Squeeze play.

• Author: Martin, Edward
• Position: Joint venture between Glen Raven Mills Inc and Alamance Regional Medical Center - Cover Story

The latest twist in managed care? Hospitals, doctors and employers team up to elbow out HMOs and insurers.

After small talk about family and sports, the conversation would always take a familiar turn: the $3 million-plus - and growing annual bill for employee medical benefits. It came up whenever Glen Raven Mills Inc. executives assembled at the headquarters in the small Alamance County community where the company was started in 1890.

About 10 miles away, on the other side of Burlington, administrators at the new Alamance Regional Medical Center were also grousing about money. Health-maintenance organizations had been making good on their threat to steer patients to Chapel Hill and Greensboro if they didn't get deeper discounts.

Throughout 1995, as private-practice doctors, mill executives and hospital administrators shared roast beef and green peas at civic-club and chamber lunches, they compared notes. Eventually, they came up with a plan: Send us your employees, Alamance Regional and a group of physicians promised Glen Raven, and we'll contract directly with you - no insurance companies, no HMOs, no other middlemen. And we'll discount your bills by a third.

Since the plan went into effect in 1996, Glen Raven's health-care costs have dropped from $1,960 to $1,461 per employee, saving the company more than $1 million a year. Six other companies that joined to form Piedmont Health Coalition are seeing similar savings. Meanwhile, Alamance Regional's admissions are up by a fifth. Revenues have leaped from $130 million to $150 million.

It's called direct contracting, and observers say it could have as dramatic an effect on North Carolina health care as the HMO industry it is trying to supplant. "What we are going to see," predicts Richard Corlin, a California gastroenterologist who is speaker of the American Medical Association's House of Delegates, "is for-profit HMOs will be gone."

Already, HMOs are crying foul. "If you walk like a duck and quack like a duck, are you a duck?" asks Paul Mahoney, the industry's chief Tar Heel spokesman. Some direct contracts, he says, are nothing more than insurance in disguise - minus the financial-reserve and other regulations that keep insurers from going broke and stranding patients. "We're not afraid of competition on a level playing field, but some of these deals push the envelope."

Even insurance regulators and the state attorney general's office are split over whether contracts in which doctors and hospitals assume financial risks amount to insurance. The Department of Insurance says yes, the attorney general's office, no.

Caught in the middle, a third of the state's 10,000 doctors and that much or more of its 160 hospitals are toiling in a legal no-man's land. Direct contracting's standing might be shaky, but its converts are growing.

Sandy van der Vaart, managed-care director of the North Carolina Medical Society, which represents most Tar Heel physicians, says deals like the one in Alamance have, with little notice, seized huge hunks of the state's healthcare market. Two years after emerging from the arcane shadows of medical finances, direct contracts, by some estimates, now account for $5 billion of the $23 billion spent on health care each year in North Carolina.

Doctors are increasingly testing such contracts in various forms, most often through membership in physician groups such as...