By Christopher Guadagnino, Ph.D.

Published October 2000

• React to this article in the Discussion Forum.

John Bauers, M.D., is chief medical officer and medical director of the NewAlliance Health Plan.

PND: What products does NewAlliance offer?

JB: Our primary products are commercial and self-insured product lines. The commercial is a standard HMO product with a point of service rider to give people the opportunity to self-direct out of the area, and with a series of standard drug and other riders offered. The self-funded plans that we manage include a wide variety of different benefit plans that are determined by the employer. We do the administration of both the claims payment and the medical management for those plans. For the HMO products we cover six counties: Erie, Crawford, Warren, Venango, Mercer and Forest. We also do have a wider unmanaged network available to some national network PPO plans. There are a couple of self-funded groups that choose to opt into the wider network, but we do not sell that in the HMO product. The unmanaged network, which consists of physicians who have not been through our standard rigorous credentialing process, covers McKean, Cameron, Clearfield, Elk, Jefferson and Clarion counties, as well as parts of Ohio and New York. Our fully insured products as of August this year have a total enrollment of approximately 39,200, which is a decrease from when we took over the plan in January. On the self-funded lines we have about 13,800 covered lives; that’s about a 32 percent increase from when we started. The bulk of our enrollees are in Erie, Crawford and Warren counties. We probably have on the order of six to seven percent market share here.

PND: What changes have you made since purchasing the plan?

JB: Alliance Health Network was an organization that was jointly owned by a consortium of hospitals. The major shareholders were the two major hospitals here in Erie: Saint Vincent and Hamot Medical Center. It was started primarily to provide a locally managed option to employers for health insurance and to try to increase the competitive environment in northwestern Pennsylvania, where there has been and continues to be pretty much a one-payer market. Unfortunately, its success was in depressing premiums below what the actual rate of increase of medical care costs were. My personal opinion is that, when you have a managed care organization that’s owned and operated by hospitals, there are too many conflicting interests and they really can’t operate the plan very effectively. The plan was continuing to lose money to a degree that was unacceptable to the insurance commissioner, who forced them into finding a buyer or close down. In the last few months it was losing something on the order of a million dollars a month. Luckily for the community, Mr. Joseph Prischak, who owns the Plastek Group headquartered here in Erie, decided to buy it and make it the first fully employer-owned health plan in the country. As of January 1 this year, we as the management team came in. The first thing that we had to do, which was unfortunate, was to let the senior and middle management staff go. Our biggest challenge up front as far as the market was concerned was to bite the bullet and take a major premium increase. We expected that would cause us to lose membership and it did. We’ve lost about 10,000 members since we started. Erie is really a small group market, and unfortunately that’s a market that is very much subject to adverse risk.

We found a company that had been seriously underfunded. But the biggest problem was that the software, claims management, medical management and accounting systems all were outmoded, hadn’t been maintained or upgraded. That’s been a project that has required a major investment of both capital and time. The other renovation was to work with staff and try to reorient them into a true service orientation. The old Alliance had developed a rather poor reputation for service to its customers, both on the member side and the provider side. So, we’ve been working very hard in the community with employers, individuals, our physicians and our hospitals, and that’s starting to show results. We’ve reached financial stability. We are just beginning to see our costs and our revenue lines meet. Our medical loss ratios are much improved over what they were. The averages for a number of years were well over 100 percent and we’re now approaching 90 percent.

PND: Since taking over the plan, have you broadened your panel of providers?

JB: No, we really haven’t much because about 95% of all the providers in our service area are in our panel already. Our total HMO physician panel right now is approximately 950 physicians. That includes primary care physicians and specialists in the six counties. If we included the unmanaged network, it’s probably twice that.

PND: Are you trying to attract more physicians to be participating providers?

JB: No we’re not. What we’re really trying to do is focus on changing the relationship with the physicians we have in a positive sense and to refocus the organization as a medical care organization rather than an insurance company. Our view is that, if we can provide the clinical expertise in terms, not of day-to-day medical decision making, but the criteria, the decision-making tools and the information tools that physicians always ask for but rarely are given by health plans, that physicians will make the right decisions. And then we need to work with the physicians to insure that we’ve got the incentives aligned appropriately and that we’re applying the benefits appropriately.

We have a number of physician specialty groups and primary care groups that we’ve been working very closely with, mostly in Erie County, and we’re beginning to work with groups out in Warren, Venango and Crawford counties. We’ve been working with one cardiology group, for example, to develop a project to look at both the quality of care and utilization of cardiac testing, use of lipid-lowering agents, use of beta blockers in post-myocardial infarction patients. These programs look at the process of care and focusing on the critical decision points. What we try to do is identify in the course of an illness or prior to the acute episode of the illness when the most fruitful time for intervening occurs. In the short run, it actually often increases utilization. For instance, these programs often will increase drug utilization because you find people who should be on certain drugs that are not. But in the long term what we’re looking for is to prevent the event, the episode that requires admission for chest pain or requires another angiogram or angioplasty or bypass grafting. We pay physicians on a consulting basis to help us develop these programs. The physicians are helping us review and refine our guidelines. We’re working with one of the largest otolaryngology groups here in town. We’re developing projects involving several of the Ob/Gyn groups. We’re working with a couple of orthopedic groups now. We have a couple of initiatives with some primary care physicians. The idea here is to work with the specialist on the disease-specific entities and then work together with the primary care groups to integrate and coordinate the care.

PND: What is your time horizon for these programs?

JB: We’ve got half a dozen in the developmental stage right now. We hope to be able to do pilot implementation late this fall and into the winter. Within two to three years we expect to have enough of these programs fully operational that we can start to see the effect of them.

PND: Do you use utilization review and preauthorization as cost control measures?

JB: Yes, we still use the standard concurrent review process. When we took over management of the health plan it was fairly obvious that inpatient utilization was not being effectively managed. The hospital days per thousand were well above industry standards. The effect of that was blunted somewhat by favorable pricing of the average per diems. Northwestern Pennsylvania is a competitively priced market from the hospital provider perspective. But essentially what we needed to do was be very aggressive in the first six to eight months in terms of pretty much 100 percent daily concurrent review of all inpatient care. We’ve been doing that quite effectively and have reduced our hospital days per thousand. By our most recent estimate, it was something around two hundred days per thousand members per year or less, down from close to three hundred. Concurrent review includes preauthorization for all elective inpatient admissions. We don’t require precertification or preauthorization for ambulatory procedures. We have a 24-hour, seven-day per week available precertification process. Many times we’re involved in helping the hospital staff and the physicians determine the right level of care.

PND: Do you use capitation to discourage overutilization?

JB: We use capitation, but not to discourage overutilization. Capitation, per se, is generally counter-productive. The pattern we usually see in a heavily capitated environment is that utilization is cost-shifted out of the primary care office into specialty care. Unless you have a fully capitated, full risk model where all of your physicians are bound by a percent of premium capitation, you’re not really achieving any cost savings by using capitation in that manner. We’re actually moving away from the capitated model. What we have now is a mixed capitation and fee-for-service model with our primary care physicians. Our specialists are all on a fee-for-service fee schedule, no withhold. Our primary care physicians are on a mixed model where they get a base capitation which covers our first estimation of what their administrative and management costs are plus the basic clinical services provided. However, we then pay over and above the capitation for certain procedures done in the office under the preventative medicine codes. Most of the other insurance companies don’t pay for those. Some primary care physicians are paid straight fee-for-service, depending on the number of lives they have enrolled, but in general all of our primary physicians are paid according to this mixed model.

PND: Do you use a standard provider contract ?

JB: Yes, we have a standard contract, one for our managed network which covers HMO and point-of-service products, and another PPO contract for our unmanaged network.

PND: Do you negotiate contracts with individual physicians or do you regard that as impractical?

JB: We don’t negotiate basic terms—administrative, quality and utilization compliance. We also do not negotiate individual fee schedules. But we continue to identify physicians who are interested and willing to work with us in advancing this new medical management model that we’re trying to develop, and for those physicians we negotiate terms of a evolving relationship focused around the support they’re giving us to develop this model.

PND: A number of the larger health insurers in Pa., including Aetna, Highmark, HealthAmerica and UPMC Health Plan, have an "all-products" provision in their provider contracts that requires physicians who wish to participate in any one product offered by an insurer to participate in all types of present and future products offered by that insurer. Does your provider contract have such a provision?

JB: No, at this time it doesn’t. Because we have a very narrow product mix we haven’t pursued that option. Any new products we would offer would be focused on a different relationship with our physicians. That would define the terms of a new agreement, and at that point we would probably develop contractual language to cover the participation in that product.

PND: Does your provider contract have a "hold harmless," or indemnification clause between NewAlliance and physicians?

JB: No we do not have any clause like that in our contract. From my perspective, it is inappropriate for a health plan to try to isolate itself from the responsibility that it has to take when working with its physicians.

PND: Does your contract give NewAlliance the ability to amend contract provisions unilaterally?

JB: Yes it does. Basically we have a notice clause that says that we can amend the contract and physicians have 90 days to review it.

PND: What kind of latitude do physicians have to reject the amendments without terminating the entire contract?

JB: Amendments to the contracts are base amendments, the building blocks on which we need to build better relationships with our physicians. The physician who is just looking at us as another insurer, basically it’s a take it or leave it proposition for them. Physicians who are willing and able to work with us to develop our new clinical model will need to accept the basic part of the contract, but then we work with them in refining the relationship with additional agreements on top of that.

PND: Do you have an arbitration provision?

JB: Yes. We use a binding arbitration process by an independent arbitrator that has to take place here in Erie County. It can be invoked for any areas of the contract where the physician or the health plan believes the other party is in violation.

PND: What competitive obstacles does Highmark pose, given its huge market share, reserves, broad provider panel and brand identification within the market?

JB: In western Pennsylvania, particularly northwestern Pennsylvania, Highmark is the Microsoft of this industry. It’s been very difficult for us to overcome the impact that they can have in terms of competitive pricing. It’s pretty clear to us that they are much more interested in retaining market share at the moment than they are in keeping a medical loss ratio that is profitable. They have pretty much stated openly that, because their investments are performing so well, they can afford to take losses on their medical loss ratios. There’s no question that the premiums have over many years been artificially suppressed in this town. If we can hold out, we believe that eventually Highmark is going to have to bite the bullet and increase rates, and we will be in a very competitive situation at that point. One of our biggest costs has been for services provided outside of the northwest Pennsylvania area at non-contracted facilities. We have been working very closely with several groups to develop an extensive tertiary care network for transplants and other high level services. We’ve got over 40 centers across the country to provide these services to our members. However, the University of Pittsburgh Medical Center is not one of them. UPMC has continually refused to negotiate anything other than a full charges relationship with us. Highmark, because of the force of their market share elsewhere in Pennsylvania, is able to get at least price-limited contracts. We’re overcoming that by developing relationships with the Cleveland Clinic, with other hospital systems in Pittsburgh, with other medical centers throughout the country and we are referring our members there.