Hospital-Physician-Insurer Integration: Marcus Welby Case Study

Overview of the Organized Delivery System

To function and succeed, a hospital is equally dependent on three factors: insurance, hospital infrastructure, and physicians.

Insurance brings to the table crucial expertise needed to market coverage to employers and individuals, including the ability to calculate actuarial risk and to manage a claims system. This encompasses marketing, financial accounting, claims processing, utilization review, and data functions such as rating and monitoring individual physicians' performance.

Hospital refers to all institutional facilities. Marcus Welby Hospital, in order to be more successful, merged with two other hospitals to form the Marcus Welby Network, with the aim of providing both primary and tertiary care cost-effectively. A hospital network may include nursing homes and outpatient facilities such as ambulatory surgery and emergency centers. These institutions may be under single or joint ownership, established either by direct construction (as Marcus Welby originally was) or by merger (as occurred in 2000). They may also be independently owned facilities that affiliate by contract.

Physicians — it is generally necessary for physicians to align themselves, through contract or partnership with an insuring or hospital entity, in order to sustain a successful medical practice.

Because of the constant challenge of competition and the risk of losing patients, hospitals endeavor to unite with physicians and insurers in a cohesive system. This is variously called "managed care," "integrated service networks," or "organized delivery systems." The intention is to use limited resources as efficiently as possible, because when one component suffers, all other components of the system suffer likewise. The critical issue is which component holds control. When insurance is in control, as seen in the Marcus Welby Hospital case, the other two components suffer to varying degrees.

An organized delivery system consists of at least four distinct models:

1. Foundation Plan — a corporation, usually nonprofit (Burns, 1995), in which the hospital's corporate parent purchases physician practices and employs the physicians directly.

2. Physician Hospital Organization (PHO) — hospitals, physicians, and insurers are linked in a loose, contractual network with no common ownership. The hospital and several physician groups enter a joint-venture partnership, contribute equal capital, and split the proceeds.

3. Management Services Organization (MSO) — the hospital contracts with independent physicians and pays for resources such as office buildings, files, and medical records for a lump sum, while also acting as a negotiating agent with insurers and/or employers. The physicians themselves remain independent contractors. Often the MSO employs all non-physician staff and provides administrative systems, in exchange for either a flat fee or a set percentage of group revenues (Burns, 1995).

4. Integrated Health Organization (IHO) — a single legal entity with three subsidiaries: a hospital corporation, a medical services corporation, and an educational and research corporation. Typically, the whole entity is tax-exempt and nonprofit. The medical subsidiary employs physicians to provide services (Burns & Thorpe, 1993).

5. Other models include physician ownership of hospitals and hospital ownership of group practices. These last two models are not addressed in this paper.

All of these models reflect different approaches to physician-hospital organization. The factor that ties any system or network together is its clinical and fiscal accountability for a defined patient population. When meeting the needs of that population becomes too challenging — as may occur under economic pressure — all models of the organized delivery system suffer, some to a greater extent than others. A case in point is the Marcus Welby Hospital infrastructure.

The Problem: Marcus Welby Hospital's Competitive Crisis

Marcus Welby Hospital (MWH) is a private, nonprofit, 400-bed facility that employs more than 2,000 workers and generates more than $100 million in annual revenues. It is located on the outskirts of a metropolitan area of one million people that also contains three other major tertiary care hospitals and four smaller community hospitals. In 2000, the hospital merged with two other hospitals to form the Marcus Welby Network. Their objective was to sign up a number of physicians — primarily in primary care but also in common specialties — and then market this network directly to employers and to large insurance companies, who would in turn offer the network to their customers.

Their efforts produced mixed results. On one hand, their network did not cover a large enough geographic area to appeal to the largest employers. On the other hand, MWH had greater success with insurers, since it offered a broad network — precisely what employers desired. Recently, however, insurers gained the upper hand by threatening to place MWH in the highest tier of their tiered networks, effectively forcing patients to choose between paying much higher co-payments and deductibles to receive local care or traveling to distant parts of the city to receive care from lower-cost providers.