Resolving conflicting laws and policy in integrated delivery systems development.

• Author: Shaffer, Anthony D.

1. INTRODUCTION

   Historically, health care services in the United States have been delivered by providers organized as separate economic and legal entities.(3) Hospitals, physicians and various allied health professionals all had distinct roles in a system of care that was rarely a model of efficiency.

   In light of the ever-increasing costs of health care however, health care purchasers, including public and private organizations, are demanding that costs be reduced and quality be improved.(4) The financial incentives that existed under traditional health insurance programs rewarded providers for the increased utilization of services. The current impetus for cost reduction has resulted in the organization of systems that function successfully in an environment where the delivery of care and the reimbursement of that care are both managed.

   Payers have encouraged this development of managed care systems, in which health care consumers are given access to care but only after consultation with and often the approval of a gatekeeper physician or other professional. Payers are also increasingly asking providers to accept some of the financial risk associated with the delivery of care to a defined population, as a way of controlling if not predicting costs. Once separate provider groups are now joining forces to develop systems that address payer concerns about cost and quality.

   As a result of these pressures, cataclysmic changes are transforming the health care industry. In the 1990's for example, we have seen extensive restructuring of health care delivery systems. In terms of delivery, the health care industry is evolving away from hospital centered systems. In terms of payment, the industry is shifting away from traditional fee-for-service reimbursement to a sharing of financial risk with providers.

   Hospitals and physicians are forming networks that integrate certain delivery and insurance functions and thereby enable the providers to sell their services directly to employers and other payers. Even if networks decide to allow insurers and others like HMOs to market the network's services, providers are in a better bargaining position for their compensation. These efforts may result in some level of integration; however, the parties often end up with a transitional system that lacks total integration and delivers less than the full range of services while engaging in some insurance functions.

   Against this backdrop, health care continues to be subject to extensive yet ever changing regulations at both the federal and state levels. As the industry responds to these changing regulatory forces and the industry's efforts to control health care costs, the traditional roles played by providers and payers are being reconsidered and often restructured into new configurations. The restructuring of any industry as large and complex as health care sometimes brings to light conflicting laws as well as public policies that underpin the laws and regulations governing this sector of the U.S. economy.

   Health care legal advisors are often called on to rationalize and synthesize these conflicting laws and policies while assisting clients to meet current market demands in developing competitive integrated delivery systems ("IDS"). This article explores the myriad of laws and regulations that affect integrated delivery systems development and proposes a practical approach for reconciling conflicting laws and policies. Some legal practitioners may recognize the proposed method as the process they already follow. For others, the suggestions in this article will hopefully challenge them to see conflicts of law and policy as opportunities to engage in creative thinking.

   Part II of this article provides an overview of the models being used to develop integrated delivery systems and briefly discusses the continuum of integration. Part III proposes a businesslike framework for resolving and synthesizing conflicting laws and policies in the context of hypothetical IDS that is used to illustrate certain conflicts. Part IV provides an overview of the laws, regulations, and public policies implicated in developing an IDS. Using the example IDS and other integration models, Part V identifies and analyzes several conflicts created by existing laws and regulations.

2. INTEGRATED DELIVERY SYSTEMS

   1. The Impetus For the Development of the Integrated Delivery System

      Due to the aging of the baby-boom generation and the ever-increasing costs of health care, both public and private payers are concerned they will be unable in the future, as they have in the past, to provide basic health care coverage to older Americans. Although the federal government has been unsuccessful to date in passing comprehensive health care reform legislation, the private sector (motivated in part by the fear that the government will become overly involved in the restructuring of the health care system if the private sector fails to implement reform) continues to restructure in order to address the dual concerns of cost and quality.

      As a result of the governmental attention and industry initiatives, many Americans are now familiar with the terms managed care or managed competition. The managed competition theory has been associated recently with the Clinton administration's efforts to develop and implement reform legislation.(5) Under managed competition, consumers are given a wide range of enrollment options among different private health plans which compete in the marketplace to provide the maximum value for the subscriber's dollar.(6)

      Both the configuration and competitiveness of gestational IDSs are critical to the success of this market-oriented approach to reforming. Competitive reformers believe that IDS's will constitute the organizational framework for controlling health care costs in the managed competition environment.(7) First, IDS's will develop governance mechanisms and incentive systems to control provider behavior. Second, competitive interaction among rival systems will ensure that systems do not stray from the goal of cost containment.(8)

      An IDS is an organization that furnishes patients with all levels and types of health care services from affiliated providers and that clinically integrates through coordinated case management and inter-provider information systems.(9) The movement towards an integrated industry includes affiliations and alliances among physicians and hospitals (and in some instances insurers(10)) as market forces cause previously fragmented providers to consolidate. An IDS typically involves the merger of physician and hospital services in and effort to align economic incentives often under a common parent or system.(11)

      IDS's often provide a package of hospital, physician, and ancillary health services(12) designed to offer payers one stop shopping for all their health care needs and a single entity to engage for managed care contracts.(13) To succeed in today's managed care environment, the system must assist the patient in making an informed health care decision and provide the service in an efficient, economical manner.(14) The more common integration models for physicians and hospitals include physician-hospital organizations, management services organizations, medical foundations, fully integrated delivery systems and at the far end of the integration spectrum, integrated organizations that offer both a licensed insurance product as well as a full-service provider organization.(15)

   2. Integration Strategies

      1. Physician-Hospital Organizations

         One of the least integrated of the models is the physician-hospital organization, or PHO. In this model, a hospital and a local group of physicians affiliate in an effort to attract managed care contracts.(16) The PHO may be formed as a separate legal entity, or the relationship may be purely contractual. The PHO provides certain basic managed care organization functions including the negotiation of managed care contracts, utilization review and quality assurance.(17)

         The PHO may have authority to enter into managed care contracts with payers which require the PHO's physician and hospital members to provide services to the payer's plan beneficiaries. Unlike other integration models, the PHO is not directly responsible to the payer for the delivery of the services.(18) Additionally, PHOs are often not substantially capitalized by its members as the hospitals and physicians do not contribute their assets to the PHO.(19)

      2. Management Services Organizations

         The management services organization, or MSO, provides management services to physicians or physician groups. MSOs are typically affiliated with an IDS or hospital system and may be operated as a service of a hospital or a wholly owned subsidiary of the hospital. They are often investor-owned or jointly owned by hospitals and physicians.(20) The MSO may be organized as a corporation, a partnership, a nonprofit corporation, or a limited liability company.(21)

         MSOs can be organized to offer complete "turnkey" management services to physicians, or physicians can be given the option of selecting various services as needed from a menu of management services provided by the MSO.(22) The primary advantages of the MSO model for physicians is that MSOs relieve physicians of their day-to-day administrative burdens, and the physicians continue to establish their own compensation and retirement plans.(23)

      3. The Foundation Model

         In the foundation model, the attributes of the PHO and the MSO are combined. The foundation can be established as a nonprofit corporation. It may own and operate one or more large clinics that offer complete ambulatory care, including both primary and specialty physician services.(24) Foundations may employ physicians directly or staff facilities with independent contractor physicians. The foundation may be independent, affiliated with a hospital, or part of a larger IDS. A hospital or hospital system is typically the sponsor...