Emory Report

 June 23, 1997

 Volume 49, No. 34

First Person:
Emory finds itself at a crossroads
with health care changes

We've all had some experience with the changes that are underway in the health care system-and the initial reaction has been mixed.

Some who work in health care, especially physicians, have come to feel a bit like they're being pushed and pulled towards a very uncertain future.

And there is evidence that much of the general public is troubled too-especially about "gatekeepers," gag rules and incentives for physicians to under-treat and minimize care costs.

Most people believe that the real challenge for academic health care centers and other provider organizations simply is to reduce their costs enough to be competitive with commercial providers. If they can do this, then they'll be able to hold their own and maybe even thrive as quality of care eventually becomes more of a differentiator in the marketplace.

But it's not as simple as that. (It never is, is it?)

Cutting costs is not the main challenge for us. There are many ways to manage costs and academic health care centers are capable of significantly reducing costs.

The real challenge comes from a related, but not well understood, new factor. And that's the change in the physician and hospital payment system that the marketplace is imposing on larger and larger segments of providers.

It's the shift to what's known as a capitation payment system that puts us on a whole different road. It's a huge detour for us down unfamiliar roads. It's the difference between managing costs and managing risk-and that makes all the difference in the world.

In the traditional fee-for-service health care system, the third-party insurer and/or the self-insured employer bears all the risk. Insurers manage risk by having a large number of enrollees so that risk can be spread over a large population, the majority of whom are relatively healthy.

In the new world of capitation, the risk is passed on to the providers-to us. In a typical case, a provider is offered a contract that pays a fixed price per patient, per month-say, $10 per enrolled patient. It now becomes the provider's task to manage the risk of incurring more costs for care than the contract provides for the patient base.

In order for a provider to manage the financial risk, a large population of patients must now be in its system to spread the financial risk.

This forces the creation of large provider systems and, for all practical purposes, eliminates stand-alone health care. Significant mergers are occurring everywhere, bringing millions of enrollees under fewer and fewer roofs, some consolidations extending nationwide; many extending at least regionally.

During the late '80s to early '90s, there were about 80 HMO consolidations, while 149 failed. From 1986 to 1994, the total number of HMOs decreased 12 percent, while the number of HMO enrollees increased 100 percent. Right now, the five largest plans (less than 1 percent of total insurers) control about 14 percent of the market. Aetna/U.S. Healthcare, which merged in May of 1996, is said to have one in 12 Americans within their programs.

So success for a provider organization in this arena requires first of all size, second of all flexibility and responsiveness in the organization and third of all clout-in the form of brand name equity, product and service differentiation and/or relative geographic monopoly.

Here in Atlanta, and at Emory in particular, we are relatively well positioned.

First, the penetration of large managed care organizations is still relatively low in the Atlanta area when compared to many other parts of the country. But this is a short-term advantage because managed care is growing rapidly here.

Second, we are the only full-spectrum academic health center in the area, whereas many large metropolitan areas have two, three or sometimes more major academic medical centers.

And third, we have a very strong reputation for medical care excellence-especially in specialized fields like cardiology.

Our major weakness is our relative lack of flexibility and responsiveness as an organization. This generally is true of academic centers, and is true with us. We are now in the midst of major planning to reorganize and improve our organization for this new era.

For most academic health care centers, as for most other providers, there are only a limited number of choices for the future.

One is to align or merge with a major managed care organization. Before my arrival here last July, Emory went through a very intensive appraisal of just such an option in talks with the Columbia/HCA organization.

A second is to try to establish your own HMO. This strategy has been tried by several academic medical centers around the country with mixed results. Most have reversed course after a relatively short time and sold off their HMOs. This is because most found that other HMOs in their area saw them as competitors and therefore stopped sending patients to them.

A third strategy is a differentiation strategy where the center capitalizes on and develops its strengths in ways that allow it to be a viable partner with a range of managed care organizations, physician groups, community hospitals and others. This strategy requires a strong base and involves differentiating yourself by developing centers of excellence, specialized products and services, innovations in disease management and other health service innovations. It also requires strategic geographical distribution of physicians, both generalists and specialists.

Our strategy will be based on this third option. We start from a relatively strong base and in an environment in Atlanta where population growth is leading the nation.

Emory Healthcare has a very active managed care contracting office and already has a large number of managed care contracts where we are able to provide the highest quality services at competitive prices. We have a relatively large, though shrinking, base of patients with more traditional indemnity insurance. We have a relatively strong patient base in the Medicare and Medicaid programs. And we have strong brand equity. On this foundation, I believe we can continue to differentiate ourselves in the marketplace and remain a strong and cost-effective provider organization.

Michael Johns is executive vice president for health affairs. This essay is excerpted from the speech he gave at the "Great Teachers Lecture Series" on April 30.

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