By Christopher Guadagnino, Ph.D.

Published January 1998

• React to this article in the Discussion Forum.

PND: What are the significant trends managed care has brought for physicians, patients and health systems?

KM: We’ve had a large transition of enrollment to managed care programs and products in a relatively short period of time. Some good has come out of that, especially in the formation of physician group practices—about the only thing that has shown some success in managing cost and quality of care. It’s difficult to pinpoint any other success stories when it comes to integration, especially the fact that vertical integration is proving not to be very successful in most markets. We’re seeing the collapse of a number of vertically integrated delivery systems. Costs have been relatively well-controlled in the past five years, but we’re starting to see that change also, as we’re into a downcycle from the insurance underwriting standpoint. We’re going to see some rate increases in the next few years that have not been commonplace in the last five years—that will cause some problems. And third, clinical quality has improved specifically from the standpoint of an intensive focus on wellness and prevention—seeing things like mammogram rates, pap smear rates, smoking cessation all on an upswing. Service and clinical quality outside of wellness and prevention—although it’s hard to really say that there’s been any true problem with it—the perception is that it’s deteriorating. And that’s valid in the marketplace: when customers, patients, members have a perception that something is wrong, we in the health care business have to respond and we’ll be held accountable for it. There’s a perception for the chronically ill, people who have benefited from receiving specialty care, that we’re blocking access. There’s also a perception that service quality is poor, people still aren’t happy with the wait time, courtesy in the office from staff, people in our business from the service side. We seem to be at odds with each other with things like referrals and authorizations, precertification and continued micromanagement. Real or perceived, these are issues we have to deal with.

PND: How will these trends affect physicians and the health insurance industry?

KM: I believe that we’re going to see more stratification of the population. When we see people who have true need, they’ll be given more rapid access or freer access to specialty care. We’ll continue to have a focus on primary care services; that won’t go away because we still have a vested interest in prevention and wellness. There are still those people who are quite difficult to manage and consume a lot of health care resources—people who are actually well but perceive themselves as being sick and are getting unnecessary and inappropriate services. That’s also the group that causes a lot of distress for physicians in their daily practice. We can help physicians by providing programs in demand management and education. In terms of change in product design, we see more people wanting a choice in health plans. Some people don’t mind some restricted access in a trade-off for price. Others want all the access in the world and are willing to pay more. We’re going to have to offer a variety of products to accommodate them.

Looking longer-term, I believe the current integration and segmentation that’s going on is going to become problematic because it will be perceived as limiting access to certain health care resources. I see us duplicating health care resources if we’re not careful. This community has an aging population; its economic structure is deteriorating and some sociocultural issues continue to get worse—family structure, education. We’re on a collision course for health care costs to rise significantly in the upcoming years. If that were to happen, health care would become a political issue again and the government will intervene. At that point we may see the advent of a government-sponsored health care program in this country.

PND: What are the defects of vertical integration efforts, in your view?

KM: Consumers are going to need an easier way to get to specialists when indeed that service is required, and they’re going to need to have the right specialist. That means there is going to be more performance and outcomes information shared with the physician and the public as people need to get more involved in decisions of who they access. System changes need to accommodate that. Open or direct access programs lead to the downfall of vertically integrated systems. Such systems, led from a tertiary care standpoint outward, can offer all the components of health care service, but they are restrictive in their accessibility. They provide a continuum of provider and insurance services and attempt to capture a portion of the market. When people are more interested in open access programs, they tend to veer away from restricted access networks, which become nothing more than niche products. If you’re that large and vertically integrated, it’s tough to survive on a niche product in the marketplace.

We as a company have elected not to become vertically integrated because we believe it’s best to be able to put out there for consumers a variety of products from which they can choose: those that have some restrictions to those that have very broad access points. We think that anyone who puts a very tightly restricted network in the marketplace is only going to appeal to a certain subsegment of the population. They have to be substantially lower in cost to attract a larger portion of the market, and that’s tough to do today as a vertically integrated system. We’ve seen vertically integrated systems start to develop a lot more corporate infrastructure which becomes very expensive. The cost structures seem to be less in the virtually integrated entities versus the corporately integrated entities that exist. Entities like the University [of Pittsburgh] are attempting to become more than just vertically integrated providers; they’re extending themselves into the insurance side. We view that as a competitive endeavor—a strategy that niche players tend to use in marketplaces—people who want to be a small player with small market share. Typically, that’s tough to do when you’re led by a tertiary care hospital system because you need a fairly substantial market base to carry out your mission and to be sustainable financially. That’s a high risk.

PND: How is Highmark going to reconcile the need to keep costs down with offering the broader choices demanded by consumers?

KM: It’s a trade-off. We’re positioning ourselves in the marketplace with a portfolio of products. Clearly, there are market segments that are willing to pay more to continue to have maximum choice. There are others who want to pay a little less and give up some on choice. And there are others who are willing to give up quite a bit on choice and pay the least amount. There’s no one product that will address all market segments out there from a cost and choices standpoint. Our traditional programs on the high end—we have an any willing provider approach on the physician side and the hospital side in those products. If you look at the mid-point, we have nearly all hospitals in our program, but we have a selected physician network. If you look at the lower end, where we have even a further trade-off in selection and price, we’re paring down the hospital network even further into a selected network and only physicians who are on staff or are able to admit to those hospitals will be utilized under the current Keystone network. So it will be a somewhat pared down physician network by that fact alone. Highmark intends, in the lowest cost product category, to work with a selected group of providers in order to attain a low cost product. You cannot do that without getting some efficiencies, providers doing something to help you attain that ultimate price in the marketplace because 85 percent or more of the cost of a product relates to the provider side of the equation. We’ve elected to put a selective network of providers together for that low cost product.

PND: Doesn’t that give physicians reason to worry about care rationing and panel ineligibility?

KM: I don’t think that’s the case at all. What it says is that the market will decide what it wants. You’re always going to have different wants and needs in the marketplace. If by some chance we as a community can find ways to control health care costs on a whole, then those products may not show such a price differential that you’d get a lot of movement between them. If we as a community cannot find a way to continue to focus on health care costs and show good end results, and the gap widens between the selected network and the others, then we may see more movement into the selected products. Only time and the market conditions will tell as to what the outcome is. From a patient standpoint and from a market standpoint it is important first and foremost to have a broad cadre of physicians in your product, especially primary care physicians. From a specialty side, we do have some excess capacity in the more metropolitan markets. We’ve tried to focus this whole initiative at the community setting where the issue of competition and excess capacity really doesn’t come into play. I think physicians in rural communities are much more exempt from this kind of activity and outcome. Physicians in suburban settings are probably at the next tier, and then physicians in the urban setting are probably more likely to be impacted by these activities. It’s a matter of geographic location, a natural outcome of where the excess capacity lies and where the excess costs are at the current time. Our population is aging; we’ve got the baby boomers coming up. We believe that there’s going to be increased demand for health care services, including specialty services. So, some of the statements about the glut of specialty care physicians, in my opinion, have been overstated. The specialty physician who is on the staff at one institution in the urban setting is at higher risk for the future than that specialty physician who is part of a larger group practice that has multiple staff privileges and is reaching out into the community setting.

PND: Could disease management programs provide more opportunity for specialists in the future?

KM: It provides an opportunity for specialty physicians in all settings, but most disease management programs are being put in place to manage chronic diseases of all severities. The majority of these people can be adequately treated in the community setting. The specialty physicians who have the capability to take care of these people in the continuum of settings—community or urban—are better positioned. I also think that in the future you’re going to see them working more closely with community hospitals to deliver bundled services and will no longer have to worry about the hospital cost versus the physician cost. Those services can be nicely bundled at the community setting from a disease management standpoint.

PND: How do you account for the recent clamor for greater regulation of the insurance industry, and what do you think should result?

KM: There’s been ongoing and increasing regulation for the last sixty years, so its nothing new. What’s led to the recent clamor, I think, is the managed care backlash. We have to respond to perceptions because that’s customers and consumers speaking. Unfortunately, we see clinical decisions being made after the fact at the legislative and regulatory levels. It’s as problematic for physicians as it is for insurance companies because it puts physicians in the spot, from a legal standpoint, of forcing them to practice under a certain standard that may no longer be applicable in the marketplace. All of us in the health care industry are at fault for that, and if we don’t do something soon, we’re going to come under the ultimate form of regulation: a single payer, government sponsored health care program. Just as we say we have to align incentives between insurer and provider, we’ve got to align those incentives with the customer also so that they’re brought into the loop collectively. Some of the care management initiatives of the future can be set up by companies like ours working with patients, not as a micromanager of the physician, but as an adjunct when the physician has only a limited amount of time to spend with patients. We can be a resource to help them effect a good outcome by using the telephone, the computer, a fax, by sending case managers on site into their home. We need to educate people more on how they can take a more active role in health care from both a clinical decision and a cost standpoint. We can’t have three parties at odds. We in the health care industry—carrier, insurer, health plan—and physician, hospital, provider need to work better together. I think that we’ve been our own worst enemies. In an attempt to gain a presence in the marketplace, we’re actually destroying each other in the eye of the public.

PND: Do you think the future is biased toward for-profit insurers?

KM: I have mixed feelings about that. My experience has been limited to that of working for a nonprofit corporation that’s community-based and focused. It’s my belief that corporations like ours have more of the community interest in mind and truly are giving physicians their due pay. Whatever the customer is willing to pay, we return most of the money to physicians and keep only enough to manage a reserve capacity. And, where possible, taking dollars that we can, along with services that providers offer at a deeply discounted rate, and making those available to people who otherwise would be uninsured. I believe that’s the best vehicle for delivering health care services. We act just as aggressively as a for-profit in managing our administrative costs and on behalf of our customers to try to get for them what they believe they need and voicing that to the providers on their behalf. So I can’t say that not-for-profit structure makes us work any differently or any less hard than a for-profit company, but when the day is done, the dollars stay in the community with the customer and the providers and don’t go into the hands of shareholders. We’re not looking to buy up the provider system. We do have some heavy investments we have to make in information systems in our infrastructure, but we believe we can do that with the current reserves that we have and not have to move into a for-profit status. We have also done many other things outside of the traditional medical-surgical health insurance to help support that mission—a vision program, a dental program, several other subsidiary corporations, all of which are bringing in dollars to this company to help offset some of those infrastructure costs and to help us maintain our not-for-profit status.