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Market Forces

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Local market conditions may inhibit the development and growth of physician organizations

A recent study reveals diverse structure and function among physician organizations (POs) in four different regional markets that have a similar history of managed care penetration. In the study, which was supported by the Agency for Healthcare Research and Quality (HS09929), Harvard University researchers conducted site visits in four health care markets in 1999: Boston and Los Angeles/Orange County, considered to be high-cost markets, and Portland and Minneapolis/St. Paul, considered to be low-cost markets. They interviewed executives of medical groups, managed care plans, major hospitals, and other groups, as well as practicing physicians, and supplemented the interview data with market data.

In spite of the similar history of managed care penetration across the four markets, there was substantial diversity seen in both the structure and function of physician organizations across the markets. Where downward pressure on insurance premiums existed alongside relatively weak hospitals, physicians took the opportunity to profit from reducing costs by accepting delegated risk and utilization management (Southern California). Where hospitals and specialists were in a position to resist decreases in their revenue and premiums were low to begin with, the lack of resources and rewards for improving clinical management thwarted the growth of large independent POs (Portland). In Portland, the formation of specialist organizations also appeared motivated by a desire to resist attempts by primary care POs to profit from reducing specialist costs (through reducing fees or referrals).

In Boston and Minneapolis, physicians and hospitals aligned in vertically integrated organizations as a counterbalance to the market power of the managed care organizations (MCOs). In Boston, the relative market power of these delivery systems combined with high premiums gave providers an opportunity to profit from delegated risk contracts. However, very little excess capacity was eliminated, and clinical management did not progress far.

Overall, only a small share of POs outside of California had developed much capacity for utilization or clinical management and shared risk with MCOs. With health care premiums once again escalating, POs will need to evolve before they can be viewed as a broadly viable force for innovation in managing care, conclude the researchers.

See "Managed care and market power: Physician organizations in four markets," by Meredith B. Rosenthal, Ph.D., Bruce E. Landon, M.D., and Haiden A. Huskamp, Ph.D., in the September/October 2001 Health Affairs 20(5), pp. 187-193.

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