Many IPAs in California face stiff new challenges in 1999. Being Y2K compliant will be of minor concern compared to being Y2K solvent. Pressure from legislative and regulatory requirements along with market forces may be the undoing of more than a few IPAs during1999.

Department of Corporations Concerns

While IPAs remain essentially regulation-free, their contractors, HMOs, are heavily regulated. To address this disparity, in 1998 the Department of Corporations (DOC) initiated a movement to hold HMOs accountable for the financial viability of contracting IPAs. Each HMO is developing its own approach to the challenge. Some will limit actions to requests for more reporting and oversight. Others will be more aggressive and invoke breach clauses to remedy poor financial performance. Some already have initiated direct contracting with individual physicians in areas where an IPA is performing poorly or has failed to pay physicians on a timely basis. At least one HMO has contracted with a CPA firm to do a statewide review of its contracting IPAs.

If the DOC decides to further increase HMOs' financial responsibility for IPAs, it may pass regulations requiring that the Tangible Net Equity requirement for HMOs include a reserve for any negative equity on the balance sheets of their contracting IPAs. This action would certainly increase the interest level of HMOs. Cattaneo & Stroud, Inc. (C&S) believes as many as 50%-75% of the state's IPAs would fall into this negative equity category if Incurred But Not Reported (IBNR) claims were properly recorded. This result would lead to pressure on IPAs to improve operating performance (which may mean pay cuts to physicians) and increase capitalization. Alternatively, HMOs would likely expand direct physician contracting efforts while selectively canceling contracts with IPAs.

Fraud and Abuse Initiatives

Simultaneous with IPAs' growing financial and capital needs, hospitals and health systems are becoming more cautious in the structuring of their risk sharing arrangements. Federal and state laws and regulations on private inurement, anti-kickback, and disclosure of financial incentives are causing many systems to rethink and revise their financial agreements with physician groups.

Many organizations are converting risk sharing agreements to "care management" agreements that delineate specific performance requirements and services to be performed by the IPA. Payments tied solely to inpatient days per thousand targets are being replaced or augmented by these care management services agreements, often with defined quality thresholds required for payment. Additionally, the agreements must formally meet the test of fair market value. Compliance with these laws and regulations is a top priority with many organizations, including Columbia/HCA which has announced and adopted a policy of "zero tolerance" for non-compliance.

C&S has assisted in a number of negotiations and evaluations of agreements among hospitals, health systems, and physician organizations. These agreements require an assessment of the initial premium allocations, interim payment rates, the financial responsibility matrix, current and historical utilization rates, and the surrounding market. With use rates no longer declining, gains from utilization controls are less achievable. Furthermore, the will of many physicians (and IPAs) to strongly manage utilization is waning in the face of negative consumer sentiment for managed care.

Physician Compensation Formulae

IPAs across the state are experiencing growing tension between specialists and primary care physicians. Primary care payments, which were enriched when IPAs were formed or as they pushed for exclusivity in a market, have remained relatively intact while specialists' rates were lowered to meet budget targets. In response, specialty IPAs have formed to negotiate better rates with the IPAs and, in some cases, to attempt direct contracting with HMOs.

Many IPAs are lowering primary care rates as a result of these pressures. With marginal IPAs failing or being dropped by HMOs, primary care physicians have fewer opportunities to shop between IPAs for good rates. The economics of primary care in a market such as California, with low capitation and premium rates, an excess supply of providers, high labor and overhead costs, and a high cost of living, are again raising the specter of a crisis in primary care. Many groups report difficulty in recruiting new physicians at current salary levels.

Specialty IPAs, with the exception of mental health and vision care, have met with limited success in direct contracting with health plans due to the presence of large multi-specialty IPAs. However, as IPAs fail, C&S believes plans may reconsider prior policies and use these specialty IPAs as an efficient mechanism for meeting immediate market needs.

C&S has been actively working with IPAs and primary care groups in addressing these challenges. Corporate restructuring of relationships with hospitals, revised compensation formulae, and alternative contracting strategies may be employed to mitigate or eliminate financial shortfalls. In extreme cases, C&S has helped IPAs get out of the capitation risk business when premiums, group size and/or membership presented untenable challenges.

Revenue Shortfalls and Cost Increase

Hospitals are also experiencing financial stress with California premiums averaging 25%-40% below the rest of the country, hospital seismic mandates, Balanced Budget Act reductions to Medicare, skyrocketing drug and supply costs, and renewed pressure from unions. Many believe that until significant premium increases are achieved, the number of hospitals and IPAs will continue to decline. Hospitals are starting to "push back" on per diem rates and risk sharing arrangements negotiated with physician organizations as costs rise and legal restrictions tighten.

Medicare Risk Products

HMOs are withdrawing Medicare risk products from specific markets because of declining margins and inability to control drug costs and utilization. Many hospitals and health systems would applaud the demise of these products, and some are implementing strategies to withdraw from unprofitable products. Yet, for IPAs, Medicare risk contracts are usually better performing than commercial business, and they certainly provide significantly higher levels of cash flow. In those counties where HMOs have withdrawn products, contracting IPAs are suffering from loss of cash flow, revenue, and relative profitability, not to mention difficulties in funding the IBNR associated with discontinued contracts. In areas that stay with Medicare risk products, C&S predicts significant increases in out-of-pocket costs for enrollees with less of the premium increase passed on to the IPAs. This could result in loss of enrollment and a revenue decline for the IPA, though alternative products for seniors often are not available.

Many IPAs cannot afford the cash flow and revenue declines that the loss of Medicare risk portends. Visit C&S' web site (www.cattaneostroud.com) for details on Medicare HMO withdrawals in California.

Growing Physician Disenchantment

Historically, as the economic noose has tightened, IPA member physicians have deserted IPAs. Private practice physicians are losing faith in IPAs and are looking for alternatives they perceive will better represent them at the negotiating table. A new batch of specialty networks and IPAs are forming for the purpose of contracting with payers and IPAs. If successful, at a minimum, these organizations will subcontract with IPAs and establish their own administrative structures, further divide the health care flow of funds, and diffuse the resources and energies of IPAs.

The larger concern, however, is that physicians in the community will become further disenfranchised from each other, and the ability to effectively integrate and coordinate care will be compromised.

SUMMARY

Cattaneo & Stroud sees 1999 as a critical juncture in the success or failure of the IPA model of care. IPAs will be seriously challenged in 1999 as the impact of these pressures mounts. To retain financial management of health care dollars, physicians must examine the reasons their IPA is not succeeding and adopt strategies to achieve fiscal solvency and profitability. Lack of capital and physician commitment to the organization and to the concept of managed care are significant issues that must be addressed if physicians want to participate in the economic decisions and clinical protocols that affect the delivery of health care in their respective communities.

Aggressive action is needed to manage the challenges and retain or rebuild the confidence of member physicians, health plans, partnering hospitals, and health systems if IPAs want to survive as a viable health care force in the next millennium. C&S has the experience to assist those IPAs willing to meet the challenges.