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Markets and Plan Performance: Case Studies of IPA and Network HMOs

Independent practice association (IPA) and network model HMOs now dominate the HMO industry and have accounted for most of the industry growth during the 1990's. These plans build their managed care organizations on financial incentives and contracts with community physicians, hospitals, and other medical service providers. As the plans grow and penetrate ever deeper in insured markets, their rapid expansion critically affects local health care systems.

This report summarizes findings from case studies of six plans and three markets that grew out of an initial analysis of financial and enrollment performance of IPA and network plans over a five-year period (1988–1992) in Boston, Los Angeles, and Philadelphia. The case studies were based on field interviews which took place from April to July 1994 and analysis of available documents on local markets and individual plans. The study's two central goals were: 1) to examine emerging issues as the managed care industry and IPA/network plans evolve and differentiate; and 2) to develop a better understanding of the relationship between performance and market pressures, structural variations, and organizational characteristics.

Key findings include:
  • Risk for the costs of care are being shifted to the physician or physician group level. In the three markets studied, IPA and network plans are evolving away from financial contracts that initially retained discounted fee-for-service payment of physicians to arrangements that shift risk for the costs of care to the physician or physician group level. In Los Angeles, a market with a long history of relatively large groups of primary care physicians, physicians are taking the full financial risk for speciality and even hospital care as well as services they deliver directly. In all three markets, plans are moving toward delegating control of practice guidelines, referrals and subcontracts where they shift financial risk for a full range of medical services.
  • Public policy lags market developments. State regulators are concerned about the implications of widening risk contracts for quality of care and financial solvency. Pressures to approve permissive capitation arrangements are mounting as physicians and physician/hospital groups seek to gain control of budgets and rules, and plans seek to shed risk.
  • Relatively successful plans shared organizational characteristics in the three markets. In the five years through 1992-93, plans in the case studies with relatively more successful financial performance shared four general organizational characteristics: a provider-friendly and physician-focussed philosophy; decentralized medical management; stable management, with a reputation for excellence; and a primary focus on developing an IPA/network HMO business. Early entry into the market also helped. In contrast, during the 1988-1992 period, size and financial backing, often by large indemnity fee-for-service focussed insurance companies, appeared of mixed benefit: insurance company sponsorship hindered the HMO plans' independence and ability to mature to financial health without subsidies, as well as helped sustain the plans' survival.
  • Market success appears at best only weakly linked to quality of care provided. Plans with relatively poorer reputations continue to grow. However, all three markets lacked systematic information for purchasers or individual patients on the quality of care provided by plans and their comparative market performance.
  • Employer demands for fewer plans covering broader markets are increasing market pressures that favor size over past performance. Plans are merging and acquiring bases in new markets in order to offer coverage to larger employers. Plans also see size as a competitive advantage in negotiations with physicians and physician/hospital groups.
  • The pressure to grow may undermine characteristics that in the past were associated with stronger reputations. Pressure to grow appears more motivated by being in a position to exert market power than by gains in plan ability to provide quality care or to invest in internal systems.More generally, the case studies lead to the conclusion that as competition intensifies, there is a critical need for readily available, quality of care measures. Such information is an essential pre-condition for forging a stronger, positive link between market success and a reputation for quality patient care. Consolidating markets will make it increasingly difficult to rely on meaningful choice as a way to assure quality.

Publication Details



Markets and Plan Performance: Case Studies of IPA and Network HMOs, Nancy M. Kane, Nancy C. Turnbull, and Cathy Schoen, The Commonwealth Fund, January 1996