Shifting Ground: Erosion of the Delegated Model in California

Originally published by the Center for Studying Health System Change (HSC), a nonpartisan policy research organization that operated with principal funding from the Robert Wood Johnson Foundation.

California HealthCare Foundation Issue Brief -- December 2009

Authors: Paul B. Ginsburg, Jon B. Christianson, Genna R. Cohen, Allison Liebhaber

Background: The California Regional Market Study

In July 2009, the California HealthCare Foundation (CHCF), working in partnership with HSC, released six regional health care market reports drawn from site visits to California communities. The six markets studied -- Fresno, Los Angeles, Oakland/San Francisco, Riverside/San Bernardino, Sacramento, and San Diego -- represented a broad spectrum of economic conditions, demographic profiles, health care delivery models, quality metrics, and financing arrangements. In December 2009, CHCF followed up with four additional reports that examined specific health system issues brought to light by the six-market study.

The Delegated Model in California

This issue brief focused on the erosion of California's distinctive delegated model of managed care. For decades, California's health care market stood apart from the rest of the country because of its widespread use of delegation, in which health plans transferred financial risk and administrative responsibilities -- including utilization management, claims processing, and sometimes credentialing -- to physician organizations and independent practice associations (IPAs). Under the delegated model, these medical groups effectively functioned as intermediaries between health plans and individual physicians, bearing significant financial risk for the cost of patient care.

Why the Delegated Model Was Eroding

By 2009, researchers found that the delegated model was losing ground across California for several reasons. Many IPAs and medical groups that had accepted capitated risk contracts during the 1990s managed care boom had experienced financial difficulties, and some had gone bankrupt. The financial failures undercut confidence in the ability of physician organizations to bear full financial risk. Health plans, meanwhile, were taking back functions they had previously delegated, particularly claims processing and utilization management, in an effort to gain more direct control over costs and quality. The shift toward PPO products and away from traditional HMO coverage also weakened the delegated model, since PPO arrangements typically did not involve the same degree of risk delegation to providers.

Variation Across California's Regional Markets

The extent to which delegation persisted varied considerably across the six markets studied. In Southern California, particularly in Los Angeles and Orange County, the delegated model remained more deeply entrenched, with large, established medical groups continuing to accept capitated contracts. In Northern California, the movement away from delegation was more advanced, with health plans playing a larger direct role in managing care. The Bay Area's market, dominated by large integrated systems like Kaiser Permanente, operated under a different model altogether. In smaller markets like Fresno and the Inland Empire (Riverside/San Bernardino), the delegated model had never taken root as deeply, and physician organizations there had less infrastructure to support the administrative functions that delegation required.

Implications for Providers and Patients

The erosion of the delegated model had real consequences for how physicians practiced and how patients received care. As health plans reclaimed administrative and risk-bearing functions, physician groups lost some of the autonomy that had allowed them to manage care according to their own clinical judgment. At the same time, the shift gave health plans more direct levers to influence utilization patterns and enforce quality standards. For patients, the changes were largely invisible at the point of care, but they reshaped the financial incentives underlying the system in ways that would affect the type and volume of services available.

The Broader CHCF-HSC Study

This issue brief on the delegated model was one of four thematic reports CHCF published in December 2009 following the six regional market studies released in July of that year. The companion briefs examined California's safety net, hospital-physician relationships, and managed care product design. Together, the reports offered a detailed look at how California's health care system was adapting to financial pressures, shifting market dynamics, and the prospect of national health reform.

The full report was originally available on the CHCF website.

Sources and Further Reading

California HealthCare Foundation -- Funder and publisher of the California regional market studies.

AHRQ -- Federal health care quality research agency.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and funding.