. has remained below the national average in h o s p i t a l spending, i t s expenditures have s t e a d i l y increased. Table 3 shows that the bulk of expenditures are directed towards operating expenses but the major expenditure growth has occurred in c a p i t a l debt. Within the structure of an open-ended medical care system, h o s p i t a l capacity and bed supply plus the price and rate of u t i l i z a t i o n of h o s p i t a l services are factors l i k e l y to affect the l e v e l s of h o s p i t a l operating expenditures and c a p i t a l debt. Table 3 Summary of Hospital Programs Expenditures 1976/77 to 1982/83 Admini-stration Payments to Hospitals Total Operating Claims Grants for Equipment Grants for Capital and Debt Payment 76/77 3,777,840 507,165,564 15,254,344 16,262,395 542,460,143 77/78 3,917,922 545,013,211 10,094,851 18,788,838 594,828,155* 78/79 4,237,159 587,412,858 15,884,637 23,848,117 631,382,771 79/80 4,459,302 660,982,515 8,247,803 26,954,208 700,643,828 80/81 5,137,086 916,179,454 8,754,673 35,025,786 965,276,999 81/82 6,123,401 1,021,532,143 22,741,890 48,919,762 1,099,317,196 82/83 5,121,720 1,125,846,391 16,311,899 63,982,651 1,211,262,661 * Long term care program i s included an t h i s t o t a l and subsequent t o t a l s Source: Adapted from B r i t i s h Columbia Ministry of Health Annual Reports, 1977, 1978, 1979, 1980, 1981, 1982 and 1983. - 31 -Capacity During the period 1946 to 1982/83 the number of hosp i t a l s in Canada increased at s l i g h t l y under 70% while bed capacity for public general and a l l i e d 2 special h o s p i t a l s t r i p l e d . In general, B.C. has followed national growth trends for h o s p i t a l s as shown in table 4 but at l e v e l s s l i g h t l y above the national rate with the exception of 1966 to 1971. When national growth in bed capacity began to l e v e l o f f in the early 1970's, B.C. continued to grow. From 1951 to 1966, B.C.'s bed capacity growth was concurrent with population growth but during the f i r s t h a l f of the 1970's i t was exceeding population growth by 3.3% per annum (n.2 p.54). Not u n t i l the l a s t year of the period, was there any i n d i c a t i o n of serious in t e r e s t in correcting the s i t u a t i o n . Table 5 i l l u s t r a t e s , however, that most of that growth was in long term care beds while reductions were occurring in acute care beds. Table 4 Average Annual Growth Rates, Number of Hospitals* and Bed Capacity^ Canada and B r i t i s h Columbia 1946 - 1982/83 Number of Hospitals Bed Capacity Year^ Canada B.C. C an ad a B.C. 1946-51 6.08 n. a. 4.38 2.06 1951-61 1.23 1.30 3.78 3.44 1961-66 1.47 1.94 4.01 2.85 1966-71 0.37 0.36 2.48 4.21 1971-76 0 0.89 0.98 5.87 1976-81-82 0.04 0.51 0.97 2.22 1981-82-82-83 -0.19 0 0.13 -3.40 1951-82-83 0.69, 1.02 2.58 3.43 1. Operating Public General and A l l i e d Special Hospitals. 2. Rated Bed Capacity u n t i l 1975; Approved Bed Complement from 1976 to 1982-83. Source: Adapted from Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System". A paper prepared for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. - 32 -Table 5 Number of Approved Bed Complement by Type of Bed in British Columbia 1976 to 1984/85 Acute Care Extended Long Term* Year Beds Care Beds Care Beds 1976 12,349 4,425 1977 12,314 5,325 1978 12,411 5,628 Nov./79 15,096 1979-80 12,228 5,694 Sep./80 15,757 1980-81 12,522 6,003 Sep./81 16,570 1981-82 12,562 6,121 Sep./82 17,626 1982-83 11,378 6,447 Nov. /83 18,205 1983-84 11,392 6,696 Sep./84 18,573 1984-85 11,501 7,019 Mar./85 17,382** * Long Term Care beds include personal care f a c i l i t i e s , intermediate care f a c i l i t i e s , family care homes, assessment and treatment centres, group homes and mental health boarding homes (until transferred to Mental Health Services Division in 1984). ** The decrease in Long Term Care beds between September 1984 and March 1985 reflects the transfer of responsibility for Mental Health Boarding Homes from Continuing Care to Mental Health Services Division. Note also the changes in the reporting structure. For Acute and Extended Care, the years 1976 through 1978 report beds as at December 31. The remaining years report beds as at March 31 (fisca l year end). For Long Term Care, the beds are reported as indicated with March 1985 beds being f i s c a l year end figures. Source: Hospital Data Support, Hospital Programs, B.C. Ministry of Health. - 33 -Prices of Hospital Services The period of h o s p i t a l growth from 1947 to 1982/83 was p a r a l l e l e d by national increases of roughly 11% per year in the cost per adult and c h i l d day in public general and a l l i e d s p e c i a l h o s p i t a l s (n.2 p.80). While B.C's per diem rates started, in 1953, at 31% above the national average (n.2 p.80), table 6 shows st e a d i l y declining r e l a t i v e growth u n t i l 1976. Since then per diem growth rates in B.C. have taken an upward turn exceeding national average by roughly 1.5% to 2% per year. Table 6 Average Annual Rates of Change in Cost Per Patient Day Adults and Children, Public General and A l l i e d Special Hospitals Canada and B r i t i s h Columbia 1956 to 1982-83 B r i t i s h Year Can ad a Columbia 1956 - 1961 9.15 7.04 1961 - 1966 9.32 6.08 1966 - 1971 11.30 11.75 1971 - 1976 15.36 14.09 1976 - 81-82 11.54 13.91 81-82 - 82-83 13.52 14.91 1953 - 82-83 11.00 9.78 1962 - 82-83 12.16 11.86 Source: Adapted from Morris L. Barer and Robert T. Evans. "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System". A paper prepared for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. Increases in per diem rates may r e f l e c t servicing i n t e n s i t y per patient day 3 . . . . and increased costs of h o s p i t a l inputs . Because servicing i n t e n s i t y - 34 -involves the volume of services delivered in a patient day, the increase could r e f l e c t more intensive ambulatory care services and more d i f f i c u l t interventions due to more complex case mixes. Neither explanation, however, appears to be adequately supported by evidence (n.2 pp.88-89). Due to the labour i n t e n s i t y of h o s p i t a l s , wage le v e l s are another factor l i k e l y to influence p r i c e s . The annual rate of change of r e l a t i v e h o s p i t a l wages in B.C. has been p a r t i c u l a r l y below average since 1981 (n.2 p.69). Neither servicing i n t e n s i t y nor wage l e v e l s , consequently, seem to be an adequate explanation for increased per diem rates. Another possible explanation may be that the costs of inputs such as technological equipment may be contributing to the rate. U t i l i z a t i o n Beginning in 1971, table 7 indicates that patient days per capita began to f a l l n a t i o n a l l y with some f l u c t u a t i o n s . A downward turning point in patient days, however, was marked in 1980/81 which was probably associated with decreased bed capacity. This pattern v a r i e d in B.C. for when the national per capita average was f a l l i n g , B.C.'s average began to r i s e considerably from 1971 to 1976. By 1979/80, B.C. had reached a position of 19% above the national average in patient days per capita which i t sustained u n t i l 1981/82 when a period of decline was s i g n a l l e d . This trend i s consistent with the reluctance of B.C. to j o i n the national downsizing movement in reducing bed capacity. - 35 -Table 7 Hospital Utilization Per 1000 Population* Canada, B.C. Relative to Canada 1971 - 1982/83 Patient 71 76 77-78 78-79 79-80 80-81 81-82 82-83 Days C an ad a 1,894.3 1,807.5 1,838.3 1,857.3 1,848.7 1,848.8 1,841.7 1,826.5 B.C. 96.0 116.3 118.5 119.2 119.1 119.1 115.4 109.0 * In Public General and Allied Special Hospitals; Operating 1971 - 75; Estimated for Operating for 1976 - 1982-83 and 1947; Utilization does not include newborns. Source: Adapted from Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, Prices, Utilization and Incomes in the Canadian Health Care System". A paper prepared for the Health Policy Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. POLICY RESPONSES TO EXPENDITURES FOR HOSPITAL SERVICES In comparison with national trends, clearly B.C. has been a latecomer to downsizing the hospital sector as a means of containing costs. Under increasing pressure to rationalize and contain expenditures, the MOH in 1979 initiated a process of negotiating a more rational system of funding for hospitals. As a result the Hospital Role and Funding Study were done in order to develop a 4 rational plan for the allocation of resources to hospitals . However, this negotiation process was far too slow in evolving as mounting cost pressures demanded more immediate measures. A change of Deputy Minister in 1980 brought a much tighter cost control orientation to the ministry and more authoritarian control over the hospital sector in particular. In addition to restrictions on capital expenditures, changes were made in hospital budgeting to move away from a cost reimbursement - 36 -base. In 1982/83, l i n e by l i n e budgeting for h o s p i t a l s was abandoned in favour of prospective global budgets negotiated annually and monitored throughout the year by the M i n i s t r y ^ . As well as better f i s c a l c o n t r o l , some ho s p i t a l s have been merged for improved e f f i c i e n c y . Budget constraints and reduced capacity of acute care beds also have acted to some extent as a brake on u t i l i z a t i o n and h o s p i t a l wages thus helping to contain costs. PHYSICIAN SERVICES While the portion of physician expenditures represented in the p r o v i n c i a l gross domestic product remained stable from 1971 to 1981, the costs of physician services have s t e a d i l y escalated. Increasing expenditures for the Medical Services Plan (MSP) are represented in table 8 and show that the l i o n ' s share of expenditures go to medical FFS p r a c t i c e . However, factors a f f e c t i n g the l e v e l s of these expenditures are the supply and a v a i l a b i l i t y of physicians, the price of t h e i r services and the rate of u t i l i z a t i o n of t h e i r services. Table 8 Medical Services Commission Summary of expenditures - 1972/73 to 1982/83 Medical Salaried and Additional Administration Total fee-for-serv ice sessional benefits 1972/73 $139,532,341 $ 6,022,920 $ 7,897,244 $ 7,320,137 $160,772,642 1973/74 159,614,356 7,991,062 8,963,080 8,581,794 185,150,292 1974/75 190,452,494 10,424,602 11,089,892 12,501,015 224,468,003 1975/76 250,026,093 15,437,520 15,045,516 12,659,521 293,168,650 1976/77 268,496,749 14,880,410 17,090,707 13,040,063 313,507,929 1977/78 298,900,495 17,749,957 17,436,161 13,207,188 347,293,801 1978/79 337,513,465 19,484,932 21,132,210 16,856,376 394,986,983 1979/80 384,735,825 23,200,389 23,534,808 19,883,088 451,354,110 1980/81 445,734,331 28,368,006 28,567,705 21,435,615 524,105,657 1981/82 562,663,997 35,113,464 34,868,280 23,661,014 656,306,755 1982/83 $671,614,777 $36,376,585 $44,791,468 $22,086,006 $774,868,836 Source: B r i t i s h Columbia Ministry of Health Annual Report, 1983, p.'20. - 38 -Supply of Physicians Considerable growth in the available supply of physicians has occurred i n Canada since 1960 as table 9 i l l u s t r a t e s . Although B r i t i s h Columbia has always been blessed with an above average supply of physicians, the l e v e l dropped to 3% above average in 1975 from 14.2% above in 1960, but i t rose again to 4.9% above average by 1983. This increased a v a i l a b i l i t y of physicians may have implica-tions for expenditure levels but i t must be considered in r e l a t i o n to prices and u t i l i z a t i o n of t h e i r services. Table 9 per Active C i v i l i a n Physician* Physician: Population Ratio Relative to Canada** 1960 - 1983 Year Canada B.C. 1960 879 114.2 . 1965 779 117.8 1970 689 110.3 1971 659 107.3 1975 585 103.0 1976 577 103.7 1978 560 105.3 1980 547 106.0 1981 538 104.7 1982 523 104.8 1983 512 , 104.9 *Includes Interns and Residents * * P r o v i n c i a l r e l a t i v e value i s inverse: values above 100.0 are above average physician-to-population r a t i o s . Source: Adapted from Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System" A paper prepared for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. Population Canada, and B r i t i s h Columbia - 39 -Fees A minimum estimate of price changes for the period 1960 to 1983 can be derived from table 10 which shows changes in o f f i c i a l fee l e v e l s , r e l a t i v e to the national average based on 100.00. Nationally, physicians made fee gains in the 1960s, suffered sharp losses in the early 1970s, then slower losses in the late 1970s followed by gains in the 1980s. Again, B.C. deviates from the national pattern as fees star t out considerably above the national average, then lose ground in the 1960s. But, since 1971, B.C. has bounded ahead of both the national average and the i n f l a t i o n rate proving to be the extreme case of fee increases among a l l the provinces (n.2 p.32). Cost constraint measures regarding physician fees c l e a r l y have been far less prevalent in B.C. than in other provinces, at least p r i o r to 1983. - 40 -Table 10 Physicians' Fee Indices, Canada and B r i t i s h Columbia 1960 - 83 (Canada. 1971 = 100.0) Year Can ad a B.C. I960 69.9 84.3 1963 74.5 82.9 1964 76.1 86.0 1965 78.7 86.0 1966 80.1 86.0 1967 86.6 94.5 1968 90.6 94.5 1969 96.1 100.9 1970 97.8 100.9 1971 100.0 100.9 1972 101.4 105.2 1973 102.3 112.9 1974 107.4 123.1 1975 114.2 141.7 1976 121.8 157.4 1977 132.0 164.1 1978 140.2 175.2 1979 150.6 189.0 1980 164.8 206.6 1981 184.2 241.7 1982 208.3 279.9 1983 227 .5 300.0 Annual Average Rates of Growth (%) 1960-•65 2.40 0.40 1965-•70 4.44 3.25 1960-•70 3.42 1.81 1970-•75 3.15 7.03 1975-•80 7.61 7.83 1980-•83 11.35 13.24 Source: Adapted from Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System" A paper presented for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. - 41 -U t i l i z a t i o n In the period 1971 to 1982, table 11 shows that per capita physician u t i l i z a t i o n increased in Canada at an average annual rate of 3.65%. During t h i s same period, the per capita physician u t i l i z a t i o n rate in B.C. lagged behind the national average, with u t i l i z a t i o n f a l l i n g from roughly 8% above average in 1970 to near the national average in 1982. Therefore, the r e l a t i v e growth of physician service costs in B.C. appears to be the r e s u l t of higher fees rather than differences in u t i l i z a t i o n . An i n t e r e s t i n g observation i s that where fees have r i s e n fastest since 1971 - B.C., Alberta, Saskatchewan and Nova Scotia, r e l a t i v e use rates have dropped whereas when fees have r i s e n slowly as in Quebec, user rates have risen fastest (n.2 p.37). This observation h i g h l i g h t s the apparent use of physicians' d i s c r e t i o n to adjust income le v e l s and supports the "target income" view of physician behavior (n.2 p.37). Such behavior has serious implications for expenditure l e v e l s in an open-ended medical care system. - 42 -Table 11 Per Capita Apparent U t i l i z a t i o n of Physicians' Services, Adjusted for L i s t Fee D i f f e r e n t i a l s , Canada and B r i t i s h Columbia, 1960 - 1982 (1971 $) Year Canada B.C. 1960 28.35 33.52 1965 35.20 39.56 1970 49.91 58.11 1971 57.91 61.79 1975 73.75 69.57 1976 75.02 72.82 1978 77.10 76.59 1980 82.80 81.24 1981 83.35 81.56 1982 85.94 85.69 Annual Average Rates of Growth Year C an ad a B.C. 1960-65 4.42 3.37 1965-70 7.23 7.99 1970-75 8.12 3.67 1975-80 2.34 3.15 1980-82 1.88 2.70 1960-82 5.17 4.36 1971-82 3.65 3.02 Source: Adapted from Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, Pr i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System" A paper presented for the Health Policy Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. - 43 -POLICY RESPONSES TO EXPENDITURES, FOR PHYSICIAN SERVICES The high costs for physician services in B.C. appear to be attributed to high fees plus high numbers of physicians. What p o l i c i e s , then, have been implemented by the MOH to address these issues? Given a fee schedule 30% higher than the rest of the country as of 1983, i t would appear that the B.C. M i n i s t r y has avoided holding fees within reasonable l i m i t s due to the equally high p o l i t i c a l costs of such action. This pattern, however, i s beginning to show signs of change. Table 12 chronicles fee schedule changes from 1970 to the present, demonstrating that from 1972 to 1982 fees have been s t e a d i l y increasing annually. A s h i f t occurred in 1982 when h a l f of the fee schedule increase was r o l l e d back for a seven month period. From that time, there have been no actual fee increases although a small increase was granted for overhead i n 1983. The current year has witnessed a further change, with a cap being placed on global medical care expenditures so that the f i r s t 4% of u t i l i z a t i o n that exceeds the negotiated global l e v e l w i l l be absorbed by the MOH and the next 4% by the medical profession as a fee decrease. The capping mechanism i s an attempt not only to l i m i t the price of services but also to begin to put some control on u t i l i z a t i o n l e v e l s that are influenced by the c l i n i c a l and economic d i s c r e t i o n of physicians. The supply of physicians, on the other hand, i s not t o t a l l y within the control of the MOH. The M i n i s t r y of U n i v e r s i t i e s , Science and Communication controls the number of medical school placements which increased from 88 in 1978 to 130 in 1984 although there has been a drop to 121 in 1985^. Likewise, federal immigration p o l i c i e s affect physician supply but changes implemented in 1975 have decreased the in-migration of foreign physicians. - 44 -1970 1971 May 1, 1972 A p r i l 1, 1973 A p r i l 1, 1974 June 1974 January 1, 1975 A p r i l 1, 1975 A p r i l 1, 1976 October 1976 A p r i l 1, 1977 A p r i l 1, 1978 A p r i l 1, 1979 A p r i l 1, 1980 A p r i l 1, 1981 August 1, 1981 A p r i l 1, 1982 September 1982 A p r i l 1, 1983 A p r i l 1, 1984 A p r i l 1, 1985 Table 12 B.C. Physician Fee Schedule Changes 1970-1985 Moratorium on fee increase 5.9% fee increase 6.5% increase on incomes guaranteed 7.56% fee increase 7.78% fee increase 0.92% fee increase 3.09% fee increase 12.167% fee increase 8.13% fee increase 0.03% fee increase ( l i k e l y reassignment of fees) 5.53% fee increase 7.22% fee increase 8.11% fee increase 9.70% fee increase 14.5% fee increase 8.3% fee increase not compounded 14.0% fee increase 7% rollback of fee increase No negotiations. 7% rollback ended. 4.2% increase given to compensate for overhead. 0% fee increase Cap placed on global medical care expenditures 0% fee increase 1.5% increase for population changes; just under 2% increase for expected u t i l i z a t i o n , compounded for a t o t a l of 3.5%. Should medical care expenditures r i s e above these l i m i t s , the f i r s t 4% above the l i m i t w i l l be absorbed by MSP and the next 4% w i l l be absorbed as a fee decrease by the medical profession. Source: Stephen Kenny, Executive D i r e c t o r , Medical Services Plan, B.C. Ministry of Health - 45 -As part of the B.C. r e s t r a i n t program in 1983, the government decided to r e s t r i c t the issuance of b i l l i n g numbers to physicians in an e f f o r t to influence the supply and d i s t r i b u t i o n of physicians. In p r i n c i p l e , t h i s did not i n t e r f e r e with medical care p r a c t i c e , as the physician could be licensed and could practice but neither the physician nor h i s patients would be reimbursed for services by the MSP. This policy was challenged in the courts by members of the medical profession and the Medical Services Commission was found to have no l e g i s l a t i v e authority in the matter''. Subsequent to t h i s , B i l l 41 was passed on May 15, 1985 providing l e g i s l a t i v e support for the r e s t r i c t i o n of the issuance of b i l l i n g numbers. The MOH has begun to take a more aggressive stand with respect to both fee increases and the supply of physicians in order to gain better administrative control over medical care expenditures. Areas previously viewed as "untouchable" because of the p o l i t i c a l costs of medical profession resistance now seem to be f a i r game for intervention as a r e s u l t of a change of climate in the province. PROBLEM SITUATION In comparison to national trends, B.C. has been a r e l a t i v e l y reluctant participant in cost control u n t i l the 1980s. In an attempt to catch up, the MOH has used "blunt instrument" p o l i c y measures such as budget constraints and reduction in bed capacity to bring expenditures in the h o s p i t a l sector under con t r o l . These measures have proven p o l i t i c a l l y f e a s i b l e and have achieved some success in curbing u t i l i z a t i o n and c o n t r o l l i n g costs. Nonetheless, they are - 4 6 -relatively short term solutions to physician generated costs. Constraints on physician supply and fee schedules, on the other hand, have higher p o l i t i c a l costs and may show results only in the long term. What has emerged from implementing these "blunt" measures is disequilibrium in the system causing strain and dissatisfaction in a l l sectors. An abundant supply of physicians is now competing for the use of fewer hospital resources. The c l i n i c a l discretion of physicians is being threatened by bureaucratic decisions limiting their range of treatment options. Restricted use of hospital f a c i l i t i e s indirectly affects physicians' economic discretion and, hence, their incomes. The usual internal p o l i t i c a l struggles between administrative and medical staff in hospitals have become exacerbated over the use of limited resources. Tension building in the system may be forecasting a c r i s i s in the not too distant future. The need for alternative solutions to control costs within the context of an oversupply of physicians and a leaner hospital sector is becoming increasingly c r i t i c a l . One possible alternative may be to consider some restructuring to better integrate physician and hospital services in order to influence more cost-effective styles of medical care practice. - 46a -FOOTNOTES Health and Welfare Canada, National Health Expenditures in Canada 1970- 1982, (Ottawa: Department of National Health and Welfare, P o l i c y , Planning and Information D i v i s i o n ) , p.22. Morris L. Barer and Robert G. Evans. "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System" paper presented for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984, p.51. Robert G. Evans. Strained Mercy: The Economics of Canadian Health Care, (Toronto: Butterworth and Co. L t d . , 1984), p.162. A C o l l e c t i o n of Occasional Papers, "Health P o l i c y Making in B.C. - 5 D i s t r i b u t i o n of Health Care Resources in B.C", Health Management Forum (Autumn 1982) :67. Personal communication with Glen Benjamin, F i n a n c i a l Administration, Hospital Programs, B.C. Ministry o f Health. Figures quoted by Student A f f a i r s , Faculty of Medicine, University of B r i t i s h Columbia. Mia v. The Medical Services Commission of B r i t i s h Columbia (March 21, 1985) The Supreme Court of B r i t i s h Columbia. Statutes of B.C. 1985, B i l l 41, Medical Services Amendment Act. - 47 -SECTION II: STAGE 3 IDENTIFYING RELEVANT SYSTEMS Section I has outlined the problem situation from the client's point of view and has cl a r i f i e d certain problem areas associated with increased health care expenditures. This expression' phase of the methodology is intended to convey the climate of the situation from an understanding of how structure and process relate to the problem situation. Stage 3 focuses on identifying systems relevant to the problem situation, then developing explicit statements about the nature of each system. The purpose is to understand the different perspective that each system has on the problem situation and what the implications might be of having a particular perspective. Checkland emphasizes that stages of the methodology do not represent rigid boundaries. Rather, he sees fluid interaction between stages as long as the primary task of each stage is respected. Consequently, order may be secondary to the objective of accomplishing the primary task designated for each stage. From the problem situation described in section I, relevant systems were identified as: the medical profession system, the hospital system and the B.C. Ministry of Health system. Each system is assessed according to the six c r i t e r i a outlined in chapter 2 . In the assessment of each system, elements of structure and process are evident. Technically, these likely should be located in section I but i t seemed more germane to this discussion to locate them here. This placement is consistent with accomplishing the tasks of each stage and is not widely variant from the chronological sequence of the methodology. - 48 -CHAPTER 5 SYSTEMS RELEVANT TO THE PROBLEM SITUATION IN B.C. The selection of the medical profession, the hospital and the Ministry as systems relevant to the problem situation in B.C. places certain limitations on how the situation is perceived. A l l of these systems in different ways are concerned with provision or arranging for provision of health care services and each has some power to influence expenditure levels. Conspicuously absent from these choices is the perspective of consumers of health care services. From the problem situation described, consumers, generally, have not emerged as a constituency concerned about the levels of health care expenditures. Therefore, the consumer perspective will be mentioned in the discussion of individual systems only as applicable. In addition to the views acknowledged here, there may be many other possible perspectives on the problem situation. The purpose of identifying these particular systems is to make their perspectives explicit so implications can be developed for the fea s i b i l i t y of change in the problem situat ion. THE MEDICAL PROFESSION SYSTEM Customers or Beneficiaries of the System The customers of the medical profession system are individuals seeking medical care in order to improve their health. As a result, they make demands on members of the medical profession who assess the valid i t y of their demands and determine whether medical care is necessary. The health of individuals is presumed to be improved by bringing specialized knowledge to bear in the medical - 49 -treatment of i n d i v i d u a l cases. Physicians benefit economically from using t h e i r s p e c i a l i z e d knowledge to act as gatekeepers of the system and to provide medical care services. Since the province has delegated s e l f - r e g u l a t i n g authority to the medical profession in return for i t s regulation of standards of practice of i t s members, i t also has benefited from the medical profession system with respect to quality control of minimum standards of service and in the reduction of c e r t a i n costs*. However, as the context of health care has changed over the years to a t h i r d party system of payment, the benefits to the province have been increasingly questioned as the monopoly power of the medical profession has been associated with enormous growth in health care expenditures. Actors in the System The actors in the medical profession system are distinguished by two l e v e l s of operation. On the i n d i v i d u a l l e v e l , physicians, both g e n e r a l i s t s and specia-l i s t s , apply t h e i r s p e c i a l i z e d knowledge in the delivery of medical care s e r v i -ces. At the c o l l e c t i v e l e v e l , the organized profession applies i t s s p e c i a l i z e d knowledge to protect the public by enforcing standards of practice among i t s members and also acts on behalf of i t s members in r e l a t i o n s with government. Transformation Process of the System At the i n d i v i d u a l l e v e l , a professional r e l a t i o n s h i p operates to give patients access to information necessary to make decisions about t h e i r health care. The physician, i d e a l l y , acts as an agent for patients assuming d e c i s i o n -making authority and accepting r e s p o n s i b i l t y for promoting t h e i r i n t e r e s t s ( n . l - 50 -p.49). The delegation of decision-making authority i s based on an information gap between physicians who possess highly s p e c i a l i z e d knowledge about health care and patients who are l a r g e l y ignorant of such knowledge. Due to the complexity of the technology of health care, i t would be d i f f i c u l t and expensive in time and money for patients to attempt to acquire such knowledge. Because of the unpredictable onset of health problems, the mental state of patients could i n h i b i t t h e i r a c q u i s i t i o n of knowledge or cause acquired knowledge to be used erroneously which might have serious and p o t e n t i a l l y i r r e v e r s i b l e consequences for t h e i r health./ The asymmetry of information present in the physician-patient r e l a t i o n s h i p erodes the p r i n c i p l e of consumer sovereignty normally operative in decisions to consume services, leaving patients vulnerable to e x p l o i t a t i o n by physicians and unable to protect t h e i r own i n t e r e s t s . Furthermore, the provision of medical care services assumes that patients' health, subsequently, w i l l be improved. The art and science of medicine, however, are practiced under considerable uncertainty and often no c l e a r or immediate outcomes of treatment are evident. The resultant s i t u a t i o n creates 2 ample l a t i t u d e for the application of d i s c r e t i o n in medical practice which adds to patients' v u l n e r a b i l i t y . In any decision to consume goods or services, the following elements can be i d e n t i f i e d : b e n e f i t - r e c e i v i n g , cost-bearing and decision-making ( n . l p.52). In the market for health care services, the natural integration of these three elements breaks down. The decision-making function performed by the physician becomes separate from the benefit-receiving function experienced by the patient and the cost-bearing function which l a r g e l y i s assumed by t h i r d party reimbursement through the p r o v i n c i a l administration of the health insurance - 51 -program. I f the agency r e l a t i o n s h i p were complete, the physician would take on e n t i r e l y the patients' point of view considering t h e i r preferences and circum-stances in the decision-making process in order to maximize the benefit received from medical care. But a number of b a r r i e r s m i l i t a t e against the re-integration of these elements and make the agency r e l a t i o n s h i p incomplete. The most important of these i s the c o n f l i c t of i n t e r e s t that e x i s t s between the physician acting as an agent for the patient and simultaneously acting as an 3 economic p r i n c i p a l on h i s own behalf supplying medical care services . D i s t o r t i o n s arise depending on the extent to which the physician's i n t e r e s t s as a supplier of medical care services enter into the agent's decision-making process. Consequently, regulation becomes a necessary i n s t i t u t i o n a l response to safeguarding e x p l o i t a t i o n of patients in an incomplete agency r e l a t i o n s h i p . At the c o l l e c t i v e l e v e l as w e l l , an agency r e l a t i o n s h i p occurs between the organized profession and the p r o v i n c i a l government. Tuohy and Wolfson have argued that t h i s i s analagous to the i n d i v i d u a l p r a c t i t i o n e r - patient agency r e l a t i o n s h i p and that the r e l a t i o n s h i p between the two l e v e l s i s interdependent and mutually r e i n f o r c i n g ( n . l p.67). The delegation of s e l f - r e g u l a t i n g authority to the medical profession i s based on the premise that i t s s p e c i a l i z e d knowledge enables i t to enforce regulation more e f f i c i e n t l y by strengthening the l i k e l i h o o d of voluntary compliance of i t s members. The medical profession protects the public against unqualified p r a c t i t i o n e r s by c o n t r o l l i n g entry to practice through a l i c e n s i n g mechanism and by setting standards of technical competence and e t h i c a l behavior that are enforced through somewhat weaker mechanisms of peer review and chart audits. However, the agency r e l a t i o n s h i p i s as incomplete at the c o l l e c t i v e l e v e l as i t i s at the i n d i v i d u a l l e v e l . Thus, - 52 -the potential remains for the medical profession, as an imperfect agent, to use its increased p o l i t i c a l and economic power to promote i t s own self interests, increase costs to consumers or misperceive the public interest and offer an inappropriate mix of services (n.l p.61). Perspective of the System The perspective embraced by the medical profession system finds i t s roots in medical ideology. Professional ideology originates from the technical role of professionals applying specialized knowledge in individual cases (n.l p.64). While specialized technological roles necessitate the creation of a professional relationship, ideology defines and defends the boundaries of the relationship in the interests of the group. Thus, ideology acts as a bonding device among members of the profession and derives its power from group consensus which 4 serves to distinguish the profession from other occupations . Professional ideology is not static and will change over time with the introduction of new technologies"*. The core of values central to medical ideology are objective rationality, altruism, individualism and professional autonomy . The rationalistic orientation leads to an emphasis on quality of care as defined by the medical profession in terms of technical competence. During their professional training, physicians are taught to apply their specialized knowledge without regard to their own interests; the patients' needs always take precedence. Similarly, they are indoctrinated that no two cases are alike and that in d i v i -duals are the true units of service (n.6 p.934). Thus, the delivery of their professional services involves the unique application of specialized technical - 53 -knowledge to highly personal individual cases that require the individual judgement of physicians who take individual responsibility for their treatment decisions. While medical ideology promotes the interests of patients, i t also biases the perception of those interests by stressing the technical quality of care rendered in individual encounters. Consequently, the medical profession perceives the public interest as an aggregate of the interests of individual patients - not a l l the potential beneficiaries of professional services (n.l p.65). Professional autonomy is a reward associated with the achievement of professional status. For physicians, this status is accompanied by certain freedoms - freedom to set their own income within the boundaries of fee schedule's and time, to set their hours of work, to practise in their own style, to choose the location of their practice and to whom they will provide service. Over time, the independent autonomous FFS practice has become the organizational arrangement that best embodies the values articulated by the ideology. Fee-for-service remuneration is a crucial organizational element as i t symbolizes the maintenance of professional autonomy and control while other methods of remuneration imply some loss of professional control and autonomy^. Furthermore, the ideology defends the entrepreneurial as well as c l i n i c a l discretion of the autonomous FFS practitioners while discrediting any outside interferences perceived to threaten the professional control of medical care practice. Resistance to change and the preservation of independent and autonomous FFS practice are dominant themes of medical ideology. Blishen's comments summarize these themes: - 54 -"Under the present system, many physicians have achieved success or recognition, change may require new professional rol e s or changes in e x i s t i n g ones and generate new competition. The physician i s emotionally committed to a career under the e x i s t i n g system, and from i t derives many of l i f e ' s s a t i s f a c t i o n s . . . There i s thus a b u i l t i n resistance to change within the profession p a r t i c u l a r l y when the impetus for change comes from outside with the p o s s i b i l i t y of outside control of professional a c t i v i t i e s " (n.7 p.1974). Due to the medical profession's emphasis on the technical quality of care and i t s i n d i v i d u a l i s t i c perspective, the l i k e l i h o o d of misperceptions of the public interest leading to the provision of an inappropriate mix of services i e n t i r e l y possible. This s i t u a t i o n i s complicated further by resistance to change. Therefore, the introduction of alternative concepts of medical care d e l i v e r y by any external group i s bound to arouse the medical profession's opposition and d i s t r u s t . Ultimate Power in the System The ultimate power or ownership of the medical profession system l i e s i n the s e l f - r e g u l a t i n g authority delegated to i t by the province. Because of the c o s t l i n e s s of information c o l l e c t i o n and analysis, error, and enforcement, the province delegates regulatory authority in return for the medical profession p o l i c i n g i t s members and protecting the public against incompetence (n.l p.70) This authority i s upheld to the extent that t r u s t i s placed in the medical pro fession to honour i t s r e s p o n s i b i l i t i e s . Trust i s maintained and reinforced by the interdependence of the two l e v e l s of the profession. The c o l l e c t i v e l e v e l provides the ideologic framework and parameters for the functioning at the - 55 -i n d i v i d u a l l e v e l but, at the same time, i t depends on the trustworthiness of the i n d i v i d u a l p r a c t i t i o n e r s to maintain i t s trustworthiness with the public and government. The right of i n d i v i d u a l p r a c t i t i o n e r s to use t h e i r s p e c i a l i z e d knowledge i s dependent on t h e i r r e l a t i o n s h i p with the c o l l e c t i v e l e v e l of the profession. The medical profession has the authority to grant, withhold, suspend or revoke licenses to p r a c t i s e . Licensure not only defines the scope of technical compe-tence and ensures the maintenance of c e r t a i n technical standards but also confers the r i g h t to economic rewards conditional on the performance of technical tasks. On one hand, licensure constrains i n d i v i d u a l p r a c t i t i o n e r s from p r o f i t i n g at the expense of patients; on the other hand, i t can act in the s e l f interest of the profession by l i m i t i n g the number of licenses which then enhances the monopoly p r o f i t s of those licensed in practice ( n . l p.70). Remuneration of p r a c t i t i o n e r s i s both a c o l l e c t i v e and i n d i v i d u a l matter which involves the price and volume of services. The establishment and enforcement of a minimum fee schedule i s accomplished at the c o l l e c t i v e l e v e l but i s based on the experience of i n d i v i d u a l p r a c t i t i o n e r s . If i n d i v i d u a l p r a c t i t i o n e r s are unable to r a i s e p r i c e s , they pressure the c o l l e c t i v e l e v e l to increase the fee schedule. I f t h i s e f f o r t i s unsuccessful, they may resort to using t h e i r entrepreneurial d i s c r e t i o n to change the various quantities of services that they provide, thus increasing the t o t a l number of these services and/or the r a t i o of more expensive to less expensive services. This i l l u s t r a t i o n shows that relevant decisions which serve to reinforce and strengthen the power of the entire group are made at a l l l e v e l s of the medical profession. However, the interdependence and mutual reinforcement of these - 56 -leve l s s i m i l a r l y poses questions about how well the public interest i s served by a s e l f - r e g u l a t i n g profession. Environmental Constraints The medical profession system may be constrained by a number of factors outside of i t s c o n t r o l . The quality of medical care can be affected by the supply, d i s t r i b u t i o n , knowledge and s k i l l s of q u a l i f i e d physicians plus the a v a i l a b i l i t y of medical care f a c i l i t i e s at the disposal of the physician. The rapid growth of complex and sophisticated health care technology has challenged medical ideology and altered the boundaries of c l i n i c a l d i s c r e t i o n . Likewise, technological change has necessitated patients having a number of encounters with a v a r i e t y of new personnel and has tended to weaken the sense of trust in the i n d i v i d u a l p r a c t i t i o n e r - p a t i e n t r e l a t i o n s h i p (n.5 p.190). Although f i n a n c i a l b a r r i e r s to people seeking medical care were removed with the introduction of p u b l i c l y funded universal health insurance, the p r o v i n c i a l government, as the consequent cost-bearer has become acutely aware of the costs of medical care services. The MOH has gradually moved towards attempting to contain medical care expenditures through fee schedule negotiations. More recently i t has become involved in issues of the supply and d i s t r i b u t i o n of physicians. Since these measures threaten the autonomy and control of the profession, considerable tension and d i s t r u s t have been generated between the medical profession and government, often culminating i n b i t t e r public confrontation and c o n f l i c t between the two groups. - 57 -Root D e f i n i t i o n The medical profession i s a s e l f - r e g u l a t i n g body that provides medical care services according to the discretionary judgement of autonomous i n d i v i d u a l p r a c t i t i o n e r s who act as gatekeepers d i s t r i b u t i n g health care resources r e l a t i v e to t h e i r professional norms and t h e i r assessment of the needs of persons seeking medical care. THE HOSPITAL SYSTEM Customers or B e n e f i c i a r i e s of the System Physicians are the primary customers of the h o s p i t a l system and use i t s i n s t i t u t i o n a l f a c i l i t i e s , t echnical equipment and s p e c i a l i z e d s t a f f to provide medical care for t h e i r patients. The economic incentives of FFS practice encourage physicians to u t i l i z e h o s p i t a l f a c i l i t i e s as they can see a greater volume of patients for diagnostic and treatment services more conveniently in a shorter period of time, thus reducing overhead practice costs. Patients, obviously, also benefit from the h o s p i t a l system but the extent of t h e i r use of the system i s determined by t h e i r physician. Other health care professionals such as nurses, physiotherapists, r a d i o l o g i s t s and an array of other technical s t a f f gain as well from the h o s p i t a l system as i t provides a place of employment for them to u t i l i z e t h e i r s k i l l s . - 58 -Actors in the System Under the requirements of the B.C. Hospital Act, each hospital must have a board of trustees that can be elected, appointed or some combination of g both . In general, the boards are composed of lay members of the community and may assume the stance of being a vehicle of consumer participation or that of s t r i c t l y a management board. Since the board is legally responsible for the administration and management of the hospital, i t appoints an administrator accountable for overseeing the general operation and management of the i n s t i t u -tion. The board obligations also include a legal and moral responsibility for providing a satisfactory level of care to patients. Physicians are held in high esteem by board members as their services are essential for the board to meet i t s obligations. Whether membership on a hospital medical staff is a right conferred on physicians who hold a valid license or a privilege granted by the hospital has long been a matter of 9 . . . debate . Acceptance of the latter argument seems to prevail in practice. Physicians, then, are not employees of the hospital, but are entrepreneurs with privileges to use hospital f a c i l i t i e s . Being members of a self-regulating profession, physicians find i t d i f f i c u l t to accept accountability to any body outside of their profession. As a result, regulations have been added to the Hospital Act which stipulate a separate medical staff organization be formed in each hospital with by-laws specific to the particular hospital and subject to the approval of the MOH. Under these regulations, the board accepts responsibility for applying the medical staff by-laws in i t s institution. The resulting structure gives rise to two lines of authority: an administrative line and a medical/technical line. - 59 -Numerous other health care professionals employed by the h o s p i t a l must also meet professional standards of q u a l i f i c a t i o n . Many of these groups have become unionized over time and have made demands for higher wages; thus unions have become s i g n i f i c a n t actors in the current h o s p i t a l system. Transformation Process Hospitals o r i g i n a l l y developed, for charitable reasons, as places to house the indigent and i l l . However, as s c i e n t i f i c advances increased the complexity and cost of medical technology and contributed to increased s p e c i a l i z a t i o n in medicine, h o s p i t a l f a c i l i t i e s were used more and more as diagnostic and treatment centres. Concurrent with these trends, h o s p i t a l capacity was considerably increased during the 1950s due to the federal National Health Grants programs for h o s p i t a l construction. Physicians began, increasingly, to l i n k the a v a i l a b i l i t y of h o s p i t a l resources to quality of care. The introduction of the Hospital Insurance and Diagnostic Services Act of 1957 spread the cost of h o s p i t a l services from the i n d i v i d u a l to society and s u b s t a n t i a l l y improved the f i n a n c i a l position of h o s p i t a l s . Having increased the supply of h o s p i t a l s , government then subsidized the demand for h o s p i t a l services based on p r i n c i p l e s of equity. The use of h o s p i t a l services was encouraged and h o s p i t a l intensive s t y l e s of medical care p r a c t i c e , l u c r a t i v e to physicians, were reinforced. The f i n a n c i a l involvement of government, also raised questions of accountability for expenditures. However, the p r o v i n c i a l MOH could not control e f f i c i e n c y and effectiveness in h o s p i t a l s as authority had been delegated to h o s p i t a l boards for administra-tion and management. S i m i l a r l y , administrators did not have control of the - 60 -technical core within hospitals, as physicians acting as entrepreneurs initiated the use of technical services on behalf of their individual patients, not patients collectively. The Task Force Reports on the Cost of Health Services in 1969 pointed out the need to improve hospital organization in order to link the provision of resources and services to the real needs for care*^. Prior to this hospitals had become concerned with quality of care and had moved towards the adoption of some standards of care through the voluntary acceptance of accreditation programs. I n i t i a l l y , accreditation was concerned with the self-evaluation of institutional standards of medical care but, while this was welcomed by board members, i t was resisted by physicians**. However, physicians managed to seize this opportunity to strengthen their hand in asking for more equipment or f a c i l i t i e s to improve standards. Although accreditation standards were not linked to cost or demographic need they did help to encourage the development of some comparative data for assessing hospital performance. Perspective Hospitals began as autonomous voluntary non-profit associations concerned with serving community interests by raising money for the establishment and expansion of f a c i l i t i e s . They were viewed as an oasis where those suffering and in need would not be turned away and where physicians could use the resources of the f a c i l i t i e s to help those requiring medical care. This benevolent attitude proved financially d i f f i c u l t to manage as often hospital revenues did not cover expenditures. The introduction of universal publicly funded hospital insurance - 61 -provided financial support, but served to reinforce the existing structures of these services. Furthermore, the insurance program placed the hospital in a partnership with government signalling a shift in the role of the hospital from an autono-mous voluntary association to a government subsidized agency. Agnew has commented that this was not a static relationship bounded by legal contract or incorporation but a flexible ill-defined relationship changing a l l the time with the province controlling the purse strings ( n . l l p.177). As a result, provincial hospital associations often assumed the role of buffer groups attempting to interpret the hospital perspective to government. With the introduction of third party payments, the provincial MOH needed to gain administrative control over hospital expenditures but the hospitals had no incentives for improved productivity and efficiency. The hospital was reimbursed for the cost of services rendered. If i t produced those services more eff i c i e n t l y , the savings did not usually accrue to the hospital but were reclaimed by the Ministry. The main area of leverage available to the Ministry was funding so i t gradually intervened to alter hospital funding patterns and incentives as a means of reducing expenditures. The provincial MOH has used this leverage to implement control strategies such as restrictions of global budgets and capital expenditures. These strategies have proven p o l i t i c a l l y acceptable and successful in containing hospital expenditures in the face of incentive structures that do not promote . 1 2 cost consciousness on the part of physicians or patients . Tuohy points out that while physicians continue to exercise discretion over the use of a leaner hospital system these control strategies increasingly threaten to constrain t h e i r c l i n i c a l as well as economic d i s c r e t i o n . In addition, Evans has described t h i s approach as " s i t t i n g on the l i d " which creates a b u i l d up of pressure in the system that in the longer term could lead to an 14 explosion . A change in policy d i r e c t i o n may need to consider the integration of organizational as well as funding mechanisms to create incentives for e f f i c i e n c y . Ultimate Power The Hospital Act allows the MOH to take over any h o s p i t a l in B.C. and impose i t s own public administrator i f i t finds the h o s p i t a l management to be i n e f f e c t i v e . Only on rare occasions, in extreme circumstances, has i t been necessary to use t h i s authority. Otherwise, within the h o s p i t a l system, the board, given i t s mandate for f i n a n c i a l accountability and administrative and management r e s p o n s i b i l i t y , has ultimate authority. While t h i s authority i s accepted by the administrator and most h o s p i t a l s t a f f , i t may be challenged by the medical s t a f f . The administrative and medical/technical l i n e s of authority f a c i l i t a t e a dual system of values which makes the h o s p i t a l vulnerable to c o n f l i c t and power struggles between these s y s t e m s S h o u l d the bureaucratic values of the board and administration concerned with e f f i c i e n c y and f i n a n c i a l control dominate? Or should professional values r e l a t i n g to service d e l i v e r y and quality of care take precedence? Perrow suggests that power s h i f t s occur in r e l a t i o n to the influence of technology on the hospital's stage of development^. Furthermore, Harris has commented that: - 63 -"Resource a l l o c a t i o n decisions in ho s p i t a l s are made not by administrators or f i n a n c i a l intermediaries, but in r e a l i t y by physicians who are motivated by a 'technological imperative 1 to expand the quality of services without c o n s t r a i n t " ^ . In the past, medical authority was reinforced by a funding structure based on cost reimbursement. The current constraints on h o s p i t a l expenditures and changes in budgeting have altered t h i s s i t u a t i o n , threatening t h e i r authority and exacerbating c o n f l i c t with the h o s p i t a l administration. Environmental Constraints The h o s p i t a l c l e a r l y has l i t t l e l a t i t u d e for negotiation with the MOH and i s compelled to accept the Minist r y ' s funding p o l i c i e s i f i t i s to survive as an organization. While these p o l i c i e s reduce expenditures, they, also, create considerable d i s s a t i s f a c t i o n and anxiety among the ho s p i t a l ' s primary customers - the physicians and the patients, due to cutbacks i n services and resources. In t h i s r e s t r i c t i v e atmosphere, the h o s p i t a l remains under pressure from new developments in technology and medical research. Advances i n these areas continuously manufacture demands for new technology which are based on the assumption that there i s a r e l a t i o n s h i p between a t t r a c t i v e new inputs into the production of health care services and the output of " q u a l i t y " care. Since new technologies are lar g e l y unevaluated, t h e i r e f f e c t on qu a l i t y may be of questionable value. Since constraints on h o s p i t a l expenditures in turn mean constraints on incomes and jobs, and since the h o s p i t a l i s a labor-intensive i n s t i t u t i o n , tension has developed between unions representing h o s p i t a l employees and h o s p i t a l s . Threats of s t r i k e s or work cutbacks may hold the p o s s i b i l i t y of adversely affecting patient consequently, make managing - 64 -care. Strains from the hospital system external constituencies, increasingly challenging. Root Definition The hospital system represents a government subsidized institution that serves the community by supplying a f a c i l i t y equipped with technological resources and staff and by granting privileges to physicians to use hospital f a c i l i t i e s for the diagnosis and treatment of their patients. THE B.C. MINISTRY OF HEALTH SYSTEM Customers or Beneficiaries of the System The taxpayers of B.C. are the consumers of health care services and are the primary customers of the MOH system. They pay taxes, premiums and hospital user fees; in return, they expect that the Ministry w i l l arrange and pay for the provision of necessary health services for their use. Physicians are beneficiaries of the system as they receive their incomes through fee payments made by the MSP. Indirectly, they also benefit from the f a c i l i t i e s , technical equipment and staff of hospitals which are financed by the MOH. Health care institutions which are mainly acute care hospitals, benefit from the MOH, as well, by receiving funding for their services and the maintenance of their f a c i l i t i e s . Finally, health care professionals and technical personnel gain from employment created in institutions as a result of government funding. - 65 -Actors in the System The senior actors in the MOH system are the Minister, who is an elected o f f i c i a l , the Deputy Minister and the senior ADM of Management Operations. As mentioned earlier, the latter two appointments are susceptible to p o l i t i c a l influence and likely to be sympathetic to Social Credit policies and the corporate objectives of government. The ADMs comprise the next level of actors (Refer to B.C. Ministry of Health Organization p.23). Since hospital programs 18 account for approximately 50% of the MOH budget , the ADM of institutional services is the most dominant actor at this level. Similarly, at the executive director level, the Executive Director of the MSP is a prominent actor as i t s budget is roughly 25 to 30% of the total MOH budget (n.18 p.43). As well, the Executive Director of Planning, Policy and Legislation plays a significant role in advising senior staff on policy directions. Transformation Process Since the MOH is the largest spending sector of the B.C. government, i t is not surprising that the issue of financial control of expenditures has become a 19 . . . central concern for ministry managers . Increased attention to financial control can be linked to changes in federal legislation, provincial government structures and recession in the B.C. economy. The introduction of publicly funded universal health insurance extended th federal role in shaping the health care system and placed the burden for opera-tion and administration of the plan on the provinces because of their jurisdic-tional responsibility. Both the Hospital Insurance and Diagnostic Services Act 1957, and the Medical Care Act, 1966, offered a 50% federal cost sharing - 66 -arrangement with the provinces for services provided in hospitals or by physicians. With the removal of financial barriers to health care, a concurrent rise in patient-initiated utilization or demand for health services was not experienced. However, expenditures did escalate after 1968 suggesting perhaps . . . . . . 20 that provider-initiated utilization was an important component . Reasons for increased costs and expenditures were attributed to increased wages, inflation, increased technology, more hospital beds and more employees. As well, the number of physicians in Canada increased almost 75% between 1966 and 21 1975 . What had occurred was that the open-ended cost-sharing agreement, while equalizing the plan across the country, had inadvertently reinforced distortions in the existing structures of health care delivery and had diluted , 22 incentives for economy Pressure to control costs and rationalize the system became evident by the proliferation of federal reports within a five year period. The Task Force on the Costs of Health Services in 1969 pointed to the misallocation of resources in the health care system, then, among other things, the Community Health Centre 23 Project in 1972 advocated structural reform . The Lalonde Report in 1974 raised questions about value for money and implied that increased expenditures on health care services had l i t t l e effect on the underlying causes of 24 mortality . The Established Programs Financing Act of 1977, consequently, abandoned cost-sharing in favour of a block funding arrangement that linked 25 federal contributions to changes in GNP . Increases in expenditures, from then on, would have to be met by increases in provincial taxes or reductions in benefits. These changes transferred not only greater accountability and responsibility to the provinces but promoted greater f l e x i b i l i t y to employ - 67 -alternative structures. The Hall Commission, Health Services Review, 1980, the Parliamentary Task Force on Federal-Provincial Fiscal Arrangements Report, 1981, and the Canada Health Act, 1984, a l l reaffirmed the principles of the national health insurance program - accessibility, comprehensiveness, universality, portability and public 26 administration . The Canada Health Act ensures that provinces violating these principles by permitting user fees or extra b i l l i n g will be penalized dollar for dollar in their federal grants. While the provinces have objected to interference of this Act with their discretionary powers, they are l e f t , nonetheless, with a narrow range of options for controlling expenditures for health services. Within B.C., the Social Credit government, elected in 1975, implemented structural changes in government, such as cabinet committees and a Treasury Board, which created a highly centralized bureaucracy with increasing administrative control concentrated in the Cabinet. Consequently, MOH expendi-tures became subject to scrutiny by the Treasury Board to ensure their consistency with the corporate objectives of the government. The MOH was no longer able to set i t s own priorities and financial control over i t s operation had been considerably tightened (n.19, p.34). The effect of federal legislation to centralize funding and changes in provincial government structure to centralize control have made the MOH increasingly accountable. At the same time, the Ministry's options for gaining control of health care resources have been limited as the problems of increased expenditures are rooted in the structures and incentives of the hospital and medical care systems. Because authority has been delegated to these groups - 68 -through legislation, the MOH has l i t t l e influence over their a c t i v i t i e s . Leverage available to the Ministry over these groups has been confined mainly to moral suasion or intervention in funding. Under economic pressures from recession and slow recovery, the interventionist approach has gained popularity, as few substantial effects have resulted from moral suasion. Perspective in the System Given the constraints on federal health funding imposed by legislation and the current recession, B.C. has chosen to raise revenue through taxation and to 27 "downsize" the present system . This perspective is consistent with the restraint and privatization ideologies of the Social Credit government that preaches that everyone must share the effects of economic discomfort and that much of what is being done in the public sector could be done in the private sector. A special income tax has been levied on taxpayers purportedly to cover penalties paid to the federal government for hospital user fees. Similarly, those employed in the health care system will feel the effects of downsizing as attempts are made to bring the system under control. Crichton (n.27 p.10) suggests that downsizing in B.C. appears to take three main courses: 1) considering restructuring government and the health service delivery system; 2) considering how to improve management practices within the two related systems; 3) reviewing inputs into the health system, particularly manpower production, control and use. - 69 -Concurrent with the noted changes in government structures, the MOH has undergone reconstruction "from a c l e r i c a l machine, which picked up grants from Ottawa, into a more professional managerial organization" (n.27 p.15). Old informal networks of medically-oriented bureaucrats have been replaced with new 28 proactive power structures of p r o f e s s i o n a l l y trained managers oriented towards supply side dynamics of conservation, rationing and control (n.19 p.33). The new managers may be less s e n s i t i v e to the underlying issues of health care associated with powerful professional i n t e r e s t s and s o c i e t a l attitudes towards health and i l l n e s s (n.l9 p.34). However, they are very much in tune with the corporate objectives of government and are comfortable bringing MOH objectives into alignment with those objectives. The role of the MOH has been transformed from that of an insurance agency b i l l payor to an i n t e r v e n t i o n i s t agency struggling to increase public accountability (n.28). The p r o v i n c i a l government has taken a business-like approach of corporate r a t i o n a l i z a t i o n in order to gain control over the resources of health care. Success has been achieved in l i m i t i n g expenditures through control strategies in the h o s p i t a l sector. The introduction of B i l l 41 to l i m i t b i l l i n g numbers to physicians as well as the placement of a global cap on funds allocated for medical care indicate stronger interventions into the medical care system. As these regulatory strategies may eventually reach p r a c t i c a l and p o l i t i c a l l i m i t s , a longer term view of v e r t i c a l integration strategies may be on the horizon. - 70 -Ultimate Power in the System The ultimate power in the MOH system is vested in the Minister and the Deputy Minster. The power of these positions is determined by their ability to manage effectively the MOH operation and to satisfy, at least minimally, the 29 expectations of constituencies strategic to ministry functioning The Minister who is kept informed of ministry operations by the Deputy Minister decides policy direction, but a major thrust of his position involves the maintenance of relationships with both internal and external constituencies. As an elected o f f i c i a l , he has allegiance to constituents in his riding as well as to members of the Social Credit party. Being a cabinet member, he must be sensitive to general issues of government in addition to those directly concerning his Ministry. He must be able to advocate the MOH position in Cabinet, with Treasury Board and with other Ministries competing for resources. In negotiations with the federal government, similarly, he must present the position of the province and the Ministry. The maintenance of his cred i b i l i t y with powerful interest groups, such as the medical profession, is also c r i t i c a l to gaining support for new policies. The Deputy Minister, on the other hand, has more managerial responsibility for ministry operations and advises the Minister on policy matters. Although this is not an elected position, p o l i t i c a l influence is involved in the appoint-ment. It is c r i t i c a l , therefore, that the Deputy Minister maintain a high degree of c r e d i b i l i t y with both his p o l i t i c a l and bureaucratic constituencies to assure effective functioning of the Ministry. He treads a fine line, gaining the f u l l support of staff for the Minister while, simultaneously, smoothing the way for staff to carry out their duties without p o l i t i c a l interference. The Minister's cr e d i b i l i t y , as well as that of the Ministry, depends a great deal on the quality of policy advice offered by the Deputy Minister. Consequently, the interdependence of these positions, as well as the incumbents' ability to assess the strategic importance of internal and external constituencies, is crucial to their acquisition and maintenance of power. Environmental Constraints Federal-provincial relations regarding health services have been notoriously contentious. While health is jurisdictionally a provincial matter, federal legislation has imposed financial arrangements and standards that constrain the discretion of provincial governments and ministries. Furthermore, within the provincial government, constraints can be placed on the MOH, by Cabinet, by Treasury Board, and by other ministries. Due to competition for limited resources, intense rivalries can develop between ministries as they attempt to minimize expenditures and maximize revenues in order to gain a more favourable position with Treasury Board. Powerful interest groups, as well, can thwart the implementation of MOH policies. For example, a recent court case challenged the policy of restricting b i l l i n g numbers to physicians although that situation has now been remedied with the passing of B i l l 41. The press, increasingly, act as watchdogs on the Ministry, publicizing reactions to new policy in addition to the positions of lobby groups vis-a-vis the Ministry. The public exercise the ultimate constraint on the Ministry, for i f they become dissatisfied with policies, they hold the power in a democratic society to elect a new government. Environmental constraints likely to affect MOH functioning have been merely highlighted here in order to illustrate the treacherous path - 72 -that the MOH must walk in order to achieve its goals. Root Definition The MOH system is a p o l i t i c a l and bureaucratic organization that is publicly accountable for seeking value for money in the provision of quality and accessible health care services for the population of B.C. - 73 -FOOTNOTES Refer to discussion in Carolyn J . Tuohy and Alan D. Wolfson, "The P o l i t i c a l Economy of Professionalism: A Perspective" in Four  Perspectives of Professionalism, ed. M.J. T r e i l c o c k (Ottawa: Consumer Research Council of Canada, 1977), pp.59-61. Once a province determines that regulation i s necessary for the protection of consumer i n t e r e s t s , i t has the choice of exercising regulatory authority d i r e c t l y or delegating i t to an i n s t i t u t i o n representing providers of the service. Like a consumer, i t w i l l seek to maximize i t s benefits subject to cost constraints. To regulate e f f e c t i v e l y the province would have to access the s p e c i a l i z e d body of knowledge of the provider group and incur the costs of mastering such knowledge. Then, i t would need to e s t a b l i s h i n s t i t u t i o n s and h i r e expensive personnel to enforce the regulations which may create d i f f i c u l t i e s for gaining compliance from the group. Consequently, the costs incurred from delegating s e l f - r e g u l a t i n g authority may be more at t r a c t i v e than those of d i r e c t regulation to a p r o v i n c i a l government. James R. Seldon, "Physician P r i c i n g and Practice Style in the East South Central Census D i v i s i o n " Mid South Journal of Economics, 7 (1983):123-130 as quoted in Greg L. Stoddart and James R. Seldon, " P u b l i c l y Financed Competition in Canadian Health Care Delivery: A Viable A l t e r n a t i v e to Increased Regulation?" i n Proceedings of the Second Canadian Conference on Health Economics, ed. J.A. Boan (Reg in a, Saskatchewan: The U n i v e r s i t y of Regina, 1984), p.122. Robert G. Evans, Strained Mercy: The Economics of Canadian Health Care, (Toronto: Butterworth and Co. L t d . , 1984), p.75. ~ Jonathan Lomas, F i r s t and Foremost in Community Health Centres:  The Centre in Sault Ste. Marie and the CHC A l t e r n a t i v e , (Toronto: Uni v e r s i t y of Toronto Press, 1985), p.129-30. Carolyn Tuohy, "Smoke and Mirrors: Professional Ideology and Symbolism in Health P o l i c y " paper presented to the Conference on Health in the 80's and 90's and I t s Impact on Health Services Education, Montebello, Quebec, March 1982, p.185. Wayne C. Menke, "Professional Values in Medical P r a c t i c e " The New  England Journal of Medicine 280 ( A p r i l 24, 1969) :930-936. Bernard R. Blishen, Doctors and Doctrines: The Ideology of the Medical Profession, (Toronto: University of Toronto Press, 1969), p.154. - 74 -8. Hospital Act, R. S.-.B.C., 1979, c.176. 9. Gi l b e r t Sharpe and Glenn Sawyer, Doctors and the Law, (Toronto: Butterworths, 1978), p.87. 10. Canada, Task Force Reports on the Cost of Health Services in Canada:  Summary, (Ottawa: Information Canada, 1970). 11. G. Harvey Agnew, Canadian Hospitals 1920 to 1970: A Dramatic  Half Century, (Toronto and Buffalo: U n i v e r s i t y of Toronto Press, 1974), p.35. 12. See for example Al l a n S. Detsky, Sidney R. Stacey and C l a i r e Bombardier, "The Effectiveness of a Regulatory Strategy i n Containing Hospital Costs" New England Journal of Medicine 309 (July 21, 1983) :158 and the discussion on "Capacity, 'prices' and U t i l i z a t i o n in the Hospital Services Sector 1946 - 1983" in Morris L. Barer and Robert G. Evans, "Riding North on a South-Bound Horse? Expenditures, P r i c e s , U t i l i z a t i o n and Incomes in the Canadian Health Care System" paper presented for the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, August 26-31, 1984. 13. Carolyn Tuohy, " C o n f l i c t and Accommodation in the Canadian Health Care System" paper presented at the Health P o l i c y Conference on Canada's National Health Care System, Banff, Alberta, August 30, 1984, p.30. 14. Robert G. Evans, "Health Care i n Canada: Patterns of Funding and Regulation", Journal of Health P o l i t i c s , P o l i c y and Law 8 (Spring 1983) :34. 15. Harvey L. Smith, "Two Lines of Authority: The Hospitals Dilemma" In Patients, Physicians and I l l n e s s , ed. E. Gartly Jaco (Glencoe: The Free Press, 1958), p.470. ' 16. Charles Perrow, "Hospitals: Technology, Structure and Goals", in Handbook of Organizations, ed. James G. March (Chicago: Rand McNally and Company,1965),p.965. 17. J e f f r e y E. H a r r i s , The B e l l Journal of Economics 7 (Spring 1976) :342. - 75 -18. Province of B r i t i s h Columbia, M i n i s t r y of Health.Annual Report 1983, p.43. This figure i s derived from the d e t a i l e d expenditures by p r i n c i p a l categories in the M i n i s t r y of Health for the f i s c a l year 1982/83. Since premium revenues are excluded, the figure represents expenditures without adjustment for revenues. 19. A C o l l e c t i o n of Occasional Papers, "Health P o l i c y Making i n B.C. -1 A Sudden S h i f t in Perception", Health Management Forum (Autumn 1982), :31. 20. Eugene Vayda, Robert G. Evans and William R. Mindell. "Universal Health Insurance in Canada: History, Problems, Trends", Journal of Community  Health 4 (Spring 1979) :224. 21. Eugene Vayda, "Universal Hospital and Medical Care Insurance in Canada: U t i l i z a t i o n and Cost Performance", paper presented at 108th Annual Meeting, American Public Health Association, Det r o i t , Michigan, October 21, 1980, pp.2-3. 22. Robert G. Evans, "Beyond the Medical Marketplace: Expenditure, U t i l i z a t i o n and P r i c i n g of Insured Health in Canada" in National Health  Insurance: Can We Learn From Canada?, ed. Spyros Andreopou'los (New York -Toronto: John Wiley and Sons, 1975), p.130. 23. See note 10 Canada, Task Force Reports and Canada, The Community Health  Centre in Canada V o l s . I - I I I (Ottawa: Information Canada, 1972). 24. Marc Lalonde, Minister of National Health and Welfare, A New Perspective  On the Health of Canadians, (Ottawa: Health and Welfare Canada, 1974). 25. Canada, Federal-Provincial F i s c a l Arrangements and Established Programs  Financing Act, v1977 . 26. See Canada, Royal Commission Report, Canada's National-Provincial Health Program for the E i g h t i e s , (Saskatoon: Health Services Review, 1979, 1980); Canada, Parliamentary Task Force on F e d e r a l - P r o v i n c i a l F i s c a l Arrangements Report, F i s c a l Federalism in Canada, (Ottawa: Information Canada, 1981); and Statutes of Canada, Canada Health Act, 1984. - 75a -27. Anne Crichton, "Health P o l i c i e s i n Canada, 1984: S t a b i l i t y and Change", paper presented at a continuing education workshop "Downsizing: Policy Implications for Health Administrators", U n i v e r s i t y of B r i t i s h Columbia, Vancouver, November 15-16, 1984, p.10. 28. Presentation by Paul P a l l a n , Director of P o l i c y , B.C. Ministry of Health at a continuing education workshop "Downsizing: Policy Implications For Health Administrators", U n i v e r s i t y of B r i t i s h Columbia, Vancouver, November 16, 1984. 29. Robert H. Miles, Macro Organizational Behaviour, (Santa Monica, C a l i f o r n i a : Goodyear Publishing, 1980), p.375. - 76 -SECTION III: STAGE 4 MODEL BUILDING Section I has described the problem situation of increased expenditures for health care services in B.C. from .the Ministry perspective in addition to clarifying the client's roles in that situation. Section II then identified systems relevant to the problem situation and attempted to understand their particular perspectives. The purpose of section III is to assimilate this information and develop a model for change, as outlined in Stage 4 of the methodology, that should improve the problem situation. Within the frame of reference of this study, the client has expressed specific interest in the HMO model as a possible solution to the problem situation. Therefore, rather than developing a model from the problem solving process which is unique to this situation, the HMO model wi l l be explored in Part A: Understanding the HMO Model which includes chapters 6 through 11. Since this exploration will necessarily be a description of the HMO model in it s American context and since this study is concerned with the possible application of this model in B.C., Canadian experience with alternate forms of medical care practice relevant to the HMO model will be interspersed throughout the discussion. Part B: Accommodating the HMO Model involves stage 4B of the methodology which considers modifications of the model to fac i l i t a t e accommodation to the particular problem situation. Thus, chapter 12 looks at various aspects of the HMO model and issues surrounding i t s accommodation to the health care structures of B.C. - 77 -PART A: UNDERSTANDING THE HMO MODEL CHAPTER 6 THE HMO MODEL INTRODUCTION Health maintenance organizations, as noted e a r l i e r , evolved from the concept of PGP. The report of the Committee on the Costs of Medical Care in the early 1930's was the f i r s t o f f i c i a l l egitimation of t h i s concept. It argued: "that the union of prepaid financing with physicians' group practice was the most r a t i o n a l response to the economic uncertainties of the Depression and to the powerful forces of ^ s p e c i a l i z a t i o n and technological development in medical science" . The medical profession, h i s t o r i c a l l y , has viewed PGP as a contentious deviation from the t r a d i t i o n a l FFS practice of medicine. Despite t h i s resistance, PGP gradually gained s o c i a l acceptance during the 1950's and 1960's, often by providing services in underserviced areas. Experience, in general, showed that PGPs were able to provide good quality medical care for lower than prevailing average costs of FFS pract i c e . Following the introduction of Medicare and Medicaid l e g i s l a t i o n in 1965, the U.S. federal government became a purchaser of health care services, thereby becoming acutely aware of the increasing costs of such services. As a r e s u l t , a report on The Federal Role in Health, in 1970, c a l l e d for the government to r a t i o n a l i z e resources i n the health sector, and c r i t i c i z e d the lack of a national health p o l i c y . Momentum was building for a "health care c r i s i s " . Baumann has commented that the pressures of r i s i n g costs, the growing p o l i t i c a l l y a r t i c u l a t e d perception of health "as a r i g h t " by the public, and the widespread recognition that more d o l l a r s would do more harm than good unless - 78 -c h a n n e l l e d to a f f e c t the o r g a n i z a t i o n o f r e s o u r c e s , l e d to the c r e a t i o n o f a 2 c r i t i c a l mass s u p p o r t i v e o f a c t i v i s m and change i n the h e a l t h c a r e system . Given the immediate need to respond to t h i s c h a l l e n g e , the HMO s t r a t e g y i n t r o d u c e d i n P r e s i d e n t Nixon's 1971 h e a l t h message to Congress was both t i m e l y and p r a c t i c a l . Dr. P a u l E l l w o o d had c o i n e d the phrase " h e a l t h maintenance o r g a n i z a t i o n " i n 1970, as a way o f r e c a s t i n g the l o g i c o f PGP and g i v i n g i t p o l i t i c a l v i a b i l i t y . The term i n t e n t i o n a l l y emphasized p r e v e n t i o n and h e a l t h maintenance i n o r d e r t o d e t e r the wrath o f the m e d i c a l p r o f e s s i o n a s s o c i a t e d w i t h PGP. As the c o r n e r s t o n e o f a n a t i o n a l h e a l t h s t r a t e g y , E l l w o o d f e l t HMOs would r e - o r i e n t the h e a l t h i n d u s t r y , due to t h e i r l a r g e l y s e l f - r e g u l a t i n g n a t u r e which was based on the market p r i n c i p l e s o f c o m p e t i t i o n and p l u r a l i s t 3 . . c h o i c e . The s t r a t e g y had enormous i d e o l o g i c a l appeal to p o l i t i c a l c o n s e r v a t i v e s anxious to decrease r e g u l a t i o n . C o n s e q u e n t l y , t h e HMO A c t o f 1973, gave l e g i t i m a c y t o HMOs as a s t r u c t u r e i n the American h e a l t h c a r e system. What emerged from t h i s p r o c e s s were two d i s t i n c t i s s u e s . F i r s t , a d i s c u s s i o n d e v e l o p e d o f the HMO concept as an e f f i c i e n t form o f o r g a n i z a t i o n f o r d e l i v e r i n g q u a l i t y h e a l t h c a r e s e r v i c e s at lower c o s t s d e v e l o p e d . Second, the c h a l l e n g e o f re s p o n d i n g to a c r i s i s p l a c e d t h e HMO s t r a t e g y on the p o l i t i c a l agenda as a p o s s i b l e c a t a l y s t f o r r e s t r u c t u r i n g the h e a l t h c a r e system. The p r o c e s s , however, caused a b l u r r i n g o f these i s s u e s , s i n c e the p o l i t i c a l r h e t o r i c about HMOs o f t e n c l o u d e d and co n f u s e d an u n d e r s t a n d i n g o f the r e a l i t y o f the f u n c t i o n i n g o f an HMO. T h e r e f o r e , the f o l l o w i n g d i s c u s s i o n w i l l t r y to s i f t r h e t o r i c from r e a l i t y by d e s c r i b i n g , f i r s t the s t r u c t u r e and performance o f the HMO, and then the p o l i c y s t r a t e g y o f u s i n g HMO's as an inst r u m e n t f o r restructuring. The selection of factors included in the prejudiced in favour of factors likely to be relevant to discussion w i l l be the Canadian context. PROBLEMS OF DEFINITION Health maintenance organization is a vague term that challenges precise definition. The term is an attempt to cl a r i f y a highly complex organization that links a financial mechanism with a particular mode of health care delivery that facilitates the vertical integration of medical and hospital care services. In theory, the HMO is able to place greater emphasis on preventive care because i t offers different financial incentives to providers. The lack of specificity in the term, however, has made i t vulnerable to a variety of interpretations. Some would equate the term with PGP, as characterized by the Kaiser Health . . . . 4 Plan. Others would refer to the legislative definition in the HMO Act , but this was so restrictive i n i t i a l l y that i t excluded many organizations considered as HMOs and required successive amendments. The origins of the term, in p o l i t i c a l rhetoric, reflected an emphasis on meeting p o l i t i c a l objectives rather than defining a form of organization. Depending on the perspective, be it p o l i t i c a l , economic, legal or professional, the definition is likely to differ. In an attempt to gain an objective perspective on HMOs, generic elements common to a l l HMOs and the relationship between these elements w i l l be described, and then their variant characteristics w i l l be identified. - 80 -GENERIC ELEMENTS A. The HMO assumes contractual responsibility to provide or assure the delivery of a stated basic range of health services. This includes at least ambulatory care and inpatient hospital services. B. The HMO services a population defined by enrolment in i t s health plan. C. Subscriber enrolment is voluntary. D. The consumer pays a fixed annual or monthly payment that is independent of the use of services. (This does not exclude the possibility of minor charges related to ut i l i z a t i o n , e.g. deductibles or co-payments). E. The HMO assumes at least part of the financial risk or gain associated with the provision of services"*. These basic elements provide the grounds from which an HMO can be di s t i n -guished from other forms of health service delivery. At the same time, there may be variation above these minimal expectations across HMOs. For example, some HMOs may provide more than basic services, i f there is a demand in the area or some may vary the degree of financial risk they assume. RELATIONSHIPS BETWEEN GENERIC ELEMENTS Having established some baseline cr the relationships between these elements gives meaning to these relationships, as sense is defined as the possibility that cover expenditures incurred in the deliv contract with the enrollee (n.4 p.125). i t e r i a , i t is important to understand In this case, risk is the theme that illustrated in figure 4. Risk in this revenues will not be sufficient to ery of services specified in the - 81 -Figure 4 Relationship Between the Generic Elements of an HMO Risk Pooling Voluntarily enrolled population HMO HMO Risk Management Management Control Underwriting Financial Planning Incentive/ Risk Sharing RISK POOLING - THE ENROLLED POPULATION The voluntarily enrolled population chooses the HMO as a source of health care during a period of open enrolment conducted by the HMO. Individuals or families can enrol directly with the HMO. Most frequently, however, enrolment is done through an employer who has a group contract with the HMO to provide services to employees and their families. Under the HMO Act, an employer with twenty-five or more employees must offer an HMO as an alternative to other health programs funded by the employer. The Act requires this only i f there is a federally qualified HMO in the area. But i f there is a federally qualified group practice HMO and an Individual Practice Association (IPA) HMO in the same area, regulations require that both be offered as options to employees. It is possible that federally non-qualified HMOs could be included in this choice, in certain circumstances. Accordingly, the employee is assured of at least a dual choice situation and, conceivably, multiple choices. With a group contract, the employer often pays part or a l l of the premium, making the enrollee less sensitive to the cost of purchasing HMO services. For the individual or family, enrolment means that they have a legal right to expect necessary health care services to be provided by the HMO^ , whereas under the FFS system, the provider is under no obligation other than an - 82 -ethical responsibility to provide service. Enrollees, then, are assured access to health care services within the boundaries of their benefit package. While a comprehensive benefit package is likely to cover the greater majority of health risks, there may be some residual risks that will remain the responsibility of enrollees. They may need to self-insure against such risks and, i f necessary, assume the costs of out of plan services. With some HMO services, there may be co-payments or deductibles requiring enrollees to pay out-of-pocket costs above the basic premium. These additional payments are made on the receipt of services and are set in accordance with regulations of the HMO Act. These payments would not be permitted under the regulations of the Act i f they were viewed as a deterrent to seeking health care services (n.4 p.53). Co-payments and deductibles charged by HMOs tend to be lower than those charged by traditional insurers although this situation may be g rapidly changing due to more intense competitive pressure on HMOs . In general, enrollees would receive the majority of their health care from the HMO, but Medicaid recipients may be exceptions. When Medicaid recipients choose HMO enrolment, they normally forfeit their e l i g i b i l i t y to see FFS practitioners. Often bureaucratic complications arise so the Medicaid recipient may be simultaneously eligible for both FFS and HMO services. Until the situation is corrected, these enrollees may use out of plan FFS practitioners in addition to HMO services at no cost to themselves (n.7 p.324). Having an enrolled population, the HMO knows for whom i t is obligated- to provide service. The risks of the population are pooled, combining both high and low risk factors such as age, sex, socio-economic status, occupation and disease risk. The dual choice provision of the HMO Act requires that an HMO be - 83 -offered as a health care a l t e r n a t i v e to employees in ce r t a i n circumstances. This option may bias HMO enrolment in favour of employed populations as i t f a c i l i t a t e s t h e i r marketing to industry. Since employed populations are l i k e l y to be h e a l t h i e r than unemployed populations, the r i s k assumed by the HMO may be reduced. In 1983, 12,490,780 Americans were enrolled i n HMOs, of that number, the e l d e r l y and poor were s i g n i f i c a n t l y under-represented with 492,035 Medicare 9 enrollees and 258,272 Medicaid enrollees . To be f a i r to HMOs, problems of retrospective cost reimbursement from the Medicare and Medicaid programs have contributed to the low numbers. Nonetheless, a bias in population composition may have implications for the evaluation of HMO performance. In any event, the defining of a population through enrolment allows the HMO to plan f i n a n c i a l l y , since i t can estimate to some extent the demand for service. Furthermore, voluntary enrolment places the HMO under competitive pressure to meet the demands of i t s consumer population while containing costs so that premiums can remain competitive in the marketplace. Unless these conditions are met, enrollees may be encouraged to seek services elsewhere. RISK TRANSFER - THE CONTRACTUAL RESPONSIBILITY The P o l i c y By e n r o l l i n g i n an HMO, consumers transfer t h e i r r i s k of incurring costs through occurrence of i l l n e s s to the organization, expecting some guarantee of service d e l i v e r y i n such an event. This r i s k transfer i s formalized i n a policy o u t l i n i n g the ob l i g a t i o n s of both the po l i c y holder and the HMO. It describes the coverage to be provided by the HMO and the premium l e v e l to be prepaid by - 84 -the consumer for the a v a i l a b i l i t y of a certain range of services that may be needed at some future date. If consumers enrol d i r e c t l y with the HMO, they are the policyholders. But, i f enrolment occurs through a group, such as an employer or union, repre-sentatives of that group are the policyholders. In t h i s case, the i n d i v i d u a l consumer i s not the po l i c y holder but has a signed enrolment agreement and i s given a brochure d e t a i l i n g benefits and exclusions. Problems can arise here, i f benefits and exclusions are not f u l l y described or adequately communicated to the e n r o l l e e . This kind of s i t u a t i o n can r e s u l t , among other things, from overly aggressive marketing techniques. Benefits The following discussion regarding benefits and premiums w i l l focus on the requirements of the HMO Act. Since 59% of HMOs in the United States are fed e r a l l y qualified*^*, i t was f e l t that the federal guidelines would o f f e r the most representative p i c t u r e . Nevertheless, i t i s acknowledged that non-q u a l i f i e d HMOs may deviate from these norms. The HMO Act requires a very comprehensive benefit package as a prerequisite to q u a l i f i c a t i o n . It l i s t s basic health services that must be provided by every HMO, in addition to a broad range of supplemental services to be offered at the option of the HMO. When basic services (and supplemental services i f contracted for) are medically necessary, they must be available and accessible twenty-four hours a day, seven days a week. I f enrollees become i l l outside t h e i r HMO area they must be reimbursed by t h e i r HMO for any expenses incurred for medically-necessary services obtained in that location before they are able to return to - 85 -their HMO for service. These regulations are intended to assure that consumers will obtain needed services in an appropriate and convenient manner. The basic health services defined by the HMO Act a r e ^ : 1. Physicians' services (including consultant and referral services by a physician) 2. Inpatient and outpatient hospital services 3. Medically necessary emergency health services 4. Short-term (not to exceed 20 v i s i t s ) outpatient evaluative and crisis-intervention mental health services 5. Medical treatment and referral services (including referral services to appropriate ancillary services) for the abuse .of or addiction to alcohol and drugs 6. Diagnostic laboratory and diagnostic and therapeutic radiologic services 7. Home health services 8. Preventive health services (including immunizations, well-child care from birth, periodic health examinations for adults, voluntary family planning services, i n f e r t i l i t y services, children's ear examinations, and children's eye examinations to determine the need for vision correction) If the necessary health manpower is available and i f enrollees contract for such services, the following supplemental services may be included as part of the basic package, at the option of the HMO ( n . l l p.53). 1. Services of intermediate and long-term care f a c i l i t i e s 2. Vision care not included as a basic health service 3. Dental services not included as a basic health service 4. Mental health services not included as a basic health service 5. Long-term physical medicine and rehabilitative services, including physical therapy 6. Drugs prescribed in connection with the provision of basic or supplemental health services Premiums Premiums are fixed payments made annually or monthly to the HMO by enrollees, independent of the use of services and exclusive of co-payments or - 86 -deductibles. This fixed pre-payment reduces the f i n a n c i a l b a r r i e r s to enrollees seeking care. The HMO Act requires that premiums for both basic and supplemen-t a l services be determined uniformly under a community-rating system in an HMO. Community rating i s a system that accounts for the t o t a l experience (or projected use l e v e l ) of the enrollees and uses such data to determine a c a p i t a -t i o n rate that i s common to a l l groups, regardless of the u t i l i z a t i o n experience of an i n d i v i d u a l or of any one group (n.4 p.324). This system spreads costs over the t o t a l membership of the HMO. Thus, each person or family enrolled under a s p e c i f i c benefit package should pay exactly the same premium. Under t h i s system, the ca p i t a t i o n rate i s equivalent to the premium, whereas other rating systems might adjust the capitation rate by adding load factors and charging premiums based on previous u t i l i z a t i o n experience. Some non-qualified HMOs may use an experience-rating system. This i s not to say, however, that every enrollee in an HMO pays the same premium. Premiums vary according to the benefit packages a v a i l a b l e . In addition, the l e g i s l a t i o n allows for small nominal d i f f e r e n t i a l s i n premiums among the multiple groups to which HMOs market to encourage HMO enrolment. Owing to the fact that HMOs operate in a competitive marketplace, premiums between HMOs may vary as well. S i m i l a r l y , HMOs compete with t r a d i t i o n a l health insurers who can o f f e r lower premiums for less comprehensive benefits but add co-payments and deductibles. Young, healthy consumers, with lower health r i s k s may be attracted to these plans with r e s t r i c t e d benefits and lower premiums. As a r e s u l t , the HMO may absorb a remaining consumer population with possibly higher r i s k s . Evidence suggests that t o t a l medical care expenditures which - 87 -include premiums and out of pocket costs are lower for HMO enrollees than for . . . 12 people with conventional insurance RISK MANAGEMENT - UNDERWRITING AND RISK SHARING Health maintenance organizations are not only health service delivery mechanisms but also insurers for those who seek t h e i r services (n.4 p.166) as i l l u s t r a t e d below. Figure 5 HMO Insurer - Provider Relationship HMO INSURER & PROVIDER \ RECEIVE A CONTRACT FOR A COMPREHENSIVE BENEFIT PACKAGE PAY A FIXED PREMIUM ENROL THROUGH EMPLOYER GROUP OR DIRECTLY WITH HMO \ HEALTH CARE SE RVICEDELIVE RY INDIVIDUALS & FAMILIES HOSPITAL ANCILLIARY 'MEDICAL CARE SERVICES CARE NEEDED SERVICES ACCORDING TO BENEFIT PACKAGE Underwriting The insurance functions of r i s k management are necessary for the HMO to attain f i n a n c i a l s t a b i l i t y . Like other health insurers, an HMO o f f e r s indemnity or protection to i t s enrollees against loss due to the costs of health care 13 services in the event of i l l n e s s . Having assumed t h i s r i s k , an HMO seeks to arrange the d i s t r i b u t i o n of r i s k among i t s various components in order to exert control over the degree of r i s k that i t i s w i l l i n g to assume. Underwriting i s the process by which r i s k in the enrolled population i s determined and evaluated. A c t u a r i a l analyses which involve the c a l c u l a t i o n of - 88 -premium rates are associated with the underwriting process. However, HMOs may choose to contract out a c t u a r i a l analyses to insurance companies with expertise in t h i s area, rather than bringing a c t u a r i a l expertise into the HMO. The choice tends to depend on the stage of development of the HMO. The c e n t r a l a c t i v i t i e s of the HMO associated with underwriting are market-ing, and f i n a n c i a l planning which involves the analyses of need, demand, capacity and flow of funds. Each HMO board determines several underwriting assumptions or rules that describe the general a c c e p t a b i l i t y of r i s k s . These rules govern the sel e c t i o n of target groups to which the HMO markets i t s services. The rules might consider such things as size and composition of the group, industry or type of company, l o c a t i o n , or previous coverage experience of the group. Like the a c t u a r i a l function, some HMOs may contract out marketing to an insurance company rather than perform the function i t s e l f . Through marketing to selected target groups and setting premium rates, the HMO s t r i v e s to manage the r i s k associated with i t s enrolled population. The HMO Act, moreover, recognizes the need to protect the consumer and the HMO from f i n a n c i a l d i s a s t e r caused by large and unusual expenses or losses. Hence, i t provides for a reinsurance mechanism, in order to avoid any temptation to the HMO to provide less or lower quality service as a means of protecting i t s reserv es. Reinsurance permits any organization serving an insurance function, which an HMO does through i t s f i n a n c i a l o bligations to provide services for a fixed premium, to purchase insurance from another company to protect i t s e l f against excessive losses (n.7 p.9). For example, the HMO might reinsure to cover expenses above $5,000 per enrollee per year or i t might reinsure for c e r t a i n - 89 -groups such as Medicaid en r o l l e e s . Reinsurance may be more a necessity for new developing HMOs than for established ones. Older HMOs are l i k e l y to have larger reserves and to pool more r i s k s so that they are less vulnerable to a few large losses. To s e l f insure against such losses i s probably p r e f e r e n t i a l to t h e i r paying expensive reinsurance premiums to outside insurers which then would have to be factored into premium rates. Since a generic element of an HMO i s to accept at least part of the o v e r a l l f i n a n c i a l r i s k or gain, r i s k cannot be sh i f t e d t o t a l l y to an external t h i r d party through reinsurance. The HMO Act sp e c i f i e s l i m i t s for reinsurance coverage for f e d e r a l l y q u a l i f i e d HMOs. Risk Sharing/Incentives The fixed prepayment made to the HMO could o f f e r an incentive for enrollees to use services as i t reduces f i n a n c i a l b a r r i e r s to seeking care. The HMO, however, operates on a fixed budget derived largely from premiums, so providing more service w i l l not increase revenue. Thus, the HMO has an incentive to reduce service u t i l i z a t i o n and contain costs. To ensure the achievement of these obj e c t i v e s , the HMO can structure i n t e r n a l incentives for r i s k sharing among i t s major provider components: the insurance plan, the physicians, and the h o s p i t a l . Each of these components may be a separate le g a l e n t i t y with which the HMO contracts, or i t may be part of the HMO structure. The p a r t i c u l a r organizational arrangements do have some impact on r i s k sharing. Incentives and risk-sharing formulae serve to increase the integration of these components. For example, some r i s k i s shared with enrollees through the cost of premiums but the insurance plan must be able to market competitive premiums to maintain enrolment. The most expensive service offered by the HMO - 90 -i s inpatient h o s p i t a l care, which, in other s t r u c t u r a l s i t u a t i o n s , i s known to be a s i g n i f i c a n t area of unnecessary u t i l i z a t i o n (See n.4 and n.7). I f physicians use h o s p i t a l services unnecessarily for enrol l e e s , h o s p i t a l costs to the HMO w i l l increase. In turn, the cost of premiums w i l l be forced up>, making the HMO less competitive, whereby i t w i l l lose enrollees and i t s f i n a n c i a l position w i l l be weakened. One of the key philosophical issues that has been associated with HMOs has been r i s k sharing through provider incentives to control excess u t i l i z a t i o n and encourage the e f f i c i e n t use of f a c i l i t i e s and resources. These incentives take the form of payment mechanisms which give physicians a f i n a n c i a l stake i n the operation of the insurance plan. The payment mechanisms w i l l be discussed l a t e r at length. Suffice to mention at t h i s point that c a p i t a t i o n and salary, often in combination with a formula for p r o f i t sharing, are the most common methods. While physicians are given incentives to control h o s p i t a l use, the HMO, s i m i l a r l y , provides incentives to h o s p i t a l s to contain costs through payment mechanisms and competitive pressure. In general, HMOs contract with independent h o s p i t a l s for the use of inpatient f a c i l i t i e s and, in some cases, for outpatient diagnostic and treatment services. I f possible, the HMO s t r i v e s to reach a fixed cost payment agreement for h o s p i t a l services, then, the h o s p i t a l accepts the r i s k for excessive costs or i n e f f i c i e n c i e s i n so far as these f a l l within i t s domain. Again, these s p e c i f i c h o s p i t a l payment mechanisms w i l l be discussed l a t e r in d e t a i l . Also, should the price of ho s p i t a l services not remain competitive, the HMO might trans f e r i t s contract to another h o s p i t a l or might choose to provide the service i t s e l f , h o s p i t a l to the f i n a n c i a l operation of 91 -These incentives, the HMO. accordingly, t i e the MANAGEMENT CONTROL The primary method of administrative control in the HMO i s f i n a n c i a l management that addresses both the short and long term. The f i n a n c i a l tools of budgeting, a c t u a r i a l analysis, underwriting, cash flow, and r a t i o analysis bring the various components of the HMO together, giving the manager a basis to control as well as evaluate HMO a c t i v i t i e s . However, f i n a n c i a l planning assumptions, consistent with the HMO's objec t i v e s , need to be developed as guidelines to c o n t r o l l i n g r i s k . Frequently, these include: decisions about s t a f f i n g r a t i o s , for example, the numbers of physicians or nurses r e l a t i v e to the number of enrollees; assumptions about l e v e l , type and sharing of r i s k ; projected u t i l i z a t i o n rates; and assumptions about l o c a l morbidity, mortality, and d i s a b i l i t y rates (n.4 p.340). Several models of f i n a n c i a l planning are available to the HMO. Figure 6 o u t l i n e s one p o s s i b i l i t y . Each model, e s s e n t i a l l y , develops estimates of costs, including medical care, h o s p i t a l care and administration. Costs are then compared with revenue from various sources: premiums, fe e s - f o r - s e r v i c e , co-payments, sales of drugs and supplies, and government loans or grants. This process f a c i l i t a t e s a cash flow analysis to determine the f i n a n c i a l solvency of the organization. With t h i s type of analysis, the administrator i s able to gain greater control over resources so that they can be allocated in such a way as to Figure 6 An Example of a Fi n a n c i a l Planning Process i n an HMO A 1 A 3 A 3 Data Collection Stgmtnt Popultiion Targat Population Eitimata Population Markat Analysll A. Naad/Ocrnand Computa Consumption lUlilitationl Project Encounter Laval B I 82 Underwriting md Actuarial Analysis 111 Pro|»et Proiact Resource* Resources Coniumtd Avallabla B. Capacity B3 Financial Analyilt C-t ca Calculata Oparatlng Cost* Prolan Oliburtamtnt C-B C-3 C4 Calculata Oparatlng Ravanua Pro|act Oparatlng Racalpta Proiact Nat Oper-•ting Cash Flow* C-7 c-e Proiact Nat Total Cash Flow Idantlly Sourcai of Nonoparating Receipts C. Funds Flow Source: Adapted from Boston Consulting Group, Inc. Fi n a n c i a l Planning i n Ambulatory Health Programs, Rock v i l l e , Md., National Centre for Health Services Research and Development, Health Services and Mental Health Administration, U.S. Department of Health, Education and Welfare, 1973, pp.12-13/ DHEW Publ. No. (HRA) 74-3027. In Robert G. Shouldice and Katherine H. Shouldice, Medical Group  Pra c t i c e and Health Maintenance Organizations, (Washington, D.C: Information Resources Press, . 1978) p.212. - 9 3 -optimize organizational performance within the constraints of a relatively fixed revenue base. In summary, the HMO creates a health care delivery system bounded by financial imperative. Because of a defined population with a contract for a specified range of services, staff resources, for example, physician availability and bed capacity in f a c i l i t i e s , can be more effici e n t l y allocated. In addition, the incentives offered to providers may improve the technical efficiency of the provision of necessary care to the enrolled population. Furthermore, the tight integration of the financial insurance mechanism with the service delivery components encourages stronger administrative control of resources and greater accountability for performance. COMPARABLE CANADIAN MODELS The HMO model developed in the context of a largely private and competitive market for health care services. Entrepreneurs, challenged by competition and pluralism, took the ini t i a t i v e to develop HMOs in response to expressed needs and demands for alternative forms of health care delivery to the traditional FFS system. The market structure created by the Canadian publicly funded universal health insurance program, in contrast, offers few incentives for experimentation with alternate forms of health care delivery to providers or consumers. Although the program has substantial public and p o l i t i c a l support, i t has become increasingly costly. This has prompted government interest from time to.time in alternate forms of health care delivery as a means of controlling costs. - 94 -The Community Health Centre Project in 1972 was a federal government . . . 14 i n i t i a t i v e towards support for alternate forms of health care delivery It proposed the restructuring of primary care medical services through the development of CHCs as non-profit organizations linked with the h o s p i t a l and other health services in a f u l l y integrated health services system. Centres were to receive global or block funding and c i t i z e n boards would be accountable for these funds. The concept advocated a m u l t i d i s c i p l i n a r y team approach to service delivery but recognized the need for a l t e r n a t i v e payment mechanisms to FFS to make t h i s v i a b l e . Stimulated by t h i s climate of reform, the NDP government elected in B.C. in 1972, i n i t i a t e d the development of four CHRHCs that c l o s e l y resembled the model described by Hastings in the Community Health Centre Report. The goal of these centres was to integrate primary medical care, public health nursing, s o c i a l and mental health services at the l o c a l l e v e l in order to f a c i l i t a t e community p a r t i c i p a t i o n and decision-making. They were to be the cornerstone of the Foulkes plan for restructuring health care services in B.C.*"* but t h i s plan dissolved with the NDP government in 1975. The thrust of the CHC model generally was toward improving a c c e s s i b i l i t y to services and a l t e r i n g the style of medical care p r a c t i c e . The b e l i e f was that by changing the payment mechanism to physicians, in combination with a team approach to d e l i v e r i n g care, incentives would be offered to provide preventive care and decrease h o s p i t a l i z a t i o n , thus costs would be reduced. The HMO had s i m i l a r b e l i e f s but the context of a competitive health care market caused i t also to have a strong in t e r e s t in f i n a n c i a l management and cost c o n t r o l . The closest Canadian comparison to an HMO is the Sault Ste. Marie and District Group Health Association (GHA) in Ontario, established in 1962 by the steel workers union on a PGP model similar to Kaiser plans in the United States. At that time, the universal medical care insurance program had not been introduced but the hospital insurance program was in effect. Union members had the choice of enrolling in a pre-paid medical plan that entitled them and their families to receive medical care from physicians employed by the health centre. Unless referred by centre physicians, enrollees were responsible for the costs of out of plan use. I n i t i a l l y , the centre operated successfully on a prospective financial base derived from pre-paid premiums. Despite evidence showing decreased hospitalization rates for i t s population*^, the centre did not share these savings as a result of no linkage to the hospital insurance program. After the introduction of publicly-funded medical care insurance in 1969 in Ontario, the centre shifted to a capitation rate paid prospectively by the provincial health Ministry*^. Because of the principles of universality and accessibility upheld by the insurance program, enrollees could now use out of plan services with no penalty. However, the organization had to pay for unauthorized out of plan use from i t s capitation rate. Lomas has documented the torturous process of negotiations between the Ministry and the centre over the years which has eventually resulted in improved arrangements. Today, the centre is part of a health service organization (HSO) program of the Ontario Ministry of Health. Medical practices that choose to participate in this program are reimbursed at a capitation rate for rostered patients rather than by FFS. The HSO capitation rate for individual patients can be negated, i f rostered patients - 96 -use o u t s i d e s e r v i c e s without r e f e r r a l but t h e r e i s no p e n a l t y to i n d i v i d u a l p a t i e n t s . Within the c o n t e x t o f a p u b l i c l y funded h e a l t h i n s u r a n c e program, the HSO program appears to move somewhat i n the d i r e c t i o n o f an HMO. In g e n e r a l , these Canadian models are c h a r a c t e r i z e d by emphasis on the s t y l e o f m e d i c a l care p r a c t i c e with s i g n i f i c a n t l y weaker concern f o r i n t e g r a t i o n with h o s p i t a l s e r v i c e s than i s e v i d e n t i n the HMO. The f u n d i n g o f these models i s d e r i v e d e s s e n t i a l l y from m i n i s t r y c o f f e r s and i s d i s a s s o c i a t e d from revenue p a i d through premiums and t a x e s by consumers who use t h a t p a r t i c u l a r s e r v i c e . While the i n s u r a n c e mechanism i s w e l l i n t e g r a t e d w i t h the s e r v i c e d e l i v e r y components o f the HMO, the l i n k a g e i s v e r y l o o s e i n the Canadian models, p a r t i c u l a r l y l i n k a g e w i t h h o s p i t a l c a r e . FOOTNOTES M e d i c a l Care f o r the American P e o p l e : The F i n a l Report o f the Committee  on the C o s t s o f M e d i c a l C a r e , Committee P u b l i c a t i o n 28, U n i v e r s i t y o f Chi c a g o P r e s s , 1932, quoted i n Lawrence D. Brown, P o l i t i c s and H e a l t h  Care O r g a n i z a t i o n : HMOs As F e d e r a l P o l i c y , (Washington D . C : The B r o o k i n g s I n s t i t u t i o n , 1983):197-198. P a t r i c i a Baumann, "The F o r m u l a t i o n and E v o l u t i o n o f the H e a l t h Maintenance O r g a n i z a t i o n P o l i c y 1970-1973", S o c i a l S c i e n c e and M e d i c i n e 10 (1976):132. " Pa u l M. E l l w o o d e t a l , " H e a l t h Maintenance S t r a t e g y " , M e d i c a l Care 9 (May-June 1971):291-298. For a d e t a i l e d d e s c r i p t i o n o f the HMO l e g i s l a t i o n and i t s amendments r e f e r to Robert G. S h o u l d i c e and K a t h e r i n e H. S h o u l d i c e . M e d i c a l Group  P r a c t i c e and H e a l t h Maintenance O r g a n i z a t i o n s , (Washington D . C : I n f o r m a t i o n Resources P r e s s , 1978), Appendix 1,2 and 3. B r i e f l y , the l e g i s l a t i o n d e t a i l s the requ i r e m e n t s o f an HMO with r e s p e c t to the p r o v i s i o n o f b a s i c and supplemental s e r v i c e s , the manner i n which these s e r v i c e s w i l l be p r o v i d e d and the s p e c i f i c a t i o n s o f o r g a n i z a t i o n and o p e r a t i o n . The g e n e r i c HMO elements d i s c u s s e d i n l e g i s l a t i v e r e q u i r e m e n t s . A l s o , the s e r v i c e s o u t l i n e d l a t e r i n the chapte l e g i s l a t i o n . t h i s c h a p t e r are c o n s i s t e n t w i t h the b a s i c and supplemental HMO h e a l t h r are those s p e c i f i e d i n the R.L. W e t h e r v i l l e and J.M. Nordby. A Census o f HMOs, ( M i n n e a p o l i s : I n t e r s t u d y , 1974) quoted i n H a r o l d S. L u f t , H e a l t h Maintenance O r g a n i z a t i o n s : Dimensions o f Performance, (New York: John Wiley and Sons, 1981) p.2. A r n o l d J . R o s o f f , "Phase Two o f the F e d e r a l HMO Development Program: New D i r e c t i o n s A f t e r a Shaky S t a r t " , American J o u r n a l o f Law and Me d i c i n e 1 ( F a l l 1975) :229. H a r o l d S. L u f t , H e a l t h Maintenance O r g a n i z a t i o n s : Dimensions o f  Performance, (New York: John Wiley and Sons, 1 9 8 1 ) , p . 3 . I n t e r v i e w w i t h Rick MacCornack, Manager, E v a l u a t i o n and P l a n n i n g Resources Group H e a l t h C o - o p e r a t i v e o f Puget Sound, S e a t t l e , Washington, 14 May 1985 - 98 -National HMO Census June 30, 1983', ( E x c e l s i o r , Minnesota: Interstudy, 1984), p.36. Ibid p.4. Also, i t should be mentioned that the HMO generic elements l i s t e d on p.80 are consistent with those used by the National HMO Census to select t h e i r HMO population. In f a c t , the generic c r i t e r i a used here were o r i g i n a l l y developed for the HMO census. See also note 5, Wetherville and Nordby, A Census of HMOs. U.S. Department of Health, Education and Welfare, So c i a l Security Administration, O f f i c e of Research and S t a t i s t i c s . Research and S t a t i s t i c a l Notes. Note No.5, Washington D.C, 1974, quoted in Robert C. Shouldice and Katherine H. Shouldice, Medical Group Practice and  Health Maintenance Organizations, (Washington D.C: Information Resources Press, 1978), pp.52-53. ^ Harold S. L u f t , "How Do Health Maintenance Organizations Achieve Their 'Savings' Rhetoric and Evidence", New England Journal of  Medicine 298 (June 15, 1978):1337. A d i s t i n c t i o n must be made between an HMO and indemnity c a r r i e r s and insurance companies. Indemnity c a r r i e r s and insurance companies reimburse against the expense of health care services after the insured person has used a service. Their contractual r e s p o n s i b i l i t y i s with the patient only, thus, they have i n d i r e c t involvement with service provision. The HMO not only provides indemnity to enrollees but also i t i s d i r e c t l y involved with contractual arrangements with providers to arrange for the d e l i v e r y of services as necessary to i t s en r o l l e e s . Canada, The Community Health Centre in Canada, Report of the Community Health Centre Project to the Health M i n i s t e r s , Vol.1 (Ottawa: Information Canada, 1972). Richard G. Foulkes, Health Security for B r i t i s h Columbians, ( V i c t o r i a , B.C.: Queen's P r i n t e r , 1973). * ' J.E.F. Hastings et a l . , "Prepaid Group Practice in Sault Ste. Marie, Ontario: Part I: Analysis of U t i l i z a t i o n Records", Medical Care 11 (February 1973) :102. Eugene Vayda, "Prepaid Group Practice under Universal Health Insurance in Canada", Medical Care 15 (May 1977) :384. - 98a -18. Jonathan Lomas, F i r s t and Foremost in Community Health Centres: The Centre in S.ault Ste. Marie and the CHC A l t e r n a t i v e , (Toronto: Uni v e r s i t y of Toronto Press, 1985), pp.114-123. - 99 CHAPTER 7 VARIANT CHARACTERISTICS OF THE HMO: SPONSORSHIP INTRODUCTION Having explored the generic elements and t h e i r r e l a t i o n s h i p in the HMO, th i s discussion w i l l focus on va r i a n t c h a r a c t e r i s t i c s in HMOs. Two general types of HMOs are referred to in the l i t e r a t u r e : the PGP which i s a closed panel practice that means only group member physicians can practice in that setting and the IPA which i s an open panel practice that means any physician i s free to practice with the organization. The organizational structures and f i n a n c i a l incentives in both models are widely d i v e r s i f i e d . Hester has argued that an a r b i t r a r y conceptualization of the HMO in terms of the dichotomy between the PGP and the IPA i s greatly over-s i m p l i f i e d and neglects key c h a r a c t e r i s t i c s of i n t e r n a l structure^. S i m i l a r l y , Wolinsky has commented that studies of HMOs have f a i l e d to i s o l a t e the i n d i v i d u a l e f f e c t s of d i f f e r e n t s t r u c t u r a l incentives and di s i n c e n t i v e s of 2 each HMO on i t s own performance . Since t h i s study i s concerned with f e a s i b i l i t y , i t seemed important to attempt to i d e n t i f y s p e c i f i c organizational features that may have an influence on HMO performance. The l i t e r a t u r e suggests that s t r u c t u r a l v a r i a t i o n in HMOs occurs in r e l a t i o n to sponsorship, physician organization and method of payment, and arrangements for h o s p i t a l care. However, there i s considerable v a r i a t i o n within each of these general categories. Figure 7 attempts to depict g r a p h i c a l l y the possible range of s t r u c t u r a l v a r i a t i o n i n HMOs according to these three c h a r a c t e r i s t i c s . The diagram allows for f o r t y - f i v e s t r u c t u r a l v a r i a t i o n s in HMOs, each as a combination of sponsorship, physician organization and h o s p i t a l arrangements. - 100 -Figure 7 Range of S t r u c t u r a l V a r i a t i o n within HMOs according to Sponsorship, Physician Organization, and Arrangements for Hospital Care EMPLOYEES OP HMff HMO ts IrJSUB^CS - 101 -From a selected review of the l i t e r a t u r e , a sample of twenty-six HMOs c i t e d f i t into nineteen of f o r t y - f i v e c e l l s , with a maximum of three HMOs in each of two c e l l s . This indicates the considerable d i v e r s i t y in the st r u c t u r a l organiza-ti o n of HMOs. But even t h i s f a i l s to capture i t f u l l y . Also, v a r i a t i o n within a c e l l of s i m i l a r HMOs i s l i k e l y to occur, for example, due to the size or age of the organization. Consequently, the following discussion w i l l elaborate on each c h a r a c t e r i s t i c and i t s sub-categories, with the goal of understanding the implications of t h i s v a r i a b i l i t y for HMO performance and f e a s i b i l i t y for B.C. The sample of 26 HMOs c i t e d in the l i t e r a t u r e reviewed was not randomized and represents s l i g h t l y under 10% of the 280 HMOs operating i n 1983 as l i s t e d in the HMO census. The l i t e r a t u r e reviewed was by no means exhaustive. Older or larger established HMOs tend to be better represented in the l i t e r a t u r e than new or smaller HMOs. Because of size and v a r i a b i l i t y observed i n the sample, generalizations beyond those described here are li m i t e d . SPONSORSHIP One of the e s s e n t i a l ingredients of HMO development, mentioned by many 3 researchers, i s an adequate population base . Sponsorship of an HMO r e f l e c t s the in t e r e s t s and values of a p a r t i c u l a r constituency of a s p e c i f i c s i z e , and can have a c r i t i c a l influence on the establishment of a population base. The sponsor may create an organization that can serve only a portion of i t s constituency or, a l t e r n a t i v e l y , that may serve a population greater than i t s 4 constituency . It i s , however, important to r e a l i z e that the r e l a t i o n s h i p between sponsor and constituency i s not absolute, but rather a dynamic process of s a t i s f y i n g the needs of the p a r t i c i p a t i n g actors (n.4 p . l ) . - 102 -The sponsor's d i r e c t r o l e i n HMO development i s concerned with setting up the organization and the assumption of i n i t i a l f i n a n c i a l r i s k s . The HMO Act, then, requires that the sponsor form a separate legal organization with a governing board. According to the l e g i s l a t i o n , one t h i r d of t h i s policy making body must be enroll e e s , and the medically underserved population serviced by the HMO must have equitable representation on the board^. Despite these legal constraints, board composition, to a large extent, r e f l e c t s the in t e r e s t s of the sponsor. For instance, HMOs sponsored by community groups, consumers or industry, w i l l have boards dominated by lay people, probably using professionals i n an advisory capacity, whereas, the reverse i s l i k e l y to hold true with HMOs sponsored by physicians. While the sponsor and the board have a predetermining e f f e c t on the structure of the organization, they do not u n i l a t e r a l l y control the organiza-t i o n . Sponsorship tends to weigh the needs and demands of the various p a r t i c i -pating actors. The board, on the other hand, i s more se n s i t i v e to the needs and demands of i t s constituents than to those of the relevant actors. The board must consider also other forces l i k e l y to affect the organization, such as the legal constraints on medical care organization, the a v a i l a b i l i t y of health care resources, and the attitudes of consumers and physicians. A l l these factors combine to influence the decision-making process that determines the structure of the organization for d e l i v e r i n g services. Sponsorship a f f e c t s the deli v e r y of services i n d i r e c t l y and, accordingly, would be expected to have l i t t l e e f f e c t on the economic performance of the organization. However, i t does affect the goals and objectives of the HMO as to whether i t i s a p r o f i t or non-profit organization. The trade-offs that the HMO - 103 -has to balance regarding a decision on p r o f i t o r i e n t a t i o n l i e between the tax advantages of non-profit status and the access to c a p i t a l markets f a c i l i t a t e d by p r o f i t status. Since the termination of federal government grants for HMO development in 1982, there has been vigorous growth i n f o r - p r o f i t HMOs mainly because of the need to raise private c a p i t a l . Sponsorship of these HMOs i s leaning increasingly towards multistate firms owning several HMOs^. (A discussion of federal involvement i n HMO development i s located i n Chapter 11.) In 1983, fourteen multi-state firms, both p r o f i t and non-profit, accounted for 129 of 280 HMOs and served 8.7 m i l l i o n members or 73% of the t o t a l HMO enrolment at that time^. The largest non-profit multi-state firm i s Kaiser which dominates with almost 50% of the multi-state firm enrolment. Some of the multi-state firms are sub s i d i a r i e s of larger firms, for example, the parent company of PruCare i s the Prudential Insurance Company; others such as Maxicare Health Plans Incorporated are independent firms. The number of f o r - p r o f i t multi-state firms, however, i s increasing and causing a s h i f t in the HMO g movement, from l a r g e l y non-profit organizations towards f o r - p r o f i t firms . Many questions, consequently, are being raised about what e f f e c t s t h i s w i l l have on service d e l i v e r y . A discussion of types of HMO sponsorship follows, and considers f i v e major sponsoring groups: consumers, industry and unions, physicians, h o s p i t a l s , and insurance companies. Although i t i s recognized that there i s a current trend toward sponsorship by f o r - p r o f i t multistate firms, relevant l i t e r a t u r e , at th i s time, i s very l i m i t e d . For t h i s reason, such firms w i l l not be included i n the following discussion. Because there has been a national health policy of public funding i n Canada, f o r - p r o f i t health care services are not the norm. This - 104 -exclusion, therefore, i s not l i k e l y to be relevant to f e a s i b i l i t y in B.C. Although the B.C. government has shown some inte r e s t i n p r i v a t i z a t i o n of services as part of a downsizing p o l i c y , health services, to date, seem to have been exempt from t h i s influence. Another point of c l a r i f i c a t i o n to be mentioned here i s that some sponsors, such as physicians, h o s p i t a l s , and insurance companies, being themselves HMO components, may have dual r o l e s . For example, they may be sponsors and at the same time be service providers within a p a r t i c u l a r HMO. This, of course, could raise questions regarding c o n f l i c t s of inte r e s t in the motivation for sponsor-ship. This discussion, however, w i l l endeavor to focus on the sponsorship role rather than the service provision r o l e . CONSUMER SPONSORSHIP From the sample of 26 HMOs in the l i t e r a t u r e reviewed, consumer sponsorship ranks as second most frequent, representing 23% of the sample. Although the l i t e r a t u r e described d i f f e r e n t types of sponsorship, no l i t e r a t u r e reviewed offered any information on the d i s t r i b u t i o n of d i f f e r e n t types of sponsorship. For instance, the HMO census i n 1983 did not designate sponsorship in i t s l i s t i n g of operating HMOs. Many consumer sponsored HMOs tend to be older and that may bias upward, to some extent, t h e i r representation i n the l i t e r a t u r e . Consumer associations, community groups, and co-operatives are among some of the sponsors in t h i s category. Frequently, t h e i r i n t e r e s t in HMOs has been a response to problems of a c c e s s i b i l i t y to health care services. Thus, enrolment i s drawn from a designated catchment area and i s open to any resident. As a r e s u l t , the p o l i c i e s of these HMOs tend to be t a i l o r e d to consumer needs and - 105 -la r g e l y r e f l e c t a non-profit o r i e n t a t i o n . Schwartz found that consumer co-operatives had more favourable i n d i v i d u a l enrolment pr a c t i c e s , e l i g i b i l i t y . 9 p o l i c i e s , and medical benefits . In addition, these HMOs have well established v e h i c l e s for consumer p a r t i c i p a t i o n in decision making and grievance procedures for complaints but these mechanisms may contribute to increased costs (n.9 pp.223-24). With consumer sponsorship, there may be s u s c e p t i b i l i t y to a lack of f i n a n c i a l expertise, r e s u l t i n g in some loss in control over the basic HMO components. Although the HMO remains ultimately responsible for providing or arranging services, and assumes the majority of f i n a n c i a l r i s k , risk-sharing with outside f i s c a l agents or medical groups i s not common with t h i s type of sponsorship (n.5 p.74). Since r i s k sharing with outside f i s c a l or marketing agents i s u n l i k e l y , the integration of the insurance plan with the other HMO components may be weakened which could a f f e c t f i n a n c i a l control in the HMO. S i m i l a r l y , there may be less control over physicians, for example, contracting with part-time physicians on a FFS basis, may d i l u t e t h e i r commitment to the organization. Also, physicians in t h i s type of organization may be apprehensive about lay interference in medical care p r a c t i c e . The physicians at the Group Health Association, Inc. in Washington D.C., a consumer-sponsored HMO, have an independent union and in 1978 had a s t r i k e over s a l a r i e s and physician independence^. As well, t h i s type of HMO may use staff-admitting p r i v i l e g e s in l i e u of formalized contracts for services, perhaps due to some d i f f i c u l t i e s of consumer groups negotiating with h o s p i t a l s . Consequently, the enrollee contract could be jeopardized as t h i s arrangement does not guarantee the a v a i l a b i l i t y of beds, i f needed to HMO enrollees (n.5 p.74). Because of - 106 -possibly looser integration of the basic components, administrative and f i n a n c i a l control may be more d i f f i c u l t than with other models. However, there are some successful consumer-sponsored HMOs that have overcome the p i t f a l l s described here; the Group Health Co-operative (GHC) of Puget Sound i n Sea t t l e , Washington i s a prime i l l u s t r a t i o n . Developing as a res u l t of the co-operative movement, GHC was formed in 1947 as a consumer-sponsored non-profit PGP. Today, i t i s an HMO serving over 300,000 enrollees in Seattle and surrounding area where i t owns and operates a h o s p i t a l in addition to eighteen medical centres**. Individual and family enrollees have always been e l i g i b l e for co-operative membership, but i n 1983, membership was extended to include consumers enrolled under employer groups ( n . l l ) . The co-operative membership e l e c t s a governing board and a l l board actions are subject to review, r a t i f i c a t i o n or r e j e c t i o n at annual membership meetings. Consumer members have always taken an active part in working committees of the board, thus p o l i c i e s tend to r e f l e c t consumer i n t e r e s t s . Increasing HMO competition in the Seattle area i s forcing some changes in pol i c y less favourable to th e i r membership. U n t i l now, GHC has taken pride i n o f f e r i n g f i r s t d o l l a r coverage for comprehensive health care services with low co-payments under ce r t a i n contracts. Since enrolment has dropped as a r e s u l t of competition, they are now introducing s i g n i f i c a n t l y higher co-payments and age rating as mechanisms for reducing t h e i r 12 premiums to competitive levels in order to regain t h e i r market share INDUSTRY/UNION SPONSORSHIP Fi f t e e n percent of the HMOs in the l i t e r a t u r e review sample f a l l into t h i s - 107 -category. Like the consumer-sponsored organizations, these HMOs generally developed in response to some i d e n t i f i e d problem of access to health care serv i c e s . From an industry perspective, the goal of developing an HMO has been to improve the health of the workers in order to enhance productivity and reduce absenteeism. An HMO may hold the l i n e as well on insurance costs paid to 13 employees, e s p e c i a l l y those r e s u l t i n g from h o s p i t a l i z a t i o n , yet industry sponsorship of HMOs has not been widespread. The dual choice option of the HMO Act appears to encourage employers to support established HMOs, although i t does not preclude t h e i r i n i t i a t i v e in establishing an HMO. A more important reason perhaps, i s the s h i f t in the industry objectives of HMO involvement, from ensuring access to services, as a means of improving pr o d u c t i v i t y , to containing the costs of employee health benefits. The most famous example of industry sponsorship, and indeed HMO develop-ment, i s the Kaiser-Permanente Medical Care Program established in 1945. O r i g i n a l l y , i t developed as a PGP to provide medical care to Kaiser Industries construction and shipyard workers. Today the program dominates the HMO industry 14 by v i r t u e of commanding the largest share of the market . The program i s not a single l e g a l e n t i t y but consists of several Kaiser developed organiza-t i o n s , the most important of which are: the Kaiser Foundation Health Plan Inc., the Permanente Medical Groups, and Kaiser Foundation Hospitals*"*. The Kaiser Foundation Health Plan i s an administrative and contracting organization that enrols members, c o l l e c t s premiums, maintains membership records and arranges for health care services by contracting with the medical groups and - 108 -ho s p i t a l s . The Permanente Medical Groups consist of six independent l e g a l l y separate medical groups which contract with the health plan. They assume r e s p o n s i b i l i t y for providing or obtaining physician services and other para-medical services i n order to d e l i v e r medically appropriate services in the o f f i c e and in the h o s p i t a l in accordance with enrollee benefits. The Kaiser Foundation Hospitals contract with the health plan to provide h o s p i t a l care which includes room, dietary services, nursing care and use of ho s p i t a l f a c i l i t i e s . Also, they have r e s p o n s i b i l i t y for providing medical centre f a c i l i t i e s which include inpatient h o s p i t a l f a c i l i t i e s , outpatient o f f i c e f a c i l i t i e s and a l l other f a c i l i t i e s and equipment necessary i n a modern medical centre. The Kaiser program i s strongly decentralized to six regional non-profit organizations with t i e s to a central o f f i c e in Oakland, C a l i f o r n i a . The central o f f i c e i s a co-ordinating mechanism for p o l i c i e s on leg a l and governmental a f f a i r s and personnel management, as well as o f f e r i n g assistance with rate setting and benefit packages. Each region i s responsible for operational management, with primary decision-making authority vested i n the medical d i r e c t o r of the regional Permanente Medical Group and the regional manager responsible for the health plan and h o s p i t a l s . The decentralized structure allows for regional adaptations in service d e l i v e r y and administrative structure. The key to Kaiser success l i e s i n good management f a c i l i t a t i n g the u n i f i c a t i o n of i t s various s t r u c t u r a l elements, and the close co-operation of physician management and administrative management working within a framework of mutual acceptance and common objectives (n.15 p.32). Union sponsorship of HMOs, on the other hand, has resulted from i d e o l o g i c a l concerns, in addition to the problems of access to serv i c e s . Union i n t e r e s t s - 109 -in forming HMOs have been that the unions can claim t h i s as t h e i r solution to a fragmented medical care system (n.13 p.38). Like industry sponsorship, union sponsorship has been l i m i t e d . Some union sponsored HMOs, such as the Community Health Association, o r i g i n a l l y sponsored by the United Auto Workers i n De t r o i t * ^ , eventually became replaced by insurance company sponsorship and i s now known as the Metro Health Plan of Detroit (n.5 p.77). Due perhaps to a lack of managerial expertise plus improved health re l a t e d benefits i n union contracts, the in t e r e s t of union membership i n HMO sponsorship has waned. Whether sponsored by industry or union, the boards of these HMOs tend to be dominated by laymen, who may not necessarily represent the in t e r e s t s of the enrollees. Both p r o f i t and non-profit HMOs emerge under t h i s type of sponsorship. A unique feature i s that enrollee premiums are usually paid in whole or in part by a t h i r d party. In contrast to consumer sponsorship, many of these HMOs may perform the functions of s e l f - i n s u r i n g , marketing, enrolment, underwriting and administration, rather than contracting them out. Risk sharing with providers for both inpatient and outpatient care also occurs, but the HMO retains the major r e s p o n s i b i l i t y for the r i s k of contracted benefits (n.5 p.80). While these HMOs were sponsored i n i t i a l l y by and for special i n t e r e s t groups, with time most of them became extended to serve the surrounding community. PHYSICIAN SPONSORSHIP According to the l i t e r a t u r e reviewed, physician sponsorship was the most common form, accounting for 27% of the HMOs in the sample. In general, physician sponsorship has been stimulated by the needs of the provider rather than those of the consumer or an in t e r e s t group. F i n a n c i a l s t a b i l i t y , l i f e - 110 -s t y l e , style of p r a c t i c e , competition, and quality of care seem to be some of the more frequent reasons for physician sponsorship. In the view of Havighurst, professional sponsorship of an HMO i s merely an extension of the medical monopoly. As a r e s u l t , he f e e l s that i t presents "an obstacle to the emergence of a s a t i s f a c t o r i l y competitive health care marketplace"*^. Three prevalent models of physician sponsorship w i l l now be discussed: the group practice model, the IPA or Foundation for Medical Care model (FMC), and the medical school model. Group Practice The most commonly accepted d e f i n i t i o n of group practice i s provided by the American Medical Association (AMA): "Group medical practice i s the application of medical services by three or more physicians formally organized to provide medical care, consultation, diagnosis, and treatment through the j o i n t use of equipment and personnel, and with income from the medical practice d i s t r i b u t e d in accordance with methods previously determined by group members."1® Furthermore, the HMO Act describes requirements for medical groups in HMOs meeting requirements for federal q u a l i f i c a t i o n s as: "'Medical group' means a partnership, association or other group - which i s composed of health professionals licensed to practise medicine or osteopathy and of such other licensed health pro-f e s s i o n a l s (including d e n t i s t s , optometrists, and p o d i a t r i s t s ) as are necessary for the provision of health services for which the group i s responsible." (n.5 Appendix I p.358) the Partnership seems to be the most predominant form of group group has a le g a l structure and i s a small organization, i t pra c t i c e . Since i s not usually necessary to form a separate le g a l e n t i t y for the HMO. However, depending on the p a r t i c u l a r l e g a l structure and the desire to achieve federal q u a l i f i c a t i o n , there may be a need to form a board to meet the requirements of the HMO Act but physician domination of the board i s a highly probable occurrence. As a r u l e , an outside insurance company w i l l have a contract to provide the insurance and marketing functions to t h i s type of HMO. The group may choose to be at r i s k for inpatient h o s p i t a l care or to share that r i s k with an insurance company. What may emerge i s an HMO with a dominant physician component, creating an imbalance, with weaker administrative control and integration of the insurance and h o s p i t a l components. The Ross-Loos C l i n i c in Los Angeles, and the Western C l i n i c of Tacoma, Washington, are examples of HMOs sponsored by physician partnerships. This discussion has t r i e d to focus on aspects of group practice relevant to sponsorship. A f u l l e r discussion of the organization of group practice and the associated methods of payment w i l l follow in the section on physician organization. Individual Practice Associations The term IPA i s frequently used interchangeably with the term FMC. While both concepts are s i m i l a r , i t i s important to understand the subtle d i f f e r e n c e s . Defined by Carolyn Steinwald "a Foundation for Medical Care i s an autonomous corporation sponsored and organized by a l o c a l (state or county) medical society concerned with the quality of medical care. It i s governed by a Board of D i r e c t o r s , nominated and elected by the Board of i t s sponsoring Medical Society. Membership consists of physicians and sometimes osteopaths, belonging to the Medical Society, who v o l u n t a r i l y apply annually to e n l i s t in the f o u n d a t i o n . " ^ There are b a s i c a l l y two types of FMC: a comprehensive type, and a claims-review type. While both are concerned with providing some regulation of physician fees within the profession, they are fundamentally d i f f e r e n t . The comprehensive type has two p r i n c i p a l functions: to design and sponsor a prepaid 20 health insurance program and to carry out peer review of quality (see figure 8). The San Joaquin Foundation for Medical Care in C a l i f o r n i a , sponsored under t h i s model, was organized to protect FFS solo practices threatened by the expansion of the Kaiser Permanente Medical Care Program (n.5 p.89). On the other hand, the claims review type only provides peer review by physicians to f i s c a l intermediaries and does not sponsor a pre-paid health plan. Thus, i t could not be considered for conversion to an HMO model. Following the comprehensive FMC approach, a medical society could form an HMO rather than a FMC. Then the HMO could contract with an IPA, which i s a medical management organization, to arrange for the provision of medical care services, as i l l u s t r a t e d in figure 9. The f i n a l stage of t h i s evolution i s that the IPA becomes the HMO, assuming not only medical management but also the added role of health plan management, as i l l u s t r a t e d in figure 10. Although these three models are referred to almost interchangeably in the l i t e r a t u r e , i t i s only the IPA model as HMO that i s recognized by the HMO Act (n.5 p.93). Involvement of the medical profession in sponsorship of an IPA model HMO i s based on the b e l i e f that physicians must reta i n r e s p o n s i b i l i t y and leadership in the design, administration, and del i v e r y of medical care services. The p r i n c i p a l e x p l i c i t objectives of t h i s type of sponsorship, i n the view of physicians, include: the a c c e s s i b i l i t y of care through a prepaid health insurance program, and the c a r e f u l monitoring of the quality of services, the - 113 -Figure. 8 The Comprehensive FMC Model COMPREHENSIVE TYPE Medical Society Foundation far Medical Cars Health Plan Insurance companies Subscribers Hospitals Participating, physicians Figure 9 The HMO Contracts with the IPA for the Provision of Medical Care Services INDIVIDUAL PRACTICE ASSOCIATION (IPA) MODEL Participating soio practicing physicians Figure 10 The IPA-HMO "Model Recognized by the HMO Act MODIFIED IPA MODEL Medical Society Participating soto-practicing physicians Source for above figures: Robert G. Shouldice and Katherine H. Shouldice, Medical  Group Practice and Health-Maintenance Organizations, Washington, D.C: Information Resources Press, 1978, p. 92. - 114 -21 appropriateness of delivery point, and the reasonableness of cost . The i m p l i c i t o b j e c t i v e s , a l t e r n a t i v e l y , are well expressed by Havighurst, who views this form of sponsorship as "a device for curbing the excesses of some physicians as a means of maintaining the monopolies and p r o f i t s of the c a r t e l members as a group against new competition and/or government intervention" (n.17 p.377). The most a t t r a c t i v e feature of t h i s form of sponsorship for the medical profes-sion i s the preservation of the t r a d i t i o n a l c h a r a c t e r i s t i c s of solo FFS practice as a b a r r i e r to economic competition and i d e o l o g i c a l challenge, posed by alternate forms of medical care organization. Risk-sharing with physicians, although possible in t h i s type of HMO, i s minimized by contract or subcontract to an insurance company. While the HMO assumes f u l l f i n a n c i a l r i s k , a large portion of that r i s k , in t h i s case, may be transferred to an insurance company. In addition to sharing a s i g n i f i c a n t portion of the r i s k , the insurance company could also have a contract to provide the insurance functions normally associated with an HMO. Customarily, t h i s type of HMO does not assume the r i s k for inpatient h o s p i t a l services, which again decreases the t o t a l r i s k to the organization. However, i t s patients are usually required to have h o s p i t a l coverage through another source. Physician i n t e r a c t i o n with the h o s p i t a l occurs through the t r a d i t i o n a l convention of s t a f f p r i v i l e g e s rather than a contract. While the l o c a l medical society appoints physicians to the IPA board, federal regulations require that one-third of the board be consumers, i f the HMO i s to be f e d e r a l l y q u a l i f i e d . Nevertheless, the locus of control in t h i s type of sponsorship c l e a r l y rests with the physicians. - 115 -In f a c t , the s i m i l a r i t i e s with t r a d i t i o n a l FFS medical care practice considerably d i l u t e the strength of the HMO under t h i s type of sponsorship. The geographic dispersion of physicians in solo p r a c t i c e s , combined with minimal r i s k - s h a r i n g , r a i s e s b a r r i e r s to the administrative control of physicians. S h i f t i n g a s i g n i f i c a n t portion of the burden of r i s k to an insurance company i s l i k e l y as well to d e b i l i t a t e control over provider behavior. In conclusion, t h i s type of HMO weakens the integration and administrative control of the HMO components which are the strengths of the HMO concept, thus making i t f a l l i b l e to the i n e f f i c i e n c i e s of t r a d i t i o n a l FFS medical care pr a c t i c e . This discussion has t r i e d to accent aspects of IPAs relevant to sponsor-ship. A description of the i n t e r n a l organization and methods of payment used in IPAs follows in chapter 8 on physician organization. Medical Schools Medical school sponsorship of HMOs has had very l i m i t e d success, due to the dilemmas posed by trying simultaneously to meet educational and economic objectives within an HMO structure. Since medical schools have been t r a d i -t i o n a l l y supportive of the FFS ideology of medical care p r a c t i c e , involvement in an HMO may antagonize some of i t s s t r a t e g i c constituencies such as i t s academic teaching s t a f f and i t s alumni. The HMO, however, does o f f e r some opportunities for upholding the c l a s s i c t r i a d of medical school objectives - service, research 22 and teaching . The achievement of these objectives may be c o s t l y and thus contradictory to the f i n a n c i a l objectives of an HMO which emphasize cost containment in order to keep premiums competitive with other health plans. - 116 -Given these inherent conflicts, the logistical complexities of a medical school, inexperienced in administrative and financial matters, setting up the basic HMO components could be formidable. F i r s t , i t would need to form a medical group distinct from the university, that could legally accept financial risk. The university teaching hospital often provides the hospital component, but i t s involvement may be conditional on hospital objectives being met. An outside insurance company likely would be engaged to handle the financial management and insurance function, or perhaps even to raise capital (n.22). The insurance company, nonetheless, will want to see financial stability in the HMO operation, in order to protect i t s interests. What may result is that each HMO component may have strong objectives which each is determined to meet, but the components may be in conflict with each other over their objectives. Frequently, the solution is a joint management arrangement equally representing the interests of each component and sharing risks. Yet, this structure may only exacerbate conflicts and power struggles undermining administrative and financial control in the HMO. Despite these d i f f i c u l t i e s , some successful HMOs have been sponsored by medical schools, for example, the Columbia Medical Plan, sponsored by Johns Hopkins medical school, was set up with this type of arrangement (n.22). HOSPITAL SPONSORSHIP In the literature reviewed, 15% of the HMOs mentioned were sponsored by i hospitals. American hospitals, in recent years, have moved from a position of dominance in the health care f i e l d to a position of vulnerability. This change can be attributed to problems caused by excess capacity, changing population trends, an oversupply of physicians influencing practice patterns, and increased government regulation, followed by a s h i f t to a competitive market 23 policy . Survival in t h i s context meant that the h o s p i t a l had to be able to gain control of i t s long run operating costs in order to maintain a competitive market share (n.23 p.65). One strategy for c o n t r o l l i n g long run operating costs i s v e r t i c a l integration through HMO sponsorship. The objective of t h i s strategy i s to control the resources needed to run the main business of the h o s p i t a l and to move as close as possible to the user of i t s services (n.23 pp.71-72). While i t i s recognized that d i f f e r e n t degrees of v e r t i c a l integration are possible between the h o s p i t a l and an HMO, a higher degree of v e r t i c a l integration -sponsorship w i l l be discussed here. Further discussion of the r e l a t i o n s h i p between the h o s p i t a l and the HMO, r e f l e c t i n g other aspects of i n t e g r a t i o n , i s addressed l a t e r in chapter 9 on arrangements for h o s p i t a l care. S u p e r f i c i a l l y , HMO sponsorship may appear to be an answer to h o s p i t a l problems. The HMO could guarantee a captured market share of patients that could possibly increase the volume and p r e d i c t a b i l i t y of admissions, as well as increase the use of a n c i l l i a r y and technological services. The apparent f i n a n c i a l s t a b i l i t y offered by the HMO through prepayment could help to improve the h o s p i t a l ' s cash flow, thus aiding in clearing bad debts. Despite these possible advantages, the two organizations have quite d i v e r -gent perspectives, which could prove to be an impediment to sponsorship. Mackie and Biblo have discussed the d i f f e r e n t organizational dynamics of the HMO and the h o s p i t a l from the point of view of consumer r e l a t i o n s , physician r e l a t i o n s , 24 and f i n a n c i a l incentives . The h o s p i t a l defines i t s e l f i n terms of - 118 -physicians' needs and values, thus assuming the i d e n t i t y of "physicians' workshop", and believing that the public interest i s served by accommodating to physicians. The HMO, because of competitive pressure, must focus on the needs of actual or potential enrollees, which makes i t more sensitive to the public's needs, values and desires. Customarily, physicians have r e s i s t e d close integration into the h o s p i t a l structure, and dual l i n e s of authority have developed, r e s u l t i n g in professional goals often taking precedence over organizational goals. In the HMO, however, organizational goals have p r i o r i t y over professional goals because physicians are more integrated into the operational and p o l i c y - s e t t i n g functions of the organization. U n t i l recently, American hospita l s have been reimbursed r e t r o -spectively on the basis of cost experience which has encouraged the maximum use of services and fostered i n e f f i c i e n c y , although trends toward prospective funding are increasing. The HMO in contrast, must l i v e within a prospective fixed budget, regardless of enrollee use of services. Thus, the HMO has an incentive to incorporate e f f i c i e n c y and cost-effectiveness into i t s basic decision-making process as a means of reducing the future need or demand for expensive services. Can differences i n organizational perspectives be reconciled through h o s p i t a l sponsorship of an HMO? S h o r t e l l describes three models of h o s p i t a l sponsorship: the primary corporate model, the shared corporate model, and the 25 contractual model . The primary and shared corporate models are relevant to the sponsorship discussion; the contractual model w i l l be more appropriately discussed i n chapter 9 on arrangements for h o s p i t a l care. - 119 -In the primary corporate model, the h o s p i t a l assumes r e s p o n s i b i l i t y for financing, marketing and general management. Physicians are e i t h e r taken on s t a f f or there i s a contract with a group of physicians. An insurance company may provide a c t u a r i a l services or sometimes marketing. Since some h o s p i t a l s are large enough to s e l f - i n s u r e against major l o s s , reinsurance may not be necessary. However, the HMO i s a separate le g a l e n t i t y and not a department of the h o s p i t a l . Although a separate board would need to be formed, part of i t s membership i s l i k e l y to be drawn from the h o s p i t a l board. This model f a c i l i t a t e s the greatest penetration of h o s p i t a l objectives into the HMO operation and also o f f e r s good f i n a n c i a l and administrative c o n t r o l . A l t e r n a t e l y , the shared corporate model allows the h o s p i t a l , physician groups and other groups such as insurance companies, industry or consumer groups to j o i n t l y develop an HMO s i m i l a r to a consortium model. The board i s composed of representatives from a l l the corporate p a r t i e s , and i t contracts with h o s p i t a l s , physician groups, and insurance companies to provide the basic HMO components. This approach was used with the Columbia Medical Plan in Columbia, Maryland, and often has been associated with medical schools (n.22). This model o f f e r s weaker f i n a n c i a l and administrative control but less influence of h o s p i t a l objectives on HMO operations. Hospital sponsorship of HMO has not been popular. Strong resistance from the FFS h o s p i t a l medical s t a f f has been a major stumbling block. Furthermore, as the HMO matures, i t i s increasingly d i f f i c u l t for the h o s p i t a l to remain i n f l u e n t i a l in i t s operation. For in order to be successful, the HMO would have to remain l o y a l to i t s cost containment objectives of reducing the use of expensive se r v i c e s . - 120 -INSURANCE COMPANY SPONSORSHIP In the l i t e r a t u r e review sample of HMOs, insurance company sponsorship accounted for 20% of the HMOs. As major sponsors o f HMOs, insurance companies include both the indemnity insurance companies and Blue Cross/Blue Shield. In the l a t e 1960's and ea r l y 1970's, national health insurance seemed imminent in the United States, and HMOs were often associated with that debate (n.13 p.44). Anxious about t h e i r future, and sensing that cost containment would be part of a federal health p o l i c y , insurance companies saw many benefits i n HMOs. They allowed insurers to d i v e r s i f y t h e i r product l i n e and explore possible new dir e c t i o n s of consumer taste. As well as potential money savers for insurance companies, HMOs could provide them with a more 26 f l e x i b l e response to federal cost-containment measures O r i g i n a l l y , the plan was to keep the HMO under the wing of the insurance company with the company acting as a broker and arranging contracts with providers for services. The insurance company would provide the usual insurance services necessary to an HMO, plus i t would assume the o v e r a l l f i n a n c i a l and administrative management of the HMO. By c o n t r o l l i n g the finances, the insurance company believed that i t would be able to dominate the operation, thus l i m i t i n g input from physicians and h o s p i t a l s . When attempts at implementation were made, the benefits of such a plan were rapidly counterbalanced by costs. Insurance companies had been t r a d i t i o n a l l y involved i n the financing side of health care, having l i t t l e experience with the deli v e r y side. F i r s t , salesmen found d i f f i c u l t i e s marketing the HMO as the pa y r o l l deduction was often higher than that of other plans because of s l i g h t l y higher premiums, even though the d o l l a r value of HMO benefits was l i k e l y to be less due to fewer copayments - 121 -and deductibles (See n.13 p.44 and n.5 p.77). The fact that choosing an HMO meant choosing a de l i v e r y system, made pote n t i a l enrollees reluctant to sever established r e l a t i o n s h i p s with providers. In addition to marketing problems, the HMO raised a v a r i e t y of i n t e r n a l p o l i t i c a l d i f f i c u l t i e s for insurance companies (n.13 p.45). Federal regulations required that the HMO be a separate legal e n t i t y not sheltered under the wing of the insurance company. The formation of a board composed of one-third enrollees, was another requirement that made insurance companies shudder. While, i n theory, HMOs should reduce costs, in practice the insurance companies, lacking i n experience with service d e l i v e r y , found i t d i f f i c u l t to confront providers i n order to get the desired outcome. Being p r o f i t oriented, the commercial companies have r e s p o n s i b i l i t y to t h e i r shareholders, thus they were very sen s i t i v e about the lack of r e s u l t s immediately forthcoming from an HMO. Governmental and public expectations that insurers should take some action about r i s i n g health b i l l s had forced the HMO onto the organizational agendas of insurance companies. Some insurance sponsored HMOs were able to surmount t h e i r e arly d i f f i c u l t i e s and thrived, while others languished and faded from existence (n.13 pp.45-46). As a consequence, insurance companies have now adopted a generally more cautious approach to HMO sponsorship since t h e i r t r i a l s had exposed the fact that an over-emphasis on business s k i l l s , in the complex operation of an HMO, was not necessar i l y conducive to producing the desired r e s u l t s . As well, they became concerned that the fear of f a i l i n g at such a venture could tarnish t h e i r public reputation and c r e d i b i l i t y . - 122 -CANADIAN EXPERIENCE WITH SPONSORSHIP Consumer Sponsorship Pr i o r to the introduction of p u b l i c l y funded health insurance in Canada, consumers showed some in t e r e s t i n sponsoring health services as a means of gaining a c c e s s i b i l i t y to services. The CHC concept was pioneered by Saska-tchewan in the 1920's to 1940's with i t s Municipal Doctor Plan which was a way of at t r a c t i n g physicians to underserved communities. Later, government planning reports such as the S i g e r i s t Report of 1944 and the Saskatchewan Health Survey of 1951 lent further support to the development of CHC's. Under the Union Hospital Act, centres eventually were established and influenced the organiza-ti o n of ambulatory care services. After that, consumer i n t e r e s t in developing health services waned u n t i l the doctors' s t r i k e of 1962, when inte r e s t was dramatically revived by the formation of consumer sponsored community c l i n i c s . Co-operatives have played a major r o l e in the economic and s o c i a l develop-ment of Saskatchewan. Concepts of tax-financed medical care and close working r e l a t i o n s h i p s between providers and consumers of medical care have been c l o s e l y 27 . . associated with t h i s philosophy . Thus, i t i s not surprising that during the Medicare c r i s i s of 1962, consumer i n i t i a t e d Community Health Services Associations emerged as pressure groups o f f e r i n g to provide f a c i l i t i e s for physicians wishing to practise under the Medical Care Insurance Act. The Saskatoon Agreement ended the Medicare c r i s i s but l i m i t e d the role of these associations to landlords renting premises, equipment and possibly support , . - 28 services to any phsyician choosing to work in t h e i r community c l i n i c s Community c l i n i c sponsorship i n Saskatchewan, therefore, became strongly linked to s o c i a l i z e d medicine and s o c i a l i s t i d e a l s . - 123 -Union Sponsorship During the 1960s in Ontario, unions took some i n t i a t i v e in sponsoring health centres to provide pre-paid medical care services to t h e i r members. Their impetus came from membership concerns about a c c e s s i b i l i t y and cost of medical care services. The s t e e l workers union sponsored the Group Health Association in Sault Ste. Marie in 1962 and the auto workers union sponsored a centre in St. Catherines in 1969. Both centres were based on concepts of PGPs developed in the United States. However, the introduction of universal medical care insurance in 1969 in Ontario dealt a stern blow to t h e i r operation. Since the Sault Ste. Marie centre had been in operation six years p r i o r to t h i s , i t weathered the blow and continues to operate on the basis of c a p i t a t i o n funding under the p r o v i n c i a l insurance program serving the l o c a l community under the leadership of a c i t i z e n board. The St. Catherines centre, however, began operation only three months before implementation of the insurance program and a l l the centre's physicians were new to the community. As a r e s u l t , the lack of constraints on out-of-plan use imposed by the universal insurance program plus subscriber t i e s to physicians established in the community led to the f i n a n c i a l 29 rum of the centre Provider Sponsorship Provider in t e r e s t in sponsoring alternate forms of health care delivery has been limited as the economic incentives offered by the national health insurance 'program discourage such i n t e r e s t . Following the introduction of l o c a l community health and s o c i a l service centres (CLSCs), however, Quebec physicians launched a counter attack encouraging the extensive development of private FFS group - 124 -p r a c t i c e s , known as p o l y c l i n i c s , to compete with CLSCs. In 1977, when approximately eighty CLSCs were operative, an estimated four hundred p o l y c l i n i c s 30 . . . had been established . This suggests the responsiveness of physicians to the threat of economic and ideologic competition. In Ontario, the HSO program o f f e r s physicians the opportunity to a l t e r practice s tyles by choosing c a p i t a t i o n reimbursement rather than FFS. In addition, they received extra incentive payments for h o s p i t a l i z a t i o n rates below the p r o v i n c i a l average. Although growth of these organizations has not been extensive, physicians have been the primary sponsors. Also, medical schools have been involved in sponsoring f i v e organizations as placements for family 31 practice residents Insurance Company Sponsorship With a p u b l i c l y funded national health insurance program, insurance companies have minimal incentives to be interested in health service d e l i v e r y other than where i t involves extended health benefits not covered by the national program. In B.C., the CU & C Health Services Society, an organization whose primary a c t i v i t y i s extended benefits health insurance, financed and developed the Mount Pleasant Community Health Centre in Vancouver. This centre serves the general community and pays i t s physicians on salary although i t s revenue i s generated by b i l l i n g the MSP on a FFS basis. Also, the health centre comes under the CU & C board rather than being a separate l e g a l e n t i t y with i t s own board. Based on the success of t h i s centre, CU & C apparently plans to 32 expand and develop the concept elsewhere in the province - 125 -FOOTNOTES 1. James A. Hester, "Research in Resource A l l o c a t i o n in a Prepaid Group", Milbank Memorial Fund Quarterly/Health and Society 57 (1979) :406. 2. Frederic D. Wolinsky, "The Performance of Health Maintenance Organizations: An Analytic Review", Milbank Memorial Fund Quarterly 58 (1980):547. 3. George B. Strumpf and Marie A. Garramore, "Why Some HMOs Develop Slowly", Public Health Reports 91 (November-December 1976) :499. 4. "Sponsorship" a paper done for the Community Health Centre Project, 1971, (Mimeographed), p.2. 5. Robert G. Shouldice and Katherine H. Shouldice, Medical Group Practice  and Health Maintenance Organizations, (Washington D.C. : Information Resources Press,1978), p.55. 6. John K. Iglehart, "Health P o l i c y Report: The Future of HMOs", New England Journal of Medicine 307 (August 12, 1982):453. 7. See the Health Maintenance Organization Industry, Ten Year Report 1973- 1983: A History of Achievement, A Future with Promise, pp.21-23 and National HMO Census, June 30, 1983 ( E x c e l s i o r , Minnesota: Interstudy, 1984), p.36. 8. John K. Iglehart, "Health P o l i c y Report: HMO's (For P r o f i t and Not-F o r - P r o f i t ) on the Move", New England Journal of Medicine 310 (May 3, 1984) : 1205. 9. Jerome L. Schwartz, Medical Plans and Health Care, ( S p r i n g f i e l d , I l l i n o i s : Charles C. Thomas Publisher, 1968), p.112. 10. Harold S. Luf t , Health Maintenance Organizations: Dimensions of Performance, (New York: John Wiley and Sons, 1981) , p.13. 11. Group Health Co-operative of Puget Sound, 1983 Annual Report. - 126 -12. Interview with Rick MacCornack, Manager, Evaluation and Planning Resources, Group Health Co-operative of Puget Sound, Seattle, Washington, May 14, 1985. Also see Seattle Post I n t e l l i g e n c e r , J u l y 5, 1985, p . l . 13. Lawrence D. Brown, P o l i t i c s and Health Care Organization HMOs as  Federal P o l i c y , (Washington, D.C: The Brookings I n s t i t u t i o n , 1983), p. 38. 14. National HMO Census June 30, 1983, ( E x c e l s i o r , Minnesota: Interstudy, 1984), Table 20. ' 15. Scott Fleming, "Anatomy of the Kaiser-Permanente Program" in The  Kaiser-Permanente Medical Care Program, ed. Anne R. Somers (New York: The Commonwealth Fund, 1971), pp.23-26. 16. Charles A. Metzner and Rashid L. Bashshur, "Factors Associated with Choice of Health Care Plans", Journal of Health and S o c i a l Behaviour 8 (December 1967) :292. 17. Clark C. Havighurst, "Professional Restraints on Innovation in Health Care Financing", Duke Law Journal (May 1978) :375. 18. American Association of Medical C l i n i c s , American Medical Association, and Medical Group Management Association, Group P r a c t i c e , Guidelines to  Joining or Forming a Medical Group, (Chicago: American Medical Association, 1970) quoted in Robert G. Shouldice and Katherine H. Shouldice. Medical Group Practice and Health Maintenance Organizations, (Washington, D.C: Information Resources Press, 1978), p.104. 19. Carolynn Steinwald, "Foundations for Medical Care" Blue Cross Reports, Research Series No.7, (Chicago Blue Cross Association^ 1971) quoted in Robert G. Shouldice and Katherine H. Shouldice. Medical Group Practice  and Health Maintenance Organizations, (Washington, D.C: Information Resources Press, 1978), p.88. 20. Richard H. Egdahl, "Foundations for Medical Care" New England Journal  of Medicine 288 (March 8, 1973):491. - 127 -21. William R. Roy, The Proposed Health Maintenance Organization Act of 1972. (Washington, D.C., Science and Health Communications Group, 1972),, quoted in Robert G. Shouldice and Katherine H. Shouldice, Medical Group' Practice and Health Maintenance Organizations, (Washington, D.C: Information Resources Press, 1978), p.88. 22. Robert M. Heyssel and Henry M. Seidel, "The Johns Hopkins Experience in Columbia, Maryland", New England Journal of Medicine 295 (November 25, 1976):1225. 23. R. Danielle Federa, "HMOs: Competitive Threat or Strategic Opportunity?", Journal of. Ambulatory,Care Management 6 (February, 1983):66-71. 24. Dustin L. Mackie and Robert L. Bib l o , "HMO Development: Threat or Opportunity for Hospitals?", American Journal of Law and Medicine 6 (Spring 1980):33-36. 25. Stephen M. S h o r t e l l , "The Costs and Benefits of Closer Group Practice - Hospital Relationships", Medical Group Management 25 (Jan/Feb.1978): 16. ~ 26. See note 13 Brown, P o l i t i c s and Health Care Organization, p.44. Although U.S. federal i n t e r e s t in national health insurance had waned, insurance companies f e l t that the writing was on the wall. Federal p o l i c i e s of cost containment were coming and were l i k e l y to be linked with HMOs because of federal i n t e r e s t in these organizations. Therefore, insurance company sponsorship of HMOs could increase t h e i r f l e x i b i l i t y to respond i f federal cost containment measures tampered with established financing patterns. 27. Samuel Wolfe, "Saskatchewan's Community C l i n i c s " , Canadian Medical  Association Journal 91 (August 1, 1964) :225. 28. Anne O.J. Cricton and Donald 0. Anderson, Group Practice in , the System, (Vancouver: University of B r i t i s h Columbia, 1973), p.83. 29. Eugene Vayda, "Prepaid Group Practice under Universal Health Insurance in Canada", Medical Care 15 (May 1977) :386-387. 30. Marc Renaud, "P r a c t i c e Settings and Prescribing P r o f i l e s : The Simulation of Tension Headaches to General P r a c t i t i o n e r s Working in Dif f e r e n t Practice Settings in the Montreal Area", American Journal, of Public Health 70 (October 1980):1068. - 128 -31. Interview with Dave Brindle, Senior Program Development O f f i c e r , Health Service Organization,, Community Health Programs Branch, Ontario M i n i s t r y of Health, Toronto, 20 June 1984. 32. Interview with David Schreck, General Manager, CU & C Health Services Society, Vancouver, 13 A p r i l 1984. - 129 -CHAPTER 8 VARIANT CHARACTERISTICS: PHYSICIAN ORGANIZATION AND METHOD OF PAYMENT Since the HMO is at financial risk for providing a contracted range of health services for i t s enrolled population, decisions made by physicians about the use of services play a crucial role in the financial v i a b i l i t y of the organization. Despite ethical considerations, physicians are widely held to respond to their own economic interests, and their consequent behavior affects treatment decisions. The major HMO objective, therefore, is to modify physician practice towards more efficient decision-making*. Motivating forms of organization and methods of payment are some vehicles for creating incentives for physicians to achieve this objective. The following discussion will explore three forms of physician organization evident in HMOs: a staff model, group practice, and individual practice association. A different method of payment is associated with each type of organization. Since the incentives affecting physician decision-making vary in each case, the discussion will try to assess their individual impact on the accomplishment of the HMO objective. At the outset, i t is important to cl a r i f y some relevant points. In each case, a distinction must be made between the method of payment to the organiza-tional unit, that is the practice or, in economic terms, the firm, and the method of payment to the individual physician for his labour in producing medical care services. Payment, in a l l cases, originates from a prospective base of funds prepaid by the consumer to the HMO. With regard to group practice and individual practice association models, the discussion w i l l proceed from the premise that the HMO has a contractual - 130 -agreement for service with these organizations. At the same time, i t i s acknowledged that each of these types of physician organization could be sponsors of the HMO as well as providers of service to the HMO. It was noted e a r l i e r , however, that sponsorship has only an i n d i r e c t e f f e c t on service d e l i v e r y , through influencing the goals and structure of the HMO. Once the type of physician organization and method of payment have been established, sponsorship i s l i k e l y to have l i t t l e e f f e c t on t h e i r operation. STAFF MODEL In t h i s model, the HMO i s the owner of the pract i c e , which corresponds to an economic firm. As such, i t uses inputs which may be c l a s s i f i e d as labour 2 services, c a p i t a l services, materials and supplies, and entrepreneurship . Accordingly, the HMO employs physicians to supply labour to the firm, and t h i s i s combined with the other inputs l i s t e d above in the production of health care services. Internal Organization In the sel e c t i o n of physicians, the HMO i s l i k e l y to consider an i n d i v i -dual's p o t e n t i a l for c o m p a t i b i l i t y with organizational goals, as well as h i s professional q u a l i f i c a t i o n s . Although both primary care physicians and s p e c i a l i s t s are hired i n d i v i d u a l l y , they are organized in a group practice that i s s e l f governing and autonomous concerning medical matters. Usually, there i s a medical d i r e c t o r to whom the physicians r e l a t e and who represents t h e i r i n t e r e s t s to HMO management. - 131 -This group structure f a c i l i t a t e s the c e n t r a l i z a t i o n of c a p i t a l equipment for a n c i l l a r y diagnostic and treatment services plus a u x i l i a r y personnel used by physicians. Gains in e f f i c i e n c y may be achieved through better co-ordination of services and some economies of scale, and hence costs may be reduced. The mixing of s p e c i a l i s t s and primary care physicians in a group structure encourages a more intense climate of consultation and peer review. Since the group has a c o l l e c t i v e stake in the quality of care, the production of a d i f f e r e n t mix of services may occur, often r e s u l t i n g in improved e f f i c i e n c y . Method of Payment The HMO, as practice owner, i s reimbursed for medical care services pro-spectively through fixed payments in the form of premiums, supplemented by co-payments when a service i s delivered. Under the s t a f f model, the HMO reimburses the physician by payment of a salary. A salary, in an HMO as in other medical care structures, represents a fixed payment to the physician for h i s time and labour, i r r e s p e c t i v e of the number of units of service rendered or 3 the number of persons cared for . Usually, the salary i s adjusted to account for the physician's professional q u a l i f i c a t i o n s , experience, s p e c i a l s k i l l s , l e v e l of r e s p o n s i b i l i t y and/or other f a c t o r s . Since the salary method of payment r e l i e v e s the physician of any d i r e c t economic i n t e r e s t in the patient, some members of the medical profession argue that t h i s weakens the doctor/patient r e l a t i o n s h i p . Glaser has commented that " s a l a r i e d systems may be vulnerable by not providing enough incentive for extra 4 e f f o r t and by omitting e f f e c t i v e penalties for neglecting patients' needs" However, the structure of the HMO can o f f s e t the v u l n e r a b i l i t y associated with - 132 -salary as a method of payment, by implementing u t i l i z a t i o n reviews or reviews of physician performance, as well as rewarding or penalizing certain types of physician behavior through bonuses. While paying a physician by salary may raise questions about quality of care, i t should be noted that medical schools and other "islands of excellence", such as the Mayo C l i n i c , h i s t o r i c a l l y have paid physicians by salary yet have gained reputations for high quality care. However, there may be other advantages associated with these sit u a t i o n s such as prestige. Advantages to Physicians Physicians may be attracted to HMO employment for professional reasons and because of working conditions and economic considerations. Since t h e i r income i s not dependent on the volume of service rendered, and since the organization has the r e s p o n s i b i l i t y for financing and managing the pr a c t i c e , physicians are free of some of the constraints of t r a d i t i o n a l FFS prac t i c e . The f i n a n c i a l structure of the organization, however, creates incentives for e f f i c i e n t c l i n i c a l decision-making and encourages the practice of preventive medicine. Furthermore, access to consultants and a n c i l l a r y services can help physicians achieve optimal performance l e v e l s . The team approach, p r e c i p i t a t e d by the group structure, encourages them to s t r i v e for the respect of t h e i r colleagues, which concurrently a f f e c t s the quality of care. Some physicians, for professional reasons, may be i d e o l o g i c a l l y opposed to FFS practice and thus find t h i s type of practice compatible with t h e i r values. Economic considerations can be a major drawing point. Employment in an HMO means immedidate income, plus fringe benefits such as malpractice insurance, - 133 -l i f e insurance, and retirement plans"*. The economic security offered by the HMO i s very appealing when contrasted with the c a p i t a l investment of setting up a practice then waiting for the practice to grow before receiving any return on t h e i r investment. In addition, schedules set by the HMO allow physicians to have regular time o f f . Educational leave without loss of income i s another advantage. Regardless of the pos i t i v e a t t r a c t i o n , many physicians are l i k e l y to find the r e s t r i c t i o n s on t h e i r autonomy imposed by employment i n a s t a f f model HMO unacceptable. Disadvantages to Physicians Brown has l i s t e d four major disadvantages that are perceived about sa l a r i e d physicians working i n HMOs^. F i r s t , t h e i r freedom to schedule work tasks and manage patients as they see f i t i s r e s t r i c t e d by HMO procedures. Second, in an HMO, review by peers and reviews by the organization's medical d i r e c t o r and executive d i r e c t o r s i s thought necessary to properly reconcile cost and qu a l i t y . Most physicians would f e e l that they were pr a c t i c i n g medicine " i n a g o l d f i s h bowl" under such stringent a c c o u n t a b i l i t y . T h i r d , due to the contractual r e s p o n s i b i l i t y of the HMO, there i s a lega l o b l i g a t i o n to treat c l i e n t s . Many physicians would have d i f f i c u l t y t o l e r a t i n g "bureaucratic c l i e n t s " who demand t h e i r r i g h t s to treatment. F i n a l l y , HMO physicians are l i k e l y to earn less than t h e i r FFS counterparts. Local medical s o c i e t i e s are notorious for t h e i r opposition to both PGPs and HMOs. Consequently, physicians employed by an HMO are l i k e l y to bear the brunt of negative peer pressure from l o c a l physicians. P o l i t i c a l pressure may also be brought to bear through the blocking of s t a f f p r i v i l e g e s for HMO doctors i n - 134 -l o c a l h o s p i t a l s . The pre v a i l i n g image of HMOs, as vast medical complexes based on large m u l t i s p e c i a l t y practices l i k e Kaiser, does not r e f l e c t the norm. Thus, pressures on HMO physicians from the l o c a l medical establishment may be considerable. As a r e s u l t , young physicians and foreign physicians from outside the area may be employed by HMOs as they are attracted by the economic security and may be unaware of l o c a l medical resistance. However, Brown has speculated that the growing surplus of physicians in the United States may make HMOs more at t r a c t i v e to physicians and may even force some to flee FFS practice (n.6 p.58). Advantages to the HMO In terms of meeting the HMO objective of modifying physician practice toward more c o s t - e f f e c t i v e decision making, the s t a f f model has a great deal of po t e n t i a l . The employer/employee r e l a t i o n s h i p with physicians, plus the salary method of payment, increases the p r o b a b i l i t y of HMO objectives being interna-l i z e d by physicians. The salary method of payment f a c i l i t a t e s better f i n a n c i a l planning and better control of costs. The HMO i s able to plan knowing what the fixed cost for physician services w i l l be, even though there may be some va r i a b l e costs, due to bonus incentive payments based on cost saving c r i t e r i a , such as decreased h o s p i t a l i z a t i o n rates. The salary plus incentive payments gives the physicians strong motivation to h o s p i t a l i z e patients only when necessary and to substitute ambulatory care when possible. It also encourages physicians to provide preventive services. These incentives are the reverse of those offered by FFS, where h o s p i t a l i z a t i o n i s a means of augmenting income - 135 -and preventive services are poorly reimbursed by the fee schedule i f at a l l . As well, the salary method of payment i s simpler than other methods of payment and i t reduces administrative costs. Since the physicians' income i s not dependent on the number of services rendered the introduction of lower cost substitute labour, such as nurse p r a c t i t i o n e r s may be less threatening. Thus the s t a f f model HMO has a greater incentive to use substitute labour to o f f e r a lower cost mix of services. But, the professional regulation of paramedical personnel as well as the attitudes of other professionals may pose obstacles to implementation. For example, the GHC of Puget Sound, which i s a s t a f f model HMO, has had problems increasing the use of nurse p r a c t i t i o n e r s because of physician resistance. At the same time, i t s medical s t a f f has s t e a d i l y increased. With increased competition in the Seattle area and pressure to reduce costs these balances of s t a f f are now being care-f u l l y reviewed. But, another pressure that may also impinge on the s i t u a t i o n i s a surplus of physicians available to the public in the Seattle area . Disadvantages of the HMO However, creating an organizational structure to compensate for the weaknesses inherent in salary reimbursement, such as possible low productivity can add to costs and must be balanced against savings. Also, the bad p u b l i c i t y directed at HMO physicians working in a s t a f f model and perpetuated by the l o c a l medical establishment can have adverse e f f e c t s on HMO enrolment. In conclusion, the s t a f f model organization, combined with salary payment, would appear, on balance, to o f f e r the HMO good administrative and f i n a n c i a l control of physician decision-making. However, the HMO i s c l e a r l y the entre-- 136 -preneur in t h i s model, shouldering the f i n a n c i a l r i s k and r i s k transfer to physicians i s minimal through bonus incentive payments. GROUP PRACTICE CONTRACT The l i t e r a t u r e reviewed showed that about 60% of the HMOs in that sample used the group practice contract model for physician services. In 1983, 65% of 280 operating HMOs in the United States used a group practice model^. This figure includes both the s t a f f model of group practice discussed above and the group practice contract model. C l e a r l y , group practice i s a dominant form of medical care organization i n HMOs. The Contract A medical group practice i s an autonomous l e g a l e n t i t y that negotiates a formal contract with an HMO, o u t l i n i n g the duties and obl i g a t i o n s of both pa r t i e s . In t h i s case, the group owns the practice and i s most l i k e l y a partnership of more than two physicians. As the owner of a practice or firm, the physician group may be both entrepreneur seeking to maximize the return on i t s c a p i t a l investment, and supplier of labour input to the firm. A l t e r n a t i v e l y , the physician group may only supply labour services to the firm and the c a p i t a l investment may come from another source. These d i s t i n c t i o n s are c r i t i c a l to understanding the contract with the HMO. For, in some s i t u a t i o n s , the HMO may be contracting only for the physicians' labour services from the group and the HMO w i l l provide the physical f a c i l i t y and a u x i l i a r y personnel q necessary to the physicians' work . i n other cases, the HMO may be contracting with the physician group for both physician labour and other inputs - 137 -supplied by the p r a c t i c e , such as physical f a c i l i t i e s and a u x i l i a r y personnel, that are necessary for the production of medical care services. Some physician groups may contract with an HMO to provide services exclu-s i v e l y to the HMO enrolled population. This arrangement has considerable advantage for the HMO, in terms of achieving i t s objective of modifying physician practice towards more c o s t - e f f e c t i v e decision making. The group, however, may contract to serve HMO enrollees and serve FFS patients as well but t h i s s i t u a t i o n may be l e s s conducive to meeting the HMO objective. The c e n t r a l focus of contract negotiations i s on f i n a n c i a l compensation for the group p r a c t i c e , which i s most often a c a p i t a t i o n rate but could be based on a FFS schedule. Other terms of the contract might include the number of enrollees to be serviced, acceptable u t i l i z a t i o n rates, and s t a f f i n g r a t i o s . On the other hand, areas of c o n f l i c t between the group and the HMO may arise over such issues as standards of q u a l i t y , u t i l i z a t i o n l e v e l s , the use of HMO f a c i l i t i e s and personnel, and the mix of FFS patients to HMO enrollees (n.5 p.123). The group contract model r e f e r s to an HMO contracting with one group exc l u s i v e l y for service (n.7 p.37). Another form of HMO, a medical group network model contracts with two or more mu l t i s p e c i a l t y groups (n.7 p.37). In the s t a f f model, the group contract and the network, enrollees are usually free to choose a primary care physician from within the group who manages t h e i r care. The network model allows enrollees to change groups, i f desired, only at s p e c i f i e d times. The Kaiser plan i s a group contract model that does not allow the enrollee free choice of a primary care physician. In a l l these models, the HMO has to purchase the s p e c i a l t y services of physicians not available in the - 138 -group from outside physicians in order to maintain i t s contractual responsi-l i t i e s to enrollees. For the purpose of c l a r i t y , t h i s discussion has attempted to present a somewhat s i m p l i s t i c view of these arrangements. However, contracts and arrange ments with physicians are highly complex and v a r i a b l e within an HMO and between d i f f e r e n t types of HMOs. The s i t u a t i o n might be summarized as there i s an ex-ception to every rule due to the m u l t i p l i c i t y of possible arrangements. Discus sions with s t a f f at the GHC of Puget Sound indicate that the current trend i s t view HMOs as managed health care systems*^*. Less emphasis i s being placed on d i s t i n c t models due to an increasingly competitive market for HMO services. The goal appears to be for the HMO to obtain the most f l e x i b l e arrangements at the most reasonable rate so that i t can maintain i t s competitive p o s i t i o n . Internal Organization Group practice environments have been known to be conducive to the e f f i c i e n t d e l i v e r y of medical care services in HMOs**. The c o s t - e f f e c t i v e behaviour of the group may be related to external competition for patients, the size of the group, economies of scale or other f a c t o r s . However, Meier and T i l l o t s o n f e e l that While each group practice may have somewhat d i f f e r e n t goals, i t w i l l have some objectives i n d i c a t i v e of i t s attitudes towards the practice of medicine. "group practice i t s e l the medical group has r e f l e c t i n g those goal imposed by the group with those goals, can physician practice de f, through the goals and o r i e n t a t i o n adopted, the physician practice patterns s and the formal and informal controls to ensure i n d i v i d u a l physician compliance serve as the overriding influence over c i s i o n s " (n.l p.74). - 139 -The group, f o r i n s t a n c e , may be i n t e r e s t e d i n i n c o m e - i n c r e a s i n g p r o d u c t i o n , more l e i s u r e time, expansion o f p a t i e n t p o p u l a t i o n , o r c o s t - e f f e c t i v e p r a c t i c e ( n . l p.74). F o r the group to be s u c c e s s f u l i n m a i n t a i n i n g a c o n t r a c t with an HMO, i t must be o r i e n t e d towards c o s t - e f f e c t i v e s t y l e s o f p r a c t i c e . C o n s e q u e n t l y , the group tends to s e l e c t p h y s i c i a n s with d e s i r a b l e p r a c t i c e h a b i t s . The most l i k e l y c a n d i d a t e s are g e a r e d towards ambulatory c a r e p r a c t i c e and are a b l e to accept peer and a d m i n i s t r a t i v e r e v i e w o f t h e i r p r a c t i c e d e c i s i o n s . T y p i c a l l y , the group i s a m u l t i s p e c i a l t y p r a c t i c e composed o f both primary c a r e p h y s i c i a n s and s p e c i a l i s t s . However, i n a network model, i t c o u l d be a l l primary c a r e p h y s i c i a n s , or a l l s p e c i a l i s t s , o r a l l one type o f s p e c i a l t y , such as o b s t e t r i c s and g y n a e c o l o g y. P h y s i c i a n s can e i t h e r be employed by the group o r be p a r t n e r s i n the group. A p e r i o d o f employment i s a common r u l e b e f o r e p a r t n e r s h i p . In a d d i t i o n to the a p p r o p r i a t e s e l e c t i o n o f p e r s o n n e l , the group seeks to modify p h y s i c i a n s t y l e s o f p r a c t i c e through both f o r m a l and i n f o r m a l s a n c t i o n s . C o h e s i v e i n t e r a c t i o n among p h y s i c i a n s can be encouraged i n f o r m a l l y through the p h y s i c a l s t r u c t u r e o f the f a c i l i t y , s t a f f meetings, and f r e q u e n t c o n s u l t a -t i o n s . As a r e s u l t , i n f o r m a l peer r e v i e w can e v o l v e which can a f f e c t p a t t e r n s o f u t i l i z a t i o n . Formal m e d i c a l l e a d e r s h i p , n e v e r t h e l e s s , i s a powerful t o o l f o r s e t t i n g the tone f o r p h y s i c i a n s to m a i n t a i n d e s i r a b l e s t a n d a r d s o f c o s t -e f f e c t i v e p r a c t i c e . In most group p r a c t i c e s , t h e r e i s an e x e c u t i v e committee t h a t g e n e r a l l y a p p o i n t s a l a y a d m i n i s t r a t o r to be r e s p o n s i b l e f o r the non-medical a s p e c t s o f the group, such as l e g a l problems, a c c o u n t i n g , the p l a n t , and equipment. Depending on c i r c u m s t a n c e s , the group w i l l e i t h e r e l e c t a p h y s i c i a n to be the m e d i c a l d i r e c t o r o r work c l o s e l y with a m e d i c a l d i r e c t o r a p p o i n t e d by the HMO. The m e d i c a l d i r e c t o r p l a y s a c r i t i c a l r o l e i n m a i n t a i n i n g - 140 -group morale, monitoring compliance with r u l e s , overseeing formal peer review and any corrections of d e f i c i e n c i e s , making arrangements with outside s p e c i a l i s t s for services not provided by the group, r e c r u i t i n g and selecting physicians, and scheduling s t a f f (n.5 p.131). To encourage more c o s t - e f f e c t i v e decision making by physicians, the medical di r e c t o r can be instrumental in designing s t a f f education programs and administrative p o l i c y to r a i s e cost consciousness. Often, information feedback of u t i l i z a t i o n and cost data i s employed to educate physicians about c o s t - e f f e c t i v e practice patterns. S i m i l a r l y , s t a f f education can be directed at less costly treatment methods that can substitute for more expensive inpatient h o s p i t a l care. Also, administrative p o l i c i e s may be implemented for the formal review and authorization of physician decisions about admission to h o s p i t a l and r e f e r r a l s to outside s p e c i a l i s t s ( n . l pp.75-76). Because the group practice i s at f i n a n c i a l r i s k in the provision of medical care services to HMO enrollees, these organizational mechanisms are necessary since the group i s dependent on the decisions of i n d i v i d u a l physicians for i t s f i n a n c i a l v i a b i l i t y . Methods of Payment The HMO shares the r i s k for the provision of medical care services with the group prac t i c e , through reimbursement of the practice by a negotiated capitation rate. In theory, r i s k placement or r i s k sharing ought to f a l l to the party with the greatest control over the desired outcome. In r e a l i t y , r i s k sharing i s 12 often a function of the bargaining power of the respective HMO components Since physicians control decisions about the u t i l i z a t i o n of services, and since the HMO objective i s to modify physician practice toward more c o s t - e f f e c t i v e - 141 -decision making, i t i s l o g i c a l then that r i s k be shared with the physician group as an incentive to achieving the desired outcome. Most commonly in t h i s model, the group i s at r i s k for both inpatient and outpatient medical care. However, t h i s could vary i n r e l a t i o n to the bargaining positions assumed by the HMO and the group practice. The c a p i t a t i o n rate, normally i s based on a per member per month payment to the group practice i n return for the provision of necessary medical care (n.12 p.69). The ca p i t a t i o n rate i s averaged across a l l enrollees and assumes average u t i l i z a t i o n of services, average unit costs, and average composition of the enrolled population, according to age and sex d i s t r i b u t i o n (n.12 p.76). The r i s k s then are s h i f t e d to the group practice with respect to any deviation from the average in u t i l i z a t i o n , unit cost, and age-sex d i s t r i b u t i o n in the popula-t i o n . For instance, the group practice has no control over the mix of enrollees so i t bears the f i n a n c i a l gains or losses for any deviation from an average age-sex population d i s t r i b u t i o n that r e s u l t s i n non-average patterns of u t i l i z a -t i o n . Therefore, i t s incentive i s to provide necessary service and, where possible, eliminate excessive or expensive services. Other methods of c a p i t a -tion payment may adjust the rate according to the type of contract sold by the HMO to the enrollee or to the u t i l i z a t i o n c h a r a c t e r i s t i c s of the enrolled population. Both methods involve d i f f e r e n t placement of risk - s h a r i n g . According to Glaser, many administrators view the capitation method of payment as a favourable compromise between salary and FFS (n.4 p.254). It i s believed to foster the practice of good medicine since i t f a c i l i t a t e s continuity in the doctor/patient r e l a t i o n s h i p in times of sickness or health. Compared with FFS payment, the turnover of patients i s lower. Since the physician stands to gain no added income from treatments, he has an incentive to practice - 142 -preventive medicine. There i s an incentive, likewise, to discourage the use of unnecessary or i n e f f e c t i v e treatment procedures. Under t h i s method of payment, physicians' treatment decisions are more l i k e l y to favour the selection of the least cost mix of resources and procedures to maintain a standard of health for the beneficiary population (n.2 p.13). No payment method, however, i s without weakness. The ca p i t a t i o n method can encourage the group practice to sign up a large roster of patients in order to increase income. Then, i t may be motivated to avoid serving or underserving the needs of that population. An alternative incentive might be to accept on to the roster only patients who are l i k e l y to require minimal care, thus screening out high r i s k groups such as the e l d e r l y . Checks and balances such as u t i l i z a t i o n reviews or q u a l i t y assurance programs, consequently, need to be b u i l t into the organizational structure in order to o f f s e t the weaknesses mentioned. While the group as practice owner i s reimbursed by the HMO, on a capitation rate, i t i s rare that an i n d i v i d u a l physician i s reimbursed by c a p i t a t i o n . As a r u l e , the group members pool t h e i r income from a l l sources, including c a p i t a t i o n payments, FFS payments, and return on c a p i t a l investment, i f applicable; then, af t e r expenses are deducted, net income i s d i s t r i b u t e d on the basis of a pre-arranged schedule developed by the physicians themselves. One method of di v i d i n g income might be to consider each member of the medical team of equal value to the group. More frequently, however, the schedule i s not one of even d i s t r i b u t i o n but i s rather based on a formula that considers length of time in the partnership, t o t a l bookings or number of patients served, professional t r a i n i n g and experience, s p e c i a l t y , and other subjective factors (n.5 p.123). Furthermore, i t i s important that incomes for the group be competitive with FFS - 143 -practice in order to attract and retain well q u a l i f i e d and competent physicians. Evans (n.2 p.8) has remarked that the t o t a l income of self-employed p r a c t i t i o n e r s , such as group partners, has three d e r i v a t i v e sources. The physicians earn a salary or wage for t h e i r labour input into the p r a c t i c e . Insofar as there has been a c a p i t a l investment in physical plant and equipment, they earn a return on t h e i r invested c a p i t a l . F i n a l l y , they receive entrepreneurial p r o f i t s equal to the amount by which the net practice income exceeds the above-mentioned amounts. Entrepreneurial p r o f i t s need not necessarily be p o s i t i v e and indeed could be negative i f the practice has not been able to meet i t s objectives of c o s t - e f f e c t i v e decision making. In t h i s case, the losses would be shared by the group members. Advantages to Physicians Physicians interested in working in group practices with a s i g n i f i c a n t pre-payment population have b a s i c a l l y the same considerations that were mentioned in the s t a f f model: professional reasons, working conditions, and economic considerations. The team approach allows physicians to share knowledge and r e s p o n s i b i l i t i e s , thus encouraging the best u t i l i z a t i o n of s k i l l s , p a r t i c u l a r l y for s p e c i a l i s t s . The group provides an atmosphere for keeping up with the l a t e s t medical knowledge and a stimulus for high standards of p r a c t i c e , in order to r e t a i n the respect of colleagues in the group. The a v a i l a b i l i t y of a n c i l l a r y services and personnel through economies of scale f a c i l i t a t e d by the group, complements the group concern for quality of care and standards of practice. - 144 -Usually, the group considers funds and time for further study and tr a i n i n g as part of physicians' remuneration. Due to professional development a c t i v i -t i e s , physicians may spend less time in actually seeing patients (n.5 p.106). However, they tend to see as many patients in a shorter time period than t h e i r 13 . . FFS counterparts i n a longer time period . Physicians seem to enjoy the co-operative s p i r i t of the group which enhances a sense of professionalism. The regular scheduling of time o f f and vacations i s con t r o l l e d by physicians in t h i s model rather than by the organization as in the s t a f f model. In sharing after-hours emergency c a l l s , physicians f e e l a sense of comfort knowing that continuity of patient care i s provided by team members whom they know and respect. While reaping these benefits, physicians s t i l l r e t a i n the entrepreneurship of private p r a c t i c e . The c a p i t a l r i s k s involved in partnership, however, are less than those of setting up a solo practice. The group structure, also, r e l i e v e s physicians of many of the business aspects of the pr a c t i c e , for which they are not trained. Despite some f i n a n c i a l r i s k s , t h e i r income, supplemented by fringe benefits, i s often immediately a v a i l a b l e . In solo p r a c t i c e , i t may take longer to develop a practice so income may be limited for some time. Because of these conditions, PGPs tend to attract . . 14 younger physicians , who tend to work fewer hours than FFS physicians and correspondingly earn somewhat lower incomes than FFS (See n.13 and n.14 Goodman and Swartwout). Disadv antages On the other i n v i t i n g . The co hand, some physicians would not find prepaid -ordinated e f f o r t required by the group could group practice threaten t h e i r - 145 -autonomy or i n d i v i d u a l i t y . They would find i t r e s t r i c t i v e to have to conform to standards of practice and quality of care reviews and to submit to administra-t i v e and peer review. Since the control of a patient may reside with the group, many physicians would object to not having " t h e i r own patients" and resent sharing l i a b i l i t y with the group. Also, patients themselves may protest at not having " t h e i r own doctor". Mechanic's study suggests that many PGPs achieve additional economies by l i m i t i n g the resources available for ambulatory medical care r e l a t i v e to demand. This s i t u a t i o n forces physicians to process patients more r a p i d l y , in an assembly l i n e fashion. Other side e f f e c t s might include the rationing of services through long waiting periods or a possible dependence on urgent care f a c i l i t i e s provided by the HMO to meet acute needs of patients. Thus, he concludes that the s i t u a t i o n p r e c i p i t a t e d by l i m i t i n g resources does l i t t l e to promote continuity of care or patient perception of the responsiveness of medical care (n.13 p.204) which in the long term could be detrimental to HMO enrolment. Since PGPs seem to attract younger physicians and incomes are s l i g h t l y lower than FFS prac t i c e , t h i s s i t u a t i o n might be further complicated by a high turnover rate of physicians. Advantages to the HMO Contracting with a group practice for the provision of physician services i s one means available to the HMO for providing medical care services to i t s enrolled population. The cap i t a t i o n rate negotiated with the group i s a way for the HMO to share some of i t s r i s k while, at the same time, o f f e r i n g an incentive for c o s t - e f f e c t i v e decision making by physicians. The cap i t a t i o n rate, l i k e the - 146 -salary in the s t a f f model, represents a fixed cost to the HMO which allows for better f i n a n c i a l planning and lower administrative costs. However, the extent to which the HMO cost-reducing objectives are i n t e r n a l i z e d by group practice physicians may not be as pervasive as in the s t a f f model. In t h i s model, the HMO has less control over the organization and management of physician a c t i v i t i e s and, therefore, i t i s more dependent on the incentives offered by the method of payment to achieve i t s o b j e c t i v e s . Furthermore, the cost-reducing behaviour of the group can be affected by the r a t i o of HMO to FFS patients or by r e f u s a l of the group to accept the r i s k for inpatient h o s p i t a l services. Ideally, the HMO would choose a group w i l l i n g to accept the r i s k for h o s p i t a l care and to see only i t s e n r o l l e e s , but i t s choices could be limited by the a v a i l a b i l i t y of groups in the community or by i t s bargaining position with a group. Over time, the HMO may be eventually able to negotiate a contract more favourable to i t s objectives. The effectiveness of a group practice contract also i s conditional on i n d i v i d u a l circumstances, such as the age of the HMO, the s i z e of the group or the external competitive environment. I f the group practice skimps on resources as a means of achieving cost reduction, the e f f e c t s outlined by Mechanic could have a negative impact on HMO enrolment. The scepticism of l o c a l medical s o c i e t i e s about HMO a f f i l i a t i o n could r e i n f o r c e t h i s negative e f f e c t although medical resistance i s often more related to the fear of change to an a l t e r n a t i v e system of medical care, and the fear of loss of income due to increased competition. A l l things considered, the p o t e n t i a l for the HMO to meet i t s c o s t - e f f e c t i v e objectives, while simultaneously assuring access to service and necessary care - 147 -appears to be stronger in the s t a f f model than in the group practice contract model. Evidence seems to indicate, nevertheless, that the group practice contract i s the dominant model, perhaps because of greater a c c e p t a b i l i t y to physicians. INDIVIDUAL PRACTICE ASSOCIATIONS Individual practice associations are the most recent development in physi-cian organization i n HMOs. Of the 280 HMOs in the United States, i n 1983, 99 used the IPA model of physician organization (n.7 p.2). Since 1980 the IPA model has been employed con s i s t e n t l y by approximately one-third of a l l HMOs (n.7 p.2). The following discussion w i l l take the perspective of the HMO contracting with an IPA for the provision of physician services. Even though i t acknowledges that the IPA might o f f e r other health services, i t recognizes that physician services predominate. The Contract The HMO negotiates a contract with the IPA, which i s a separate le g a l e n t i t y having as i t s primary objectives the del i v e r y , or arrangements for the delivery of health services, and which has entered into a written services arrangement or arrangements with persons who are licenced to practise medicine or with other health professions, such as dent i s t r y or optometry*^. Individual physicians, or occasionally small groups of physicians, i n private practice, v o l u n t a r i l y e n l i s t with the IPA. This signals t h e i r willingness to accept HMO enrollees as patients. The HMO's contract with the IPA allows i t s - 148 -enrollees to choose a physician from the IPA's l i s t . The enrollees receive medical care services from these physicians in t h e i r respective o f f i c e s . These physicians i n d i v i d u a l l y are owners of t h e i r practice or firm. Thus, as entrepreneurs, they have invested c a p i t a l to obtain and equip an o f f i c e . Also, they may consider that they have made an investment in human c a p i t a l with respect to t h e i r professional education and t r a i n i n g . As inputs into the pro-duction process of the pr a c t i c e , they may h i r e the labour of a u x i l i a r y personnel, such as s e c r e t a r i a l s t a f f or nurses. Their own labour then i s combined with the other inputs of c a p i t a l investment, hired labour, and materials and supplies, to produce medical care services received by the HMO enrollee. The HMO, therefore, in contracting with the IPA, receives not only the labour services of physicians but also a l l the other inputs contributed by them to the production process of medical care. Internal Organization A l o c a l medical society usually forms an IPA and then appoints physicians from i t s membership to the board of d i r e c t o r s of the association. The board, subsequently, appoints a lay administrator, who reports to the president of the board and i s responsible for: accounting and finance, consumer r e l a t i o n s , marketing, enrolment and that part of the medical program concerned with claims' review (n.5 p.132). Instead of selecting a medical d i r e c t o r as the group practice model does, the president of the board, who w i l l be a physician, i s responsible for the medical and administrative functions of the organization. However, many of the medical administrative functions, such as standards, fees, and u t i l i z a t i o n review, are delegated to physician committees that are d i r e c t l y - 149 -accountable to the board. Thus, the president of the board, i n addition to board r e s p o n s i b i l i t i e s , assumes the role of both medical d i r e c t o r and executive d i r e c t o r for the IPA. Individual practice associations face organizational problems s i m i l a r to those of group practices. They must be able to o f f e r services to the HMO at a cost low enough to keep the HMO premium competitive, otherwise enrollees w i l l be attracted away to alternative plans. The f i n a n c i a l v i a b i l i t y of the IPA, l i k e that of the group prac t i c e , i s ultimately r e l i a n t on the c o s t - e f f e c t i v e practice decisions of i n d i v i d u a l physicians. I r o n i c a l l y , an outside threat of competition, such as a group practice HMO, usually forces IPA physicians to focus on c o s t - e f f e c t i v e goals. At the same time, t h e i r behaviour tends to c l o s e l y resemble the i n e f f i c i e n t c h a r a c t e r i s t i c s of t r a d i t i o n a l FFS p r a c t i -tioners and poses a s i g n i f i c a n t i n t e r n a l threat to the attainment of cost containment goals by the IPA. The IPA has an incentive to e n l i s t as many physicians as possible in order to be a t t r a c t i v e to the HMO. Since i t i s an open panel pra c t i c e , any licensed physician i s free to e n l i s t with the organization. Thus, the IPA i s not able to select physicians with practice habits conducive to i t s goals. Meier and T i l l o t s o n point out that "whereas a group can match medical resources to the needs of the population, an IPA i s usually forced to accommodate whatever s p e c i a l t y mix occurs from voluntary p a r t i c i p a t i o n of the community's physicians - with obvious cost consequences i f that mix i s skewed towards higher priced s p e c i a l t y care. This i n f l e x i b i l i t y makes the modification of physician behaviour extremely c r i t i c a l to the IPA" ( n . l p.78). - 150 -This s i t u a t i o n i s further complicated by the geographical dispersion of physicians and the v a r i a t i o n in practice o r i e n t a t i o n among physicians. Physicians must reconcile the c o s t - e f f e c t i v e expectations of the IPA with the demands of FFS patients who may constitute the greater majority of t h e i r p r a c t i c e . Brown estimates that only about 10% of IPA physician practices are HMO enrollees (n.6 p.53). The l i k e l i h o o d , then, of t h e i r a l t e r i n g t h e i r practice patterns towards IPA standards i s low. Also, because of i t s association with the l o c a l medical society, the IPA i s p o l i t i c a l l y constrained from imposing sanctions on transgressors. Given t h i s context, the IPA must turn to formal organizational mechanisms in an e f f o r t to achieve i t s goals. Peer i n t e r a c t i o n i s fostered largely through formal u t i l i z a t i o n review programs. The effectiveness of these programs l i e s i n r a i s i n g awareness that physician practice decisions are under scrutiny, but i n t e r a c t i o n i s usually r e s t r i c t e d to a few physicians, r e l a t i v e to the number of p a r t i c i p a t i n g physicians. S i m i l a r l y , r e s t r i c t e d peer i n t e r a c t i o n occurs on various policy and administrative committees. This weak cohesion among p a r t i c i p a t i n g physicians may be attributed to geographical dispersion or perhaps a lack of commitment to the organization for fear of losing some of the autonomy associated with independent p r a c t i c e . Medical leadership, likewise, i s i n e f f e c t i v e in promoting and enforcing c o s t - e f f e c t i v e practice standards, as medical leaders are perceived as f i r s t among equals rather than a superior authority ( n . l p.78). The IPAs, consequently, lean heavily on administrative procedures to control u t i l i z a t i o n , such as preadmission c e r t i f i c a t i o n of e l e c t i v e surgery, authorization of r e f e r r a l s to non-IPA s p e c i a l i s t s , second s u r g i c a l opinions, and preadmission testing ( n . l p.78). For physicians accustomed to the independence - 151 -and autonomy of private p r a c t i c e , these procedures are often cumbersome and d i s t a s t e f u l . Method of Payment The IPA i s reimbursed by c a p i t a t i o n , negotiated with the HMO, which places some r i s k on the IPA and gives i t an incentive to d e l i v e r services within that fixed amount. However, the IPA reimburses physicians on a FFS basis, which provides them with l i t t l e incentive for eit h e r economy or e f f i c i e n c y . Evans (n.2 pp.11-12) has proposed that t h i s t r a d i t i o n a l method of payment encourages each practice to produce large numbers of reimbursable procedures and to stress those y i e l d i n g the highest d o l l a r return per unit of provider time. Because these procedures are valued and paid for independent of t h e i r impact on the patient's health, unnecessary, wasteful and d u p l i c a t i v e services may be performed. In addition, t h i s method could encourage the wrong mix of procedures; for example, h o s p i t a l care rather than ambulatory care. Physicians have no incentive to minimize treatment costs; on the contrary, in as much as treatment costs represent income, physicians have an incentive to maximize them. These incentives are in d i r e c t opposition to those of the IPA and the HMO, since the cap i t a t i o n rate provides an incentive to contain costs in order that the organization may remain f i n a n c i a l l y solvent. As a r e s u l t , most IPAs guard against f i n a n c i a l d e f i c i t s by withholding a percentage of physicians' fees (n.l p.80). The amount withheld, however, i s c r i t i c a l : i f i t i s too low, i t may not produce an incentive to a l t e r decision making; i f i t i s too high, some physicians may leave the IPA. An alternative approach i s the imposition of a c e i l i n g to control physician fees (n.l p.80). While t h i s may have a desirable .- 152 -e f f e c t on bringing high cost physicians under c o n t r o l , i t could encourage other physicians to increase t h e i r fees to allowable l e v e l s . F i n a n c i a l incentives, l i k e the organizational mechanisms in the IPA, may not necessarily be successful in modifying physician practice patterns. F i n a n c i a l d e f i c i t s incurred by the IPA are passed on to physicians by not remitting a portion of the withheld fee. Instead of adapting more c o s t - e f f e c t i v e decision making to compensate for f i n a n c i a l l o s s , physicians may either leave the IPA or attempt to r e t r i e v e l o s t income by adding more services to treatment regimens. Given the weaknesses of i n t e r n a l f i n a n c i a l and organizational mechanisms for modifying physician practice patterns, the threat of an external force such as competition seems to be the only remaining p o s s i b i l i t y to stimulate change in the practice patterns. Threat of Competition In general, IPAs which are established in response to group practice HMO development, seem to have stronger competitive incentives to contain costs**'. In Minneapolis-St. Paul, for example, two IPAs, HMO Minnesota and Physicians' Health Plan, were a competitive response by t r a d i t i o n a l FFS physic-ians to f i v e other group practice HMOs in that area. Christianson and McClure found that t h i s competition helped to reduce h o s p i t a l i z a t i o n , contain costs, and improve access to medical services. At the same time, i t focused attention on consumer s a t i s f a c t i o n with medical care services, increased the range of consumer choice, and gave consumers better information about providers*''. The degree of competitiveness in a p a r t i c u l a r market area, therefore, may be an important determinant of IPA performance. For the IPA to be competitive, i t - 153 -must eventually model the practice standards adopted by group practice HMOs, since those standards are r e f l e c t e d in the r e l a t i v e costs of the two programs (n.l p.80). Without competition, the IPA has the pote n t i a l to dominate or monopolize the d e l i v e r y of health services in i t s market area. Some IPAs, in fac t , may have been consciously designed to monopolize medical care services in an area, 18 in order to ward o f f the entrance of group practice HMOs into the market Monopoly control in a market area, however, could have severe adverse e f f e c t s on 19 ca p i t a t i o n rates, or the quality of care, or both Advantages to Physicians The IPA allows physicians to practice t r a d i t i o n a l FFS medicine that i s consistent with the pr e v a i l i n g ideology of the medical profession. Indeed, the development of IPAs was a strategy employed by l o c a l medical s o c i e t i e s to preserve these values and thwart the economic competition of closed panel group practice HMOs. The medical profession perceives the group practice HMO as s h i f t i n g some of the control of physicians to the organization. In i t s view, any reduction in autonomy represents a loss of prestige and poses a threat to the status of the profession, as well as a loss of i d e n t i t y as 20 . . . entrepreneurs . Consequently, physicians dominate the management accountability of the IPA and the loosely-integrated structure does not infringe on t h e i r i n d i v i d u a l autonomy or i d e n t i t y as entrepreneurs. The open panel practice of the IPA allows any physician the freedom to j o i n the organization whereas closed panel group practice HMOs select physicians according to t h e i r needs. Subsequently, the open panel allows the patient the - 154 -freedom to choose the physician who w i l l be responsible for h i s care. Although the thrust of peer review of u t i l i z a t i o n and standards practice in IPAs tends to be voluntary and educational in focus, i t allows i n d i v i d u a l s physicians more 21 control over the d e f i n i t i o n of quality of medical care . On the other hand, the group practice HMO tends to influence the quality of medical care towards the perspective of the organization, r a t i o n a l i z i n g the physician's role in an attempt to eliminate expensive or unnecessary practices (n.20 p.618). The IPA, also, permits physicians to practice in the settings of t h e i r choice rather than i n a c e n t r a l i z e d location of the group practice HMO. The geographical dispersion of physicians i s f e l t to be advantageous to a c c e s s i b i l i t y for patients. F i n a l l y , the IPA supplies physicians with a source of c l i e n t e l e which may be p a r t i c u l a r l y appealing i f they are building a practice. Disadvantages to Physicians Withholding of a portion of t h e i r fees and possibly sharing in any finan-c i a l losses of the IPA may be objectionable to some physicians. Others may have d i f f i c u l t y complying with the administrative procedures for the review of t h e i r u t i l i z a t i o n decisions. However, physicians can eit h e r become more involved in the organization, in order to act on t h e i r concerns, or they can withdraw from the IPA with l i t t l e d i f f i c u l t y . Advantages and Disadvantages to the HMO Of a l l the models of physician organization discussed, the IPA model i s l i k e l y to be the least e f f e c t i v e in modifying physician practice towards cost-- 155 -e f f e c t i v e decision making. Due to i t s many s i m i l a r i t i e s to t r a d i t i o n a l FFS practice, i t has the p r o b a b i l i t y of emulating the i n e f f i c i e n c i e s of that system. Why then, would an HMO choose t h i s model? In a market area with several competing HMOs, the IPA model may o f f e r an HMO the opportunity for product d i f f e r e n t i a t i o n . Some consumers who have established a r e l a t i o n s h i p with a physician may be reluctant to f o r f e i t that r e l a t i o n s h i p to j o i n a closed panel HMO. Others may value highly the freedom to choose a physician and thus resent the limited choices offered in a closed panel HMO. HMOs, in general, are known to be se n s i t i v e to consumer preferences, often having formal grievance procedures to ensure consumer s a t i s f a c t i o n with services. The choice of an IPA model by an HMO may indicate a desire to meet a consumer preference expressed in the population. This s e n s i t i v i t y to consumer preference may prove to be a very e f f e c t i v e marketing t o o l for a t t r a c t i n g enrollees. The geographic dispersion of physicians in an IPA may be more convenient for enrollees than having to t r a v e l to a central l o c a t i o n . However, lack of c e n t r a l i z a t i o n could mean that an enrollee might have to t r a v e l to several locations to get required services. Mechanic's study (n.13 p.203) found that FFS physicians spend more time with each patient even though they may work longer hours. Although t h i s may be economically advantageous to the physician, enrollees may also be more s a t i s f i e d than i f they receive assembly-line processing in a group practice model. Resistance from l o c a l medical s o c i e t i e s , that has been prevalent in other models, would be greatly reduced with t h i s model, which might constitute a p o s i t i v e e f f e c t on enrolment. - 156 -The main disadvantage of t h i s model to the HMO i s the p r o b a b i l i t y of higher costs which could present d i f f i c u l t i e s in keeping premiums competitive. The HMO pays a fixed cost to the IPA for medical care services just as i t pays a fixed cost in the other models. However, the e f f i c i e n c i e s achieved in the other models, through c e n t r a l i z a t i o n and economies of scale in the use of equipment and personnel, may l a r g e l y be absent in the IPA. Also, the economic incentives of the FFS method of payment and weak organizational control in the IPA are l i k e l y to contribute to higher costs, which would then have to be r e f l e c t e d in the c a p i t a t i o n rate. As a r e s u l t , the HMO i s more dependent on external v a r i a b l e s , such as competition, over which i t has l i t t l e c o n t r o l , in order to achieve i t s objectives. Another external v a r i a b l e which may fluctuate i s the number and type of physicians j o i n i n g the IPA. If the IPA i s small, with a mix of physicians appropriate to the needs of the population, the chances of achieving cost containment are higher. In conclusion, the HMO must balance the tradeoffs of a t t r a c t i n g enrollees by d i f f e r e n t i a t i n g i t s product to meet with t h e i r preferences against the p o s s i b i l i t i e s of higher costs and dependence on external v a r i a b l e s to influence cost containment. CANADIAN EXPERIENCE WITH ALTERNATE FORMS OF PHYSICIAN ORGANIZATION The Community Health Centre Model The CHC model in Canada has operated e s s e n t i a l l y on a s t a f f model of physician organization, as described for the HMO. In B r i t i s h Columbia, Ontario and Quebec, centres have been funded through global budgets from t h e i r - 157 -respective health M i n i s t r i e s . Physicians who are largely general p r a c t i t i o n e r s are hired as employees of the centre and are paid salary and fringe b e n e f i t s . The centre provides f a c i l i t i e s , support s t a f f and arranges for or provides a n c i l l a r y services. The global budget usually allows these centres to provide services for those riot currently covered under the health insurance program, for example, new immigrants or the unemployed. Depending on the number of physicians employed, there may be a medical d i r e c t o r or one physician designated to represent medical profession i n t e r e s t s in the centre. A team approach to health care d e l i v e r y i s common in these centres which involves the integration of physicians and other health and s o c i a l service professionals in d e l i v e r i n g care to patients. Physicians are equal members of such a team but may not necessarily be the team leader. Just as HMO s t a f f model physicians met resistance from t h e i r medical profession colleagues, s i m i l a r experiences happened in Canada. In a l l provinces, the medical profession demonstrated strong resistance to CHCs, from p r o v i n c i a l l e v e l professional organizations to l o c a l physicians. They worried that accountability to c i t i z e n boards and the team concept would i n t e r f e r e with t h e i r authority to make medical decisions. Also, the use of alternate methods of payment other than FFS was perceived by the medical profession as an inherent threat to quality of care, although there was no evidence to suggest that CHC patients received i n f e r i o r care. The atmosphere in Sault Ste. Marie, Ontario was p a r t i c u l a r l y h o s t i l e . Group Health Association physicians were rejected for membership in the l o c a l medical society. As well, there was great d i f f i c u l t y over acquiring admitting p r i v i l e g e s in one of the l o c a l h o s p i t a l s , and r e f e r r i n g patients to l o c a l - 158 -s p e c i a l i s t s . The physicians in t h i s setting formed a partnership that contracted with the board in order to side step issues of accountability and 22 decrease l o c a l h o s t i l i t y about t h e i r being employees of the board In Quebec, the professional associations representing s p e c i a l i s t s and general p r a c t i t i o n e r s were c r i t i c a l of CLSCs and the p r o d u c t i v i t y of t h e i r physicians. For a time, a union of CLSC physicians was refused a f f i l i a t i o n with the Quebec Federation of General P r a c t i t i o n e r s . As a r e s u l t of the Saskatoon Agreement, community c l i n i c s in Saskatchewan were r e s t r i c t e d to using FFS 23 remuneration as a method of payment to physicians . Also, the r o l e of Community Health Services Associations in r e l a t i o n to physicians was limited by 24 the Agreement to that of landlord/tenant rather than employer . The progress of community c l i n i c s as well was impeded by the College of Physicians and Surgeons i n Saskatchewan which used i t s power to prevent advertising and to constrain the granting of h o s p i t a l p r i v i l e g e s (n.22 p.133). Protestations of the Ontario Medical Association to the Minister of Health, s i m i l a r l y , were i n f l u e n t i a l in slowing CHC development and prompting a 25 p r o v i n c i a l task force that was to recommend a plan for evaluating the provision of primary care services which may be a l t e r n a t i v e s to normative or 26 conventional means of services . In B.C., the expressed view of the medical profession that CHCs may well have a place in i s o l a t e d and special 27 areas was i n f l u e n t i a l i n the s e l e c t i o n of remote areas as locations for CHRHCs. - 159 -The Health Service Organization Model The Ontario HSO program with i t s c a p i t a t i o n funding base i s the most s i m i l a r Canadian model to the HMO group practice contract. Although there are some substantial d i f f e r e n c e s , the HSO, for instance, has a contract with the MOH to provide services under t h i s program rather than being an organization providing prepaid health care services. Stoddart provides a pertinent de s c r i p t i o n of the program's funding. "Capitation funding as applied to the HSO program i s a t o t a l d o l l a r amount paid monthly for a l l e l i g i b l e Ontario Health Insurance Plan (OHIP) insured persons who have enrolled in the HSO. Capitation-negation i s the term used to describe an amount of money subtracted from the monthly c a p i t a t i o n payment based on the number of e l i g i b l e enrollees in a given month who received health services from sources other than the HSO, despite the fact that the HSO agreed to provide and be accountable for those services. The amount subtracted (negated) i s equal to the payment which otherwise would have been made for those roster members in question."^^ The c a p i t a t i o n rate paid to the HSO i s determined by the M i n i s t r y and i s based on the current OHIP fee schedule plus an adjustment for the age and sex of the population. In addition, the Ambulatory Care Incentive Program provides an incentive payment to HSOs which have demonstrated a reduction in h o s p i t a l u t i l i -zation for t h e i r rostered patients compared to a s p e c i f i e d comparison population (n.28 p.10). From t h i s revenue, the HSO pays for i t s f a c i l i t i e s , equipment and s t a f f and determines i t s own formula for reimbursing i t s physicians. In the twenty-one operating HSOs, there are one hundred and t h i r t y - n i n e physicians p r a c t i s i n g , of which roughly two-thirds are primary care physicians 29 and one-third are s p e c i a l i s t s . These HSOs, also, employ a t o t a l of thirty-one nurse p r a c t i t i o n e r s and one hundred and twenty-seven health related - 160 -s t a f f (exluding s e c r e t a r i a l , administrative and maintenance s t a f f ) (n.29). The composition of non-medical s t a f f in these organizations suggests perhaps a d i f f e r e n t s t y l e of medical care practice associated with a d i f f e r e n t method of funding. For services not available in the HSO, patients are referred to appropriate outside sources of care which are covered through OHIP and are not charged against the HSO c a p i t a t i o n rate (n.29). The HSO program appears to att r a c t physician practices that have invested t h e i r i n i t i a l c a p i t a l and have an established c l i e n t e l e . Thus, they j o i n the program in order to be able to experiment with d i f f e r e n t styles of practice not l u c r a t i v e in the FFS system. The HSO program seems to be more acceptable to the medical profession and has had less resistance than the CHCs. On the other hand, there are some B r i t i s h physicians who immigrated to Canada in order to avoid c a p i t a t i o n who would be very r e s i s t a n t to t h i s form of reimbursement being introduced here. While in general, HSOs have not developed in s i g n i f i c a n t numbers to make an impact on FFS physicians, approximately h a l f the population of Sault Ste. Marie are rostered in i t s HSO (n.29). There i s no Canadian counterpart to the IPA model HMO. In general, alternate forms of medical care practice have not developed extensively enough to seriously threaten FFS p r a c t i c e . The response of physicians in Quebec to the economic and ideologic threat of CLSCs was to encourage the development of FFS p o l y c l i n i c s which were b a s i c a l l y group pr a c t i c e s . This experience shows that Canadian physicians can make a competitive response that might, l i k e an IPA, be conducive to reducing some costs. - 161 -FOOTNOTES 1. Jerry Meier and John T i l l o t s o n , "Influence of Physician Practice Setting on U t i l i z a t i o n and Cost of Service in an HMO", Topics i n Health  Care Financing 8 (Winter 1981) :73. 2. Robert G. Evans, "Paying the Dentist: How, To Whom and For What?", paper prepared for the Dental Health Care Services and Epidemiology Research Unit, Faculty of D e n t i s t r y , U n i v e r s i t y of Toronto, Toronto, March 1975, p.7. 3. Milton I. Roemer, "On Paying the Doctor and the Implications of D i f f e r e n t Methods", Journal of Health and Human Behavior 3 (Spring 1962) :5. 4. William A. Glaser, Paying the Doctor: Systems of Renumeration and Their E f f e c t s , (Baltimore" The Johns Hopkins Press, 1970), p.204. ! ' i 5. Robert G. Shouldice and Katherine H. Shouldice, Medical Group Practice' - and Health Maintenance Organizations, (Washington, D.C: Information Resources Press,1978),p.107. 6. Lawrence D. Brown, P o l i t i c s and Health Care Organization: HMOs as Federal P o l i c y , (Washington, D.C: The Brookings I n s t i t u t i o n , 1983), p.53. 7. National HMO Census June 30, 1983 ( E x c e l s i o r , Minnesota: InterStudy 1984), p.2. 8. Interview with Kathy Devine, Manager, Corporate Nursing Operations Group Health Co-operative of Puget Sound, Seat t l e , Washington, 14 May 1985. 9. This type of contract d i f f e r s from the s t a f f model as the group i s paid a negotiated sum by the HMO. Then, the group makes decisions about how physicians within the group w i l l be paid. 10. Interview with Jane C r i g l e r , Vice President for Planning, Group Health Co-operative of Puget Sound, Seattle, Washington, 14 May 1985. 11. See F.E. Graham, "Group Versus Solo Practice Arguments and Evidence", Inquiry 9 (June 1972):49-60 and R. Pineault, "The E f f e c t of Prepaid Group Practice on Physician U t i l i z a t i o n Behavior", Medical Care 14 (1976) :121-136. - 162 -12. Robert A. Zelten, "Provider Reimbursement Alternatives and the Placement of F i n a n c i a l Risk: A Framework for Analysis", Topics in Health Care  Financing 8 (Winter 1981) :67. 13. David Mechanic, "The Organization of Medical Practice and Practice Orientation among Physicians in Prepaid and Nonprepaid Primary Care Settings", Medical Care 13 (March 1975):203. 14. See Wallace H. Cook, " P r o f i l e of the Permanente Physician", i n The Kaiser Permanente Medical Care Program ed. Anne R. Somers (New York: The Commonwealth Fund, 1971), pp.97-105 and Louis J . Goodman and James E. Swartwout, "Comparative Aspects of Medical P r a c t i c e : Organizational Setting and F i n a n c i a l Arrangements i n Four Delivery Systems", Medical Care 22 (March 1984):255-266. " 15. U.S. Department of Health Education and Welfare, Public Health Service. "Health Maintenance Organizations, Proposed Rulemaking" Federal Register. 39(90): 16432, May 8, 1974 quoted in Robert G. Shouldice and Katherine H. Shouldice. Medical Group Practice and Health Maintenance Organizations, (Washington, D.C: Information Resources Press, 1978) p.105. 16. Jon B. Christianson, "The Impact of HMOs: Evidence and Research Issues", Journal of Health P o l i t i c s , P o l i c y and Law 5 (Summer 1980) :365. 17. Jon B. Christianson and Walter McClure, "Competition in the Delivery of Medical Care", New England Journal of Medicine 301 (October 11, 1979):812-818. 18. Clark C. Havighurst, "Health Maintenance Organizations and the Market for Health Services" in Health Care, ed. Clark C. Havighurst (Dobbs Ferry, New York: Oceana Publications Inc., 1972), pp.297-307. 19. John Holahan, "Foundations for Medical Care: An Empirical Investigation of the Delivery of Health Services to a Medicaid Population", Inquiry 14 (December 1977) :354. 20. Stephen L. F i e l d i n g , "Organizational Impact on Medicine: The HMO Concept", So c i a l Science and Medicine 18 (1984) :617. - 163 -21. Richard H. Egdahl, "Foundations for Medical Care", New England Journal  of Medicine 288 (March 8, 1973):497. /, 22. Jonathan Lomas, ' F i r s t and Foremost in Community Health Centres: The  Centre i n Sault Ste. Marie and the CHC Alternative" (Toronto: University of Toronto Press, 1985), p.75. 23. Robin F. Badgley and Samuel Wolfe, Doctors' Strike (New York: Atherton Press, 1967), p.97. 24. Anne O.J. Crichton and Donald 0. Anderson, Group Practice i n the System (Vancouver: U n i v e r s i t y of B r i t i s h Columbia, 1973),p.83. 25. Interview with Ray Berry, former Director of the Program Development Branch, Ontario M i n i s t r y of Health, Toronto, 29 A p r i l , 1985. 26. Ontario Council of Health,. Evaluation of Primary Health Care Services (Toronto: Ontario Council of Health, 19.76),. p.7 . ' 27. Richard G. Foulkes, Health Security for B r i t i s h Columbians Vol.6 ( V i c t o r i a , B.C.: Queen's P r i n t e r , 1973), p.46. r ' 28. Greg L. Stoddart, "Memorandum on Health Care Funding", i n F i n a l Report of  the Task Force to Review Primary Health Care, Ontario M i n i s t r y of Health, (Toronto: M i n i s t r y of Health, 30 December 1982), Appendix A, pp.9-10. 29. Interview with Dave Brindle, Senior Program Development O f f i c e r , Health Service Organization, Community Health Centres Program, Community Health Programs Branch, Ontario M i n i s t r y of Health, Toronto, 20 June 1984. - 164 -CHAPTER 9 VARIANT CHARACTERISTICS: ARRANGEMENTS FOR HOSPITAL SERVICES As mentioned e a r l i e r , the r e l a t i o n s h i p between the ho s p i t a l and the HMO can be described as one of v e r t i c a l i n t e g ration, which v a r i e s in degree r e l a t i v e to the s p e c i f i c arrangements made between the two organizations. Although both organizations d i f f e r in t h e i r perspectives, they share a common goal, which i s the desire to survive in a competitive health care market. Since the HMO i s responsible for ensuring comprehensive health care services to i t s enrolled population, i t must have a range of services available to i t . The role of the ho s p i t a l in t h i s spectrum i s to o f f e r technical f a c i l i t i e s for the use of HMO physicians i n the provision of inpatient and, in some cases, outpatient services. While the HMO needs the h o s p i t a l in order to f u l f i l i t s contractual o b l i g a t i o n s to en r o l l e e s , the h o s p i t a l needs the HMO to be able to gain and maintain a market share for h o s p i t a l services. The degree of need, in each organization, governs the r e l a t i v e bargaining position of each in negotiating an agreement for the use of services. In the past, when the h o s p i t a l was losing i t s market share, i t often responded by increasing operating costs through the introduction of new diagno-s t i c and treatment services or renovations, in order to at t r a c t new medical s t a f f . However, when competition replaced regulation as a health policy in the U.S., an increased awareness of costs became a factor that led to improved e f f i c i e n c y * . These old st r a t e g i e s , which induce high operating costs, make prices too high to be competitive. I f the h o s p i t a l cannot remain competitive, a reduction in capacity may be necessary for s u r v i v a l . While h o s p i t a l s h i s t o r i c a l l y have perceived HMOs as a threat to t h e i r market share, the f a i l u r e - 165 -of conventional strategies for maintaining their market shares in a competitive health care market has gradually been modifying their view of HMOs. Mackie and Biblo have described some strategies adopted by hospitals to meet the potential threat of an HMO in their area and possibly convert i t to an opportunity. Such strategies are filibustering, passive acceptance, direct 2 sponsorship, and accommodation or strong support . The use of these stra-tegies has guided the HMO into basically three types of arrangements for hospi-tal services: hospital ownership, contracts with hospitals, and medical staff privileges. Each arrangement represents certain trade-offs made by the HMO, in terms of i t s ab i l i t y to meet it s contractual responsibility to enrollees and it s goal of providing cost-effective quality health care services. The following discussion will outline the relationships between the hospital strategies and the subsequent effectiveness of HMO arrangements for hospital services. HOSPITAL OWNERSHIP From the literature reviewed, 26% of the HMOs represented in that sample provide hospital services through ownership of the hospital. However, hospital ownership seems to be more, common with older, more established HMOs, for example, Kaiser Permanente Health Plan, Group Health Co-operative of Puget Sound, and Ross Loos Clinic in Los Angeles. Due to their age, these HMOs tend to be more represented in the literature. The contrasting operational incentives and financial mechanisms of the hospital and the HMO, combined with competition for shares of the health care market, invite conflict between the two organizations and could lead to bitter rivalry in some communities (n.2 p.36). Mackie and Biblo suggest that in these - 166 -circumstances, the hospital is likely to employ a filibustering strategy where it attempts to place as many obstacles as possible in the path of the HMO. Traditionally, this has taken the form of excluding HMO physicians from member-ship in local medical societies, and the denial of hospital privileges to HMO physicians. More recently, hospitals have included p o l i t i c a l obstruction tactics by trying to influence Health Service Agencies, which are local health service planning bodies, to deny certificates of need to HMOs for the develop-ment of ambulatory care f a c i l i t i e s (n.2 p.37). While this strategy may bring the hospital effective short term results, the long term repercussions may be serious. Such active resistance was the stimulus for Kaiser to build i t s own hospi-3 tals rather than rely on local f a c i l i t i e s used by FFS physicians . This approach by Kaiser and other large established HMOs is very significant, as i t allows the HMO not only to compete economically with the traditional system but also in terms of product differentiation, based on the style of medical care practice (n.3 p.197). For example, the hospital bed population ratio used by Kaiser is 2 per 1000 which is significantly lower than the American national 4 average of 4.4 per 1000 . The HMO is in a better position to affect the length of stay of patients, particularly i f hospital ownership combined with a staff model of physician organization. Since inpatient hospital services are the most expensive provided by the HMO, ownership puts i t in better control of these resources and costs. Finally, the threat of external interference deterring the HMO from f u l f i l l i n g i t s contractual obligations and i t s cost reducing objectives, is eliminated to a large extent with hospital ownership. - 167 -A myopic f i l i b u s t e r i n g strategy can place the HMO in the long term in a stronger competitive position for achieving i t s objectives and the h o s p i t a l in a weaker position. But, i t i s u n l i k e l y , in the i n i t i a l stages of development, that the HMO would have the resources to buil d i t s own f a c i l i t y . The higher costs of h o s p i t a l services generally associated with the use of medical s t a f f p r i v i l e g e s and contractual arrangements may nudge the HMO towards h o s p i t a l ownership in an e f f o r t to control i t s costs. However, these higher costs may be a r e f l e c t i o n of market prices and not necessarily a form of resistance from l o c a l h o s p i t a l s . In conclusion, h o s p i t a l ownership by an HMO represents a high degree of v e r t i c a l integration where the HMO i s in greater control of h o s p i t a l resources, which enhances i t s a b i l i t y to contain costs and e f f i c i e n t l y d e l i v e r health care services. MEDICAL STAFF PRIVILEGES Thirty-two percent of the HMOs in the l i t e r a t u r e review sample used medical s t a f f p r i v i l e g e s as a means of providing h o s p i t a l services. Medical s t a f f p r i v i l e g e s means that the HMO physicians are given permission by the h o s p i t a l to practise i n that f a c i l i t y but must compete with FFS p r a c t i t i o n e r s for the use of f a c i l i t i e s . The HMO may be quite vulnerable with t h i s arrangement since the hosp i t a l does not guarantee the a v a i l a b i l i t y of beds and t h i s could place the HMO's contractual agreement with enrollees in jeopardy. However, as an alter n a t i v e to for t h r i g h t obstructionism, t h i s strategy of passive acceptance may be palatable to both parties as i t minimizes any deviations from t r a d i t i o n a l health care d e l i v e r y r e l a t i o n s h i p s . Very l i t t l e mutual commitment i s required of e i t h e r organization as the medical s t a f f rather than the organizations per se, by v i r t u e of t h e i r p r i v i l e g e s , are the focus of the int e r a c t i o n (n.2 p.38). - 168 -Under t h i s arrangement, the h o s p i t a l makes no special concessions to the HMO in reimbursement. The HMO i s l i k e l y to pay charges least favourable to i t s enrollees and comparable to insurance c a r r i e r s or s e l f insuring patients."* Generally, t h i s means that the HMO reimburses the h o s p i t a l i t s price for services, which does not provide any incentive for the h o s p i t a l to reduce costs or be e f f i c i e n t in d e l i v e r i n g services to HMO e n r o l l e e s . In most instances, the HMO would not find t h i s arrangement a t t r a c t i v e other than when perhaps there was a limited choice of h o s p i t a l s in a community. Because of i t s s i m i l a r i t i e s to FFS prac t i c e , the IPA type of HMO i s usually associated with the use of medical s t a f f p r i v i l e g e s . Frequently, IPAs lack the bargaining power of other types of HMOs in extracting more favourable arrangements from the h o s p i t a l (n.2 p.38). The h o s p i t a l , l i k e the HMO, gains few benefits from t h i s type of arrange-ment as i t does not r e s t r a i n HMO development in the area nor does i t encourage a constructive partnership with the h o s p i t a l . Furthermore, the h o s p i t a l i s not in a position to increase i t s market share at the expense of other h o s p i t a l s . Over the long term, the h o s p i t a l may be susceptible to greater r i s k s , as the unfav-ourable reimbursement arrangements may lead the HMO to e s t a b l i s h i t s own h o s p i t a l or use a more competitive h o s p i t a l (n.2 p.38). Medical s t a f f p r i v i l e g e s , therefore, constitute a low degree of v e r t i c a l integration between the two organizations and give the HMO the least control over the management of ho s p i t a l resources. CONTRACTUAL AGREEMENTS Contractual agreements are the most common arrangements between h o s p i t a l s and HMOs, comprising 42% of the HMOs mentioned in the l i t e r a t u r e reviewed. This - 169 -type of agreement represents a middle ground for both organizations between the extremes of HMO sponsorship or h o s p i t a l ownership on one hand, and medical s t a f f p r i v i l e g e s on the other. Within the scope of a contractual agreement, however, each organization may vary i t s strategy from a position of mutual accommodation to strong support, depending on the motivation for the association. In any event, the formal contract defines mutual o b l i g a t i o n s , such as the reimbursement formula and the a v a i l a b i l i t y of beds and a n c i l l a r y s e r v i c e s , among other things. Due to d i f f e r e n t structures and goals plus c o n f l i c t i n g f i n a n c i a l incentives in the two organizations, contract negotiations are l i k e l y to begin with a mutual accommodation strategy. However, the stage of organizational development and competitive circumstances facing each organization are l i k e l y to influence the process as well. For example, Federa has outlined a l i f e cycle concept for HMOs, i l l u s t r a t e d in figure 11. During the start-up and drive to maturity stages, the HMOs' in t e r e s t s may centre more on gaining a market share than c o n t r o l l i n g costs. At these stages i t s behavior i s l i k e l y to show some s i m i l a r i t i e s to the t r a d i t i o n a l health care system. Thus i t may use more h o s p i t a l services and be more w i l l i n g to accommodate the h o s p i t a l . Once i t s market share becomes more secure in the maturity stage, the HMO w i l l probably place greater emphasis on e f f i c i e n c y , intensely reviewing u t i l i z a t i o n with the goal of cost containment and cost reduction^. Then, the HMO w i l l look for more accommodation to i t s needs from the h o s p i t a l , and i f t h i s i s not f o r t h -coming, w i l l use other hospitals or develop i t s own. - 170 -Figure 11 L i f e - c y c l e Concept of HMOs START UP DRIVE TO MATURITY* DECLINE MATURITY * Maturity i s defined as breakeven enrolment. Source: R. Danielle Federa, "HMOs: A Competitive Threat or Strategic Opportunity?" Journal of Ambulatory Care Management 6 (February 1983) : 75. Since the h o s p i t a l i s in a strong bargaining position during the early stages of HMO development, the reimbursement formula i s l i k e l y to favour i t s i n t e r e s t s . But i f the h o s p i t a l i s anxious to develop a r e l a t i o n s h i p with the HMO as a means to gaining a greater market share, the HMO may have the f i n a n c i a l advantage, perhaps negotiating discounted rates. In return, i t may o f f e r the ho s p i t a l rapid payment of claims, which might r e l i e v e some of the hos p i t a l ' s bad debts. S i m i l a r l y , as the HMO matures, i t may seek to have i t s medical care standards influence patient care i n the h o s p i t a l , for example by al t e r i n g practices such as preadmission workups and lengths of stay (n.2 p.44). Although the mutual accommodation strategy may be useful in the i n i t i a l stages of i n t e r -action between the two organizations, i t o f f e r s l i t t l e assurance that the re l a t i o n s h i p w i l l continue. Depending on the strength of the motivation for the re l a t i o n s h i p between the two organizations, the strategy may s h i f t to one of strong support to ensure - 171 -the continuance of the r e l a t i o n s h i p . The goal of t h i s strategy i s to f a c i l i t a t e greater integration of the h o s p i t a l and the HMO. The h o s p i t a l board, for example, may give strong backing to the contractual agreement. In return, the ho s p i t a l may be offered a seat on the HMO board (n.2 p.45). In addition, the ho s p i t a l i s l i k e l y to be open to p a r t i c i p a t i o n in r i s k sharing with the HMO, where the reimbursement formula i s based on a fixed price that may include only inpatient services or inpatient services plus the use of a n c i l l a r y outpatient services. While many versions of t h i s method of payment are possible, following are two common p o s s i b i l i t i e s : a fixed reimbursement per patient per day or a predetermined fixed payment for an en t i r e unit or fl o o r reserved so l e l y for HMO use, or a capitation system whereby the hos p i t a l i s paid a fixed amount for each HMO enrollee, regardless of use of the h o s p i t a l (n.2 p.46). The h o s p i t a l assumes the r i s k for costs exceeding the fixed payment or i t may share in the savings from the HMO's e f f e c t i v e system of u t i l i z a t i o n c o n t r o l . Also, i t provides the h o s p i t a l with an incentive to improve the e f f i c i e n c y of i t s services. The i m p l i c i t assumption in r i s k sharing i s that the h o s p i t a l w i l l be guaranteed the bulk of HMO admissions (n.2 p.46). Once a strong support strategy has been adopted, i t may be necessary to improve physician r e l a t i o n s and smooth patient flow between the two organiza-tions. Hospital a f f i l i a t i o n can be b e n e f i c i a l to the HMO in r e c r u i t i n g physicians, as i t can assure h o s p i t a l p r i v i l e g e s , f a c i l i t a t e r e f e r r a l s to hospi-t a l s p e c i a l i s t s and, in some cases, o f f e r a teaching a f f i l i a t i o n (n.2 p.46). However, the community-based FFS h o s p i t a l medical s t a f f may be highly r e s i s t a n t to a strong HMO support strategy, due to the competitive threat to t h e i r incomes. The h o s p i t a l has to a c t i v e l y buffer t h i s opposition and may need board - 172 -involvement to a l l a y the fears of medical s t a f f . S i m i l a r l y , the h o s p i t a l needs to make some adjustments from i t s physician o r i e n t a t i o n to the consumer or i e n t a t i o n of the HMO, which means seeing the patient as a customer. Since marketing i s a v i t a l factor in HMO success, the h o s p i t a l environment must be conducive to encouraging continued enrolment in the HMO. Table 13 summarizes the main advantages and disadvantages of HMO a f f i l i a t i o n for the h o s p i t a l . However, i t assumes a strong support strategy and also that the h o s p i t a l i s the sole h o s p i t a l with which the HMO a f f i l i a t e s . Table 13 HMO A f f i l i a t i o n Factors Considered by the Hospital ADVANTAGES DISADVANTAGES 1. Captive enrollee market. 2. Potential improved market share po s i t i o n . 3. More predictable and increased volume of inpatient services. 4. Expanded use of outpatient a n c i l -l i a r y and technological services. 5. Captive r e f e r r a l base for h o s p i t a l s p e c i a l i s t s and s u b - s p e c i a l i s t s . 6. Improved payment mechanism s t a b i l i z i n g cash flow p o s i t i o n . 1. Lower per capita u t i l i z a t i o n rates for inpatient and a n c i l l i a r y services. 2. Risk sharing through fixed payment reimbursement. 3. Medical s t a f f resistance. 4. Poten t i a l influence or " c o n t r o l " of h o s p i t a l procedures by the HMO. The captive enrollee market, plus the fixed cost prepayment form of reim-bursement, enables the h o s p i t a l to improve i t s f i n a n c i a l planning and gain better control of operating costs, and consequently develop a better competitive - 173 -pos i t i o n . In addition, the current and potential enrolment of the HMO, r e l a t i v e to other prepaid plans in the area, helps the ho s p i t a l to predict what u t i l i z a -tion might be expected and what i t s market share might be^. On the other hand, because of the f i n a n c i a l incentives of the HMO, a reduction in inpatient u t i l i z a t i o n i s a strong p o s s i b i l i t y . This i s l i k e l y to be a p a r t i c u l a r problem for the h o s p i t a l , the greater the extent to which the HMO enrolled population g overlaps with the hos p i t a l ' s natural service or catchment area . Also related to the HMO's incentives, i s the fact that patients admitted to h o s p i t a l may, on average, be somewhat more i l l than other h o s p i t a l patients (n.8 p.20). In early stages of development, the HMO usually needs to purchase a n c i l l a r y services plus s p e c i a l i z e d technological services form the h o s p i t a l . But as the HMO moves towards maturity, i t may prefer to have i t s own a n c i l l a r y services i f h o s p i t a l prices for these services are not competitive enough for i t to meet i t s o b j e c t i v e s . However, the HMO w i l l continue to need ce r t a i n s p e c i a l i z e d technological services offered by the h o s p i t a l . Despite the advantages of HMO a f f i l i a t i o n s for the h o s p i t a l , nagging fears p e r s i s t that the HMO w i l l use the leverage of i t s captive enrollee market to attempt to change h o s p i t a l procedures and p o l i c i e s i n a manner b e n e f i c i a l to the HMO's goals. Table 14 out l i n e s the primary advantages and disadvantages of h o s p i t a l a f f i l i a t i o n to the HMO. Again, i t assumes a strong support strategy and also that one h o s p i t a l i s the sole source of ho s p i t a l , s e r v i c e s for the HMO. - 174 -Table 14 Hospital A f f i l i a t i o n Factors Considered by the HMO ADVANTAGE S DISADVANTAGES 1. Assurance of the use of h o s p i t a l f a c i l i t i e s to meet i t s contractual r e s p o n s i b i l i t i e s to enrollees. 2. Opportunity for r i s k sharing through fixed cost reimbursement. 3. Asset in r e c r u i t i n g physicians. 4. Access to s p e c i a l i s t s and sub-s p e c i a l i s t s . 5. Opportunity to possibly influence h o s p i t a l policy towards more e f f i c i e n t and c o s t - e f f e c t i v e delivery of services. 1. Danger of domination of the h o s p i t a l philosophy and o r i e n t a t i o n over that of the HMO. 2. Hospital medical s t a f f resistance. 3. Possibly less attention to consumer s a t i s f a c t i o n . 4. Depending on the terms of a contract for a fixed payment for services, the HMO may have less f i n a n c i a l control than with ownership. The assurance of the use of h o s p i t a l inpatient and a n c i l l a r y and technolo-g i c a l services has benefits for both HMO enrollees and the medical s t a f f . Since the HMO i s at r i s k for providing s p e c i a l i s t services, i t must make outside arrangements for these i f the sp e c i a l t y or sub-specialty i s not included in i t s medical group. Access to s p e c i a l i s t s and su b - s p e c i a l i s t s through the ho s p i t a l may f a c i l i t a t e more favourable and convenient arrangements, enhancing continuity of care. Nevertheless, resistance from h o s p i t a l medical s t a f f could seriously hamper these arrangements. Furthermore, the f i n a n c i a l incentives of the HMO cause emphasis to be placed on prevention and health maintenance, thus h o s p i t a l services are used only when medically appropriate a l t e r n a t i v e s are unavailable. Hospital a f f i l i a t i o n , then, creates some apprehension for the HMO that the 175 -h o s p i t a l philosophy of maximizing the use of i t s services might permeate the HMO operation. CANADIAN HOSPITALS AND ALTERNATIVE PRIMARY CARE STRUCTURES The medical s t a f f p r i v i l e g e s model of HMO arrangements for h o s p i t a l care i s the type of r e l a t i o n s h i p between alternative primary care structures and h o s p i t a l s prevalent in Canada. The model i s not deviant from t r a d i t i o n a l FFS practice and provides a low l e v e l of v e r t i c a l integration between the h o s p i t a l and medical care p r a c t i c e . In general, the response of h o s p i t a l s and h o s p i t a l associations towards 9 CHCs was lukewarm . Since the legitimacy of the h o s p i t a l was t i e d to being the centre of medical care, the emphasis of the CHC on primary care and prevention challenged t h i s image. Hospitals feared that CHCs would take away th e i r work, thus they f e l t i f funds were allocated to them they could do the job just as well as CHCs*^. This perspective, combined with physician resistance and the d i f f i c u l t i e s of CHC physicians acquiring p r i v i l e g e s , did not provide a conducive atmosphere for improving the integration of CHCs and h o s p i t a l s . In most provinces, CHCs were dependent on the p r i v i l e g e s of t h e i r physicians and other voluntary arrangements for the integration of t h e i r services with those of l o c a l h o s p i t a l s . The new primary care structures in Quebec, CLSCs, were to act as a point of r e f e r r a l to s p e c i a l i z e d health and s o c i a l services at the secondary l e v e l of care** (Refer Appendix B). B i l l 65, the l e g i s l a t i o n implementing health care reforms i n Quebec described in d e t a i l the i n t e r n a l organization CLSCs but f a i l e d to define linkages for these centres with other parts of the health care - 176 -12 system . In r u r a l under-populated areas of Quebec, however, attempts were made to o r g a n i z a t i o n a l l y integrate the CLSCs with h o s p i t a l s in the secondary l e v e l of care. The CLSCs came under the h o s p i t a l boards with only two user representatives on that board and the CLSC administrator became a d i r e c t o r under the h o s p i t a l administer. While fusion of these organizations seemed highly desirable both s o c i a l l y and economically in these areas, i t created considerable c o n f l i c t . Begin studied these centres and found that d i f f e r e n t objectives, values, technology and s o c i a l organization in the CLSC and the h o s p i t a l hampered 13 integration . These findings show some s i m i l a r i t i e s to those of Mackie and Biblo on the d i f f e r e n t organizational perspectives between HMOs and ho s p i t a l s (n.2). For Canada, t h i s represents an elementary attempt at v e r t i c a l i ntegration but medical s t a f f p a r t i c i p a t i o n was a major stumbling block. Since physicians concentrated most of t h e i r services in the h o s p i t a l and since t h e i r attitude towards CLSCs was very reserved, the CLSC was often placed in a compromising p o s i t i o n . For example, i t might have to accept part-time rather than f u l l time physicians on t h e i r s t a f f (n.13 p. 13). Other CLSCs in more populated areas were s i m i l a r to CHCs in other provinces which had to depend on h o s p i t a l p r i v i l e g e s of physicians and voluntary arrangements as mechanisms for integration with h o s p i t a l services. Although, there was some encouragement for the l o c a l h o s p i t a l board to have a CLSC representative and likewise for the CLSC board to have some h o s p i t a l and other health care organization representatives, experience seemed to indicate a generally low l e v e l of i n t e g r a t i o n . Consequently, the Canadian experience with v e r t i c a l integration of h o s p i t a l and medical care has been very limited indeed. - 177 -FOOTNOTES 1. Richard L. Johnson, "The 1980's: The Rise of HMOs and Marketplace Competition", Hospital Progress 60 (June 1979): 40. 2. Dustin L. Mackie and Robert L. Biblo, "HMO Development: Threat or Opportunity f o r Hospitals?", American Journal of Law and Medicine 6 (Spring 1980): 29-49. 3. Donald W. Moran,. "HMOs, Competition, and. the P o l i t i c s of Minimum Benefits", Milbank Memorial Fund Quarterly/Health and Society 59 (1981): 1*95: 4. See Debra Cascardo, "Factors Affecting Cost Containment in an HMO: A Review of the L i t e r a t u r e " Journal of Ambulatory Care Management 5 (August 1982) :54. Also, the 4.4 ho s p i t a l beds per 1000 national average i s based on community h o s p i t a l reported data for 1981. See United States, Department of Health and Human Services, National Centre for Health S t a t i s t i c s , Health and Prevention P r o f i l e : U.S. 1983, (Washington, D.C: Government Publications O f f i c e , December 1983), Table 60, p.167. 5. Hospitals in the United States may operate on a for p r o f i t or a not for p r o f i t basis. Those operating on a for p r o f i t basis may increase the r a t i o of charges per service r e l a t i v e to actual costs depending on insurance coverage or the a b i l i t y of patients to pay. See for example a discussion in Robert G. Evans, Strained Mercy: The Economics of Canadian Health Care, (Toronto: Butterworths, 1984) pp. 231-33. : 6. Danielle R. Federa, "HMOs: Competitive Threat or Strategic Opportunity?", Journal of Ambulatory Care Management 6 (February 1983): 75-76. 7. Frederick S. Fink and John H. Trimmer, "Operating and F i n a n c i a l Implications of Prepaid Plans on Hospitals", Topics in Health Care  Financing ( F a l l 1981): 62-63. 8. Stephen M. S h o r t e l l , "The Costs and Benefits of Closer Group Practice -Hospital Relationships", Medical Group Management 25 (January/February 1978): 20. 9. John E.F. Hastings, "Community Health Centres - What's Happened Since the Hastings Report", paper presented at the Nineteenth Annual Refresher Course: Issues in Community Health, Faculty of Medicine, University of Toronto, Toronto, Ontario, 7 March 1978, p.10. - 178 -10. Canada, Department of National Health and Welfare, The Community Health  Centre in Canada: Health Care Organization of the FutureT Vol.3 (Ottawa: Information Canada, 1972) , pp.5-12. 11. John E.F. Hastings and Eugene Vayda, "Health Services Organization and Delivery: Promise and R e a l i t y " , paper presented at the Health P o l i c y Conference on the Canadian Health Care System, Banff, Alberta, 26-31 August 1984, p. 12. 12. Sidney S. Lee, Quebec's Health System: A Decade of Change 1967-1977, (Toronto: I n s t i t u t e of Public Administration of Canada, 1979), pp. 24-25. 13. Clermont Begin, "Can the HC and the LCSC's Co-Exist?" Canada's Mental Health 25 (December 1977): 11. - 179 -CHAPTER 10 EVIDENCE OF HMD PERFORMANCE The f o r e g o i n g d i s c u s s i o n has e x p l o r e d the g e n e r i c components o f the HMO and t h e i r r e l a t i o n s h i p s as w e l l as i t s v a r i a b l e c h a r a c t e r i s t i c s . What has emerged i s a c o n c e p t u a l l y i n t r i g u i n g and a d m i n i s t r a t i v e l y complex mode o f h e a l t h care d e l i v e r y * . S i n c e the purpose o f t h i s study i s t o a s s e s s f e a s i b i l i t y o f HMOs f o r B.C., i t i s important to understand the e f f e c t s o f HMO performance. From the s t r u c t u r e o u t l i n e d i n f i g u r e 7, i t would appear t h a t the l i t e r a t u r e reviewed might be s l o t t e d s i m p l i s t i c a l l y i n t o a p p r o p r i a t e c e l l s , and then the c e l l s w i t h the be s t performance outcomes might suggest models w i t h c e r t a i n o r g a n i z a t i o n a l c h a r a c t e r i s t i c s worthy o f e m u l a t i o n . However, t h i s method i s f r a u g h t w i t h d i f f i c u l t i e s due to the d i v e r s i t y o f HMOs and v a r i a t i o n s i n the d a t a . C r i t e r i a would need t o be developed to s t a n d a r d i z e c o n d i t i o n s f o r comparison a c r o s s c e l l s and w i t h i n a l l c e l l s . Such a p r o c e s s would be time consuming and i n e v i t a b l y would e l i m i n a t e some s t u d i e s unable to s a t i s f y the ne c e s s a r y c r i t e r i a . C o n s e q u e n t l y , i t was d e c i d e d t h a t w h i l e such an approach would be d e s i r a b l e , from the p o i n t o f v i e w o f b e t t e r a s s e s s i n g f e a s i b i l i t y , i t was beyond the scope o f t h i s s t u d y . As an a l t e r n a t i v e approach, aggregate t r e n d s i n HMO performance w i l l be i d e n t i f i e d , then an attempt to understand some o f the re a s o n s u n d e r l y i n g these performance t r e n d s w i l l be made. While t h e r e i s a p r o l i f e r a t i o n o f s t u d i e s on HMOs, they v a r y i n o b j e c t i v i t y , depth, b r e a d t h and q u a l i t y , and by and l a r g e have c o n c e n t r a t e d on 2 s i z a b l e r e l a t i v e l y s t a b l e HMOs , such as the K a i s e r Permanente H e a l t h P l a n . As w e l l , t h e r e has been a co n s p i c u o u s l a c k o f randomized c o n t r o l l e d e xperiments (n.2 L u f t 1980 p.507), the l a t e s t e x c e p t i o n being the r e c e n t Rand - 180 -3 Corporation study on health insurance . In general, research e f f o r t s addressing HMO performance have encountered a series of i n t e r r e l a t e d problem areas of p a r t i c u l a r importance, namely: comparability of populations studied, control of exogenous v a r i a b l e s , the assignment of causation and the impact that 4 . . . . HMOs have on the enti r e delivery system . Despite these l i m i t a t i o n s , common themes p e r s i s t among empirical studies which indicate that HMOs are a less expensive means of providing care than the FFS system, that h o s p i t a l i z a t i o n rates, on average, range from 20 to 40% lower and are the primary source of HMO cost saving, and that enrollees probably receive comparable quality of 5 care . Since HMOs are known to be a less expensive means of providing care, a b r i e f o v e r a l l picture of HMO cost performance w i l l be presented f i r s t . Then, because lower h o s p i t a l i z a t i o n rates have been i d e n t i f i e d as a primary source of cost saving, an attempt w i l l be made to understand the reasons underlying these d i f f e r e n t i a l s . Unless these reasons can be understood, i t w i l l be d i f f i c u l t to assess whether the same r e s u l t s might f e a s i b l y be expected i n B.C. The framework outlined by Barer i n a study on community health centres and h o s p i t a l costs in Ontario w i l l be used to consider determinants in the enrolled population, in the providers of care and in.the organization that may explain d i f f e r e n t i a l s i n h o s p i t a l u t i l i z a t i o n ^ . HMO COST SAVINGS Since expenditures for health care services are the major concern of the c l i e n t i n t h i s study, h i s f i r s t i n t e r e s t i s l i k e l y to be in the r e l a t i v e costs of HMOs as compared with the t r a d i t i o n a l health care system. The economic - 181 -incentives i n HMOs re s u l t i n cost reducing behavior which i s often viewed as p o t e n t i a l l y o f f e r i n g a pattern for cost control in the system as a whole^. Since t h i s study i s concerned with assessing f e a s i b i l i t y , i t i s important to understand where cost savings are made in HMOs. The l i t e r a t u r e reviewed showed that the t o t a l costs for medical care (premium plus out of pocket costs) were lower for HMO enrollees than for people g with comparable conventional insurance coverage . The lower costs are most predominant i n PGP-HMOs and range 10 to 40% lower than conventional insurance (n.2 Luft 1978). Although evidence i s scant, t o t a l costs do not appear to be as low i n IPA-HMOs (n.2 L u f t 1978). Knowing that t o t a l costs are lower, t h i s d i f ference, t h e o r e t i c a l l y , could be r e f l e c t e d in lower costs per unit of service or i n the number and mix of services delivered. Unit costs may be lower as a r e s u l t of the lower cost of inputs. Yet no suggestion appeared in the l i t e r a t u r e reviewed that HMOs pay lower costs f o r labour or other inputs. An alternate explanation may be that lower unit costs are achieved through improved e f f i c i e n c y i n the production of medical care services. Group practice settings may lead to some economies of scale that e f f e c t physician productivity through the c e n t r a l i z a t i o n of resources but i t could be argued that such e f f i c i e n c i e s are not exclusive to the HMO but also could be equally available i n FFS pr a c t i c e . Since h o s p i t a l care i s the most expensive part of medical care services, e f f i c i e n c i e s i n the production of h o s p i t a l services may have some impact on t o t a l costs. Data from Kaiser h o s p i t a l s in C a l i f o r n i a and Oregon, as well as the GHC of Puget Sound h o s p i t a l , were compared with a matched sample of s i m i l a r h o s p i t a l s in the same region. No consistent differences were found i n the cost - 182 -per patient day but lengths of stay were shorter for the HMO-controlled h o s p i t a l s , making the costs per case lower (n.5 Luft and n.7). From the e a r l i e r discussion on arrangements for h o s p i t a l care (Chapter 9), i t was apparent that most HMOs do not own t h e i r h o s p i t a l s so these findings may not apply generally to other HMOs. Thus, lower unit costs do not seem to emerge as a major factor contributing to reductions in t o t a l costs. The number and mix of services delivered by an HMO, therefore, may shed some l i g h t on cost reduction. Increased coverage for ambulatory care services and the su b s t i t u t i o n of ambulatory care for inpatient care have always been emphasized by HMOs. In reviewing data from 26 pairs of HMOs matched to comparison groups, Luft (n.2, 1978) found PGP enrollees to have 4.41 ambulatory care v i s i t s per year in contrast to 4 . 1 9 v i s t i s for those with conventional insurance coverage. For the IPAs in h i s sample, the difference was 5.11 v i s i t s versus 4.32 with conventional coverage. Despite increased v i s i t s , HMOs have not been found to o f f e r more preventive services than FFS practice when people have 9 the same coverage . Nor i s i t apparent that more ambulatory care v i s i t s are neces s a r i l y associated with lower h o s p i t a l i z a t i o n s . Furthermore, the major source of the cost difference in HMO was cons i s t e n t l y shown, i n the l i t e r a t u r e reviewed, to be lower h o s p i t a l i z a t i o n rates. Enrollees in PGPs have generally about 35% fewer h o s p i t a l days per 1000 than people with conventional insurance coverage. Again, IPAs show less consistent and higher rates but s t i l l may be up to 25% lower than those with conventional insurance*^. The lower rates seem to be associated with fewer admissions as length of stay shows some v a r i a t i o n (nn.2, 5 and 10 L u f t ) . Why these rates are lower i s yet an unanswered question about HMOs? Consequently, - 183 -the following discussion w i l l look at some factors that may help to explain these di f f e r e n c e s . Before leaving costs, however, one c r i t i c i s m of HMOs i s that t h e i r f i n a n c i a l incentives cause them to skimp on care i n order to achieve cost savings. Although evidence on the qua l i t y of care in HMOs i s not extensive, what i s available suggests that care i s not i n f e r i o r and i s at least equal to FFS p r a c t i c e * * . F i n a l l y , a c r i t i c a l question about HMOs i s what e f f e c t does HMO cost saving behavior have on the health care system as a whole but l i t t l e i s known about t h i s . In 1970, there were 33 HMOs in the United States, by 1983, 280 HMOs were 12 serving 12 m i l l i o n people or 6.7% of the insured population . While these numbers remain small compared to the t o t a l population, continued growth l i k e l y would f a c i l i t a t e some assessment of the f i s c a l impact of HMOs on the American health care system. Next, enrolled population, physician, h o s p i t a l and organizational factors w i l l be i n d i v i d u a l l y discussed from the perspective of th e i r p o t e n t i a l impact on lower h o s p i t a l i z a t i o n rates in HMOs. ENROLLED POPULATION FACTORS Because the HMO i s at f i n a n c i a l r i s k for services provided to enr o l l e e s , i t would be in i t s i n t e r e s t to select the he a l t h i e s t enrollees, least l i k e l y to use a s i g n i f i c a n t number of services. I f t h i s were the case, i t would provide an explanation for lower h o s p i t a l i z a t i o n rates. The American Public Health Associ-ation has i d e n t i f i e d d i s t o r t e d r i s k s e l e c t i o n as a pote n t i a l hazard of 13 HMOs . However, the regulations of the HMO Act protect against t h i s to a - 184 -large extent by requiring community rating and periods of open enrolment. The dual choice requirement of the Act f a c i l i t a t e s the marketing of HMOs to employed populations who may be a h e a l t h i e r target group than the general population by v i r t u e of t h e i r employment status. Nevertheless, by d e f i n i t i o n the HMO requires voluntary enrolment which assumes that the HMO w i l l be a more a t t r a c t i v e option to the enrollee than a l t e r n a t i v e plans. The answer to the question then, of who joins what kind of HMO and why, i s of v i t a l importance to understanding d i f f e r e n t i a l s in HMO performance. Underlying the choice of any health plan, i s a basic assumption that consumers behave as u t i l i t y maximizers and w i l l choose a plan that maximizes t h e i r s a t i s f a c t i o n for any given l e v e l of costs. Thus, numerous v a r i a b l e s may have an influence on s a t i s f a c t i o n and subsequently on the choice of a plan. This discussion, however, w i l l focus only on v a r i a b l e s associated with r i s k as perceived by the consumers and on v a r i a b l e s associated with a c c e s s i b i l i t y to care. The r i s k v a r i a b l e s are associated with the insurance c h a r a c t e r i s t i c s of the HMO plan while a c c e s s i b i l i t y v a r i a b l e s are associated with service d e l i v e r y c h a r a c t e r i s t i c s of the HMO. These v a r i a b l e s may have independent e f f e c t s on HMO choice, but also there may be i n t e r a c t i v e e f f e c t s between the v a r i a b l e s and with other exogenous v a r i a b l e s to influence choice. The i n t e r a c t i v e e f f e c t s , however, are d i f f i c u l t to d i s t i n g u i s h and often are not mentioned in the l i t e r a t u r e . Bashshur and Metzner proposed a r i s k v u l n e r a b i l i t y hypothesis as a possible explanation of HMO s e l e c t i o n . In b r i e f , i t suggested that people who believe that they may be at high r i s k for expected i l l n e s s and who f e e l f i n a n c i a l l y vulnerable due to p o t e n t i a l l y high out-of-pocket costs, are more l i k e l y to j o i n - 185 -14 prepaid plans . Others have argued that t h i s hypothesis should be disaggregated to consider r i s k v u l n e r a b i l i t y and f i n a n c i a l v u l n e r a b i l i t y as separate v a r i a b l e s l i k e l y to enter into a decision about choice of an HMO*"*. Risk v u l n e r a b i l i t y r e f e r s to expectations about needs for service and i s associated with the concept of adverse selection (n.15 B i c e ) . F i n a n c i a l v u l n e r a b i l i t y , on the other hand, r e f e r s to expectations about the e f f e c t s of the costs of services and i s associated with the concept of s e l f selection (n.15 Bice). Since both of these concepts have d i f f e r e n t implications for HMO enrolment, they w i l l be discussed separately below. Adverse Selection The r i s k v u l n e r a b i l i t y hypothesis states that: "the higher an i n d i v i d u a l ' s perceived l i k e l i h o o d of the occurrence of future events that w i l l require the use of medical services, the more l i k e l y that i n d i v i d u a l i s , other things being equal, to choose a more comprehensive benefit package and to pay the higher premium"16 The l e v e l of perceived health r i s k i s l i k e l y to be related to the i n d i v i d u a l ' s medical h i s t o r y , age, previous u t i l i z a t i o n of health services and present state of health. The r i s k v u l n e r a b i l i t y hypothesis i s consistent with the concept of adverse s e l e c t i o n . Perceiving that they may need future services, these i n d i v i d u a l s choose extensive coverage and are w i l l i n g to pay higher premium p r i c e s . Once they begin to u t i l i z e services, however, t h e i r out-of-pocket costs are lower thus t h e i r use of services may increase s u b s t a n t i a l l y (n.16 p.594). - 186 -From the perspective of the HMO, high u t i l i z a t i o n behavior i s not desirable. Yet, many HMOs o f f e r comprehensive benefit packages with generally lower co-payments and deductibles and are l i k e l y to be a t t r a c t i v e to those with high perceived r i s k v u l n e r a b i l i t y . Several studies have found comprehensive coverage to be a reason for HMO enrolment*^. The primary a t t r a c t i o n of comprehensive coverage appears to be associated with prepayment and knowing medical care costs in advance (n.17 Tessler and Mechanic). However, other aspects of the benefit package such as immediate coverage and preventive 18 services are also important. Hetherington and h i s colleagues (n.8) studied six d i f f e r e n t insurance plans and found those choosing PGPs rather than conventional insurance or provider-sponsored plans were characterized by the highest l e v e l of i l l n e s s r i s k s , whether measured by age l e v e l , symptom s e n s i t i v i t y , or chronic i l l n e s s . Benefit differences that were present across these plans may have had some influence on choices as well. S i m i l a r l y , Blumberg found that those with l i m i t a t i o n s on a c t i v i t y due to chronic conditions, and those who self-appraised t h e i r health status as f a i r or poor, were s l i g h t l y higher among PGP members than those with 19 private coverage . In a post enrolment study at the Columbia Medical Plan in Maryland, Gaus (n.17) found that enrolled families had h i s t o r i e s of more frequent p r i o r h o s p i t a l use as well as more medical conditions requiring continuous follow up. In addition, Tessler and Mechanic (n.17) found more chronic conditions prevalent among PGP enr o l l e s who p a r t i c i p a t e d in a telephone survey after a dual choice experience. But, there was some v a r i a t i o n in benefit coverage that could have contributed to the d i f f e r e n c e . - 187 -Previous u t l i z a t i o n of health services may influence the l e v e l of perceived r i s k v u l n e r a b i l i t y and thus may affect choice of an HMO. Jackson-Beeck et a l . studied the inpatient u t i l i z a t i o n and costs of employees and t h e i r f a m i l i e s during the year, p r i o r to optional HMO enrolment i n the Minneapolis-St. Paul area, and found both h o s p i t a l and professional expenditures to be lower among 20 those who chose HMOs . Eggers came to a s i m i l a r conclusion at the GHC of Puget Sound i n Seatt l e , where he compared the pre- HMO-enrolment u t i l i z a t i o n pattern of a group of aged Medicare b e n e f i c i a r i e s to a control group of Medicare b e n e f i c i a r i e s from the same area. The GHC group demonstrated markedly lower . . . 21 pre-enrolment u t i l i z a t i o n than those in the control group . Also, Roghmann et a l . (n.17) i n an enrolment survey among firms in the Rochester area, found no evidence that HMO enrollees are at higher r i s k than non enrollees but on the contrary, t h e i r younger age and more favourable attitudes towards prevention put them at lower r i s k l e v e l s . At times, age may be used as a proxy measure for health status and may be in d i c a t i v e of a degree of r i s k v u l n e r a b i l i t y . Several studies suggest younger fam i l i e s with children enrol i n HMOs (n.14 and n.17 Moustafa et a l . and Juba et a l . ) . However, Berki et a l . (n.15) found younger families with more children l i k e l y to choose an IPA-HMO rather than a PGP-HMO. Gaus (n.17) found HMO enrollees to have larger families and older heads of fami l i e s than non-enrollees, although the mean age for both groups was fo r t y . Likewise, Scitovsky et a l . found more people f o r t y - f i v e years and under enrolled in an 22 HMO . The apparent a t t r a c t i o n of younger fa m i l i e s to HMOs may be associated with a perceived future need of health care services for people in an expanding stage of l i f e . This kind of population may demand cer t a i n services - 188 -23 such as maternity benefits and i f t h e i r service expectations are met th e i r enrolment duration may be affected. The experience at GHC of Puget Sound suggests, however, that young families may change plans frequently in search of 24 better f i n a n c i a l arrangements . Berki and Ashcraft (n.16 p.626) caution that most studies have focused on dual choice options, involving employed workers and t h e i r families which, by d e f i n i t i o n , exclude p o t e n t i a l l y higher users of services - the aged and the unemployed. Furthermore, a number of studies have found no differences i n health status between those enrolled i n HMOs or PGPs and those enrolled in conventional 25 insurance plans using the FFS system of care . In addition, Berki and Ashcraft (n.16 p.626) found no differences in health status between those who enrol i n IPA-HMOs and PGP-HMOs. To summarize, i t seems apparent that evidence supporting adverse s e l e c t i o n of HMO enrollees i s mixed and inconclusive, thus suggesting that t h i s may not be a major factor l i k e l y to affect HMO performance. S e l f - S e l e c t i o n The f i n a n c i a l v u l n e r a b i l i t y hypothesis argues that: "the larger the expected u t i l i t y loss associated with a given l e v e l of expected f i n a n c i a l l o s s , the more l i k e l y that the in d i v i d u a l w i l l purchase a plan that reduces the cost of u t i l i z a t i o n of medical services" (n.16 p.593) F i n a n c i a l v u l n e r a b i l i t y i s related to r i s k perception; for without an anticipated future need of health care services, the f i n a n c i a l v u l n e r a b i l i t y hypothesis may not hold. But, even in the absence of perceived health r i s k , fear of future economic consequences may e x i s t . Thus, the c h a r a c t e r i s t i c s of - 189 -d i f f e r e n t plans may be s a l i e n t in an enrolment decision and influence s e l f -s e l e c t i o n into c e r t a i n plans (n.16 p.614). In order to assess the impact of f i n a n c i a l v u l n e r a b i l i t y on an HMO enrolment decision, i t i s necessary to have some measure of the degree of v u l n e r a b i l i t y . In general, factors that may be linked to such a measure are income, age, and family s i z e . Income appears to be the most common ind i c a t o r but there seems to be no agreement on whether family income or per capita income should be used as the measure. Some studies using family income as a measure reported higher family incomes for HMO enrollees (n.17 Gaus and n.18 Metzner and Bashshur) whereas Scitovsky et a l . (n.22) found lower income for f a m i l i e s choosing the Kaiser plan over a FFS group p r a c t i c e , although premiums and co-payments were lower for Kaiser. Roghmann et a l . (n.17) found no s i g n i f i c a n t d ifferences i n family income between those choosing a Blue Cross/ Blue Shield plan and those choosing three HMO plans in Rochester, New York that had wider coverage and no waiting period for maternity coverage. However, among the HMO plans that they studied, the open panel or IPA-HMO had the highest family income. A l t e r n a t i v e l y , using a per capita measure of income, Berki et a l . (n.15) found lower per capita incomes, in support of the f i n a n c i a l v u l n e r a b i l i t y hypothesis, for those joining HMOs in a quadruple choice s i t u a t i o n involving Blue Cross/Blue Shield, one open panel, and two closed panel HMOs. Looking at choices between d i f f e r e n t types of HMOs, Berki et a l . 1978 (n.25) found that lower per capita income increased the p r o b a b i l i t y of enrolment in a PGP-HMO. Enrollees in IPA-HMOs, on the other hand, had higher family and per capita incomes as well as the largest f a m i l i e s , namely the largest number of c h i l d r e n . - 190 -F i n a n c i a l v u l n e r a b i l i t y may be related to expected future expenditures for health care. I f HMO enrolment i s an action to protect against t h i s , higher pre-enrolment medical expense might be expected to lead to HMO s e l e c t i o n . However, in the studies done by Berki et a l . (n.15) and Roghmann et a l . (n.17) no differences were found in previous out-of-pocket expenses between those choosing HMO enrolment and those choosing Blue Cross/Blue Shield. The same studies also found IPA-HMOs were chosen over PGP-HMOs, despite potential savings offered by the closed panel HMO. Juba et a l . (n.17) found that HMO enrollees generally reported expected out-of-pocket savings on medical expenses were a s i g n i f i c a n t reason for HMO se l e c t i o n . The prepayment aspect of "knowing medical costs in advance" was also viewed to be a relevant factor in HMO choice by Tessler and Mechanic (n.17). However, Moustafa's study (n.17) showed that plan members were often not aware of services offered by t h e i r chosen plan. Thus, i t appears that there i s some support for the f i n a n c i a l v u l n e r a b i l i t y hypothesis playing a role in the sel e c t i o n of an HMO and of d i f f e r e n t types of. HMOs. A c c e s s i b i l i t y Donabedian (n.4) and others (n.17 Gaus, Juba et a l . , and Tessler and Mechanic) have suggested that the greatest obstacle to PGP enrolment i s the existence of reasonably s a t i s f a c t o r y t i e s with the t r a d i t i o n a l health care system. Using multivariate analysis, Berki et a l . 1978 (n.25) found the strongest predictor of HMO enrolment was the previous source of care. Having a private physician as a regular source of care reduces the p r o b a b i l i t y of enrolment i n a PGP-HMO, while not having a private physician or regular source - 191 -of care increases the p r o b a b i l i t y s i g n i f i c a n t l y . The l a t t e r may r e s u l t from reduced access caused by poor int e g r a t i o n into the t r a d i t i o n a l medical care system due to being new in an area (n.17 Gaus and Juba et a l . ) . Goldberg and Greenberg found population migration to be an important v a r i a b l e in HMO 26 choice . Ashcraft et a l . (n.25) reported that d i s s a t i s f a c t i o n with a previous source of care was a c h a r a c t e r i s t i c pre-enrolment experience of an HMO enrollee, whereas the post-enrolment experience showed s a t i s f a c t i o n with the access aspect of care. In t h e i r analysis of factors a f f e c t i n g s e l e c t i v i t y of plans, Metzner and Bashshur (n.18) found being able to choose a doctor and to see the same doctor ranked very high. S i m i l a r l y , Berki et a l . (n.15) found having a private physician as a usual source of care very s i g n i f i c a n t and those with such r e l a t i o n s h i p s tended to follow t h e i r physician into an IPA-HMO. Free choice of physician, therefore, appears to be an important factor influencing the type of HMO chosen. Geographic a c c e s s i b i l i t y , i n terms of physical distance from the source of care, was found by Scitovsky et a l . (n.22) and Tessler and Mechanic (n.17) to have an influence on the choice of a plan. Furthermore, Gaus et a l . (n.25) measured a c c e s s i b i l i t y to care in terms of the time i t took to contact a physician by phone, by appointment, and by waiting time in the o f f i c e , and t h e i r r e s u l t s favoured the HMO. A discussion of problems of access also raises questions about d i s t r i b u -t i o n a l equity of services and whether some sections of the population may be underserved. According to the 1983 HMO Census, t o t a l membership in HMOs was 12,490,780 but aged members covered by Medicare represented 492,035 of the - 192 -t o t a l , and poor members covered by Medicaid represented 258,272 of the 27 t o t a l . The figures suggest that these groups known to have higher health r i s k s are s i g n i f i c a n t l y underserved by HMOs. Spitz (n.l) provides a discussion of the Medicaid program and enrolment in HMOs and correspondingly, Bonanno and 28 Wetle discuss HMO enrolment and the Medicare program . Both indicate that problems have arisen due to bureaucratic b a r r i e r s and ret r o a c t i v e payment mechanisms which have deterred HMO involvement with these populations. Another factor related to a c c e s s i b i l i t y of services i s f i n a n c i a l b a r r i e r s to seeking needed care. In many instances, employers pay part or a l l of HMO premiums, p a r t i c u l a r l y where union contracts are in ef f e c t (n.5 L u f t 1981). Not only does t h i s improve a c c e s s i b i l i t y by reducing the employees' costs for services but also i t may increase a c c e s s i b i l i t y through better benefit coverage. Due to l e g i s l a t i o n , HMOs generally o f f e r more comprehensive benefits than conventional insurance plans, e s p e c i a l l y with respect to ambulatory care services. Third party involvement in the f u l l or p a r t i a l payment of premiums • f makes the enrollee less s e n s i t i v e to the cost of purchasing these services. When t h i s i s combined with improved benefit coverage, i t may lead to a greater use of services, for example, of ambulatory care v i s i t s . In a review of several studies, HMO enrollees were found to have at least as many or s l i g h t l y more ambulatory v i s i t s (n.2 L u f t 1978). The suggestion i s that HMOs may not necessarily make savings from increased ambulatory care v i s i t s . However, some studies that used matched populations with differences in ambulatory care coverage have reported higher rates of ambulatory care servicing accompanied lower inpatient h o s p i t a l u t i l i z a t i o n i n PGP (n.15 Berki et a l . , and - 193 -n.23). These findings imply that there may be an association between lower h o s p i t a l i z a t i o n rates in HMOs and greater a c c e s s i b i l i t y to care through better ambulatory care coverage. Thus, the evidence presented on a c c e s s i b i l i t y suggests that an established r e l a t i o n s h i p with a physician decreases the p r o b a b i l i t y of HMO enrolment. Those without access to a regular source of care appear to be more attracted to HMO enrolment. Questions arise as to whether t h i s group may d i f f e r i n some way that may affect h o s p i t a l i z a t i o n rates from those served by the t r a d i t i o n a l health care system. The under-representation of the poor and aged covered by publicly-funded health care programs in HMO populations suggests perhaps some homogeniety of population that may have implications for lower h o s p i t a l i z a t i o n rates. F i n a l l y , broader coverage offered by the HMO improves a c c e s s i b i l i t y to a wider range of services, p a r t i c u l a r l y ambulatory care, which may also be r e f l e c t e d i n lower h o s p i t a l i z a t i o n rates and decreased costs. In conclusion, t h i s discussion has attempted to i d e n t i f y factors in the enrolled population that may account for d i f f e r e n t i a l s i n h o s p i t a l u t i l i z a t i o n and subsequent lower costs attributed to HMOs. It i s by no means exhaustive, and merely accents the generally mixed and inconclusive evidence on HMO e n r o l -ment . Although evidence presented did not support adverse s e l e c t i o n i n HMO populations, i t did suggest that HMOs may serve population subsets favourable to i t s objectives such as young families and few aged or poor populations. This s i t u a t i o n appears to have developed despite mechanisms designed to promote equity in population s e l e c t i o n such as community rating and open enrolment. To be f a i r to HMOs, other structures may have predisposed i t to t h i s s i t u a t i o n . - 194 -The dual choice option of the HMO Act encourages the marketing of HMOs to lower r i s k employed populations. At the same time, the p u b l i c l y funded Medicare and Medicaid structures present bureaucratic b a r r i e r s to the enrolment of higher r i s k populations. The incentives offered by a competitive market structure reinforce the s i t u a t i o n as i t tends to place the HMO in a favourable p o s i t i o n in the marketplace. As a re s u l t of these structures, i t may be very d i f f i c u l t and not l i k e l y desirable to a l t e r the population mix in HMOs. While some evidence indicates s e l f s e l e c t i o n i n HMO enrolment due to f i n a n c i a l v u l n e r a b i l i t y , i t i s not clear t h i s would have an influence on HMO performance. A c c e s s i b i l i t y to ambulatory care through broader benefit coverage i n HMOs may increase u t i l i z a t i o n . Increased ambulatory care u t i l i z a t i o n may not necessarily be cost saving but i f there i s an association, as some studies suggest, with lower h o s p i t a l u t i l i z a t i o n , o v e r a l l savings may r e s u l t . F i n a l l y , the evidence on having an established r e l a t i o n s h i p with a physician and on the freedom to choose a physician suggest possible implications for the type of practice setting selected which might i n d i r e c t l y a f f e c t h o s p i t a l u t i l i z a t i o n rates and possibly lower costs. PHYSICIAN FACTORS Physician factors possibly accounting for lower h o s p i t a l i z a t i o n and reduced costs i n an HMO could be related to the supply and mix of i t s physicians. In the s t a f f and group contract models of physician organization mentioned e a r l i e r , - 195 -the HMO controls the number of physicians selected as well as the mix of primary care physicians and s p e c i a l i s t s . Most of these HMOs attempt to determine optimal r a t i o s of physicians to enrollees but t h i s may vary with the stage of 2 9 development of the organization and the needs of the population . While the determination of such r a t i o s may f a c i l i t a t e lower admissions per capita, Barer (n.6) points out that i t i s d i f f i c u l t to separate t h i s argument from the issue of patient access, as lower physician/population r a t i o s may mean less access. However, access does not appear to be a problem in HMOs and may in fact be improved by an HMO. On the other hand, IPAs, being open panel p r a c t i c e s , have no control over the number and mix of physicians j o i n i n g t h e i r organizations. I f t h e i r physician mix i s skewed in favour of s p e c i a l i s t s who tend to have h o s p i t a l intensive practices, higher h o s p i t a l admission rates might be expected. As discussed e a r l i e r , IPA physicians are reimbursed on a FFS basis which provides an incentive to maximize services e s p e c i a l l y those with high renumerative value such as h o s p i t a l i z a t i o n where overhead costs to physicians are considerably reduced. Also, as previously noted, IPAs have weaker organizational influence on physician decision making than the PGP model HMO. Thus, a combination of number and mix of physicians, the method of payment to physicians and the structure of the organization may possibly affect h o s p i t a l i z a t i o n rates in HMOs. While Egdahl et a l . show reductions in h o s p i t a l i z a t i o n for IPAs r e l a t i v e to 30 FFS practice , others have found these reductions not to be as great as in 31 the PGP model . In Pett's study (n . 3 1 ) comparing a s t a f f model HMO and an IPA where benefits were i d e n t i c a l and enrollees very c l o s e l y matched, he - 196 -suggests that the explanation for differences in h o s p i t a l i z a t i o n i s organizational incentives, but he was not able to determine which incentives were responsible. However, Holahan proposes that the prepayment incentives affect decision making of the i n d i v i d u a l physician in the PGP model more than 32 under the IPA model and t h i s has an influence on u t i l i z a t i o n patterns In contrast, Broida et a l . comparing prepaid and FFS populations each receiving care from s a l a r i e d physicians demonstrated no differences in h o s p i t a l i z a t i o n 33 between the two groups . In t h i s study, the method of reimbursement to physicians was held constant rather than varying in accordance with the d i f f e r e n t types of populations served which i s the usual procedure in such studies. Therefore, these r e s u l t s may need cautious i n t e r p r e t a t i o n . If access to h o s p i t a l admitting p r i v i l e g e s i s denied physicians for any reason, such as resistance to HMOs by l o c a l medical s o c i e t i e s , t h i s could be r e f l e c t e d in lower h o s p i t a l i z a t i o n rates. Klarman c r i t i c i z e d e a r l i e r studies done on the Health Insurance Plan (HIP) of Greater New York on t h i s basis. He implied the lower h o s p i t a l i z a t i o n rates reported were affected by discrimination . . 34 against HIP physicians with respect to admitting p r i v i l e g e s . Densen et a l . refuted t h i s claim, reporting that 80% of HIP general p r a c t i t i o n e r s were 35 a f f i l i a t e d with at least one h o s p i t a l . In response, Klarman suggested that the figure would be more impressive i f i t related to s p e c i a l i s t s who tend to have more admissions and that h o s p i t a l a f f i l i a t i o n i s not necessarily to be equated with access to h o s p i t a l p r i v i l e g e s . Given the f i n a n c i a l incentives of the HMO, i t i s reasonable to expect that more preventive services might be provided by HMO physicians and that t h i s may - 197 -have an e f f e c t on h o s p i t a l i z a t i o n rates. Luft in reviewing the evidence on pre-ventive services in HMOs concludes that greater use of preventive services by HMOs "appears to be at t r i b u t a b l e to better f i n a n c i a l coverage rather than a preventive care ideology. When people have f u l l coverage they have at least as many i f not more, services under the FFS system than in an HMO. These r e s u l t s are e n t i r e l y i n accord with data for h o s p i t a l i z a t i o n - HMO enrollees seem to get fewer services i f everything else i s held constant" (n.9 pp.163-164) Donabedian (n.4) has proposed that the key question about u t i l i z a t i o n rates i s whether they are appropriate. Thus, do lower h o s p i t a l i z a t i o n rates i n HMOs represent reductions in "necessary care" or "excess care"? From his review of the h o s p i t a l i z a t i o n l i t e r a t u r e , Luft suggests that PGP physicians admit patients less frequently for diagnostic tests than control group physicians. But h i s findings with respect to surgery were not as c l e a r , "people in HMOs have markedly lower s u r g i c a l rates and prepaid group practices have very low rates for some s p e c i f i c 'discretionary' procedures. However, the rates for non su r g i c a l admissions tend to be equally low and the 'discretionary' rates, with the exception of tonsillectomies are not con s i s t e n t l y lower than the rates for a l l s u r g i c a l procedures" (n.2 L u f t , 1978 p.1341) These findings suggest that reductions in h o s p i t a l i z a t i o n rates in HMOs occur across the board i n su r g i c a l and non-surgical categories. However, the implication i s that HMOs do not necessarily reduce admissions only in the discretionary or unnecessary categories. Another question a r i s i n g i s ; are lower h o s p i t a l i z a t i o n rates associated with a lower quality of care? Cunningham and Williamson reviewed 27 studies concerned with quality of care i n HMOs. - 198 -"In 19 studies, the investigators found the quality of care in HMOs to be superior to that of other settings; in the remaining eight studies, e i t h e r quality was found to be simil a r or the t o t a l study findings were inconclusive; in no project were the o v e r a l l r e s u l t s i n d i c a t i v e that quality of care in HMOs was below that of other sett i n g s " ( n . l l i p . 4 ) The C a l i f o r n i a Medicaid experience described by Starr seems to be the only 36 exception reporting substandard services . While t h i s experience involved fraudulent practices and low qua l i t y care, i t seems to have been a d i s t i n c t exception to the norm. Because of the involvement of government funds, i t was quickly remedied and no recurrences have been reported. On balance, HMOs would appear to d e l i v e r at least equal i f not somewhat better care than conventional p r a c t i c e s . To sum up, from the above discussion of physician f a c t o r s , i t would appear that the method of payment to the physician, the form of organization prevalent in the practice setting and h o s p i t a l admitting p r i v i l e g e s are factors that may l i e behind lower h o s p i t a l i z a t i o n rates attributed to HMOs. HOSPITAL FACTORS E a r l i e r , the discussion on arrangements for h o s p i t a l care pointed out di f f e r e n t l e v e l s of integration between the h o s p i t a l and the HMO. As a r e s u l t , certain c h a r a c t e r i s t i c s such as h o s p i t a l ownership or the method of payment to the h o s p i t a l are factors that may influence i n t e r n a l h o s p i t a l p o l i c y but are unli k e l y to have any d i r e c t impact on admission rates aside from t h e i r e f f e c t on the a v a i l a b i l i t y of beds. - 199 -Some evidence suggests that per capita bed supply may be a factor c o n t r i -buting to h o s p i t a l u t i l i z a t i o n rates. A study conducted by Roemer in up state New York found that when two hundred new beds were added in a community that had a previous bed occupancy rate of 78%, a sharp r i s e in h o s p i t a l admissions and 37 average lengths of stay was observed . However, bed supply per se does not determine admission rates as u t i l i z a t i o n decisions ultimately rest with physicians. The Kaiser Permanente Health Plan i s the c l a s s i c example of the use of lower bed population r a t i o s because i t operates on the allowance of two beds per thousand enrollees when the American average i s 4.4 beds per thousand popula-38 tion . The Kaiser plan i s at r i s k for providing h o s p i t a l services and generally has lower h o s p i t a l admission rates, although factors other than bed sc a r c i t y may be involved. Weil studied seven HMOs de l i v e r i n g health services to 39 Medicare patients, three of these were Kaiser plans . Resource a v a i l a -b i l i t y was one dimension that he considered in each plan. The Kaiser plans, in addition to owning t h e i r own h o s p i t a l s , also owned and operated t h e i r own home health agencies and one plan owned an extended care f a c i l i t y . Consequently, t h i s suggests that the a v a i l a b i l i t y of alte r n a t i v e resources may influence the extent of u t i l i z a t i o n of acute care h o s p i t a l beds. However, other findings such as those of Densen et a l . i n a study involving HIP of Greater New York, show lower h o s p i t a l i z a t i o n rates even when the organization was not at r i s k for h o s p i t a l care and when bed supply was not subject to c o n s t r a i n t s ^ . Furthermore, Wersinger et a l . (n.23) compared three HMO settings i n Rochester, New York where bed a v a i l a b i l i t y was not r e s t r i c t e d and found lower admission rates for the PGP-HMO than for the IPA or - 200 -network types of HMOs or Blue Cross/Blue Shield. The findings of these studies imply that imposing constraints on the number of available beds is not a necessary condition to reduce admission rates. However, restrictions on bed availability eventually could become a sufficient condition to reduce hospital admission rates. Thus, lower admission rates reported by Kaiser plans may have been related, to some extent, to bed scarcity. To sum up, i t would appear that factors within the jurisdiction of hospitals such as bed supply do not offer an adequate explanation for lower admission rates in HMOs. Bed restriction policies do not discriminate directly against particular population groups so could not reduce admissions through the exclusion of, for instance, high risk groups. These policies, nevertheless, may have some interactive effect on the treatment decisions of physicians but these decisions are probably more susceptible to the influences of the payment method and the organization of the practice setting. ORGANIZATIONAL FACTORS Wolinsky (n.4) has noted the failure of studies on HMOs to isolate the influence of different structural incentives on HMO performance. As a result, the literature was able to shed l i t t l e light on the influence of organizational factors in decreasing hospitalization rates. Barer has commented, "Undoubtedly that is partly due to the vague 'formalizations' of organizational factors and their dimensions and to the conceptual d i f f i c u l t y of distinguishing practice style and philosophy from the entrepreneurial and financial risk aspects." (n.6 p.66) - 201 -The previous discussion on physician organization and method of payment (in Chapter 8) suggests a number of organizational factors that may contribute to decreased h o s p i t a l i z a t i o n r a t e s . P a r t i c u l a r l y i n the group models, factors such as peer review, the a v a i l a b i l i t y of diagnostic f a c i l i t i e s and a u x i l i a r y personnel, the a c c e s s i b i l i t y of consultation with s p e c i a l i s t s and the absence of FFS as a method of payment could have an influence on h o s p i t a l i z a t i o n patterns. Scitovsky and McCall compared a prepaid m u l t i s p e c i a l t y group practice with a prepaid FFS mul t i s p e c i a l t y group practice that was not at r i s k for h o s p i t a l 41 care . They found that the number of patient days per 1000 persons (excluding maternity) was almost i d e n t i c a l for the two plans. Although the admission rates for the PGP were lower, i t s lengths of stay were longer. These findings lend support to the hypothesis that lower h o s p i t a l i z a t i o n rates may be due as much to the group practice form of organization as the prepayment feature. Since many comparisons showing lower h o s p i t a l i z a t i o n rates have been done between solo FFS practice and PGPs, t h i s suggests possibly an independent ro l e for organization factors as an explanatory v a r i a b l e . Nevertheless, the extent of the influence of organizational factors or the s p e c i f i c factors l i k e l y to be responsible for lower h o s p i t a l i z a t i o n rates remain highly uncertain. SUMMARY The t o t a l costs to enrollees are lower in HMOs than for comparable compre-hensive coverage under conventional insurance plans. These savings appear to be achieved through lower h o s p i t a l i z a t i o n rates, without jeopardizing the quality of care to the enrolled population. However, having reviewed some evidence of - 202 -factors l i k e l y to affect lower h o s p i t a l i z a t i o n rates, i t i s d i f f i c u l t to draw conclusions about causation^ Certain subsets of populations served by HMOs may be a contributing factor. The unwillingness to change a source of care once a r e l a t i o n s h i p i s established with a physician may prejudice the s e l e c t i o n of a p a r t i c u l a r practice setting which subsequently may affect h o s p i t a l u t i l i z a t i o n . Regarding physician f a c t o r s , practice s e t t i n g , method of payment and access to h o s p i t a l p r i v i l e g e s , were a l l possible explanations for consideration in lower h o s p i t a l i z a t i o n rates. Since decisions to h o s p i t a l i z e ultimately rest with physicians, the a v a i l a b i l i t y of resources i s the only h o s p i t a l factor l i k e l y to have an i n d i r e c t e f f e c t on u t i l i z a t i o n patterns. F i n a l l y , organizational factors, although l i m i t e d , seem to point to practice setting as a probable pre-disposing f a c t o r . The theme throughout seems to indicate a role for practice setting as possibly being i n f l u e n t i a l in lower rates. Often, the most favourable r e s u l t s of decreased h o s p i t a l i z a t i o n were associated with the PGP model. Since physicians in t h i s setting are not paid FFS, t h e i r incentives to h o s p i t a l i z e are removed. Thus, i t appears from t h i s analysis that practice setting and payment method are consistent factors associated with lower h o s p i t a l i z a t i o n rates. Evans o f f e r s a conclusion that seems appropriate to t h i s discussion: "Organization and philosophy d i f f e r dramatically across modes, as presumably does the psychology of the p a r t i c i p a t i n g physician. It i s not rigorously proven, therefore, that the remarkably consistent reduction of h o s p i t a l use of about 20-25% which i s associated with s h i f t s away from fee-for-service i s in fact the r e s u l t of the removal of economic incentives to excess use. Nevertheless, on the basis of e x i s t i n g evidence, i t i s c l e a r l y much more plausible than the n u l l hypothesis." ^ - 203 -EVIDENCE OF PERFORMANCE IN ALTERNATE FORMS OF MEDICAL CARE PRACTICE IN CANADA Evaluation of the performance of CHCs in Canada has not been extensive, although the Community Health Centre Project report recommended that CHCs be developed in s u f f i c i e n t numbers to allow e f f e c t i v e evaluation. One estimate, in 1983, accounted for 140 CHCs in Canada and of these, 112 were CLSCs in 43 . . . . . . Quebec . Thus, l i m i t a t i o n s in numbers plus a lack of standardization among CHCs due to adaptations to l o c a l needs have provided some obstacles to evaluation. The p r e v a i l i n g p o l i t i c a l climate towards a l t e r n a t i v e forms of health care d e l i v e r y as well has tended to create a defensive atmosphere where the onus to prove the worth of these organizations i s placed on i t s supporters. Evaluation, frequently, becomes a matter of measuring CHC performance against a FFS standard often in terms of cost rather than other less measurable v a r i a b l e s 44 such as appropriateness, quality or a c c e s s i b i l i t y . The studies that have been done on CHCs,