Managed Care in California: Cost Concerns Influence Product Design

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: Jon B. Christianson, Ha T. Tu, Genna R. Cohen

Background: The CHCF-HSC California Market Study

In July 2009, the California HealthCare Foundation (CHCF), working in partnership with HSC, released six regional health care market reports based on site visits to California communities. The six markets -- Fresno, Los Angeles, Oakland/San Francisco, Riverside/San Bernardino, Sacramento, and San Diego -- represented a wide range of economic, demographic, health care delivery, quality, and financing conditions. CHCF followed up in December 2009 with four additional reports examining specific health system issues that emerged from the six-market study.

Cost Pressures Reshape Managed Care Products in California

This issue brief examined how cost concerns were shaping the design of managed care products across California's six regional markets. The state had long been at the forefront of managed care nationally, with high HMO penetration rates and a tradition of capitated payment models. But by 2009, rising health care costs and the economic recession were forcing health plans, employers, and consumers to rethink what types of insurance products the market could sustain.

The Shift Toward PPO Products and Consumer Cost Sharing

Across the markets studied, researchers observed a continued drift away from traditional HMO products and toward preferred provider organization (PPO) plans that gave consumers broader provider choice at the cost of higher premiums and out-of-pocket expenses. At the same time, employers were increasingly interested in high-deductible health plans paired with health savings accounts or health reimbursement arrangements. These consumer-directed products appealed to employers looking for ways to slow premium growth, though their adoption remained uneven across the six markets.

The shift toward PPOs had consequences for the delegated model of managed care that had long distinguished California's health care system. Because PPO products typically did not involve delegation of financial risk to physician groups, the growth of PPOs weakened the position of independent practice associations (IPAs) and medical groups that had built their business models around capitated HMO contracts. Health plans were also reclaiming administrative functions -- such as utilization management and claims processing -- that they had previously delegated to physician organizations.

Narrow Networks and Tiered Products Gain Interest

In response to premium affordability concerns, some health plans were developing narrow-network products that restricted the pool of participating hospitals and physicians in exchange for lower premiums. Tiered network products, which charged consumers different cost-sharing levels based on the efficiency or quality ratings of the providers they chose, were also gaining traction. These products represented an attempt to restore some of the cost discipline that had characterized the managed care era of the 1990s without reverting to the restrictive utilization controls that had provoked a consumer backlash.

Regional Variation in Product Design

The study found that product design trends varied meaningfully across the six California markets. In Southern California, where large medical groups and a strong tradition of delegated managed care persisted, HMO products retained a larger market share than in other parts of the state. In Northern California, the market was more heavily oriented toward PPO products and the influence of Kaiser Permanente's integrated model. In smaller and more rural markets like Fresno and the Inland Empire, the range of available products was narrower and employers had fewer choices. The economic downturn hit the Central Valley and Inland Empire harder than the Bay Area or San Diego, intensifying pressure on employers to seek the lowest-cost coverage options available.

Looking Toward Health Reform

With the Affordable Care Act signed into law in March 2010, the product design landscape was expected to change further as insurance exchanges and essential health benefit requirements reshaped the types of plans available to individuals and small employers. The brief raised questions about whether California's managed care traditions -- including delegation and capitation -- would prove compatible with the reform law's requirements, or whether the market would continue its migration toward PPO-style products with greater consumer cost sharing.

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.