Center for Studying Health System Change

PUBLIC POLICY

Orange County’s generally conservative political culture has emphasized reliance on the private sector to fulfill health care functions. Local public policy has been limited to those functions that the state delegates to counties. As one respondent described it: "Politicians have been more interested in real estate development and business development than health care." State law requires counties to meet the health care needs of the indigent, but the Orange County Board of Supervisors has interpreted this requirement relatively narrowly. County financial support for health care ranks among the lowest in the state, and is barely above the level required to receive state matching funds for mental health and indigent care. The Medical Services for the Indigent (MSI) program, the county’s vehicle for fulfilling its legal responsibility to provide care for the uninsured, historically has been viewed as an underfunded mechanism to subsidize physicians and hospitals that treat the uninsured. The Orange County Health Care Agency is working on transferring administration of the MSI program to CalOPTIMA, the entity that administers Medi-Cal managed care for the county. This transfer is intended to incorporate managed care principles into the MSI program and improve care for uninsured patients.

Implementation of the state’s mandate to enroll the Medi-Cal population in managed care is the most significant local health care policy issue. The State Department of Health Services has sponsored several models for moving Medi-Cal recipients into managed care. Five counties, including Orange County, were granted authority to enroll all their Medi-Cal in one health-insuring organization that contracts with the state to provide capitated Medi-Cal services. In 1993, the Orange County Board of Supervisors created CalOPTIMA to contract with the state of California to serve Medi-Cal beneficiaries. All Medi-Cal beneficiaries are required to enroll in CalOPTIMA, which in turn contracts with 19 health plans, including licensed HMOs and Medi-Cal-specific physician-hospital consortia, and operates a direct provider contracting program, CalOPTIMA Direct.

CalOPTIMA instituted several measures to protect the role of traditional Medi-Cal and indigent care providers. It established physician-hospital consortia as a direct vehicle for traditional safety net provider participation without identification with a particular licensed HMO. CalOPTIMA capped health plan enrollment at 30,000 members to distribute Medi-Cal membership,⁹ required health plans to include safety net providers and adopted an auto-assignment policy for beneficiaries who do not select a primary care provider. This policy favors traditional Medi-Cal and indigent care providers.

State and federal governments have been the source of other significant public policies affecting health care organizations. Two examples involve California’s implementation of the federal welfare reform law and its citizen-backed Proposition 187, both of which target certain immigrants’ eligibility for health care coverage. Respondents estimate that more than 50,000 Orange County residents could lose their Medi-Cal eligibility and be forced to rely instead on the county’s underfunded MSI program. Federal caps on Medicaid’s disproportionate share hospital (DSH) program, which has provided some relief to safety net providers serving Medi-Cal and indigent patients, is another significant policy issue.

State regulation also affects organization of care in the broader health care marketplace. The state’s Corporate Practice of Medicine Law, which is actively enforced, bars employment of physicians by corporations. Further, the state’s Knox-Keene law, which governs HMOs and risk assumption, precludes organizations from assuming risk for services that they are not licensed to sell. As a result, health plan payments to providers generally are structured through separate contracts for physician and hospital services. These regulations have spawned cumbersome physician-hospital contracting structures, as hospitals seek to align their financial incentives with those of their medical staffs and to share risk for the provision of care. An alternative approach allowed by law and employed by one system in the county is the hospital-owned medical foundation. A few large physician groups in the state, including at least one in Orange County, recently received limited Knox-Keene licensure that enables them to accept global capitation for hospital and physician services through a single health plan contract.

PURCHASING

Health care purchasing has been driven largely by price considerations, although demand for broad geographic networks and more flexible benefits has also been important. Services for the indigent are purchased by the county’s Medical Services for the Indigent (MSI) program, and services for Medi-Cal eligibles are purchased by CalOPTIMA on behalf of the county.

Private Purchasing

Respondents characterize Orange County as a business community of small to mid-size firms. Only five local employers have 5,000 or more employees. Many of the large firms in Orange County are headquartered elsewhere or have operations that span several locations. These companies typically make their purchasing decisions based on national or regional coverage considerations rather than on local market conditions. Respondents report that purchasing decisions for small and large employers alike are driven by price concerns.

There are reportedly more than 80,000 small businesses in Orange County.¹⁰ These small and mid-size companies rely on brokers to make their health care purchasing decisions. Health plans operating in the county consider brokers an "essential market" and have targeted their marketing and information specifically to the broker community. In addition, the state has established a health insurance purchasing cooperative, the Health Insurance Plan of California (HIPC), for businesses of up to 50 employees seeking health insurance. With the statewide HIPC in place, small businesses reportedly have little incentive to organize purchasing coalitions.

Statewide health insurance purchasing by the California Public Employees Retirement System (CalPERS), on behalf of state employees and retirees, and by the Pacific Business Group on Health, a coalition of large businesses that operates across the state, has produced public information on health insurance premiums. This information has had an effect on local markets such as Orange County, where employers can obtain competitive premiums without active involvement in or understanding of the local health care market.

A few years ago, several mid-size and large firms in Orange County attempted to establish a purchasing cooperative called the Orange County Coalition. Participating companies intended to contract directly with providers and/or develop consolidated contracts with a few health plans. They determined, however, that direct or selective contracting would enable them to achieve only small price reductions. At the same time, participants believed that they might expose themselves to employee backlash if they offered limited provider networks. Logistically, direct contracting probably would be difficult, because many employees commute long distances, making widely dispersed provider networks a necessity. For these reasons, the coalition ultimately dissolved.

Employers that offer health insurance have included HMOs in their offerings for quite some time. HMOs reportedly dominate the commercial market, although PPOs have maintained a strong presence. According to respondents, there is very little traditional indemnity insurance. Opinions varied on the growth potential for HMO and PPO products. While some respondents believed that the already high HMO penetration would make continued HMO growth difficult, others reported that PPO products could not be priced competitively in this market.

Consumers demand choice and broad geographic networks from their health plans. Once they select primary care providers, however, many consumers are expected to remain within relatively tightly controlled sub-networks of physicians and hospitals that have been carefully constructed around joint marketing and shared risk strategies. Respondents reported that consumers are starting to express discontent with gatekeeper arrangements that impede their ability to see physicians other than their primary care provider. In response, plans are developing point-of-service (POS) and hybrid products, as well as products with "speedy referral" processes that enable HMO enrollees to "go around" their gatekeeper.

Some plans have sought greater feedback and participation from their largest customers or brokers. These plans report heightened interest among purchasers in all facets of plan activity, including the design of plan forms and brochures, provider contracting and utilization information on plan providers. Informants reported that Cigna is providing physician-level profiling information to some of its large employers.

Public Purchasing

Recent managed care growth has been most rapid in the Medi-Cal and Medicare programs. As discussed, the implementation of CalOPTIMA in 1995 moved all Medi-Cal beneficiaries into managed care arrangements; previously, the proportion enrolled in HMOs was less than 2 percent. Medicare HMO penetration reportedly has been growing rapidly as well. CalPERS’s purchasing strategy for public employees have relied on HMOs and a managed competition approach for several years.

CalOPTIMA conducted an inclusive bidding process for contracting with licensed HMOs and Medi-Cal-specific local physician-hospital consortia. CalOPTIMA received 45 bids in response to its first request for proposals in 1995, and awarded 36 contracts to HMOs and physician-hospital consortia. These contractors have subsequently "consolidated" through attrition or aggregation of small plans into 19 contracted plans, including five HMOs and 14 physician-hospital consortia. These 19 plans serve 250,000 people. Furthermore, CalOPTIMA Direct is a direct provider contracting program for beneficiaries who have not yet enrolled in health plans or who have limited "special" eligibility for Medi-Cal (e.g., dual eligibles and undocumented immigrants who only qualify for Medi-Cal coverage for prenatal care and deliveries). Approximately 50,000 individuals are served through CalOPTIMA Direct.

Beneficiaries select their primary care provider and plan within CalOPTIMA, and they appear to prefer certain providers and plans. CalOPTIMA officials report that Medi-Cal beneficiaries overwhelmingly made their plan selections on the basis of specific physicians. The physician-hospital consortia participating in CalOPTIMA reportedly are more experienced with serving the Medi-Cal-eligible population than commercial health plans operating in CalOPTIMA. Accordingly, the physician- hospital consortia have had much higher enrollment than the participating HMOs that serve the commercial market.

In contrast to Medi-Cal, respondents believe that Medicare beneficiaries select plans on the basis of cost,¹¹ scope of benefits and perceived quality of affiliated medical groups and hospitals. PacifiCare, FHP and Kaiser historically have competed for Medicare beneficiaries with benefit enticements. Respondents estimate that the recent acquisition of FHP by PacifiCare concentrates approximately two-thirds of Orange County’s Medicare risk enrollment into this one entity.

CalPERS has influenced the health insurance market through publication of the premiums it negotiates for its nearly one million members statewide. For 1998, CalPERS negotiated an average rate increase of almost 3 percent for the 11 HMOs with which it contracts, its first premium increases in five years. CalPERS also announced a three-year agreement with Orange County-based PacifiCare, the only HMO that agreed to a multiyear contract. Under this agreement, a portion of the premium CalPERS pays each year will be placed at risk, based on member satisfaction and the completion of selected quality initiatives.