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Health maintenance organizations formed in the 1970s offer an early example of coupling the financing and delivery of healthcare services at scale. They were touted as an alternative to fee-for-service medicine, delivering care through its own clinicians and facilities via capitation—a preset amount of pay per member, per month.
But HMOs fell short, in part, due to increased competition from preferred provider organization plans, failing to meet employers’ demands for experience-rated premiums and lack of group-specific data on cost, use and quality, researchers said.
“The jury is still out on providers that have acquired insurance arms,” said Tim Gary, a healthcare attorney for Dickinson Wright and CEO of Crux Strategies. “One side or the other wins out—either the finance guys or medical providers have dominance. It’s not typically a good blend. It’s like the left brain and right brain operating with a huge disparity in information.”
The HMO model was largely unsuccessful because it tried to control costs by restricting access to care, which led to unhappy doctors and patients, industry observers said. Payviders are bound to repeat those mistakes if incentives aren’t aligned, they cautioned.
“In a lot of cases, they don’t have intercompany contract terms aligned,” said Melissa Smith, executive vice president of consulting and professional services at HealthMine. She has worked in both the provider and insurance sectors. “In a good situation, these contracts will write in capitation or other value-based terms. But I’m shocked at how often those incentives are loosely constructed at best. I didn’t expect these interorganizational self-inflicted limitations to be perpetuated this long.”
Private equity-backed physician practice management companies offered another alternative to fee-for-service medicine. PPMs would acquire physicians and drive cost savings through economies of scale.
In many cases, physicians would receive an upfront payment for their practice and secure long-term contracts in exchange for a split of revenue after accounting for overhead. Private practice doctors were lured by the access to capital, buyouts of their practice equity and lower administrative burden, with PPMs handling the finances, IT integration and revenue cycle management.
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But those models failed largely because of execution, rather than a flawed business model, experts said. They overpaid for physicians and grew too fast, didn’t adequately incentivize physicians, overestimated economies of scale and struggled to keep up with HMOs, observers said.
“There are some horror stories from the ‘80s and ‘90s, with providers going into risk-based reimbursement models that didn’t work,” Gary said. “They cut corners on care, which no one was happy about. But if you hired the right people and crunched the actuarial data, you could have a reasonable chance of success.”
Hospital systems trying to integrate health plans have the best shot because they are used to living in multiple disciplines, he added.
Meanwhile, the drivers of consolidation are not going away, experts said. Competition, heightened regulatory scrutiny and reimbursement cuts will likely spur more vertical integration, industry observers said.
“Vertical integration has the potential to convey significant benefits to consumers,” said Susan Manning, senior managing director at FTI Consulting. “It all comes back to what we expect from health systems.”
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