Medical Practice Strategies:  Systems Based Practice - Business Laws Ethics

Janet Lerman, J.D.

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Yes, it does make a difference what kind of HMO a physician is part of, because if it is a staff model HMO then the physician is an employee of the HMO as compared to being an independent contractor who contracts with a HMO

Managed care is provided by different types of entities such as HMO’s, PPO’s, specialty providers, and spin-offs of these type of entities. Historically, one of the main differences between an HMO and a PPO involved risk-sharing. According to Smeeta S. Rishi in "Getting a Jump on the Jargon,": "Risk refers to the chance a payor or provider takes on whether the amount it is paid or receives for providing covered health-care services is greater or lesser than the amount it costs the payor or provider to provide the services. In an indemnity arrangement, the risk is borne by the payor who receives premiums as payment from enrollees (or employers) and then pays providers to provide care on a fee-for-service basis. In a capitated arrangement, the payor limits its risk by paying a fixed fee for services, regardless of the amount of services provided to the enrollee. In such an arrangement, the provider bears the risk since the provider is paid the same amount irrespective of the frequency, nature or scope of covered services required by the enrollees."

Traditionally, one of the major differences between HMOs and PPOs was the financial risk to providers - because HMOs used capitation and PPOs used discounted fee-for-service as a method of payment to providers

HMOs contracted with providers on an at-risk basis where the providers assumed risk of a certain level of utilization of medical services by the patient pool provided by the HMO. PPOs contract with providers typically on a discounted fee-for service basis where there is basically no financial risk for fluctuations in utilization of medical services based on actuarial assumptions. PPOs commonly use discounted fees, package or bundled rates and are often not allowed by regulatory agencies to offer any risk-sharing arrangements. Another difference that unlike the gatekeeper system which has been used by HMOs for many years, PPOs allow visits to non-PPO providers.  Under this system, HMO members choose a Primary Care Physician and then this Primary Care Physician would make referrals to specialists and authorize admissions to hospitals as determined appropriate by the Primary Care Physician. A third difference is that originally HMO’s readily implemented utilization review procedures such as pre-notification of hospital admissions, concurrent review and PPOs did not.  Currently, the vast majority of PPOs now perform utilization review. 

Evolution of HMOs - 3 stages of managed care

bullet Cost driven - to reduce costs
bulletQuality driven - emphasis on quality and patient satisfaction and education is key
bullet Population oriented care - cost and quality combine to keeping entire communities of populations healthy

Specialty provider type of managed care programs, typically called "carve-outs" such as for cardiology, transplants, and neonatal intensive care units tend to be created for costly treatments in which special claims procedures are used by the HMO’s. They are "carved-out" from the standard benefit package and these type of claims are to be processed in a separate pre-defined manner. Often, entities are created to package, market, and administer these specialty type of services. Carve-outs may be sold to employer groups, as well as to HMO’s and PPO’s.


Types of HMOs

bulletStaff Model - Physicians are employees of HMOs
bulletGroup Model - Physicians create groups and then contract with HMOs
bulletNetwork Model - HMOs contract with variety of physicians to create network of providers
bulletIPA Model - HMOs contract with IPAs - IPAs are an entity consisting of affiliated physicians 

Within the HMO category there are different types of organizational structures. There are basically four different models of Health Maintenance Organizations ("HMO"). These are the: (1) Group model, (2) Network model, (3) Independent Practice Association (IPA"), and (4) Staff model. However, the first three of these listed models can easily start to looking like each other, so that it may be difficult to distinguish them. However, it is clear how to distinguish these first three models from the Staff model. Under the Staff model, providers are employees of the HMO as compared to independent contractors. In the other models, the providers are generally independent contractors who enter into contracts with HMOs.

In the Group model, the providers may be joined together as an organized group which in turn contracts with HMO(s). In the Network model, the HMO may enter into various agreements to create a contracted network of providers. In the Independent Practice Association also known as Independent Physician Association ("IPA"), individual providers join together, yet maintain their independent status in order to contract with managed care organizations such as HMO’s. The "IPA" is the entity structure joining a group of doctors for the purpose of contracting with managed care organizations like HMO’s and PPO’s.

HMO’s tend to pay its providers on a capitated rate basis which is a flat fee per member per month paid in advance for services being rendered. Established HMO’s have traditionally paid their contracted primary care physicians a capitated rate and are now exploring approaches to pay contracted hospitals in this manner also.

The HMO industry claims that they arrange for the provision of designated medical services at a cheaper rate than other kinds of insurance. However, there have been concerns by the general public that HMO’s tend to provide inferior quality of service and that rising costs of HMO’s premiums do not make them so attractive. In addition, there have been public claims that HMO’s avoid providing services by placing physicians in position of choosing between rendering appropriate care to their patients or receiving financial compensation of some sort. Also, there have been allegations that HMO’s use the "experimental" exclusion in their contracts to avoid paying for costly medical services for its enrollees.

In response, HMO’s may claim that they are catalysts for physicians to change their manner of practice in order to be more cost effective and to focus on preventative care. For HMO’s cost effectiveness typically includes avoiding unnecessary and/or duplicative services, using most appropriate care for the circumstances involved, prescribing generic drugs if appropriate. As HMO’s compete with each other to sell their services to employer groups, quality of service becomes a more important factor in their marketing efforts. HMO’s are now more in a position to determine who they will or will not contract with because providers may be in need of a patient base. Accordingly, HMO’s may use "quality" of care rendered by the providers as a key in its contracting decision-making process.

It has been said that HMOs will evolve in three stages (as presented later in this book): (1) Cost driven - where the emphasis is on reducing costs; (2) Quality driven - where the emphasis is on quality and patient satisfaction and education is key; that this is now occurring in the areas with more advanced managed care; and (3) Population oriented care - where cost and quality combine to keeping entire communities of populations healthy.


PPOs contract with providers, such as primary care physicians, specialists, hospitals, and pharmacies to create a network of providers. These contracted providers agree to provide health care services at a rate lower than their normal charges. Unlike HMOs, they historically, do not capitate their contracted network of providers or use the gatekeeper system.

Some states have laws governing what a Preferred Provider Organizations ("PPO") can and can not do. For example, some states specifically do not allow PPOs to pay its contracted providers a capitated amount. These states might only allow PPOs to create a network of contracted providers and to sell the use of this network to businesses, companies and other such employer groups. Patients in a PPO who use providers from their PPOs list of contracted providers pay less as compared to using other providers who are not contracted with their PPO.

PPOs may hire Third Party Administrators ("TPA"), entities that collect and handle premium money and handle claims. PPOs may contract with a TPA directly or create its own TPA. Large employer groups, especially if they are self-funded, might contract with a TPA to handle its health care administrative functions.

Contract with Providers Contract with Providers
Fee-For Service Capitation Discounted Fee-For-Service\ Not Capitation
No risk for Providers/ Risk borne by Insurer or Payor Risk sharing with Providers Little or No Risk
Collects Premiums/ Settles Claims Collects Premiums/ Settles Claims
Originally used Gatekeeper System Originally did not use Gatekeeper System
Implements Utilization Review (UR): Prospective, Concurrent, Retrospective Originally did not use UR - now does 
Actuarial Assumptions: Level of Utilization - Patient Pool Actuarial Assumptions: Level of Utilization - Patient Pool
Models: Group, Network, Independent Practice Association (IPA) and Staff May Create or Contract with Third Party Administrator (TPA) to Collect Premiums/ Settle Claims

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