United Health Care of North Carolina

Case Study

United Health Care

U of North Carolina

Michelle Casey, M.S., and Anthony Wellever, M.P.A.

‘nited Healthcare of North Carolina (for- merly known as PHP Inc.) is a for-profit independent practice association (1PA)- model health maintenance organization (HMO) owned by United Healthcare

Corp., a national managed care firm. The HMO is based in Greensboro, N.C., with regional offices in Asheville, Cary, Charlotte, Fayetteville, and Wilmington, N.C. About 17 percent of the HMOs 160,000 commercial members reside in nonmetropolitan counties.

Greensboro, N.C., is part of the Greensboro- Winston-Salem-High Point metropolitan statistical area (MSA). The city of Greensboro has a population of 193,621, and the total population of the MSA exceeds 1.1 million.

Carolina does not require enrollees to select a primary care physician, and it allows enrollees to self-refer to specialists. All providers are paid on a fee-for-service basis. The HMOs service area has expanded in several phases. As of January 1996, it encompassed the entire state of North Carolina. This study’s site visits to Greensboro, Reidsville, Asheville, and Hendersonville, N.C., were conducted in November 1996.

An open access HMO, United Healthcare of North

Historical Development

One of the first HMOs in North Carolina, PHP Inc. was created in 1985 by a task force of the Medical Society of Greensboro to ensure local physician control of a managed care entity. Approximately 300 primary

care and specialty physicians in the Greensboro area contributed $1,000 each to capitalize development of the HMO. An additional line of credit for $1.5 million was secured to satisfy the HMO capitalization require- ments of the state insurance commissioner. After obtaining an HMO license, the owners of PHI’ decided to contract with an existing HMO to provide management services, including information services, underwriting and reinsurance. PHI? evaluated proposals from three HMOs and signed a management services contract with United Healthcare in 1985.

The success of the Greensboro venture led physicians in nearby counties to encourage PHP to expand its provider network and broaden ownership opportu- nities. In 1988, approximately 660 physicians responded to a PHP stock offer, investing $1,500 each. The $1 million infusion of capital financed the first corporate expansion of PHP in North Carolina. As it expanded its service area, PHP began to establish a system of regional offices to handle marketing and development of its provider network at the local level. During the early to mid-l990s, PHP established four regional offices in addition to its corporate headquarters, which also functions as the Greensboro regional office.

that could provide the HMO with additional capital and technical expertise. PHP agreed to be purchased by United Healthcare, the national firm that had provided PHP with management services since 1985. United Healthcare purchased PHP in March 1996 for $140 million. The physician owners of PHP sold the HMO to ensure the success of their health care delivery model in an increasingly competitive health care marketplace.

In 1995, PHP began looking for a strategic partner

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In addition to providing PHP with access to the resources of a major national managed care firm, the sale also improved the HMOs market position in North Carolina. United Healthcare integrated MetraHealth, a nationally incorporated indemnity health plan that it had purchased just prior to the PHP acquisition, into the unified plan. MetraHealth‘s North Carolina headquarters in Charlotte became one of the regional offices for the new plan. United Healthcare renamed the HMO United Healthcare of North Carolina, effective Jan. 1, 1997, and does business under the name United Healthcare of North Carolina.

The HMOs strategy of decentralizing HMO functions to its regional offices and moving senior management from its headquarters to manage the regional offices continued after the sale to United Healthcare. As of August 1996, the HMO had decentralized most of its core functions, with the exception of claims processing, to its regional offices. Each regional office now handles marketing, provider network development, provider relations, and utilization management for its region, and each is responsible for profits and losses of the plan in its region.

United Healthcare has experienced significant enrollment growth during the past two years, increas- ing in size from approximately 100,000 enrollees in mid-1994 to more than 160,000 by February 1997. It expects continued growth in the future. - Structure and Mission

United Healthcare of North Carolina’s board has six members: the CEO of the HMO, two physicians from North Carolina, and three members from the United Healthcare parent corporation. Assurance of local representation on the board was part of the purchase agreement with United Healthcare. Most of the senior management team in place prior to the purchase of the HMO has remained at the HMO. The senior management of the HMO meets monthly. Policy is developed centrally, with input from HMO staff in the field.

Marketing, network development, and case management staff in each of the regional offices report to their respective executive directors. The executive directors, in turn, report to the HMOs CEO. In the Greensboro corporate office, senior managers in charge of finance and operations for the plan-including underwriting, actuarial, claims processing, customer service, contracting, and human resources-report to

the CEO as does the sales and marketing manager for the Greensboro market. A full-time medical director supervises the medical management and health policy functions of the plan, including quality management, utilization review, health promotion, pharmacy and physician credentialing and profiling.

Rural Provider Network

The HMO has had a broad provider network since its inception. It includes all physicians in a market area who meet its credentialing standards and who agree to the HMOs terms of participation. The provider network has more than 7,000 physicians, and it continues to grow as the HMOs service area expands. The HMO has developed a provider network in 70 counties in North Carolina and currently contracts with approximately 70 percent of the primary care and specialty physicians and more than two-thirds of the hospitals in these counties.

More than one-half of the plan’s primary care physicians practice in rural areas. Mental health and chemical dependency services are provided statewide through a contract with United Behavioral Health Inc. The HMO contracts with 10 national chain pharmacies and many independent pharmacies.

dentialing processes follow national procedures developed by United Healthcare to meet National Committee for Quality Assurance (NCQA) and Joint Commission on Accreditation of Healthcare Organizations (JCAHO) accreditation standards. The HMOs credentials committee reviews physician appli- cations and does primary source verification. On-site facility and medical record reviews are conducted for all primary care physicians and for high-volume specialists. Physicians are recredentialed every two years. The HMO prefers that physicians in its network be board certified, but it has included a few rural physicians who are not board certified to ensure access to care in the areas served by those physicians. The HMO uses on-site nurse consultants when necessary to help physician practices achieve its standards, e.g., for medical records. Only a small percentage of physicians can- not meet standards and do not qualify to participate in the network. Hospitals are not independently creden- tialed by the HMO; the HMO believes that JCAHO accreditation and state licensure processes serve as sufficient quality assurance mechanisms.

Physicians are compensated on a modified fee-for-

United Healthcare of North Carolina’s local cre-

Casey and Wellever 207 Summer 1998

service basis. They have historically been subject to withholds that average 5 percent for primary care and 10 percent for specialists. The HMO is phasing out the withhold policy and replacing it with an incentive system; bonuses will be based on quality indicators and cost-effectiveness. Hospitals are compensated on either a per diem or a per case basis. Negotiations with each specific hospital define the method of payment for that hospital.

As it seeks to develop its provider network in new service areas, the HMO faces challenges not only from the rapid development of physician organizations (POs) and physician-hospital organizations (PHOs), but also from the purchase of physician practices by hospitals. In some markets, physicians are informing the HMO that they will not negotiate individually but through only the PO, PHO or, less frequently, a hospital owner.

report the number of patients seen and compare actual to expected costs. Actual costs also are compared with other physicians in the same specialty throughout North Carolina. The quarterly reports of primary care physicians and obstetricians and gynecologists also include quality scores reporting rates of immunizations, Pap smears, mammograms, etc. In its first round of clinical report cards in late 1996, the HMO focused on primary care physicians, orthopedists and cardiologists.

The HMO uses a number of medical and surgical guidelines prepared by other organizations as well as the on-line medical guideline system of its parent company, United Healthcare. As needed, the HMO can query the on-line system and obtain a printout of a guideline that it, in turn, faxes to a physician who requires additional information or consultation. The HMO also is in the process of developing and decentralizing ongoing physician education programs aimed at improving quality of care.

Management Systems

United Healthcare of North Carolina requires that care be certified as medically necessary before enrollees can be admitted to a hospital. Once admitted, enrollees are monitored concurrently by HMO staff. The HMO does not require prior authorization for specialty referrals by a primary care physician.

The utilization management functions of the HMO have been decentralized. Nurse case managers in each regional office monitor care delivered to enrollees within their region. The HMO also has established panels of regional physician peer reviewers that are available on a case-by-case basis to assist network physicians with specific problems or to improve their general utilization performance. The HMO utilizes local medical directors who are responsible for utilization management and quality improvement activities in the region.

HMO executives describe case management as a major initiative of the HMO. Patients with key condi- tions (identified either at the time of hospital admis- sion or through billing records) have their cases managed by a regional nurse case manager. When a needed service may not be locally available (e.g., home care in rural areas), the HMO arranges to provide those services, paying a transportation supplement to providers for excessive travel.

On a quarterly basis, United Healthcare of North Carolina prepares and disseminates physician performance evaluations. By physician, these evaluations

Marketing in Rural Areas

United Healthcare of North Carolina has two groups of HMO products, one targeted at the large- group market (50 or more enrollees) and the other aimed at the small-group market (fewer than 50 enrollees). In the large-group market, the HMO strives to be a total replacement vendor, offering indemnity and preferred provider organization (PPO) products under its insurance company license in addition to its HMO products. For this market, United Healthcare of North Carolina offers an HMO plan and two point-of- service plans. The HMO plan features a $10 per visit co-payment for physician visits, a $50 per visit deductible on emergency room services, and full coverage for inpatient care. The in-network coverage in the point-of-service plans resembles that of the HMO plan; the point-of-service plans differ from one another only in the amount of co-payments required. Out-of-network coverage in the point-of-service plans requires co-payments of either 20 percent or 30 percent on most services, depending on the plan.

North Carolina primarily sells two HMO plans: a point-of-service plan and a state-mandated plan for small groups (one to 49 people). The small-group HMO products require co-payments of either 20 percent or 30 percent of inpatient expenses (up to an annual out-of-pocket maximum) in addition to co-payments on physician office visits and emergency ser-

In the small-group market, United Healthcare of

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vices. The small-group point-of-service product features in-network coverage that is identical to the small- group HMO product with the lower (20 percent) co- payment; out-of-network coverage requires higher cost-sharing percentages and a higher out-of-pocket maximum than in-network coverage.

Small-group employers predominate in rural North Carolina. Of the HMOs 2,700 employer contracts, 2,000 have been sold to small-group employers. One of the HMOs marketing goals is to have a 20 percent share of the small-group health insurance market by the year 2000. To reach this goal, the HMO thinks it will have to increase its distribution network, contracting with local agents who will sell the products in rural areas.

group strategy and the rural marketing strategy are identical. With first-time purchasers in the small-group market, the HMO advises offering its point-of-service product. Because this product allows employers and employees to learn about managed care in a way that does not completely eliminate freedom of choice, the HMO considers the small-group point-of-service a transitional product. In all of the HMOs point-of-service plans, the out-of-network “leakage” is less than 5 percent. When employers and employees learn how lit- tle out-of-network care occurs, they often are willing to accept a more restrictive provider network for a decrease in premium price.

North Carolina perceives that its competitors are national indemnity insurers rather than HMOs. Few HMOs have ventured into rural areas of the state, and even fewer have a statewide rural provider network the size of United Healthcare of North Carolina’s. The HMO thinks it has a competitive edge over indemnity plans because of its lower premium prices. It attributes some of its success in rural areas to the opening of regional offices; the HMO expanded from these regional hubs in an explicit attempt to cultivate the rural market.

In the large-group market, United Healthcare of North Carolina competes with both indemnity insurers and HMOs. POs and PHOs that contract with self- insured employers have become an additional source of competition in some areas. North Carolina has experienced rapid HMO growth during the past few years. Twenty-three HMOs are now licensed in the state. The urban HMO market in.North Carolina is becoming increasingly competitive, and United Healthcare of North Carolina executives anticipate a market ”shake-

HMO marketing executives stress that the small-

In the small-group market, United HealthCare of

out” soon that, could substantially reduce the number of health plans in the state.

wage industries that traditionally have either not offered health care benefits or have offered minimal coverage. This presents a significant challenge for United Healthcare of North Carolina in marketing HMO products with comprehensive coverage for primary and preventive care. While the HMO products compare favorably on cost with indemnity products that offer similar benefits, they are more expensive than limited-coverage indemnity plans and are, therefore, less attractive to many rural employers.

United Healthcare of North Carolina plans to begin offering a Medicare risk product in the Greensboro area in early 1998, but it has no immediate plans to offer this product in rural North Carolina. HMO executives suggest that they will be cautious about such a move, given the financial experience of other HMOs that have offered Medicare risk products in rural areas.

Many employers in North Carolina operate in low-

Rural Providers

Reidsville, N.C., (population 9,399), about 30 miles north of Greensboro, and Hendersonville, N.C., (population 15,655), located about 25 miles from Asheville, N.C., are two rural communities served by United HealthCare of North Carolina. Approximately 45 primary care and 60 specialty physicians practice in Rockingham County, where Reidsville is located. With a population of 86,927, Rockingham County has two hospitals, one in Reidsville and one in Eden; for the most part, the medical staffs of the two hospitals are separate. Both hospitals and about four-fifths of the physicians in Rockingham County participate in the HMOs network.

Approximately 50 primary care physicians and 95 specialists practice in Henderson County, where Hendersonville is located. Henderson County has a population of 71,774. Two hospitals, one in Hendersonville and one in Fletcher, serve the county. Both hospitals and about two-thirds of the physicians in Henderson County are HMO partici- pating providers.

Reidsville, N.C. In Reidsville, most physicians practice in solo or small-group practices. Most Reidsville patients are referred to local specialists or to Greensboro specialists. Physicians in the community


and the hospital report that they have discussed the formation of a PHO for the purpose of negotiating with health plans. At the time of this study, they had not taken any action on forming a PHO, due in part to a lack of physician leadership and in part to physicians' concern regarding the hospital's role in the PHO.

HMO Relationships. Reidsville physicians were not part of the initial group of physicians that created PHI'. However, they were favorably inclined toward it, both because they had relationships with the physicians in Greensboro and because the HMO was physician con- trolled. In Reidsville, three provider representatives were interviewed: a solo-practice primary care physician, a primary care physician in a two-person practice, and a senior manager at Annie Perm Hospital.

In addition to United Healthcare of North Carolina, the physicians contract with several HMOs, including Partners, Provident, and Blue Cross and Blue Shield. The hospital in Reidsville also contracts with several HMOs. Both the physicians and the hospital indicated that a primary motivation for contracting with United Healthcare of North Carolina and other HMOs was to avoid losing patients, especially to providers in Greensboro. A substantial number of people living in Reidsville already go to Greensboro for medical care.

Local physicians first contracted with United Healthcare of North Carolina three to four years ago. One practice estimates that 20 percent to 25 percent of its patients are members of the HMO, and about one- half of its patients belong to an HMO. United Healthcare of North Carolina enrollees comprise about 15 percent of the other practice. The physicians are compensated by the HMO on a fee-for-service basis, with a small withhold, which typically is returned to the physicians. They find their compensation arrangements with United Healthcare of North Carolina easy to understand. One physician thinks that the HMOs with which he contracts have similar fee schedules for office visits; he is critical of all the HMOs for not allow- ing him to raise fees to cover rising costs. He has had to hire additional staff to deal with all the paperwork required by the HMOs. The other physician has found United Healthcare of North Carolina's payment amounts to be similar to his charges.

One physician anticipates that a substantial portion of plans will move to capitation within the next five years. The other physician related a bad experience he had with a capitated plan, in which the payment from the plan was not sufficient to cover costs for the small volume of patients he treated. Consequently,

he dropped the plan, and would hesitate to contract on a capitated basis again.

Both physicians rate United Healthcare of North Carolina highly on plan administration and support. One said it is the easiest HMO to deal with in terms of paperwork. He gives it positive marks for paying promptly and for not requiring written referrals to specialists,,in contrast to most of the other HMOs. Occasionally, he has had a patient complain that the plan does not allow complete freedom of choice of providers; however, only rarely has he had to change a referral because a specialist was not in the plan. He has found that a few of the pharmaceuticals he prescribed were not on the formulary, but he has had no problem substituting another product in the formulary.

The other physician compares the United Healthcare of North Carolina referral process favorably with another HMO that micro-manages referrals. That physician suggests that the referral network is adequate and, in fact, may be over inclusive. Neither physician has had problems with denial of claims.

Hospital-HMO Rela tionships. The hospital in Reidsville has contracted with United Healthcare of North Carolina for several years. Its contract generates less than 5 percent of the hospital's revenue, yet it is the largest of its HMO contracts. Medicare and Medicaid account for about 65 percent to 70 percent of the hospital's revenues. The hospital reports that it has a pretty good contracting relationship with the HMO and notes that United Healthcare of North Carolina is one of the few HMOs that will reimburse it on a per case basis, which the hospital prefers to per diem reimbursement. Because it is paid on a per case basis, the hospital regards the HMOs concurrent review process as unnecessary.

According to hospital management, the data received from United Healthcare of North Carolina is not very useful, but no other HMOs provide the hospital with useful data. Overall, the hospital does not think that affiliation with United Healthcare of North Carolina or other HMOs has had much impact on its operations. Its average length of stay has declined sig- nificantly during the past two years, which the hospital attributes primarily to declines in Medicare and Medicaid lengths of stay and not to the influence of HMOs.

Hendersonville, N.C. Most physicians in Hendersonville practice in solo or small-group practices. In addition, Hendersonville is one of four sites in Henderson County served by a Community and

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Migrant Health Center that employs six physicians and six nonphysician providers; that center serves patients from western North Carolina and parts of South Carolina and Tennessee. Many of the physicians in Hendersonville participate in an IPA developed about three years ago that includes about 95 percent of the physicians in Henderson County.

Physician-HMO Relationships. In Hendersonville, two physicians who contract with the HMO were interviewed: one in solo practice and one employed at a Community and Migrant Health Center. Hospital management and a representative of the IPA in the county also were interviewed.

with United Healthcare of North Carolina for three years. He sought to participate in the plan as a way to build up his new practice. He contracts with United Healthcare of North Carolina as an individual physician, but with CIGNA and Healthsource through the IPA, which does not contract with United Healthcare of North Carolina. About 10 percent to 15 percent of his patients are HMO enrollees, and about 40 percent to 50 percent of his patients are in managed care plans. He finds the plan’s compensation arrangements to be fair. In-plan referrals are easy with the HMO, and it was responsive in the one case in which he needed to make an out-of-network referral. He does not think that contracting with HMOs has had any impact on quality of care. However, he thinks that it has added to the costs of patients care because he has added staff time to do HMO billing.

The community health center began contracting with HMOs at the request of several small employers in the area who wanted to offer an HMO option to their employees. It contracts with several HMO plans in addition to United Healthcare of North Carolina, including Healthsource, Maxicare, Provident, CIGNA, and Blue Cross and Blue Shield. The federally support- ed Community and Migrant Health Centers and Rural Health Clinics in North Carolina have discussed forming their own HMO through the North Carolina Primary Care Association to contract directly with the state to serve Medicaid managed care patients. Currently, the Hendersonville community health center serves Medicaid patients through Carolina Access, the state’s primary care case management program. About 10 percent of the Hendersonville clinic’s patients are in HMOs or other managed care plans; approximately one-half are uninsured, and most of the rest are Medicaid or Medicare beneficiaries.

The physician in solo practice has been contracting

Due to the patient population it serves, the com-

munity health center faces some unique issues. For example, the community health center often has to ask specialists in private practice to see uninsured community health center patients. Although the community health center contracts with several managed care plans, it does not have a significant number of patients from any one managed care plan. Thus, the community health center has to deal with multiple referral procedures, formularies, and practice guidelines from the various managed care entities. Although United Healthcare of North Carolina does not require referrals to specialists, the community health center has had to add another staff person to handle referrals for other managed care plans.

The community health center finds some of United Healthcare of North Carolina’s quality initiatives to be helpful (for example, sending physicians a list of patients who are due for a mammogram) and would like to have similar information on all of its patients. Ideally, the community health center would like all of the HMOs to cooperate on the development of a formulary and referral and practice guidelines. It also would appreciate combined data from all of the plans on clinical indicators such as immunization and mammogra- phy rates for the community health center’s entire patient population. Meanwhile, the community health center is improving its own management information system to try to capture and use more information.

The IPA in Henderson County has about 150 physician members. The IPA helps physicians evaluate managed care contracts and negotiates contracts on behalf of its members with several health plans, mainly PPOs. In the future, the IPA plans to position itself for direct contracting by developing a management information system and a claims processing system.

Hospital-HMO Relationships. Margaret Pardee Memorial Hospital in Hendersonville has contracted with United Healthcare of North Carolina since 1994. Its first experience with managed care was in 1992, when it signed contracts with Blue Cross and Blue Shield’s two HMO products. The hospital also contracts with Healthsource and several PPOs. All the HMOs together account for about 10 percent of the hospital’s revenue. Medicare payments comprise about 50 percent, and Medicaid about 6 percent, of revenue.

The hospital is compensated on a per diem basis by United Healthcare of North Carolina. Its contracting experience with the HMO has been fairly positive and better than its experience with other HMOs. It describes United Healthcare of North Carolina as an HMO that deals fairly with the hospital. The HMOs


precertification and utilization review processes work reasonably well for the hospital. The hospital’s administration is uncertain whether HMO affiliation has had any impact on hospital operations and states that its cost reduction programs were not implemented to respond to HMOs. Contracting with HMOs has helped the hospital to maintain its market share and is regard- ed as necessary to avoid losing additional patients to Asheville.

The Hendersonville hospital belongs to a regional network that includes the two hospitals in Asheville as well as other rural hospitals. The hospitals in the network are self-insured and use a common third-party administrator to provide health care coverage for hospital employees. The regional network, which would like to contract directly with employers in the future, is in the process of negotiating a merger with another regional network that includes hospitals, physicians, and local health departments. - Rural Empfoyers and Employees

Three employers were interviewed in Rockingham County, two of which purchase United Healthcare of North Carolina products. The one that did not, Rockingham County government, purchases PPO coverage from the North Carolina Association of County Commissioners Health Insurance Trust, a fund admin- istered by Sedgwick James of the Carolinas with claims processed by Blue Cross and Blue Shield of North Carolina. In Henderson County, two employers were interviewed who purchase United Healthcare of North Carolina products.

Reidsville, N.C. Employer A, a local service indus- try employer, offers only one United Healthcare of North Carolina product and no other health insurance options. In 1995, Employer A offered a United Healthcare of North Carolina point-of-service product but dropped it because of cost and because so few employees used out-of-network services. Employer B, a local subsidiary of a national manufacturing firm, offers two plans (a second HMO and an indemnity plan) in addition to the United Healthcare of North Carolina plan. The majority of Employer B’s employees are enrolled in the United Healthcare of North Carolina plan; a handful enrolls in the rival HMO, and only one employee is enrolled in the indemnity plan. Employer B planned to replace the indemnity plan in January 1997 with a United Healthcare of North

Carolina point-of-service product. The benefits of the two HMOs offered by Employer B are nearly identical. United Healthcare of North Carolina is more popular than the other HMO plan because it has a wider network and is marginally less expensive.

Employer A contributes an amount equal to 65 percent of the cost of individual coverage; the employee is responsible for premium costs exceeding that amount, regardless of the coverage selected. Due to low wage rates and the high level of employee contributions to the premium, one-third of the eligible employees elect- ed not to accept health insurance coverage provided through Employer A. Instead, they use the coverage provided by a spouse or a parent, or they have no coverage. Employer B pays 82 percent of the premium for a single employee, 56 percent for a double plan, and 41 percent of the amount for family coverage.

Employer A purchased Blue Cross and Blue Shield coverage before changing to United Healthcare of North Carolina in 1994. In 1997, it plans to begin a process of annual evaluation and selection of health benefits vendors. The selection decision will be made by the director of personnel, the associate executive director, and the executive director. The criteria for selection have not been finalized, but price will play a paramount role. In selecting its health insurance vendors, Employer B accepted proposals from a number of firms. Price, the extent of the network, and the actual or likely ”relationship with plan administration” were factors in the selection of plans. Employer B evaluates its health insurance benefits annually and does not include employees in the decision-making process. The corporation employs a managed care consultant to assist local subsidiaries in the selection of health plans.

Both Employers A and B are satisfied with United Healthcare of North Carolina’s products, service, and price. Employer A remarked positively on the quality of services. This sentiment is echoed by Employer B who observes that the HMO had not increased its premium rate in five years, that its open access feature was well received by employees, and that the quality of services was good.

mary care services under United Healthcare of North Carolina--even though it is an open access model- than under previous indemnity plans. Employer A, in contrast, said that co-payments on preventive and primary care visits negatively affect employees’ use of those services. Both employers describe the co-payment for emergency room services ($50) as too high and think the prospect of denial of coverage is too

Employer B cited higher use of preventive and pri-

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great. They also remark that their employees have complained about the restrictiveness of the United Healthcare of North Carolina pharmaceutical formulary. Employees have had to pay the full cost of prescrip- tions written by their physicians for drugs not included in the HMOs formulary.

Hendersonville, N.C. Both of the employers interviewed for this study in Hendersonville are owned by out-of-state corporations that have many subsidiaries. All of Employer A's 470 full-time employees are eligible to select one of four health insurance plans. Two of the plans are offered by United Healthcare of North Carolina; one is an HMO, and the other is a point-of- service product. Neither plan features a deductible, but both plans collect co-payments of $10 per office visit and 20 percent on inpatient charges to a maximum of $1,500 (single) for in-network care. Out-of-network care is not covered for HMO enrollees, but point-of- service enrollees may chose out-of-network providers and pay a co-payment of 30 percent on both inpatient and outpatient services.

Employer A's other two plans are self-insured indemnity plans, which differ in the level of employee cost sharing. The plan with the richer benefits features a deductible of $200 per individual ($400 for families) and co-payments of 20 percent on outpatient services (except outpatient surgery, where inpatient rules apply). All inpatient costs are paid if preauthorization for services is obtained. Without preauthorization, the employee is responsible for a 20 percent co-payment. The other plan has deductibles of $300 per individual and $600 per family, plus 20 percent co-payments on all services to an annual out-of-pocket maximum of $1,200 for individuals and $2,400 for families.

of the two United Healthcare of North Carolina plans. Fifty-two percent of the employees chose the indemnity plan with a smaller deductible and lower cost sharing. Despite the popularity of this plan, Employer A intends to phase it out by the end of 1999. Only 5 percent of the employees use the other indemnity plan.

The premium price of the United Healthcare of North Carolina HMO plan is approximately 30 percent lower than the amount of the higher-cost indemnity plan and 25 percent lower than the lower-cost indemnity plan. Employees pay about only 7 percent of the premium across all plans.

Employer B offers two health benefit choices to its 68 full-time employees, a United Healthcare of North Carolina HMO product and an indemnity plan. None

Forty-three percent of the employees selected one

of the eligible employees has selected the indemnity plan, whose premium is substantially more than the HMO; the employee's contribution to the premium averages 20 percent. The HMO plan has no deductible, and enrollees make co-payments of $10 for office visits.

Neither of the employers studied makes health benefit purchasing decisions locally. All such decisions are made at corporate headquarters, following a process of obtaining and analyzing requests for proposals from national and local insurance companies. Having decided to offer its employees an HMO option at every location where it is possible to do so, Employer A adopted a sophisticated annual review process. In April of each year, requests for proposals are sent to all competing vendors. Local subsidiaries help identify possible local HMOs. The requests for proposals collects information on various aspects of HMO organization and performance, including financial stability, community rating, ownership, medical management practices, access, number and proportion of board-certified physicians on the provider panel, NCQA status, and Health Plan Employer Data and Information Set indicators.

A health plan management consultant evaluates the proposals using a criteria-based point system to rate the HMOs. All HMOs that receive qualifying scores are visited by a team composed of Employer A staff and the consultant. At the site visit, the HMO is asked to review the proposal with the team. The team also meets with executives and middle managers of the HMO during the eight-hour site visit. Site visit criteria are assigned point values, and the HMO with the high- est score is the recommended plan.

the corporation, no HMOs are available to serve its employees because local providers are unwilling to contract with HMOs. In these instances, Employer A, working individually or in concert with other local subsidiaries of national corporations, has been successful in encouraging local providers to contract with HMOs.

Healthcare of North Carolina, citing the low premi- ums, the breadth and openness of the provider panel, and the quality of customer service. Employer B said that the HMO had reduced out-of-pocket expenses of employees, and that employees used fewer services under the HMO due to the plan's preventive health philosophy. Employer B relates that the transition from an indemnity plan to an HMO was an easy adjustment for its employees because there was no paperwork (the paperwork burden for the previous indemnity plan

Employer A reports that, in some rural locations of

Both employers are satisfied with United


was enormous), and the details of the plan were easy to understand. Both employers cite the restrictiveness of the United Healthcare of North Carolina pharmaceutical formulary as the most frequent employee complaint.

Employees. Four employees who are enrolled in United Healthcare of North Carolina through the same employer were interviewed regarding their experiences and satisfaction with the HMO. United Healthcare of North Carolina is the only plan currently offered to these employees. Previously, the employees were either uninsured or covered by the plan of a spouse. Although satisfied with the scope of the provider network and the range of benefits, the employees expressed dissatisfaction with the cost of coverage, the restrictiveness of the pharmaceutical formulary, and the prior authorization procedure required for emergency room services.

The cost of coverage is a function of both company policy (which does not pay the cost of the premium in full) and the co-payment provisions of the plan. The plan under which these employees were covered called for co-payments on most services up to an out-of-pocket maximum amount. The co-payment amount--except for the $50 co-payment on emergency services-was of less concern to these employees than their portion of the premium cost.

premium seemed to grow with the scope of coverage; those with double or family coverage were more unhappy than those with single coverage.

Two of the four enrollees would recommend United Healthcare of North Carolina coverage to family and friends. One would recommend it with the reservation that one’s income should be sufficient to support the employee’s share of cost. The fourth employee would not recommend it all because she perceived that the restrictive formulary caused her physician to alter her treatment regimen from one that was successful to one that was less successful.

Employees’ dissatisfaction with their portion of the

Summa y

Physicians. While many of the rural physicians interviewed in North Carolina would prefer not to deal with HMOs at all, they are generally positive about their relationships with United Healthcare of North Carolina. These physicians chose to contract with the HMO to obtain new patients and to retain existing

patients. They are satisfied that their participation has accomplished these goals. Their reimbursement arrangements are easy to understand, and most view the payment amounts as satisfactory. The physicians regard the size of the HMOs provider network and the open-access structure of the HMO as positive features that allow them to make referrals without the restric- tions imposed by some other HMOs.

To date, participation in United Healthcare of North Carolina has imposed few burdens on rural physicians. They are reimbursed on a fee-for-service basis, and their financial risk has been limited. They do not perceive that the HMO has had a significant impact on the way they practice medicine. This situa- tion may change in the future if enrollees from United Healthcare of North Carolina and other HMOs consti- tute a greater proportion of their practices and if these HMOs move toward capitated reimbursement. The attitudes of rural physicians toward United Healthcare of North Carolina also may change if the HMO attempts to more actively manage the care provided to its enrollees.

United Healthcare of North Carolina plans to eliminate physician risk sharing (in the form of withholds) and replace it with bonus payments. As one HMO executive said, the plan wants to ”put incentives where they belong.” If rewarding good performance instead of punishing poor performance yields intended conse- quences, it may provide United Healthcare of North Carolina with a competitive advantage in rural areas. First, because such a change offers an opportunity to augment a physician’s income instead of diminishing it, physicians might prefer to contract with the HMO rather than with other HMOs. Second, because bonus payments depend on performance, United Healthcare of North Carolina providers may produce outcomes that allow reductions in premium prices or expansions of benefits compared with the HMOs competitors.

Hospitals. Rural hospitals cited similar motiva- tions (attracting and retaining business) for participat- ing in United Healthcare of North Carolina and similar levels of satisfaction with their relationships. In their experiences, the HMO has been fair in its negotiations and reimbursement. Although they contract with multiple HMOs, these rural hospitals do not perceive that HMO participation has had a significant impact on hospital operations. Because these hospitals, like many rural hospitals, rely heavily on Medicare (and, to a lesser degree, on Medicaid) as revenue sources, the future impact of managed care on their operations will

208 Vol. 14, No. 3 The Journal of Rural Health

depend in large part on the extent to which significant proportions of their Medicare and Medicaid patients enroll in HMOs.

Employers. Until recently, employers in rural areas of North Carolina who wished to purchase health insurance on behalf of their employees were limited to choosing coverage from available indemnity insurers. Some employers, particularly local affiliates of national firms, wanted to offer their employees a choice of health insurance benefits, including PPOs and HMOs. United Healthcare of North Carolina responded to rural employer demand by adopting a marketing plan that explicitly recognized the deficiencies of the rural health insurance market. United Healthcare of North Carolina decided to compete with indemnity insurers in rural areas of the state, targeting small employers. The marketing strategy has been successful; the HMOs provider panel is sufficiently broad so employees who enroll in the plan do not have to change physicians, and the premium price of the HMO, in most cases, is below the premium price of indemnity insurance. Thus, employers can reduce their benefit costs while offering their employees more comprehensive health insurance benefits.

The regionalization of United Healthcare of North Carolina supports the rural marketing plan. Employers indicate that regional HMO staff are available to solve problems and are responsive to the needs of employers and employees. Although the HMO is a statewide organization owned by a national firm, decentraliza- tion of customer and provider relations to regional offices has given the HMO a ”local face.”

insurance agent who increasingly sells United Healthcare of North Carolina products to rural employers. Many small employers have long-standing relationships with local insurance brokers who play a variety of roles for them, including agent, consultant and administrator. These employers rely on the advice of their insurance agents. Selling through community insurance agents helps promote the HMOs local flavor.

Although it concentrates on the small employer market, United Healthcare of North Carolina also sells to larger employers in rural areas who are affiliates of national firms. Unlike smaller employers, these employers require no managed care education. Sophisticated purchasers of health care benefits, they actively seek out managed care vendors. These firms typically accept proposals locally but evaluate them nationally, frequently using the expertise of managed care consultants. For such employers, the choice is not

Another element of the rural strategy is the local

between United Healthcare of North Carolina and an indemnity plan but between it and another HMO. To date, United Healthcare of North Carolina has had an advantage over other HMOs in rural areas by virtue of the size of its provider network. As the HMO market in North Carolina matures and competition among HMOs increases, this advantage is likely to diminish.

Employees. The rural employees covered by United Healthcare of North Carolina are generally satisfied with their coverage. The HMOs large provider network means that they do not have to change doc- tors when they enroll in the plan. The open access feature of the plan eliminates the need for employees to obtain referral authorization before seeking care from a specialist. Employees also enjoy first-dollar coverage on a number of preventive services, some of which were not covered by previous indemnity plans.

Employee dissatisfaction with the HMO focuses primarily on aspects of the plan that are not exclusive- ly within the control of the HMO. Those employees interviewed think that their portion of the premium is too high and that the cost-sharing provisions of the contract are too onerous. The proportion of the premium that employees pay is determined by company policy and not by the HMO. For small-employer HMO plans, co-payments are required by state law; the level of the co-payments is determined by the plan the employer selects. In both cases, however, employees view the HMO as the problem. One source of employee dissatisfaction that is attributable to the HMO is the perceived restrictiveness of the pharmaceutical formulary; this issue was mentioned by every employer and by three of four employees interviewed.

Future Issues for United Healthcare of North Carolina

A primary issue facing United Healthcare of North Carolina is whether its purchase by a national managed care firm will alter its relationship with rural providers, employers and employees and, if so, in what way. Prior to its acquisition by United Healthcare, PHP had operated in North Carolina for more than 10 years and had developed a statewide reputation and name recognition. PHP’s structure as a physician-developed and physician-owned plan set it apart from many of the national HMO firms that have recently entered the HMO market in North Carolina and may have assisted in development of the HMOs provider network in rural areas.


A few of the providers interviewed raised the issue of the United Healthcare purchase, and one expressed concern that the change in ownership would result in a more aggressive contracting stance on the part of the HMO. The HMO recognizes that providers may have concerns about the change, and it has been trying to inform providers about the benefits of the purchase, such as expanded access to resources, technology and capital.

Part of the success United Healthcare of North Carolina has enjoyed in rural areas is due to its ability to contract with rural providers. The willingness of rural providers to contract with the HMO has been due, in part, to lenient utilization management and quality assurance procedures and to a lack of restric- tions on referrals. To the extent that utilization, quality, and referral policies become more stringent in the future, the HMO may find it more difficult to maintain positive relationships with rural providers. Many rural physicians in North Carolina still practice in solo or small-group practices; therefore, the HMOs future success in contracting also may depend, in part, on the degree to which rural physicians in solo or small- group practices join with others in POs and PHOs and choose to have these organizations negotiate on their behalf with managed care plans.

In some of United Healthcare of North Carolina's recent rural expansion areas, there has been no previous managed care development at all. Thus, in these regions, the HMO will have to build its provider network and its enrollee base from the ground up. The HMO faces a challenge that may be experienced by

other HMOs as they seek to expand to rural areas previously unserved by HMOs. Providers in these rural areas often are reluctant to participate in the HMO provider network unless a significant number of their patients or potential patients are already enrolled in the HMO. At the same time, many rural employers are hesitant to offer HMO coverage without a guarantee that the HMO has a sufficient number of local providers in the network.

Another major issue for United Healthcare of North Carolina is increased competition from other HMOs. North Carolina is a rapidly developing managed care market. Commercial HMO enrollment in the state increased 27 percent from December 1995 to June 1996. As of March 1997, North Carolina had 23 HMOs licensed to provide or arrange for a full range of medical services and four HMOs licensed to provide or arrange for a single line of business. United Healthcare of North Carolina executives anticipate a market shake out that may result in several HMOs exiting the North Carolina market in the near future.

ened competition on United Healthcare of North Carolina, and the subsequent effect on rural areas, is not clear at this time. The strong position of United Healthcare of North Carolina in some rural areas of the state may diminish as the HMO is forced to compete with other HMOs. The overall effect of HMO competition in rural areas, however, may be to drive indemnity plans from the field, especially if HMOs lower their premium rates in reaction to heightened competition.

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The effect of HMO market maturation and height-

The \ournaZ of Rural Health 210 Vol. 14, No. 3

Documents

United Health Care of North Carolina