California Health Care Market Report 2004 Prepared by Allan Baumgarten California Health Care Market Report 2004 by Allan Baumgarten prepared for THE CALIFORNIA HEALTHCARE FOUNDATION © Copyright 2004 Allan Baumgarten All rights reserved. Contents About This Report . .3 1.0 Overview of Findings . .4 2.0 Market Review — Key Organizations . .5 2.1 Purchasers . .5 2.2 Health Plans . .9 2.3 Hospital System and Networks . .15 2.4 Physician Organizations . .19 2.5 Health Plan/Provider Relations . .22 3.0 Trend Review . .24 3.1 About This Analysis . .24 3.2 HMO Enrollment . .24 3.3 Medicare HMO Plans . .27 3.4 Medi-Cal Managed Care . .29 3.5 HMO Enrollment by Region . .33 3.6 HMO Net Revenues and Income . .36 3.7 Premium Revenue Trends . .37 3.8 HMO Medical Loss Ratios . .39 3.9 Capitation Payments . .41 3.10 Prescription Drugs . .42 3.11 Administrative Expenses . .44 3.12 HMO Net Worth . .45 3.13 Utilization and Effectiveness of Care Measures . .46 3.14 Enrollee Satisfaction . .48 4.0 Regional Sub-markets and Provider Systems . .50 4.1 San Francisco Bay Area . .51 4.2 Sacramento . .60 4.3 Central Valley . .63 4.4 Los Angeles - Orange County . .68 4.5 Inland Empire . .79 4.6 San Diego . .84 ABOUT THIS REPORT California is big, not just in geographic area or in population. It also has enormous resources and faces huge economic and social challenges. In health care, it has world class hospitals and physi- cians and innovative organizations. At the same time, it also has millions of people with no health insurance and is faced with the monumental task of maintaining a safety net for health care that is fraying under the strain of caring for so many people. California’s size is matched by its diversity—whether in geographic features, ethnic background of its people, or local economies. Yet bringing together all this diversity are unifying institutions such as major transportation systems, finance and human service programs operated by state agencies, and the networks of supermarkets and banks whose signs and teller machines are seen through- out the state. Similarly, while health care systems around the state have significant regional differ- ences, they are linked by major organizations that provide health care or purchase and administer health benefit plans. The California Health Care Market Report 2004 is intended to be a resource for understanding the organizations that provide health care and purchase and administer health benefit plans in the state, and the market forces affecting them. This is the third annual edition of this report, known in its first two years as California Managed Care Review. Recognizing that the scope of this research goes beyond managed care organizations, the report was given a new title this year. The California HealthCare Foundation commissioned the report to provide a resource that would inform health policy debates by providing an objective analysis of health care market trends and comprehensive data on health care organizations. This report is based on two kinds of research. First, it presents a competitive analysis of data on health plans, hospital systems, and physician organizations. Most of the data are drawn from pub- lic sources, including the annual statements that HMOs file with the California Department of Managed Health Care and the annual surveys that hospitals submit to the Office of Statewide Health Planning and Development. The report examines the financial performance of health plans and hospitals and examines enrollment trends, measures of utilization, and effectiveness of care and patient satisfaction. Second, the author conducted 40 interviews with different leaders in and observers of the California market. These are in addition to 90 or so interviews conducted in preparing the two previous editions of this report. The new interviews, most of them in person, were conducted between November 2002 and June 2003. These interviews provided very helpful perspectives and a complementary context for the data. Interviewees are not quoted directly, but the author has gleaned their insights and placed them in the report as unattributed comments. This edition of the report is organized into four major sections. The first section summarizes the findings of the research that went into this report. The next part provides an overview of organi- zations involved in purchasing health benefits, delivery of health care and administering health benefit plans. It focuses on the evolving business relationships that connect these organizations. The third section of the report provides a detailed analysis of health plans in the state, examining trends in enrollment and net income, and comparing large HMOs on measures of utilization and effectiveness of care. Sidebars in this section benchmark California health plans with their counter- parts in the eight other states where the author prepares similar market analyses: Colorado, Florida, Illinois, Michigan, Minnesota, Ohio, Texas, and Wisconsin. In the fourth section, the report examines health market issues in major regions of the state: the San Francisco Bay Area, Sacramento, the Central Valley (including Fresno and Bakersfield), Los Angeles/Orange County, the Inland Empire of Riverside and San Bernardino Counties, and San Diego. Each regional analysis includes exhibits with information about major physician organiza- tions, the market share of the largest health plans, and the finances and inpatient occupancy of hospital systems. CALIFORNIA HEALTH CARE MARKET REPORT 2004 3 What Is Managed Care? 1.0 OVERVIEW OF FINDINGS provider choices. This issue is discussed in Section 2.4, Physician Organizations. The Health Insurance Health care in California has been based on busi- Association of America, a 3. Variation in practice and performance has ness and professional relationships that link hospi- Washington-based insurance emerged as a key issue in payment systems, tals, groups of physicians, health plans, and private industry group, describes man- physician organization and how issues like and public purchasers of health benefits. In the aged care systems as plans or patient safety are approached. Simply put, there world outside of the Kaiser Permanente system, organizations that integrate is wide variation in how effectively physicians prac- purchasers paid the health plans and the health the financing and delivery of tice, the rate at which they perform certain proce- plans, in turn, passed premium dollars and insur- appropriate health care ser- dures and how much they get paid. The introduc- ance risk, and delegated responsibilities to the med- vices to covered individuals tion of tiered hospital networks with different HMO ical groups. Those relationships have been evolving using the following basic ele- payment rates for each tier is a good example of in the past few years, but the direction of those ments: how the variation issue can pose challenges. For changes was unclear. In the past year, their heading example, can health plans actually identify the best • Arrangements with selected has become clearer. The circumstances described in performing physicians and hospitals? Are the meth- providers to furnish a last year’s report as “relative calm” now appear as a ods used to evaluate providers transparent to those comprehensive set of significant challenge to key organizations. There has providers and understandable to consumers? Can health care services to been a fundamental change in business relation- health plan companies devise payment systems that members; ships and in how economic power is held and used. reward those providers? These variation issues have • Explicit standards for the Here are some key findings in this report: led to efforts to develop standard measures of prac- selection of health care tice and performance. For example, the Pay for 1. Hospitals and medical groups once were part- providers; Performance initiative launched by the Integrated ners, but they are now more likely to be com- Healthcare Association seeks to tie a component of • Formal programs for ongoing petitors whose economic interests are more in physician group compensation to achievement of quality assurance and conflict than in alignment. Under the old model certain clinical measures, enrollee satisfaction, and utilization review, and; of health plan and provider relations, physician use of information technology. The issue of varia- groups and hospitals shared risk. If the physicians • Significant financial incentives tion in practice and performance is discussed in held down hospital utilization, they shared any dol- for members to use providers Section 2.4 and tiering of hospitals is covered in lars left in the payment pools at the end of the year and procedures associated Section 2.5. with the hospitals. During the late 1990s, however, with the plan. those pools of dollars stopped growing and there 4. Capacity of hospitals and physicians is now Managed care has evolved, and was much less money left to divide. Through sys- seen as limited instead of excessive, further health plans have reduced their tem building and more strategic negotiating, hospi- strengthening providers’ negotiating power. use of medical management tals have used their expanded leverage to escape Until recently, hospital beds were seen as overbuilt tools to control utilization and from risk-sharing contracts. And while the total dol- and employers and state officials wondered costs. They have also expanded lars available from employer premiums for provider whether market forces or regulation could some- their provider networks to offer payments have increased, hospitals have placed how “rightsize” the system. Now inpatient capacity broader choices. And they are themselves higher on the proverbial food chain and seems scarce, although that has as much to do with less likely to pay providers have generally benefited more than medical the available supply of nurses as with bricks and using capitation contracts that groups. The relationship between hospitals and mortar. Hospitals have closed in recent years but created incentives for the medical groups is discussed in Section 2.5, Health hospital administrators say that they are unable to providers to hold down utiliza- Plan/Provider Relations.