"Specialty Service Carve Outs: Fad or Fixture?"

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"Specialty Service Carve Outs: Fad or Fixture?"

Does a vision or eye care carve-out contract make sense for your group?

Copyright © Gil Weber, MBA


Predicting the future in managed care is simultaneously simple and impossible. On the one hand it's safe to say that tomorrow will bring fewer but stronger players on the payor side as merger and acquisition mania shrinks the number of entities offering provider contracts. With fewer available opportunities competition to secure those contracts is sure to heat-up, resulting in increased competitive pressures to reduce costs and endure on ever thinner margins.

On the other hand, from market to market managed care is changing in unpredictable ways which a year or two ago nobody would have imagined. Take for example the 1997 announcement that Kaiser Permanente's employed physician groups, each an independent entity in states spread across the country, were forming a national alliance to position their multi-specialty group practices for bidding on regional or national contracts. Strategic plans included pursuing non-Kaiser business. Who would have guessed this from the prototypical group/staff-model HMO which historically only served its own insureds?

Gazing Into The Crystal Ball

I am often asked to predict the future for vision and eyecare carve outs. Physicians, optometrists, and administrators are rightly concerned that the current, often frantic activity to form group practices and align competitors into networks may, on occasion, result in little more than the enrichment of attorneys, accountants and consultants. In some cases that may prove true.

Some perceive networks as little more than a fad response to managed care. Others are looking for a prepackaged way to get into the group practice/network game, perhaps via participation in the emerging Physician Practice Management Company (PPMC) phenomenon. To each inquiry of "Should I get into a network; should I join a PPMC" my answer is always the same. "It depends."

State to state, market to market, even within markets, healthplans, employers, and Primary Care Physicians (PCPs) have differing attitudes towards direct provider contracting and carve outs. Differing attitudes result in diverse opportunities, and mandate disparate responses from providers and their practice administrators. For example, in healthplans where the PCPs have a lot of experience with capitation contracts, wield enormous leverage with HMOs, and maintain a financial stranglehold on specialty referral pools, large scale (plan-wide) vision and eyecare carve outs may not be in the cards. Yet smaller, local groups might be just the ticket for dealing with PCPs.

For example, one of California's largest HMOs has globally contracted its medical service contracts with approximately 400 capitated multi-specialty groups and Primary Care Physician groups. A statewide eyecare carve out for this plan's one million plus members is quite unlikely since it would require that every one of those 400 master medical group contracts plus each PCP's contract be renegotiated to back-out the eyecare premium component. That's just not going to happen. In such circumstances an eyecare group would be better served going to individual PCP and multi-specialty groups and negotiating for local carve outs, perhaps building several into a multi-county or regional program.

In other instances payors that have not already gone down this one-way street may see the clinical wisdom and financial logic of shifting vision and eyecare to those best qualified to manage it on a regional or even national scale. A carefully structured carve out proposal may result in a large body of patients directed exclusively to the forward-thinking network.

And so the questions then turn to these: "Will future carve out contracts go to national organizations or to local, provider-owned or provider-managed entities? With whom will payors typically prefer to deal? Is there a trend (fad or fixture)?" Again, the answer is: "It depends."

National vs. Local Opportunities

Certain of the largest national employers (e.g., General Electric) have a "sole-source" focus they're likely to continue. They use national or regional organizations that can guarantee uniform administrative performance standards and protocols, dedicated staff resources, and services from providers located anywhere in the country. While such national powerhouses support the concept of carve outs, their resource-intensive logistical demands mean that they are unlikely to do it with a local physician or optometric group or network. Some other national players (HMOs and hospital networks) have similar requirements and perspectives.

Most providers never even know when these biggest players put their vision and/or eyecare business up for bid. The Request For Proposal (RFP) process is normally a secretive affair inclusive of only a select, invited few. Typically, those invited few are the high-profile names known to benefit managers, benefits consultants, or provider contracting directors (e.g., VSP, EHN, Davis Vision, Cole/Pearle, LensCrafters, Block Vision, The Eye Care Network, and more recent entries Superior Vision and PrimeSight). Once a national payor has decided to carve out vision or eyecare, providers, groups, and networks can access the process and those patients only if they are represented by a strong, national or regional organization that has full-time staff actively prospecting for leads and invitations to the negotiating table.

While national contracts are relatively few and far between compared to local offerings, the total number of covered lives and the geographic spread of each is usually significant. Practices simply can't risk the collateral damage of nonalignment, and I recommend participation in at least one such national or regional organization.

However, many experts still say that most managed care contracting is done at the local level -- between local payors and local providers. Here opportunities abound for those who understand how to cultivate personal relationships, craft a deal, and build delivery systems that bring maximum benefit and value to payor, patient, and provider. As an example, particularly as it applies to internal process and protocol, eye doctors and administrators can learn from the behavioral health industry which is a bit farther down the managed care road when in comes to experience in locally managed, provided-sponsored specialty carve outs.

Surprising Findings

A report in the Bureau of National Affairs (BNA) Managed Care Reporter (September 25, 1996, page 921) noted that "...[B]ehavioral health providers are now forming their own networks that allow them to bypass the national behavioral managed care organizations." Quoting the head of Merit Behavioral Health Care the report stated that purchasers "...[A]re looking for practitioners who can replace the MCOs because they know they will get quality." And continuing, "The fact is, there is no little black box of managed care secrets; its all a marketing gimmick. Everyone is doing the same thing, only now everybody knows how to do it -- including the providers."

BNA also reported on an interesting survey of 15 national and eight provider- owned, regional behavioral managed care firms. The survey found "...[M]ental health professionals who have formed their own networks are faring better than their counterparts in networks owned by national MCOs. Practitioners in provider-owned networks receive somewhat higher fees and 15 percent more referrals than do their colleagues in national networks."

The overall implications can be extrapolated to vision and eyecare, though the specifics found in mental health may not be applicable directly and universally. Specialists seem to fare better when their networks are locally organized and administered. Further, payors are expecting (even requiring) this level of sophistication from provider organizations. Therefore, you should be looking into efforts to expand the carve-out concept at the local level.

What To Understand

Networks will be part of your professional life. No matter your market's current sophistication in or penetration by networks and capitated arrangements, payors are forcing a paradigm shift. While some legislation may be passed which makes certain aspects of managed care a bit less egregious (a questionable if), providers should not be oblivious to the changes around them. Nor should they be deceived into thinking that there is no demand what so ever in a particular marketplace for such sophisticated delivery systems. In communities across the nation we have observed capitated contracts awarded where capitation was thought unlikely or impossible. In some cases those contracts went to national networks; in others to well positioned, proactive local groups.

But in every case physicians and optometrists not participating in the contracted networks found their fee-for-service patients taken away. Those non-participants felt as if they had been blind-sided. But in reality they had been out-positioned.

There is no escaping the fact that the unaligned or poorly aligned are vulnerable today and more vulnerable tomorrow. HMOs are now in every state except Alaska, yet even in Alaska PPO networks are forming as hospitals scramble to capture market share and survive. But vulnerability certainly does not mean everyone should rush out and join every network that sends a provider agreement.

What To Do

With an eye on the future, keep some key points in mind. Payors are actively looking for entities that will:

  • lower costs and share risks,
  • furnish an organized interface with ophthalmic providers,
  • ensure that health plan HEDIS scores (report cards) look good to the payor and patient communities.

Ophthalmologists and optometrists need to have one foot in each camp. Gain access to patients from large, national payors through participation in one or more of the big-name vision plans. But don't depend solely on a national entity to weather the storms brought on by managed care. It's likely local relationships will always control the majority of managed care contracts and access to patients. Therefore, it is essential that you also join or build high quality, cost-effective, local delivery systems to access those populations not pursued by national vision and eyecare firms, or not accessible to them due to local payor preference.

Getting Involved

Positioning for tomorrow means carefully selecting your partners today. It is intuitively clear that not every network will have the requisite internal strength or character to survive. Some may try but will not capture enough contracts to support on-going operations. Others will waste participants' funds or, worse, rush headlong into cut-throat pricing wars that only benchmark vision and eyecare at impossibly low rates.

In the final analysis, yesterday's advice to join every panel and every carve-out opportunity is no longer valid. Now you must select only those with the best chance of success. Tomorrow, as payors become increasingly selective, it will no longer be enough to deliver the same services at a lower cost.

Successful carve-outs must demonstrate to payors that they have a better means of delivering the care and intervening in disease management. They will need to document substantive outcomes measures, and they will need to demonstrate continuous quality improvement. Successful networks will move quickly from "quality by declaration" to "quality by documentation." These will be critical factors for success on either a national or local level. Every doctor and every network will have to work harder and smarter to compete and survive.

Choose Your Partners Wisely

What are some of the key issues for physicians and optometrists seeking to forge network alliances? In part the answer depends if you are building the network and holding an ownership position, or if you are joining an existing network as a contracted participant. Your financial and legal risks and rewards can be substantially different under each scenario. Therefore, qualified legal counsel and business consultants are a must before making any move.

In either case you must identify and feel comfortable with the network's philosophy as set forth by its founders. Is the network firmly committed to the patient and to delivering the highest quality, ethical care despite operating within the difficult constraints of a managed care environment? Are the network's leaders those with whom you would choose to practice? Are their names those you'd be proud to stand by in a provider directory? Are there affiliated tertiary or university centers which bring credibility and marketability to the network? If the network provides comprehensive vision and eyecare are reasonable numbers of physicians, optometrists, and dispensing opticians included to allow patient choice and provide sufficient geographic coverage?

Do you agree with the network's formal business plan -- its goals and objectives, time lines, and underlying assumptions? Are you confident that the network has qualified business management from both the financial and managed care perspectives? Are you comfortable with the governance structure as either an owner or contracted participant? Is the network properly capitalized and can it continue to operate on current capital for at least two or three years until contracts with sufficient cash flows come on-line (capitalization being the most obvious of several potential Achilles heels)? Does the network have, or is there a formal plan to obtain any licensure which may be required to accept capitation?

Is the network effectively differentiated from the competition? Is there even a need for this network or are there already too many in your marketplace? Does the network allow you the flexibility to participate in other networks or does it demand your exclusive participation? If joining a PPMC this is a very important issue.

Fad Or Fixture?

While there may be specific circumstances within individual markets which don't generally favor carve-outs, within most every market some opportunities do exist. HMOs, self-insured employers, union groups, municipal governments, etc. are all potential candidates. And it seems quite evident from the many vision and eyecare carve-outs now in place around the nation that this is more than just a fad. Payors want contracting and administrative simplicity plus cost savings, and carve-outs have shown that they are viable. Still, given the volatility of the marketplace, carve-outs may only be the penultimate stage.

Lurking over the horizon some see the specter of increased global capitation, the actual "end game" and final fixture. Under a global capitation scenario payors would no longer contract with specialty-specific carve-outs. Instead, they would enter into contractual relationships with "mega" health care systems capable of delivering all health care services over a vast geographical area under a single administrative umbrella. These super systems would be the result of market consolidation among large provider networks, perhaps inclusive of several multi-specialty groups and PCP alliances. Such "mega" systems would likely internalize all possible vision and eyecare services with employed or equity partner providers, thereby reducing or eliminating any need for external (carve-out) contracting.

It is a disturbing possibility, and unfortunately one for which proactive positioning may not be enough if market forces and certain very powerful players move in directions which specialty-specific networks cannot follow. (For example, the October 1997 announcement of an $8 billion merger of PhyCor and MedPartners, the nations two largest PPMCs, would have created an immensely powerful health care system. That this proposed merger failed to come together is not an indication of any fundamental change in the game. This merger just had some insurmountable problems going in.)

"Denial Ain't A River In Egypt -- Red Duke, MD"

In the end, whether carve-outs in your market place seem fad or fixture, you cannot afford to avoid or ignore these issues of networks and practice alliances. There are no simple answers or quick solutions -- not even PPMCs. Networks and capitated risk- sharing arrangements have and will continue to change the way vision and eyecare providers practice. And survival into the next century is dependent on properly structured, well capitalized affiliations and collaborative efforts. Failure to proactively position for marketplace demands is to court disaster.


Gil Weber is a nationally recognized author, lecturer and practice management consultant to practitioners and the managed care and ophthalmic industries, and has served as Director of Managed Care for the American Academy of Ophthalmology.

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