Strategic health system development and managed care delivery.

For the past quarter century major hospitals and physician groups have actively developed competitive health systems. Their compelling motivation has been fueled by the onslaught of managed care. Successful initiatives have been driven by mutual strategic system planning, effective management, and enhanced quality of care. Key words: market evolution, vertical integration, health system development, consumerism, managed care.

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FOR MOST of the past century, the United States had a history of gradual health care business development in all aspects of delivery. The United States thrived as an open medical market not overly burdened by the principles of supply, demand, and price. Major hospitals had exceptional success in relatively non-competitive markets. The same was true of the physician community that had few incentives for group practice formation and maintained strong controls on fee-for-service operations.

This all began to change dramatically during the past quarter century with the onslaught of managed care and the strategic logic of health system development. Market forces rapidly evolved in ways that sought to control health care costs, secure prospective payments, control utilization, enhance quality, and manage overall care delivery. Formats unfolded that micromanaged insurance options, consumer choice, and providers' preferred diagnoses and treatment procedures. Financial controls and incentives were put into place to alter the service delivery priorities of hospitals, physicians, and other providers.

These trends were underscored by organized businesses and regional group associations, which acted as catalysts in reshaping supply and demand in the health care industry. Larger entities gained power and control over consumer choices in local markets. Many had national organizational connections and established priorities for managed care development and service delivery standards. Smaller businesses and government entities joined them in seeking to reduce overall health care costs and simplify managed care delivery.

Acting in response to all of these trends, major hospitals pursued initiatives to form full service health systems and develop their managed care capabilities. Efforts were pursued with their medical staffs to create joint venture entities in order to capture market shares and gain competitive strength. These included health maintenance organizations (HMOs), physician-hospital organizations (PHOs), preferred provider organizations (PPOs), and other similar entities.

Unfortunately, in many cases the attempted joint ventures between hospitals and physician groups ended in financial catastrophes. Negotiated reimbursement rates failed to bring bottom line profits to participating physicians. Substantial distrust often developed between hospitals and physicians as a result.

At the same time, physicians increasingly realized the importance of mergers and system development for their independent regionalized practices. They added increased specialization, select market penetrations, and multiple site developments as the keys to their continued growth and profitability. They also awakened to the business components needed for success with effective management and financial oversight.

These experiences among hospitals and physicians have triggered new initiatives to form alliances, to assess risks and achieve profitability. Hospitals have awakened to the tact that physician partnerships are the foundation for strategic health system development and managed care delivery. This requires shared information, trust, and common visions of business success.

Successful physician-hospital enterprises have acknowledged common incentives to protect regional market positions from inroads by competitors and domination by insurance entities and major payers. Their guiding priorities have been to escalate efforts to reduce costs, develop new managed care alternatives, enhance quality, and substantially improve service delivery and overall administration.

Health Care Market Evolution

Managed care has become a driving force for integrated regional delivery systems. Physicians and hospitals have increasingly realized the importance of their interdependence and their mutual needs to compete aggressively on the bases of cost control and quality enhancement. Increasingly they have been influenced by organized business and patient demands.

Health care market evolution is typically conceptualized in various stages of development. The most advanced markets feature extremely high levels of managed care, dominant health care systems that exert oligopoly power, large medical groups with multiple locations and services, and direct contracting initiatives by employers and government. In such markets the lines between health care purchasers and providers often blur as they compete against each other for covered lives under increasingly risk-bearing contracts.

The main causes of this market evolution are the increasing price sensitivities of purchasers and the evolution of managed care delivery. Virtually all states now have sufficient coverage of their overall workforces in managed care ranging from hard core HMOs to relatively loose Point of Service Organizations (PSOs). There is an increasing focus on allowing employees multiple options to choose from various provider alternatives for care and levels of cost coverage.

Throughout the country, this has tightened interdependencies among hospitals, physicians, and supporting health care professionals. The drive for managed care and prospective payment has motivated renewed efforts to integrate hospitals, medical staffs, and other provider entities into unified health systems.

At this juncture there are more than 200 major health systems throughout the United States. They include both public and private entities that have combined ambulatory care, inpatient care, and long-term care …