Physicians Key to Health Maintenance Organization Popularity in Orange County

Originally published by the Center for Studying Health System Change (HSC) as Community Report No. 10, August 2011.

HMO Model Thrives in Orange County's Delegated Care System

In June 2010, researchers from the Center for Studying Health System Change (HSC) visited Orange County, California, as part of the Community Tracking Study (CTS). The team conducted more than 45 interviews with local health care leaders from major hospital systems, physician groups, insurers, employers, benefits consultants, community health centers, and government agencies to understand the local health care landscape.

What set Orange County apart from most other health care markets was the extent to which health plans delegated financial risk and utilization management to physician organizations caring for health maintenance organization (HMO) enrollees. Although preferred provider organizations (PPOs) and newer product designs had gained some ground in recent years, the HMO model remained popular among local employers and consumers, driven by cost advantages and a wide choice of participating providers.

The Delegated Model and Physician Risk-Bearing

Under Orange County's delegated model, physician organizations including large multispecialty medical groups and independent practice associations (IPAs) assumed financial risk and care management responsibilities from health plans. These organizations received capitated, fixed per-member per-month payments and bore the responsibility for managing their patients' total cost of care. This arrangement required the physician organizations to develop practice infrastructure supporting care coordination, utilization management, and cost control.

Despite earlier predictions that the delegated model would fade, it was thriving in Orange County at the time of the study. The physician organizations that had survived earlier periods of financial stress had developed considerable expertise in managing care under capitation. Their accumulated experience with risk-bearing gave them capabilities that positioned them well for emerging payment reform models, such as accountable care organizations, that similarly require providers to accept accountability for the cost and quality of care for defined populations.

Hospital Competition and Physician Alignment

The hospital market in Orange County remained relatively unconsolidated, with multiple systems competing for patients. After years of coexisting in somewhat distinct geographic areas, hospitals were increasingly encroaching on each other's territories, particularly in the wealthier southern and coastal parts of the county, where well-insured patients were concentrated. This geographic competition was intensifying as hospitals sought to protect and grow their market share.

Hospital interest in tighter affiliations with physicians was growing. While California law restricts hospitals from directly employing physicians, hospitals were forming medical foundations and other arrangements to align with physicians, secure patient referrals, support specialty service lines, and prepare for potential changes under national health reform. Kaiser Permanente, the integrated delivery system and closed-panel HMO, had raised its profile in the market by constructing a new hospital and reducing its reliance on contracts with other providers for enrollee care.

Safety Net and Coverage Transitions

Orange County is commonly perceived as a wealthy coastal community, but it is actually quite diverse. With more than 3 million residents, the county includes significant low-income populations, particularly in its inland areas. Safety net providers and stakeholders had increased their focus on obtaining federal dollars to expand capacity and develop programs to help transition uninsured residents into Medi-Cal, California's Medicaid program, or subsidized insurance coverage under national health reform.

CalOptima, the county-organized health system that managed Medi-Cal and other public coverage programs, had regained its operational footing after earlier organizational difficulties. The agency was working to develop a managed system of care that could accommodate the expected influx of newly eligible Medicaid beneficiaries under health reform, drawing on the local market's deep experience with managed care models to build the infrastructure needed for coverage expansion.

Sources and Further Reading

Felland, Laurie E., Genna R. Cohen, Paul B. Ginsburg, et al., "Physicians Key to Health Maintenance Organization Popularity in Orange County," Community Report No. 10, Center for Studying Health System Change (August 2011).

Center for Studying Health System Change, Community Tracking Study site visit reports and data.