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Physicians Key to Health Maintenance Organization Popularity in Orange County

Health Plans Delegate Patient Financial Risk and Care Management to Physicians

News Release
Aug. 11, 2011

Alwyn Cassil (202) 264-3484 or

WASHINGTON , DC—The extent of health plan delegation of financial risk and utilization management to physicians caring for health maintenance organization (HMO) enrollees makes Orange County stand out from many health care markets, according to a new Community Report released today by the Center for Studying Health System Change (HSC).

Although preferred provider organizations (PPOs) and new product designs have gained some traction in recent years, the HMO model remains popular among Orange County employers and consumers because of cost advantages and a wide choice of providers. Physician organizations, including large, multispecialty medical groups and independent practice associations (IPAs), provide the practice infrastructure to support care coordination and have fared well under capitated, or fixed per-member, per-month, payments.

At the same time, hospital and physician interest in tighter affiliations has grown. While California’s ban on the corporate practice of medicine prohibits hospitals from directly employing physicians, hospitals, nonetheless, are forming medical practice foundations that employ physicians and aligning with physicians in other ways to secure patient referrals, support specialty-service lines and prepare for national health reform. Indeed, expected payment reforms will likely provide incentives to integrate care delivery and expand opportunities for physicians to assume risk for additional patient populations.

“Despite predictions to the contrary, the so-called delegated model, where physicians assume financial risk and associated care management of patients from health plans, is thriving in Orange County,” said HSC President Paul B. Ginsburg, Ph.D.
In June 2010, HSC researchers visited the Orange County metropolitan area—which parallels the borders of Orange County—to study how health care is organized, financed and delivered in the community. Researchers interviewed more than 45 Orange County health care leaders, including representatives of major hospital systems, physician groups, insurers, employers, benefits consultants, community health centers, state and local health agencies, and others.

Orange County is one of 12 communities across the country tracked intensively as part of the Community Tracking Study site visits, which are jointly funded by the Robert Wood Johnson Foundation and the National Institute for Health Care Reform. HSC has been tracking these communities since 1996. Key findings of the report, Physicians Key to Health Maintenance Organization Popularity in Orange County, available online at, include:

  • After coexisting for years in somewhat distinct areas of Orange County, hospitals are impinging on each other’s territories in the wealthier southern and coastal parts of the county to attract well-insured patients.
  • Kaiser Permanente, an integrated delivery system and closed-panel HMO, has attained a higher profile in the market by building a new hospital and becoming less reliant on contracts with other providers for enrollees’ care.
  • Safety net providers and stakeholders have increased their focus on obtaining federal dollars to expand capacity and programs, including developing a managed system of care to help transition uninsured residents into Medi-Cal—the state’s Medicaid program—or subsidized insurance coverage under national health reform.

Commonly perceived as a wealthy, southern California coastal community, Orange County, with more than 3 million residents, is quite diverse along socioeconomic lines. The Pacific coast and southern part of the county are home to more affluent residents, while the northern parts of the county have greater concentrations of low-to-middle income residents.

The Orange County hospital sector is relatively unconsolidated, with three prestigious nonprofit systems holding about half of the total market share, and a number of additional systems and independent hospitals sharing the rest. St. Joseph Health System is the largest system, with more than 20 percent of inpatient admissions and four hospitals; Hoag operates two hospitals; and MemorialCare Health System operates three hospitals in coastal and southern Orange County:

Compared to other markets, tightly managed HMOs hold a large proportion of the commercial health plan market in Orange County. Among HMO products, the network model is dominant, while Kaiser’s closed-panel HMO historically had relatively small market share. However, in recent years, Kaiser’s enrollment has grown to about 20 percent of privately insured people in Orange County, while network HMOs lost some ground to Kaiser and to PPOs.

Orange County has various types of physician organizations that are able to assume financial risk for patients’ care, and in many cases, provide physicians with practice infrastructure and administrative support. These organizations include independent practice associations, independent medical groups and hospital-affiliated medical foundations. Many primary care physicians (PCPs) and specialists remain in solo or small, physician-owned practices but become members of one or more IPAs, which contract with plans as a single entity for capitated HMO patients.

Demand for charity care grew during the recession, and the safety net expanded in response. Safety net hospitals reported increasing uncompensated care spending over the last few years, and patient volume at community clinics reportedly rose significantly. Services to low-income people (Medi-Cal enrollees and the uninsured) also are more dispersed among hospitals in recent years.

In an effort to control costs, California has continued to place more Medi-Cal enrollees in managed care arrangements, which vary by county. Orange County directly administers the program as a “county organized health system.” Established in 1993, Orange County’s agency—CalOptima— has turned around financially since 2007, when the agency had to dip into reserves. Still, market observers are concerned that the agency’s finances remain fragile.

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.


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The Center for Studying Health System Change Ceased operation on Dec. 31, 2013.