Buying Coalitions New Wrinkle in Managed Care Market

WASHINGTON--Employers, who first embraced managed care as a wayto lower health care costs, are now joining together in buyingcoalitions to extract even greater price reductions from organizationssuch as HMOs from whom they purchase health care insurance fortheir employees.

"The implications for providers are extraordinary,"consultant Allan Fine, MBA, said at the annual meeting of theAssociation of Community Cancer Centers (ACCC). "Clearly,to the extent that you or your affiliated managed care organizationhas a contract with one of these buying coalitions, you are ina superior position, not only to secure additional market sharebut, most important, to preserve existing market share."

Mr. Fine, a Chicago-based senior manager of Ernst & YoungLLP Health Care Consulting, cited two examples of the growingpower of these emerging purchasing groups.

A dozen companies, including Sears, IBM, and American Express,have formed the HMO Purchasing Coalition, which intends to contractwith only one or two HMOs in each of 27 areas throughout the countrywhere its member companies have employees.

The Pacific Business Group on Health, consisting of large employersin the San Francisco Bay area, has used its mass buying powerto obtain additional premium reductions from HMOs.

"It is these types of organizations that you are going tohave to convince as to the merits and value of the services thatyou offer," Mr. Fine said.

The growth of carve-outs as a means of purchasing the servicesof specialists is evolving, he noted, most commonly in the fieldsof oncology, cardiology, ophthalmology, and orthopedics. Thosewho pay the bills believe that limiting the number of specialiststhey contract with is an effective way of managing costs.

"Payers and managed care companies have made it clear thatthey don't want to contract with everybody who is out there,"he said. Successful competition in this kind of market requiresproviding quality service at the right price, he added. This meansproviders must carefully determine their own fixed and variablecosts, find ways to more cost effectively deliver services, andprove to potential purchasers that they have done this.

"What they are going to say is, show us that you're doingit better; show us that you're priced competitively," Mr.Fine said.

Multiyear Contracts

Large payers are now often seeking to negotiate multiyear contracts.Such contracts carry obvious risks for providers, such as inflationaryfactors and opportunity costs (lost opportunities to participatein other plans), but also offer a predictable revenue and thepotential to increase profits. Providers are also being asked,even forced by some competitive situations, to assume some ofthe financial risks of providing care, he said.

Despite these urgent warnings, Mr. Fine advised physicians andhospitals not to act too quickly out of fear of being excludedfrom managed care arrangements. "It's a risky strategy toprecipitously come up with pricing strategies and approaches withoutfully recognizing your own costs or appreciating the competitivemarket," he said.

Effective marketing requires knowing your own strengths and weaknessesand those of your competitors, as well as the needs and desiresof the marketplace. The best way to learn this is to talk directlyto the people who are potential purchasers of oncology services.

"There is no substitute for asking them," Mr. Fine said."Engage them in a dialogue that ascertains what their needsand concerns are, how they are purchasing these kinds of services,and what's important to them."

Big Buyers/Big Providers

Big buyers want to deal with big providers, a number of speakersemphasized at the meeting, whether these are community cancercenters, large group practices, or well-defined , coordinated,and cost-efficient networks of smaller group practices and oncologists.

"Initially, payers are interested in looking at organizationsthat have adequate volume in a particular area," he said."Even though you may not be in that position today, whatsteps are you taking to position yourself in the future?"

Groups seeking managed care contracts must look at such agreementsas partnerships. "There has to be a willingness to shareinformation with purchasers," he said. This can be disconcertingto some oncologists, who find they must reveal detailed financial,professional, and personnel data to others, but, he stressed,such collaboration is essential for establishment of a successfulrelationship with purchasers.