TODAY'S MANAGED HEALTH care industry is in turbulence. However, this tumult is creating potential opportunities for future-oriented, flexible, and innovative physician executives of health care organizations. Certainly, the catastrophic operational failures of the Oxford Health Plan provide lessons

that can be applied to new initiatives. These lessons, revolving around the issues of designing and implementing management information systems. as well as rapid enrollment initiatives, suggest that physician executives must be cognizant of the perils involved in rapidly expanding the core business. Similarly, the serious legal issues confronting Columbia/HCA afford an opportunity to reassess contractual and reimbursement arrangements. These issues, including alleged Medicare fraud, indicate that physician executives must be knowledgeable of the legal implications of aggressive market initiatives. (1) In addition, the recent merger initiatives of such health care giants as United Healthcare and Humana suggest that physician executives who are content with organizational relationships, market share, and competitive arrangements may be In for a surprise. They may suddenly find themselves subjected to unexpected market dynamics that make them and their managed care organizations the targets of friendly (or unfriendly) acquisitions and reorganizations.

Managed care objectives

As Figure 1 suggests, managed care organizations are focused on three objectives to ensure their "success."

These objectives include enrollees' satisfaction with access to health care, containing costs (including minimizing expenses and maximizing revenues), and providing quality health care. Admittedly, "success" may be defined differently for various managed care organizations depending on their strategic goals and operational realities. For example, a newly formed organization may seek rapid market share, a state agency may be concerned with the health of the population, while a for-profit company may seek maximum quarterly profit. Increasingly, organizations are defining "success" in terms of providing "value" to the customer. Although value is also subject to the organization's philosophy, many consider value as the optimal relationship between cost, quality, and satisfaction.

However, how organizations define the optimal relationship among these three factors has a major impact on how decisions are made, This is especially true when competition is tough and there is pressure to improve all three performance measures. But, there can only be one primary goal (the other two areas can be necessary conditions). If low cost is the primary goal, there may be certain minimum levels of quality and satisfaction below which the organization cannot go without losing the ability to function at all. But as long as the organization is above these thresholds, questions such as should we decrease cost or improve quality have only one possible answer if cost is the primary goal--reduce cost.

Similarly, If the choice is between improving quality or improving satisfaction, then the answer is either improve the one that will reduce costs the most or maybe to improve neither if increased expenses are associated with the improvements. It is easy to see how the decisions would be different if either quality or customer satisfaction was the primary goal. Likewise, it can easily be seen how the decisions would change if short-term, or long-term, profitability was adopted as the goal. Then, the "optimal balance of cost, quality, and satisfaction" would be a function of how they interacted with each other to produce short-term or long-term profits. Therefore, It is necessary to consider the implications when deciding which objective will be considered primary.

1. Patient satisfaction

Enrollees' satisfaction with their level of access to health care is rapidly becoming a significant issue. This contrasts with the managed care organizations' original focus of cost containment, including lowering employers'/buyers' premiums. Now, however, access is becoming a dominant Issue. (2) Evidence of this includes the numerous legislative initiatives to ensure that patients have appropriate access. For example, Florida mandates "direct access" to specialists and payment for emergency room visits until a physician determines the nature of the visit, (3) At the federal level, significant political pressure is growing in response to voters disenchantment. This disenchantment, reflected by "managed care reform proposals," deals with patients' rights to denied care, lengths of stay for certain conditions, and the ability to sue ERISA-protected managed care plans. (4)

What are the implications of these initiatives for the future direction of managed care organizations? Clearly, they suggest that the managed care industry is seen as a profit-centered business, which is insensitive to patients and buyers of health care.

Consequently, the successful managed care organization should be one that proactively markets its programs to the enrollees/employees, as well as to the buyer/employer. The intent would be to differentiate its managed care plan from all the others.

This program would have a comprehensive "consumers'/patients' bill of rights," including such provisions as an independent appeal mechanism and the right to information about alternative treatments. It would also offer more patient-friendly systems regarding a broader mix, number, and geographic distribution of providers, as well as responsive demand management, pre-admission review, and emergency department authorization procedures. For example, it is not unreasonable to predict that patients will expect prompt, courteous, and efficient access to the primary care manager, timely and uncomplicated referrals to specialists, and layman criteria for what constitutes an emergency department visit.

Lastly, successful organizations should acknowledge that ERISA protection will inevitably remain a "trigger Point" for state and federal legislative initiatives. (5) Consequently, the industry should consider designing alternative resolution procedures for allegations of malpractice, These alternatives might include expedited internal grievance procedures or external arbitration. In addition, the industry should aggressively pursue legislative actions to establish reasonable caps in civil cases on the award for non-economic damages for pain and suffering.

2. Cost containment

Certainly, the thrust of managed care has been reducing the cost of health care to employers and their employees. As Figure 2 shows, the managed care industry was very successful in cost reduction until recently.

This successful cost reduction has transformed a substantial number of employees' health care benefits from fee-for-service to some type of managed care plan (please see Figure 3).

However, serious cracks are beginning to be seen In the managed care industry's ability to continue to drive down costs. For example, after four years of constraining costs, the Minneapolis area's largest managed care organizations are increasing their premiums by up to 15 percent. (6) In fact, there is anecdotal evidence of some employers experiencing annual premium increases of 20 percent. (6) This should be of concern for physician executives in other regions of the United States, since the Midwest has been considered a model for the rest of the nation's growing managed care systems. Analysis of the primary components of cost containment (please see Figure 4) suggests several reasons for these increases which can reasonably be extrapolated to a national trend.

First, the "low hanging fruit" of obvious fat in the system was quickly eliminated by reducing admissions and length of stay. Second, unrealistically and unsustainably low reimbursement arrangements were offered to employers as a means for the managed care companies to gain market share. (7) Third. although some providers and customers were made aware of the cost of medical treatments, the "technological imperative" continued to drive costs upward. This imperative is characteristic of American medicine--the latest technology. especially in terms of equipment and pharmaceuticals, is considered the best and, therefore, is adamantly demanded by providers and patients. Certainly, the demand for MRI and Viagra reflect how rapidly a new technology or drug can become "state-of-the-art." Employers and the managed care plans find it difficult, from a marketing perspective, to deny this technology to their employees and members, respectively. (8) And, finally, there is doubt whether managed care organizations have show n substantial cost benefit from their wellness and health promotion initiatives.

The experience in the Minneapolis area may suggest the direction for containing managed care costs. Although, as indicated in Figure 5, hospitals will continue to align themselves with systems in order to gain market share, bargaining power, and economies of scale when confronted with managed care plans, competition and employer demands should keep costs under some control. Certainly. this was the case when Kaiser was not able to increase its premiums as much as it desired to the California Public Employees Retirement System (CalPERS). (7)

Even with consolidation, managed care plans will shift their cost focus from traditional utilization management to patient-oriented techniques. These techniques will include developing new organizations where complete financial risk is assumed by the provider, whether that provider is a hospital, medical group, or some organizational combination. Certainly, managed care organizations appear to prefer capitation, although other reimbursement techniques may grow in popularity. (9) However, additional sophistication Is required in analysis, such as case mix adjustment and episodic versus individual patient encounter rates, to optimize the reimbursement system. These will necessitate continued investment in state-of-the-art management information systems that can track and simulate patient and provider profiles.

Additionally, cost-effective wellness and health promotion programs will grow in importance, although management will need to ensure that the programs do not generate inappropriate provider visits. (10) This may force managed care organizations to consider long-term contracts with employers. Admittedly, this Is a problematic issue but ills doubtful that wellness and health promotion initiatives will achieve an acceptable return on investment without a longer term health education relationship with the enrollees. Certainly, the financial aspects of long-term contracts will need to be properly structured to ensure that the appropriate level of financial risk is maintained. Thus, issues such as adjustments for inflation, technology, and employee case mix will necessarily be factored into multi-year contracts.

3. Quality

Until recently, it appears that quality has not been addressed as a primary concern of employers and enrollees. It is possible that most health care buyers (e.g., employers) have assumed that quality would remain consistently high while, at the same time, cost would decrease and access would increase. However, it now appears that buyers and consumers recognize that quality is at risk when reduced cost and increased access dominate the goals of the industry. (2)

Thus, physician executives will have to give much more attention to quality care as defined by medical outcomes. (11) This is clearly the next frontier of managed care organizations. Although it is reasonable to expect an increase in patient and provider demand for the latest technology, managed care organizations will continue to seek to control costs through the use of less sophisticated technology for diagnostic and treatment assessment. This will be a challenge.

For example, it will be crucial to convince the patient that an X-ray is appropriate when the patient expects an MRI. In addition, initiatives such as benchmarks, clinical guidelines, and other disease management techniques, (12) as well as report cards, (13) will continue to be implemented. There may also be increased attention to the individual medical and socioeconomic characteristics of enrollees, as well as more emphasis on provider training and treatment preferences. (12) Likewise, in an effort to reduce buyer and enrollee confusion, as well as reduce compliance costs, organizations will urge the standardization of quality measures employed by leading accrediting organizations, including JCAHO and NCQA. (14)

As noted previously, the technological imperative is problematic. However, it can also be beneficial in the sense that it enables managed care organizations to accelerate the continued shift to an ambulatory care system. The modalities of ambulatory care shown in Figure 6 will continue to be refined in terms of cost and patient access.

Certainly, urgent care centers (UCC), ambulatory care centers (ACC), and same day, free-standing surgery centers should offer at least the level of quality currently existing in hospitals, but at a lower cost and higher convenience. Disease-specific clinics should grow in popularity, consistent with the trend toward managed care plans' carve-outs in such areas as mental health, dialysis, pain management, and substance abuse. The corollary is that hospitals may rapidly evolve into very short-term, intensive care-type facilities that also become the emergency "safety net" for adverse Outcomes in ambulatory facilities.

Changing staff needs

A dominant characteristic of managed care organizations, which includes hospitals, medical groups, and ambulatory clinics, is the need for a large staff that encompasses the entire range of experience and education. This spectrum can be viewed as three groups of personnel: physicians and physician extenders, ancillary clinical staff, and administrative staff.

The future portends drastic changes in the mix of employees. At the highly trained professional end of the spectrum are the physicians and physician extenders (e.g., physician assistants, nurse practitioners, and physical therapists). These providers will be required to enhance their professional and interpersonal abilities to meet future demands of patient satisfaction, cost containment, and quality health care. Physicians will continue to migrate away from being specialists to being generalists, although the definition of "generalist" will probably expand to Include previously considered specialty treatment, such as pediatrics and obstetrics-gynecology. (15)

Paradoxically, there will be a need for highly trained specialists because of the trend toward ambulatory care. This will make only a relatively few physicians responsible for inpatient care. Generalists will transfer their patients to these "intensivists" (16) or hospitalists" (17) when hospitalization is required. This will also require the generalists to be sensitive to the need for establishing solid patient-provider relationships so that patients trust the hospitalist to whom they are referred. Likewise, the graying of America suggests that specialties such as geriatrics and rehabilitative medicine will come to play a dominant role in shaping how managed care organizations incorporate other ambulatory care modalities into an Integrated delivery system. As Figure 7 suggests, these modalities will include skilled nursing facilities, step down units, day care geriatric centers, hospices, and home health care.

To maintain their competitive edge, managed care organizations may be required to assist in "retraining" specialists. This retraining will include business as well as technical knowledge, so that the physicians' treatments are cost-effective. (18) In addition, these clinicians will need to be consumer-oriented since patient satisfaction should be part of their economic credentialing. This credentialing should play a greater role In determining whether the managed care organization continues the physician's employment.

Physician extenders have been shown to be cost effective and well received by patients. (19) To ensure maxi mum flexibility within the organization, physician extenders should be expected to perform as a specialist and a generalist; for example, an orthopedic physician assistant may be required to retain a level of primary care proficiency. Thus, managed care organizations will continue to utilize physician extenders to relieve physicians of inappropriate cases. In addition, the organizations will increase the scope of practice to the maximum extent allowable under licensing laws. Certainly, the organization will be required to train these extenders to ensure that appropriate and timely referrals are made to physicians. This training will enable physician extenders to treat routine, acute, and chronic conditions as a member of a health care team, led by the physician.

Likewise, ancillary support personnel (e.g., laboratory technicians) will need additional training to maintain maximum flexibility in job placement. Thus, these employees might be cross-trained in skills to enable them to perform tasks relating to laboratory, radiology, nursing, and administration. This flexibility will be essential as organizations continue to restructure to meet new marketplace demands.

There will be new staff needs regarding administrative personnel as well. One of the most important foci in managed care organizations will be marketing. It will play a continuing role in ensuring new enrollments, reducing disenrollments, and designing the appropriate benefit package for potential buyers. In addition, information technologists will become even more significant as they will make data pertaining to patient and buyer satisfaction, cost containment, and outcomes management available throughout the organization.

These individuals must be able to design, implement, and modify management information systems quickly and reliably so that the managed care organization can rapidly assess its market performance. To survive the projected fluidity of organizational structures, all administrative staff will need training in team building, organizational matrix dynamics, and participating in ad hoc task forces.

A new brand of physician executive

A new type of physician executive will be required to integrate these other groups into a successful organization. Because of the turbulence in the health care marketplace, this physician executive must be a performance-oriented leader trained in change theory, team management, and strategic thinking. Although soundly based in the fundamentals of business operations, the successful physician executive will be required to tailor these concepts to the unique features of health care. This physician executive will be sensitive to the fact that health care is not a commodity but a very personal service. This awareness of the social contract will ensure that the physician executive is able to conduct accurate environmental and stakeholder assessments and respond proactively.

Conclusion

The managed care industry will continue to confront issues of patient and buyer dissatisfaction until it is able to market and manage itself from the point of view of health care as a unique service, recognizing that the "unit of production" is a patient, not a "widget." The present, admittedly essential, bottom line orientation will continue to ensure financial viability. But, the focus will broaden from being process-oriented, cost-driven to being quality-oriented, value-driven with the knowledge that high quality health care is cost-effective. Simple changes, such as modifying the organization's focus from "managed care" to "comprehensive care" or "coordinated care," will reinforce this change. Hospitals should recognize the need to reorganize into intensive care centers with other key components oriented to ambulatory care. Certainly, all these components should maintain constant patient and employee feedback mechanisms to optimize patient and buyer satisfaction.

The future will belong to those physician executives of managed care organizations who confront declining opportunities to contain costs (i.e., decrease the rate of increase) with more emphasis on quality (i.e., assess outcomes) and increased attention to patient satisfaction (i.e., understand the patient's perspective). The successful physician executive will be the one who can maintain a proactive posture in a turbulent health care marketplace in which the only constant will be change.

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[FIGURE 5 OMITTED]

FIGURE 3

PERCENT OF ALL EMPLOYEES WITH HEALTH BENEFITS

Type of Plan  1993  1997

FFS           48%   15%
PPO           27%   35%
POS           7%    20%
HMO           19%   30%

Source: Mercer, 1993

Note

The opinions expressed herein are strictly those of the authors and do not reflect the official policy or position of the Department of the Army, the Department of Defense, or the US Government.

References

(1.) Blecher. M.B. Burned on the Street, Hospitals & Health Networks. March 5, 1998. Pp. 23.28.

(2.) Mason. S.A. Service Reconfiguration: Preparing for Clinical Integration, Healthcare Executive. July/August. 1998. pp. 13-16.

(3.) Goldstein, A. Florida Curbs HMOs' Powers, The Washington Post, June 24, 1998. p. Al.

(4.) MeGinley. L. House Republicans Outline Blueprint for Managed-Care Health Legislation, The Wall Street Journal June 25, 1998.

(5.) Cassll, A. Expand ERISA Consumer Protections. Panel Urged, AHA News. May 18, 1998. p.1.

(6.) Winslow. R. Health-Care Inflation Revives In Minneapolis Despite Cost-Cutting, The Wall Street Journal. May 19, 1998, p. Al.

(7.) Haugh. R. Kaiser's Squeeze Play. Hospitals & Health Networks. May 5. 1998, pp. 37-38.

(8.) Goldreich, S. Health Care Costs Beginning to Climb. The Washington Times. June 3, 1998. p. B1.

(9.) Reynolds, J. X. Of Mutual Interest: Aligning Physicians' Interests with Those of Your Organization, Healthcare Executive. July/August 1998, pp. 7-10.

(10.) Greene, I. Bound & Nagged, Hospitals & Health Net works. February 5,1998, pp. 24-26.

(11.) Millenson. M.L. Forces for Change, Hospitals & Health Networks. February 20, 1998, pp. 44-46.

(12.) Crazier. K.L 'Profiling' Managed Care, Journal of Healthcare Management. May/June 1998. pp. 215-217.

(13.) Sloveosky. DJ., Fottler, M.D., & Houser, H.W. Developing an Outcomes Report Card for Hospitals: A Case Study and Implementation Guidelines, Journal of Healthcare Management. January/February 1998, pp. 15-34.

(14.) Dunn, P. Acacditing Groups Coordinate Quality Measures, AHA News. May 25, 1998, p.1.

(15.) Clinton Tells of Medicare Upgrades, The Washington Times. June 24, 1998, p. Al.

(16.) Carlson. R.W., Weiland, D.E. & Srivathsan. K. Does a Full-Time. 24-Hour Intensivist Improve Care and Efficiency? Critical Care Clinician. July 1996, pp. 525-551.

(17.) Aronowitz, P. Turning Over Inpailents to a "Hospitalist," Medical Economics. December 22. 1997. pp. 100-104.

(18.) Hudak. RP., Brooke, P. Finstuen, K. & Trounson. J. Management Cempetencies for Medical Practice Executives: Skills. Knowledge and Abilities Required for the Future. The Journal of Health Administration Education, Fall 1997. pp. 218-239.

(19.) Suits, HA. and Young, KM. Health Care USA. Aspen Publications: Galthersburg, MD. 1997, pp. 153-154.

Ronald P. Hudak, JD, PhD, FACHE, is an Associate Professor of Health Services Administration at Uniformed Services University of the Health Sciences in Bethesda, Maryland. He can be reached by calling 301/295-3830 or via email at rhudak@usuhs.mil.

William M. Barkley, PhD, is the President of Effective Interventions in Nashville, Tennessee. He can be reached by calling 615/366-7481 or via email at bbarkley@spryney.com.