HMOs Alive and Well in Orange County

Community Report No. 9 | Summer 2003 | By Aaron Katz, Robert E. Hurley, Leslie Jackson Conwell, Bradley C. Strunk, Andrea Staiti, J. Lee Hargraves, Robert A. Berenson, and Linda R. Brewster

In March 2003, HSC researchers visited Orange County as part of the Community Tracking Study, interviewing more than 110 health care market leaders. Orange County, encompassing about 30 cities south of Los Angeles, was one of 12 communities that HSC monitored through biennial site visits. Earlier visits in 1996, 1998 and 2001 had established the baseline. Contrary to a national retreat from tightly managed care, Orange County maintained extensive HMO enrollment and continued its distinctive model of delegating financial risk for patient care to large medical groups.

Medical Groups and Health Plans Revive the Delegated HMO Model

HMO enrollment in Orange County remained strong, capturing more than half of the private insurance market as HMO premiums stayed lower than alternatives. Two years earlier, many had expected less restrictive insurance products to gain ground, reflecting national trends and the shaky finances of local physician organizations. Instead, medical groups ranging from the 900-physician Monarch independent practice association to smaller groups like Bristol Park Medical Group had stabilized financially with help from health plans that recognized their HMO business depended on healthy physician organizations.

Health plans increased payment rates to medical groups -- as much as 10 percent annually in recent years -- and provided additional management support. Medical groups improved their finances by focusing on managing risk for physicians' fees while identifying and declining unpredictable risks like prescription drug costs and injectable medications. This recovery reduced contracting tensions between plans and physicians and slowed interest in PPO products.

Innovation in Quality and Payment

The delegated HMO model fostered innovations including greater use of hospitalists -- general internists specializing in inpatient care -- and new payment systems rewarding better quality. PacifiCare's Quality Index program let consumers compare medical groups and tied ratings to customer satisfaction, quality indicators and technology adoption. The Integrated Healthcare Association's Pay for Performance initiative brought plans and medical groups together around a uniform set of quality measures with meaningful financial incentives.

Hospitals Financially Stronger but Facing New Pressures

Most hospitals had obtained higher payment rates from health plans and largely shed risk contracts. However, sharply rising operating costs, strained capacity and the mandate to renovate facilities to meet state seismic standards created new financial pressures. Labor shortages were particularly severe, with some hospitals reporting 20 percent vacancy rates for nursing positions.

Access Gains for Low-Income Residents

Public insurance expansions and grants from tobacco settlement revenues had improved access for low-income residents and strengthened the safety net. CalOPTIMA, the county's Medicaid managed care program, drew mostly positive reviews. However, severe state budget problems threatened to reverse this progress by cutting back public program eligibility and funding.

Sources and Further Reading

This report was originally published as Community Report No. 9 by the Center for Studying Health System Change as part of the Community Tracking Study, funded by the Robert Wood Johnson Foundation.