NCPA - National Center for Policy Analysis

The Decline of Managed Care

December 4, 2003

Health Maintenance Organizations (HMOs) are increasingly being replaced by preferred provider organizations (PPOs) and other fee-for-service plans. As a result, Independent Physician Associations (IPAs), which negotiated fees with the big managed care organizations are disappearing. Many IPAs have gone bankrupt, and some are being investigated by federal regulators.

IPAs flourished for much of the 1990s because of their ability to pool doctors and amass group leverage in negotiations with managed care plans, particularly HMOs.

  • Doctors paid a fee to join an IPA, which negotiates prices with HMOs and other managed care plans for a fixed amount per patient -- called a capitation -- to be shared among IPA members for care rendered in a given period.
  • For example, an HMO would offer a capitation of $1,000 a year per doctor per patient to an IPA, which would process the fees; the IPA and its member doctors would absorb any costs of care above the set limit.
  • Consumers and physicians began to revolt against HMOs in the late 1990s, particularly against capitation and restrictions on health care access.
  • Health insurers began to relent, scrapping capitation-based HMOs in lieu of more lenient Physician Provider Organizations (PPOs) and other fee-for-service plans.
  • Fee-for-service arrangements took away the very component that made IPAs vital for doctors to reduce their financial risks of capitation -- but if IPAs aren't bearing financial risks, then they're little more than tools for collusion, in the eyes of regulators.

Many IPAs nationwide have declared bankruptcy or shut down, and Federal Trade Commission investigators began scrutinizing the surviving IPAs for business tactics some say amount to collusion and price fixing.

Source: Roger Lu, "Physician networks try to adapt as HMOs falter," Dallas Morning News," December 4, 2003.


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