regional markets issue brief June 2016 San Diego: Major Providers Pursue Countywide Networks and New Patient Care Models Summary of Findings San Diego has long been a geographically well-defined health financial performance, as has Kaiser Permanente. Kaiser’s care market with high managed care penetration and a consol- presence in the market is growing, with its health plan idated provider sector. In recent years, hospital systems have now covering one in five insured county residents. UC San faced increasing cost pressures as commercial health plans Diego Health (UCSD) has increased both patient volume have responded to employer demands for more affordable and financial margins in recent years, in part by expand- premiums by offering limited-network health maintenance ing affiliations with community providers to gain more organization (HMO) and high-deductible preferred provider tertiary referrals. In contrast, most of the smaller hospitals organization (PPO) products. In the health care safety net have been losing volume and struggling financially; some for low-income people, providers expanded capacity to deal also lack the major capital needed to comply with state with the large Medi-Cal expansion that began in 2014, but seismic regulations, raising doubts about their future. continue to grapple with how to provide adequate care for a new enrollee population that is far sicker, with more complex medical and social service needs, than their previous patient base. Key developments include: ▶▶ ▶▶ Major systems pursuing population health strategies. Kaiser, Sharp, and Scripps are building countywide networks that can manage care efficiently enough to compete vigorously for coveted commercial and Medicare Advantage patients. While Kaiser and Sharp have long focused on these approaches, population health represents Market positions shifting slightly among major hospi- a major strategic shift for Scripps. Systems are increasingly tal systems. The hospital market remained largely stable using provider-sponsored health plans to take full risk for in recent years, with no major closures, acquisitions, or more patients; Sharp’s long-established plan expanded its affiliation changes. However, the competitive positions market presence in 2014, while Scripps obtained an insur- of the two largest systems did change somewhat, with ance license in 2015. These systems all have expanded Sharp Healthcare gaining and Scripps Health losing both their clinical footprints into areas of the county where they inpatient and outpatient market share. Payers’ increasing had little or no previous presence — most notably the fast- emphasis on provider affordability and value has strength- growing North Inland region. These expansions have been ened Sharp’s market position, while it created challenges focused on development of ambulatory facilities and ser- for Scripps — historically a higher-cost system. Despite vices, with the aim of increasing access and convenience cost pressures, both systems continue to achieve strong for patients and reducing costs for the systems. ▶▶ Private practice increasingly less viable for physicians, Medi-Cal payment rates, and the multiple, complex, and particularly in primary care. Low reimbursement from challenging health needs of many new Medi-Cal enrollees. public and private payers, along with the long and unpre- ▶▶ dictable work hours required in independent practice, are themselves and with hospitals. Twelve Federally Qualified leading many primary care physicians (PCPs) to choose Health Centers (FQHCs) belonging to San Diego’s clinic employment at system-affiliated groups over the auton- consortium recently announced a collaboration, Integrated omy of small practices. This trend, also present in other Health Partners of Southern California, that will conduct California markets, poses a threat to independent practice unified contracting with Medi-Cal managed care plans associations (IPAs), with many seeing a decline in their and aim to build a clinically integrated network with the PCP membership base and commercial HMO volume. goal of improving quality and efficiency. With the state However, the market’s largest IPA, Sharp Community expected to replace its current method for paying FQHCs Medical Group, has been able to adjust successfully so far, with a new capitated approach over the next few years, the by expanding geographically and adding sizable primary new partnership is an effort to prepare the diverse group of care practices as members. To accommodate PCPs seeking clinics to assume financial risk for patient care. Individual the stability and security of employment but reluctant FQHCs continue to form — or at least explore — more to join a large group, Sharp is launching a new practice collaborations with hospitals; several of these joint efforts model, SharpCare Medical Group, whose members will are focused on linking low-income hospital patients to practice in relatively small, community-based settings and sources of primary care as a way to relieve hospital ED will belong to the Sharp Community Medical Group IPA overuse and prevent avoidable readmissions. for managed care contracting. ▶▶ Community clinics increasingly collaborating among ▶▶ Large Medi-Cal expansion exposes safety-net access Mixed views of county government’s safety-net role. San Diego County’s commitment to providing health gaps. In the two years since Medicaid eligibility was care for low-income residents has long been limited. The first expanded under the ACA, San Diego’s Medi-Cal county sets stringent eligibility criteria for subsidized managed care enrollment almost doubled, to a total of health services, and it operates neither a county-run hos- nearly 700,000. The county’s strong, stable network of pital nor primary care clinics. While the county provides community clinics increased their capacity substantially both inpatient and outpatient behavioral health services to prepare for surging demand from the expansion. As for low-income residents, hospital systems expressed frus- a result, although clinics did face primary care capac- tration that the county’s limited funding for these services ity constraints, these appeared less severe than in some has shifted costs onto their own organizations. In recent other California communities. However, many Medi-Cal years, the county Health and Human Services Agency enrollees without a regular primary care provider sought (HHSA) has played an increasing role in collaborations to care at hospital emergency departments (EDs). Access improve health care for low-income people, including ini- gaps for many kinds of specialty care and behavioral health tiatives to link health services with related social services, care were more severe, reflecting not only the shortage of such as food and housing. Some HHSA collaborations many of these providers in the county overall, but also the extend beyond the safety net, including a joint effort with lack of willingness among many providers to accept low local hospital systems to reduce readmissions among highrisk Medicare beneficiaries. 2 Market Background San Diego County occupies an area of more Table 1. D emographic and Health System Characteristics: San Diego vs. California San Diego California POPULATION STATISTICS, 2014 than 4,500 square miles, with well-defined geo- Total population 3,263,431 38,802,500 graphic boundaries: the Pacific Ocean to the Population growth, 10-year 11.2% 9.1% Population growth, 5-year 6.9% 5.0% west, Mexico to the south, the desert to the east, AGE OF POPULATION, 2014 and Marine Corps Base Camp Pendleton to the Under 5 years old 6.7% 6.6% north (see map on page 23). With 3.3 million Under 18 years old 23.5% 24.1% 18 to 64 years old 61.5% 63.1% 65 years and older 15.0% 12.9% Asian non-Latino 10.2% 13.3% Black non-Latino 4.7% 5.5% Latino 33.2% 38.9% White non-Latino 47.2% 38.8% residents, it is California’s second most populous county. The county’s population grew by 11% over the past decade, moderately faster than the state’s average growth rate. San Diego is somewhat less racially and ethnically diverse than the state as a whole, with a higher proportion of white residents and lower proportions of Latino, Asian, and foreign-born residents. County residents have moderately higher education and income levels, on average, RACE/ETHNICITY, 2014 Other race non-Latino 4.7% 3.5% 25.5% 28.5% High school diploma or higher, adults 25 and older 86.8% 83.4% College degree or higher, adults 25 and older 40.5% 37.9% 14.1% 17.1% Foreign-born EDUCATION, 2014 HEALTH STATUS, 2014 Fair/poor health Diabetes 6.9% 8.9% Asthma 15.6% 14.0% 5.6% 6.1% Below 100% federal poverty level 16.7% 18.4% Below 200% federal poverty level 37.3% 40.7% Household income above $100,000 22.3% 22.9% 6.4% 7.5% Private insurance 53.8% 51.2% Medicare 11.9% 10.4% declined substantially, from 63.9% to 53.8%. Medi-Cal and other public programs 23.6% 26.5% The key factors driving this trend include the Uninsured 10.7% 11.9% 211 194 than state residents. In recent years, the county’s unemployment rate consistently has been lower than California’s overall rate by more than a full percentage point. (See Table 1.) The county’s health insurance coverage mix Heart disease, adults ECONOMIC INDICATORS, 2014 is slightly more favorable than the state average. Unemployment rate However, from 2007 to 2014, the proportion of HEALTH INSURANCE, ALL AGES, 2014 San Diego residents covered by private insurance ACA making many low-income residents eligi- PHYSICIANS PER 100,000 POPULATION, 2011 Physicians ble for Medi-Cal, an aging population becoming Primary care physicians increasingly eligible for Medicare, and employer- Specialists 64 64 147 130 181.8 HOSPITALS, 2014 sponsored coverage eroding during the major Community, acute care hospital beds per 100,000 population† 155.6 recession of the late 2000s and not completely Operating margin, acute care hospitals* 7.8% 3.8% 58.2% 53.0% recovering afterward. While San Diego is more affluent than Occupancy rate for licensed acute care beds† Average length of stay, in days† Paid full-time equivalents per 1,000 adjusted patient days* 4.3 4.4 16.1 16.6 $3,179 $3,417 California overall, large socioeconomic dispari- Total operating expense per adjusted patient day* ties exist within the county. Generally, northern *Kaiser excluded. †Kaiser included. regions of the county are much more prosper- Sources: US Census Bureau, 2014; California Health Interview Survey, 2014; “Monthly Labor Force Data for California Counties and Metropolitan Statistical Areas, 2014” (data not seasonally adjusted), State of California Employment Development Department; “California Physicians: Supply or Scarcity?” California Health Care Foundation, March 2014; Annual Financial Data, California Office of Statewide Health Planning and Development, 2014. ous than the central city and southern regions. 3 The six regions defined by the county’s Health and Human region, each accounted for 9%. Smaller inpatient facilities Services Agency, ranked from most to least affluent, are: include Rady Children’s Hospital, which dominates inpatient ▶▶ pediatrics; Tri-City Medical Center, a district hospital in the North Central (also popularly known as Central North Coastal region; and for-profit Prime Health Care’s two Coastal). Includes coastal community of La Jolla. hospitals, Alvarado and Paradise Valley. Wealthy, well insured. ▶▶ ▶▶ Although the hospital sector has been largely stable, a North Coastal and North Inland. Not as wealthy as gradual shift in market positions between the two dominant La Jolla, but generally affluent and well insured. North systems has taken place in recent years. Sharp’s share of both Inland reportedly has fastest-growing population in inpatient and outpatient volume increased, while Scripps’ the county. share declined. Sharp, which has long embraced capitation and its role as a lower-cost, more integrated delivery system, East. Middle-of-the-road on economic indicators, has seen its market position strengthening as both public and also fast growing. ▶▶ ▶▶ private payers have increasingly emphasized provider afford- South. High rates of poverty and uninsured; highest ability and value in recent years. Those same market forces proportion of Latino residents. Community of have created challenges for Scripps, historically a higher-cost National City has highest unemployment rate in the provider that thrived under fee-for-service payment. (See county. Sharp and Scripps sections below for more detail.) Kaiser’s presence in the San Diego market has expanded in Central. Includes core urban areas of the city of San recent years, as enrollment in its health plan grew significantly. Diego. Highest rates of poverty and uninsured; highest About one in five insured county residents is estimated to have proportion of African American residents; very diverse Kaiser coverage, and the proportion is higher for the coveted region containing areas of wealth and affluence as well commercially insured population. Kaiser’s growing market as poverty. presence is not reflected in its share of inpatient volume, which has declined as its share of health plan enrollment has Incremental Competitive Changes Within Largely Stable Hospital Market increased. In part, this disconnect stems from Kaiser’s policy Strong, well-established systems continue to anchor San services to other systems, most notably cardiac surgery to Diego’s hospital sector, which has been defined largely by its Scripps and general inpatient beds to Palomar. A broader stability. No major closures, acquisitions, or other organiza- reason for the disconnect is that Kaiser’s business model does tional changes took place over the past few years.1 The hospital not rely on inpatient facilities to drive profits, as is the case sector is characterized by substantial consolidation: Its two under fee for service; instead, its hospitals serve as cost centers largest systems — Sharp Health Care and Scripps Health — in a model where Kaiser’s health plan takes full financial risk. each with four general acute care hospitals, accounted for As a result, Kaiser continuously seeks to improve on already 30% and 26%, respectively, of inpatient discharges in 2014.2, 3 efficient hospital utilization and has been able to do this while The county’s next-largest systems have a much more limited it expands health plan enrollment. of continuing to outsource a significant volume of inpatient inpatient presence: UC San Diego Health (UCSD) had 11% Along with Sharp, UCSD has seen its share of both inpa- of inpatient discharges in 2014, while Kaiser Permanente and tient and outpatient volume increasing in recent years. After Palomar Health, a district hospital system in the North Inland long functioning as a standalone academic medical center, 4 in recent years UCSD has stepped up efforts to collaborate a margin of 12.3%.4 Sharp’s margins, which were modest in with community providers — both physician organizations the late 2000s, have improved markedly over the past five and smaller community hospitals — a strategy that report- years or so. Its 2014 margin of 10.8% was in line with recent edly has helped boost tertiary referrals to the UCSD system. performance. After several years of breaking even or running UCSD’s first affiliation — with Rady Children’s Hospital and deficits, UCSD achieved a margin of 6.6% in 2014 — not its network of pediatric specialists — dates back to the early on par with the two dominant systems, but still robust.5 2000s and was tightened in the late 2000s. More recently, Kaiser does not report financial results at either the individual UCSD has formed affiliations with Eisenhower Medical hospital or local market level, but the system as a whole has Center and El Centro Regional Medical Center in neigh- achieved strong financial performance for several years in a boring Riverside and Imperial Counties, respectively, and row while increasing health plan enrollment. Tri-City Medical Center in San Diego County (see below). In contrast to the large systems, most of the smaller hospitals have experienced financial struggles to varying degrees. Large Systems Fare Well Financially, While Most Smaller Hospitals Struggle The lone exception was Rady Children’s Hospital, which Despite significant consolidation, the San Diego hospital pediatrics to achieve a 9% margin in 2014. Palomar’s perfor- sector historically has been characterized by relatively low mance has fluctuated: After four straight years of achieving hospital unit prices, according to market observers. They operating surpluses, the system reported deficits in 2013 and attributed this in part to the local economy being largely 2014 (3.7% and 0.9%, respectively). Multiple respondents composed of small to mid-sized firms that one market expert suggested that Palomar had overextended itself in building described as “very price-conscious . . . [because] for the most a third hospital, which opened in 2012, and had too many part, you’ve never had concentrations of high-margin, high- inpatient beds. In a move aimed at rightsizing the system and wage [businesses] here that you see in . . . San Francisco or reducing its cost structure, Palomar’s board voted in mid- Silicon Valley.” As a result, San Diego’s commercial insurance 2015 to close Palomar’s old hospital (the original Palomar sector has never tended to be a “pass-through environment” Medical Center) in downtown Escondido and move its ser- in which payment rate increases to providers can easily be vices to the system’s remaining two hospitals, primarily to the passed on to employers as premium increases of the same new Palomar Medical Center in west Escondido. continued to leverage its dominant position in inpatient magnitude. Compounding these rate pressures from private Despite its recent mixed financial performance, Palomar’s purchasers and payers have been low Medicare and Medi-Cal position is still stronger than those of other small hospitals payment rates. in the market, in large part because its two hospitals occupy Hospital executives reported that payers were continuing the North Inland submarket, which has no other inpatient to exert downward pressure on rates and described having to facilities and is home to a fast-growing commercially insured make concerted, ongoing efforts to reduce both clinical and population. One result is that Palomar has an ongoing con- administrative expenses in order to achieve positive financial tract to supply more than 100 inpatient beds to Kaiser at results. Despite those pressures, however, San Diego’s largest Palomar Medical Center. Palomar also benefits from an systems continued to turn in impressive hospital operat- affiliation with the county’s largest IPA, Sharp Community ing margins in 2014, the most recent year for which public Medical Group, which has expanded its North Inland pres- data are available from the state. Scripps — which has long ence in recent years and participates in managed care contracts achieved high margins — continued that trend in 2014, with alongside Palomar (see below). One potential concern for 5 Palomar is that Kaiser’s North County enrollment may grow Market observers suggested that keeping these inpatient facil- enough that Kaiser decides to build its own hospital in the ities open beyond 2030 might be possible only if the state area, perhaps within the next decade.6 The loss of the Kaiser relaxes its current seismic requirements. contract would pose a serious setback for Palomar, according New Inpatient Facilities Come Online to market observers. The other small hospitals — Tri-City and Prime Health Most hospital systems in the region either recently completed Care — both reported operating deficits of around 4% in construction or are currently engaged in construction, partly 2014, after several years mostly running deficits of varying to meet seismic requirements and partly to pursue other magnitude. In recent years, Tri-City has lost volume to larger major strategies such as enhancing key service lines. Palomar rivals — most notably Scripps and Palomar, which both became the first system in San Diego to meet full seismic operate hospitals in adjacent service areas and have expanded compliance when it opened the new Palomar Medical Center physician networks and ambulatory facilities into Tri-City’s in west Escondido in 2012. Other notable construction proj- service area. In late 2015, Tri-City announced an affiliation ects include Scripps’ Prebys Cardiovascular Institute, which with UCSD, surprising some market observers who believed opened in 2015 and became the main facility for one of the a partnership with Scripps or Sharp might be a better fit. Tri- system’s highest-priority service lines, combining cardiac City has been facing management turmoil, with its board services previously provided at two other Scripps hospitals. voting in March 2016 to oust the CEO, who had held the Kaiser members make up a large share of Prebys patients, position for less than two years, and to elevate the CFO to reflecting a long-term arrangement under which all of Kaiser’s that role.7 cardiac surgery needs are provided by Scripps. Slated to open Prime’s business model reportedly has long involved in late 2016 is UCSD’s new Jacobs Medical Center, which avoiding contracts with commercial health plans, instead cap- will house three specialty hospitals under one roof: advanced italizing off of high billed charges to those plans when Prime surgery, cancer care, and women and infants. The new facility hospitals “capture” their patients through emergency admis- is located on UCSD’s Thornton campus in wealthy La Jolla, sions. Recently, health plans and capitated providers have where UCSD has been expanding since 2008. UCSD has con- become much more proactive in repatriating their patients currently reduced services on its Hillcrest campus in central from Prime facilities back to the hospitals in their own net- San Diego, a service area with a far less favorable payer mix. works — a development that one observer suggested might Sharp has been renovating and upgrading several facilities, be a key factor behind Prime’s weakening financial perfor- including converting its Mary Birch Hospital for Women & mance. Another observer noted that Prime recently has been Newborns to all private rooms. Sharp Grossmont Hospital (a seeking more health plan contracts, a reversal of its longstand- district hospital in East County operated by Sharp) is under- ing approach. going extensive taxpayer-financed expansions. These include Seismic compliance issues loom large for Tri-City and the construction of a new Heart & Vascular Center, sched- Prime’s two hospitals. Neither of these hospitals meet seismic uled for completion in late 2016, and a new surgical floor, standards beyond 2030. The amount of capital needed to slated to open in 2018. Sharp Chula Vista Medical Center make them compliant appears prohibitive for both systems will undergo a major expansion, with its new Ocean View and would likely act as a major deterrent to acquisition as Tower, featuring private patient rooms and high-tech operat- well. Voters in Tri-City’s district reportedly twice rejected ing rooms, scheduled to open in 2020. bond issues to finance construction to meet seismic standards. 6 Systems Focus on Ambulatory Expansions Kaiser is building its second hospital in the county: a 550-bed facility in Kearny Mesa, scheduled to open in early Despite the high-profile launch of some new inpatient 2017. The new hospital supports Kaiser’s growing health plan facilities, most hospital systems have been more focused on enrollment, which topped 600,000 in early 2016. Kaiser’s expanding their presence in a wide variety of ambulatory overall plan for San Diego reportedly calls for a total of three settings. This shifting emphasis from inpatient to ambula- hospitals in the county by 2030. When the new Kearny tory care — driven by changes in both medical technology Mesa hospital opens, some services from Kaiser’s existing and payment incentives — is consistent with trends seen in hospital (commonly known as Zion) will be relocated to the markets elsewhere across the state and the country. In San new hospital, and Zion will undergo major renovation, with Diego, the large systems — Sharp, Scripps, and Kaiser — all its rooms converted to private rooms. As of early 2016, also have been expanding their clinical footprints to cover Kaiser had not announced whether any of its currently out- areas of the county where their presence had been limited sourced services would be brought in-house after the new until recently. These geographic expansions have helped hospital opens. Most observers expected Kaiser to continue serve the systems’ population health strategies (see “Systems using Palomar for inpatient beds because of the significant Pursue Population Health Strategies” below) and include the distance and travel time between Kearny Mesa and most of development of physician networks by acquiring practices the North County locations where Kaiser members are con- outright as well as forming affiliations with existing physi- centrated. Kaiser’s contract with Scripps for cardiac surgery cian organizations (see “Large System-Affiliated Physician runs through 2020; if Kaiser were to decide to in-source this Groups Continue to Grow” below). Systems also have been service, it would first need to hire its own cardiac surgeons, very active in building, expanding, or acquiring a wide variety then have them practice at Scripps for a period of time before of ambulatory facilities, ranging from medical office build- moving the service line (along with related interventional car- ings to urgent care centers, ambulatory surgery centers, and diology services currently performed by Kaiser physicians at imaging facilities. Prebys) to the Kearny Mesa facility. In recent years, San Diego’s hospital systems have intro- San Diego historically has been considered an under-bed- duced several different forms of convenience care, most ded community, but some observers have suggested that the notably retail health clinics. One market observer noted that recent spate of hospital construction might be moving the systems appear to be pursuing retail-based strategies to a market in the opposite direction toward at least some excess greater extent in San Diego than elsewhere. Since Palomar first capacity. However, the overall net impact on bed capacity partnered with the Albertsons retail chain in 2008 to operate remains highly uncertain, in part because the systems have Palomar Health Expresscare clinics inside Albertsons/Sav-on not made final decisions on what to do with their old capac- Pharmacy stores, Sharp affiliated with CVS/MinuteClinic ity as new construction comes on line. Those determinations in 2013, and Kaiser with Target in 2014. Scripps, which depend, in turn, on whether the state decides to relax its launched its first convenience clinic in late 2015, is taking a current seismic standards, as many providers and observers different approach: Instead of partnering with a retail chain, expect it to do. it teamed up with a commercial real estate firm, The Irvine Company, to open a Scripps HealthExpress clinic — perhaps the first of several — in an office tower across the street from a large shopping mall. The new clinic is slated to offer corporate wellness services as well as the usual set of convenience 7 care services.8 The Irvine Company’s clinic arrangement with This approach also helps the system better compete for the Scripps is similar to partnerships the company has formed many patients covered by high-deductible health plans, who with other prominent providers elsewhere in California, have strong incentives to keep their own out-of-pocket costs including Stanford Health in Santa Clara and St. Joseph low by price-shopping among providers. Scripps’ move is Hoag Health in Orange County. similar to those recently adopted by traditionally high-priced providers in other markets to reduce their ambulatory cost Kaiser has been particularly active in introducing new structure. types of convenience care to the market. In addition to its retail clinics in Target stores, Kaiser operates a mobile clinic full primary care office visits as well as services such as basic Large System-Affiliated Physician Groups Continue to Grow chronic care management, lab work, and biometric screen- Many San Diego physicians have long practiced in large ings. Like Mobile Health Vehicles operated in Kaiser’s other medical groups, each aligned exclusively with one of the major major Southern California markets, the truck pays regular systems. Kaiser’s Southern California Permanente Medical visits to the offices of large Kaiser corporate accounts, allow- Group is the largest, employing more than 1,000 physicians ing employees to attend to routine health needs without and operating 25 ambulatory centers throughout San Diego leaving their workplace. The truck also makes regular stops in County. In the UCSD system, physicians are employed by the areas of the county not located near a Kaiser primary care site, university and belong to the UCSD Medical Group. Because where enrollees would otherwise have to drive a fair distance a portion of their time is devoted to research and teaching, to seek routine care. these physicians represent significantly fewer clinical full-time called a Mobile Health Vehicle: a truck equipped to provide Expanding their ambulatory presence allows San Diego’s equivalents than the total count of approximately 750. hospital systems to pursue multiple strategies, including The other large systems continue to rely on the medical better competing for patients on the basis of convenience and foundation model to align physicians with their systems.9 access and, in many cases, reducing the system’s clinical cost Sharp’s foundation currently contracts exclusively with one structure. An example of the latter is Scripps’ 2015 acquisi- large multispecialty group, Sharp Rees-Stealy Medical Group tion of Imaging Healthcare Specialists (IHS), a chain of eight (SRS), and one small group consisting of Sharp’s cardiac sur- freestanding radiology centers. In the past, systems typically geons. At SRS, which has about 500 physicians practicing bought such ambulatory facilities in pursuit of a fee-for-ser- in 21 ambulatory centers, physicians typically refer patients vice strategy: The acquired facilities would become part of the to other physicians within the group. Scripps’ foundation system’s hospital outpatient department, thus allowing the contracts with multiple groups, the largest being Scripps system to charge a higher rate to payers for the same service Clinic Medical Group, with more than 600 physicians. than a freestanding facility could charge. After the recent Other groups in Scripps’ foundation include Scripps Coastal acquisition, however, Scripps is taking a different approach: Medical Center, with more than 100 PCPs at nine sites, and continuing to operate IHS as freestanding facilities, using the separate groups consisting of Scripps’ cardiac surgeons and same independent radiologists who had previously staffed hospitalists. Palomar’s foundation, Arch Health Partners, is these facilities. Maintaining the lower cost structure should much newer and smaller. Launched in 2010, its physician help Scripps manage the total cost of care for the growing members now total more than 60, and it belongs to San number of patients for whom it will be taking on financial risk Diego’s largest IPA, Sharp Community Medical Group (see (see “Systems Pursue Population Health Strategies” below). below), for HMO contracting. 8 Over the past few years, San Diego’s large groups all con- foundation. Organized along very different lines than Sharp tinued to grow, especially in their PCP ranks. As in other Rees-Stealy’s large integrated group model, SharpCare aims markets, this trend has been driven in part by the preference to retain some key attributes of small, community-based of most new physicians — particularly PCPs — for the stabil- practices that many independent physicians are reluctant to ity, security, and predictable work hours of the employment give up, while also offering physicians the security and sta- model over the autonomy of private practice. In addition, bility of employment. Members would practice in relatively many PCPs currently in private practice are finding that busi- small primary care offices with only about 3 to 10 practi- ness model increasingly less viable, and some are making the tioners per site and would be able to continue referring transition to system-affiliated groups. Indeed, systems have patients to community-based specialists. At the same time, reported increasingly being approached by independent prac- they would receive clinical support from the Sharp system titioners interested in being acquired. — for example, from care managers, pharmacists, and other Driving this trend has been the slow erosion of the capi- clinicians, rotating among the primary care sites. Within the tated HMO model, which continued to lose ground to Sharp system, SharpCare would be most closely aligned with high-deductible PPOs in the commercial sector. Financially, Sharp Community Medical Group, the IPA, and would be a physician organizations have always fared worse under PPO member of the IPA for HMO contracting and accountable fee schedules than HMO capitation. PPO rates paid by com- care organization (ACO) participation. Fee for service PPO mercial health plans to small independent practices were contracting for the new group will be done through Sharp described as “horrible” by multiple physician executives. One Healthcare, which should have the leverage to obtain better respondent noted that “commercial [PPO] rates are below rates than small practices would have received. Medicare [rates] . . . and San Diego has the lowest Medicare rates in the state.” (San Diego’s low Medicare payment rates Changing Market Conditions Pose Major Challenges for IPAs stem from its designation as a rural locality by the Centers IPAs historically have played a central role in San Diego’s for Medicare & Medicaid Services (CMS) — a designation health care market, given the county’s dual characteristics of that is scheduled to change in 2017, resulting in an expected high managed care penetration and a significant proportion of payment boost of 6% to 9%.)10 Capitation has long been the physicians practicing in small, independent practices (which “lifeblood of independent physicians,” according to a physi- rely on IPAs for HMO contracting and practice support). The cian executive, who suggested that if commercial PPOs keep recent, continuing decline of this small, independent practice gaining ground on network-model HMOs, “it will put every model — especially in primary care — means that IPAs are single [small practice] out of business.” More recently, finan- facing what one physician executive describes as an existential cial pressures on small practices have been compounded by threat as well. If current trends continue, IPAs inevitably will the passage of the Medicare Access and CHIP Reauthorization experience declining membership that is increasingly skewed Act of 2015 (MACRA), which will replace Medicare’s current toward specialists and older physicians. In recent years, most method for paying physicians with a new Quality Payment IPAs have lost a substantial number of commercial HMO Program.11 lives as a result of network-model HMOs losing volume to Some systems are recognizing the need to find new high-deductible PPOs (mentioned above), as well as declin- approaches for aligning the many independent PCPs who are ing PCP membership in many IPAs. While most IPAs have now seeking employment options. Sharp has begun forming aggressively pursued Medicare Advantage HMO contracts a new medical group, SharpCare Medical Group, under its 9 over the past decade, the gains in enrollment there have not members, including Graybill, are using the services of the compensated for the loss of commercial HMO lives. new practice management company, which reportedly has Sharp Community Medical Group (SCMG), by far the been successful in helping practices run more efficiently and largest IPA in San Diego, has been the most successful in improving measures of financial performance such as income adapting to market changes. Pursuing a long-term strategy to and cash flow. expand its footprint throughout the county, SCMG contin- SCMG also has been active in efforts to gain patient ued to grow both its membership (nearly 1,000 physicians) volume through diversification. Several years ago, it became and HMO lives (107,000 commercial, 27,000 Medicare the first IPA in San Diego to collaborate with health plans in Advantage) over the past several years, bucking the down- commercial ACOs. Currently, it participates in three ACOs ward trend experienced by nearly all other IPAs. SCMG was for a total of nearly 27,000 lives (see “Providers Expand able to increase its patient volume primarily by adding two Commercial ACO Participation, Despite Reservations” sizable North County groups to its membership base: Arch below). SCMG also has been developing a method for Health Partners (Palomar’s foundation, with about 40 physi- ranking its PCP members based on their patient-centered cians) and Graybill Medical Group (an independent group of medical home capabilities and reportedly will market this about 50 physicians, also located in Palomar’s service area). tiered structure to health plans as a new “high-value network” Without the addition of these two groups, SCMG’s HMO product, with each tier corresponding to a different patient lives would have declined. About 40% of SCMG’s members cost-sharing level. Other IPAs in the market have far fewer physician are now based in this submarket. Historically (and still) tightly aligned with the Sharp members and HMO patients, and a more limited geographic system, SCMG also developed an affiliation with Palomar footprint, than SCMG. They also tend to have less clinical as it expanded into the North Inland region, where Palomar integration and less product diversification, and most have operates the only hospitals. SCMG participates in HMO struggled far more with declines in commercial HMO enroll- contracts with Palomar, along the same lines as its longstand- ment. Among the several IPAs affiliated with Scripps, the ing arrangement with Sharp: SCMG holds its own HMO largest is Mercy Physicians Medical Group (MPMG), with contracts, accepting professional risk; the hospital system about 600 physicians, primarily specialists. Closely affiliated assumes institutional risk; and the parties share a hospital risk with Scripps Mercy, MPMG has about 24,000 HMO lives, pool.12 split evenly between commercial and Medicare Advantage. At SCMG has adopted strategies aimed at accommodating its peak, MPMG’s commercial HMO enrollment was twice as physicians across a broad spectrum of practice preferences. high as it is now. MPMG has remained independent to date, As noted above, for PCPs choosing employment with a sys- but reportedly, larger organizations — including both Scripps tem-affiliated group but still seeking the qualities of small, and MPMG’s own management company, North American community-based practices, SCMG has partnered with Medical Management (NAMM) — have shown interest in Sharp Healthcare to develop the SharpCare Medical Group, acquiring it. NAMM already owns another, much smaller which should provide a boost to SCMG’s physician mem- Scripps-affiliated IPA, Primary Care Associates Medical bership and patient volume. For member practices choosing Group, located primarily in the North Coastal region.13 to remain independent but seeking more support, SCMG In 2014, San Diego Physicians Medical Group, one of launched a practice management company to provide clini- the market’s larger IPAs, formed an exclusive affiliation with cal and administrative services. Some of SCMG’s largest Scripps when it joined with two smaller IPAs to form Scripps 10 Physicians Medical Group, with a total of more than 500 the Covered California public insurance exchange) and the physicians. In mid-2015, Scripps formed an affiliation with California Public Employees’ Retirement System (CalPERS) another IPA, MultiCultural Primary Care Medical Group. market. After two years competing in those segments, SHP Tightening and expanding such affiliations is part of Scripps’ has gained traction in both, attaining a 17% share of Covered strategy to build up its physician networks as it makes a California enrollees, and a 20% share of CalPERS enrollees, return to commercial capitation (see “Scripps Returns to living in San Diego County. It also has continued growing Commercial Capitation” below). steadily in the small and mid-sized employer-sponsored segments in which it has long competed. In the small-group Systems Pursue Population Health Strategies market, SHP has had notable success competing on the Population health management has long been a central strat- CaliforniaChoice private insurance exchange, where it has egy for two of San Diego’s major systems. Kaiser’s model captured about 30% of all San Diego enrollees. Overall, SHP’s — an integrated delivery system and a health plan taking full total group enrollment has reached 102,000, and its individ- financial risk for all patients — was described by one market ual enrollment — both on and off the Covered California observer as “the classic case of population health manage- exchange — now tops 28,000. One market observer noted ment.” Among the non-Kaiser systems, Sharp stands out as that “[SHP’s] figures barely register as a blip if you’re com- having the highest degree of population health commitment paring them against the statewide [enrollment] totals . . . and capabilities. Although Sharp, unlike Kaiser, does provide [but] that’s not the right metric to be looking at. . . . The a significant amount of fee-for-service, volume-based care, only market they compete in is San Diego, and in this local the system has long focused on accepting full risk for patient market, they’re a force to be reckoned with.” care and managing care efficiently for that population within Like other providers sponsoring their own health plans, an integrated system. In contrast to Sharp, Scripps spurned Sharp has been motivated by the opportunity to gain more commercial capitation in favor of fee-for-service strategies in HMO lives, to counteract the commercial market trend the late 2000s, but over the past few years, it has reversed toward PPO products. As noted above, physician practices, in course in response to changing market conditions. Scripps is general, fare much better financially under HMO capitation now pursuing commercial capitation and population health than PPO fee schedules. Because of Sharp’s clinical integra- — a strategy that requires significant system transformation tion and care management capabilities, the system’s physician (see Scripps section below). organizations, SRS and SCMG, reportedly have done especially well under capitation. And, unlike some California Sharp Health Plan Gains HMO Volume and Market Share providers whose experience with capitation has been largely Since the early 1990s, Sharp has held a full insurance license, limited to professional risk, Sharp has long embraced the and the system has long offered HMO products under the full-risk model, including assumption of risk for inpatient Sharp Health Plan (SHP) brand in the commercial group utilization and costs. As a result, using its own health plan market, predominantly to small and mid-sized local employ- to compete for patients suits Sharp’s care delivery model par- ers. By 2013, SHP’s group enrollment had reached about ticularly well. 70,000, including several thousand in Sharp’s own workforce. Not all of Sharp Health Plan’s new enrollment represents It was in 2014 that the health plan gained greater visibility patients new to the Sharp system. Some new SHP enrollees and substantially more enrollment when it entered two new already were using Sharp’s physician network under previous market segments: the individual market (both on and off coverage from other plans. Nevertheless, for providers like 11 Sharp, there are clear benefits to enrolling these patients in a premiums in exchange for restricted provider choice, and plan sponsored by the system itself rather than by an exter- many local employers showed much greater willingness to nal health plan. One benefit is the ability to retain the total adopt these products than they had in the past. The limited savings from care management efficiencies within the system, provider networks either excluded Scripps outright or rel- instead of having to share the savings with external health egated it to a higher cost-sharing tier. In introducing these plans. Other benefits include control over insurance product network changes, plans were reacting not only to the fee-for- design and pricing, as well as customer service. service method used in Scripps contracts but also to the high In addition to gaining significant enrollment in all the fee-for-service rates charged by the system. Enough employ- market segments it has entered, SHP has performed well on ers adopted the new limited-network products that Scripps ratings of member satisfaction and health plan quality. In began losing commercial HMO volume, primarily to Sharp. the 2015 health plan ratings by the National Committee for The need for providers to compete on affordability and Quality Assurance (NCQA), SHP outperformed all commer- value was reinforced when the ACA became law in 2010, cial plans in California on consumer satisfaction, and trailed establishing the public insurance marketplaces. The design only Kaiser on overall commercial plan ratings.14 A market and structure of these marketplaces gives individual consum- observer commented that “[SHP] is a different model than ers strong incentive and ability to price-shop among insurance Kaiser, but the two [plans] are similar in that they’ve both products, while also encouraging participating plans to keep found combinations of affordability, . . . quality, [and] con- premiums low by excluding high-priced providers from their sumer experience that work well for a lot of people.” networks. In response to these changing market forces, Scripps began changing course strategically and turning back to com- Scripps Returns to Commercial Capitation, Launches Its Own Health Plan mercial capitation. In 2011, the system began approaching As noted above, in the late 2000s, Scripps made the strate- major proposed change: risk adjusting payments to correct gic decision to abandon capitation in favor of fee-for-service for adverse selection — an unprecedented approach in com- payments in all of its commercial HMO contracts. This shift mercial HMO contracts. Eventually, most of the commercial was motivated by Scripps’ belief that sicker HMO patients plans contracting with Scripps agreed to try retrospective risk were disproportionately choosing Scripps providers, in large adjustment on an experimental basis, and between 2012 and part because of Scripps Clinic’s strong capabilities and reputa- 2014, all but one of Scripps’ commercial HMO contracts tion in high-end tertiary services. Unlike Medicare Advantage transitioned from fee for service to risk-adjusted, capitated payments, commercial capitation payments are not risk- payment.15 commercial plans about returning to capitation but with one adjusted, thus financially disadvantaging capitated providers While the concept and the logic behind risk-adjusted who attract a less healthy patient mix. (Scripps continued payments were compelling, the actual implementation was accepting both professional and institutional risk in Medicare described by respondents familiar with the process as a sig- Advantage.) nificant operational challenge fraught with major data gaps The timing of Scripps’ move away from commercial capi- and other serious administrative problems. The main issue tation coincided with a major economic recession, which put was that encounter data used to calculate retrospective intense pressure on San Diego health plans and employers enrollee risk scores were incomplete, leading enrollees to to find more affordable insurance coverage options. Health appear much healthier in the year-end reconciliation process plans responded by rolling out products that charged lower than they were.16 Efforts to resolve these problems consumed 12 substantial staff time and resources at Scripps and the health for Sharp, given Scripps’ historically higher costs and greater plans, leading all parties to conclude that retrospective cal- reliance on volume-based, fee-for-service payment. In a sign culations of enrollee risk scores would not be viable while of the cost pressures facing Scripps, the system announced in encounter data still lacked reliability. As a result, Scripps is March 2016 plans to eliminate about 100 management and discontinuing its risk-adjustment experiment. Commercial administrative positions as part of a broader, ongoing effort to HMO contracts coming up for renewal reportedly are being reduce operating expenses.17 renegotiated under standard commercial capitation terms, As Scripps moves toward a population health approach, with base rates adjusted only by age, sex, and benefit plan. If one of its key challenges is developing greater clinical inte- Scripps indeed suffered from adverse selection in the past on gration, an area where it lags behind Sharp. With clinical its commercial HMO contracts, and continues to do so now, information exchange among its clinicians currently ham- it remains to be seen how significant a financial disadvantage pered by the use of separate, incompatible electronic health this return to standard commercial capitation payment might record (EHR) systems in its inpatient and ambulatory set- represent for the system. tings, Scripps is making a $500 million investment in a new, Besides returning to capitation in its contracts with integrated EHR platform. Still in the design phase, the new commercial health plans, Scripps also has launched its own clinical IT system is scheduled to begin rolling out in early health plan. In August 2015, its application for a full insur- 2017 and to be completed in 2018. ance license was approved by the state, and in 2016, Scripps Further developing and tightening affiliations with its Health Plan began offering coverage to Scripps’ own work- physician network is another key challenge Scripps has force. This year, the new plan also will begin offering quotes been working on as part of its population health strategy. to other employers for 2017 coverage. Like many provider- As described above, Scripps’ physician network encompasses sponsored health plans, the new plan is likely to focus on the multiple IPAs, including the relatively recent alignment with mid-sized local employer segment of the market. The plan Scripps Physicians Medical Group. Those multiple rela- is also likely to enter the Covered California marketplace tionships make it more challenging to pursue a population at some future point, but it will not be ready to do so by health strategy in contrast to the single, longstanding, very 2017, as it must first meet numerous requirements, including tight alignment Sharp has with its IPA, SCMG, which has NCQA accreditation. achieved a substantial degree of clinical integration. With the market’s two largest systems now both sponsor- More broadly, Scripps’ strategy of transforming itself into ing their own health plans, along with Kaiser, the impact on a value provider that competes on affordability and takes full the market — at least in the near future — is likely to be an risk for large patient populations represents a paradigm shift increase in both price competition and product choices. It for a system whose success was built largely as a high-priced is in the market segments where these plans will all be com- provider in a fee-for-service environment. Like Sutter Health peting — the mid-sized employer market and the Covered in Northern California — another high-priced provider now California marketplace — where benefits will most likely be pursuing population health — Scripps inevitably will face concentrated for purchasers and consumers. How sustainable many conflicting incentives internally about how much, and those gains are, and how much impact the provider-sponsored how fast, to move away from conventional fee-for-service plans will have in the longer term, depends largely on the strategies that have served it so well in the past. ability of the systems to continue reducing their cost structures. This is an issue that looms much larger for Scripps than 13 Providers Expand Commercial ACO Participation Despite Reservations collaborations. While data sharing between health plans In the last round of the study in 2012, San Diego was among launched, the patient data currently available to providers for the first California markets to see the emergence of commer- attributed ACO lives still are not nearly as comprehensive cial ACO collaborations between health plans and providers. or timely as the data that providers have for their capitated Both of Sharp’s affiliated physician organizations, SCMG patients, according to one physician executive. Care manage- and SRS, had begun participating in an ACO with Anthem ment is another key logistical challenge for ACOs, with health Blue Cross in 2011, and SCMG also had started partnering plans and providers often “treading on each other’s toes” with with Aetna in a much smaller ACO in 2012.18 Both ACOs separate programs whose lack of coordination can result in were based on a PPO platform and used attribution models costly duplication for the ACO partners, and confusion and to assign physicians financial responsibility for individual frustration for patients. and providers has improved markedly since ACOs were first In spite of these limitations, providers continue to explore patients. In 2012, SCMG’s patient lives from both ACOs ways to expand their participation in ACOs, largely as a totaled about 15,000. Since then, the number of commercial ACOs involv- means of increasing patient volume. As one physician execu- ing Sharp physician organizations has grown to three with tive observed, “However clunky [ACOs] are . . . they allow us the recent addition of a United ACO (also based on a PPO to reach people who have never been in, and will never be in, attribution model). Across all three ACOs, SCMG has about HMOs. . . . It gives us a chance to capture people who might 27,000 patient lives, and SRS has more than 35,000.19 not [otherwise] be our patients.” Scripps also has begun to participate in commercial ACOs, Safety Net Responds to Rising Demand with Capacity Expansions, Collaborations with a Cigna collaboration already in place and another with Anthem expected to roll out in late 2016. Despite increasing participation in these arrangements, Historically, San Diego’s safety net has been considered weak providers expressed several reservations and frustrations about in some respects — most notably the limited extent of county ACOs. First, they pointed out that sharing risk with health commitment to and funding for low-income health services plans in ACOs is less advanced for a provider than accept- — but strong in other dimensions, such as the extensive, ing full risk under capitation, which major systems have well-established set of community clinics providing relatively long done in San Diego. As one system executive observed, robust primary care services to low-income residents. As in “[ACO risk sharing] is a step forward if your starting point other California communities, the large expansion of Medi- is fee for service . . . but in this market, where you have the Cal eligibility under the ACA has strained the capacity of major [providers] able to take full risk for [patient care], it safety-net providers to meet increased demand. feels like — and it is — a step backward.” Respondents from As one of the few large California counties not operat- both systems and health plans noted the drawbacks inher- ing its own hospital, San Diego continues to rely on several ent in the shared-savings approach used by ACOs, which community hospitals, along with its public academic medical require the partners to identify new sources of savings over center, to provide safety-net inpatient care. Hospitals with time, in contrast to capitation, which allows providers to be a disproportionate share of low-income patients include rewarded consistently from one contract to the next as long UCSD (Hillcrest campus); Scripps Mercy (both Chula Vista as they continue to manage care efficiently. In addition, pro- and Hillcrest campuses); Sharp Grossmont (El Cajon, East viders noted the many data and logistical challenges of ACO region); Sharp Chula Vista; and Rady Children’s Hospital. 14 Measured as a proportion of total inpatient discharges for basis. Under this model, there is no public, county-operated low-income patients (defined as Medi-Cal and uninsured), health plan. The five plans currently serving the market repre- Sharp provides the most low-income inpatient care in the sent a mix of local and national, and nonprofit and for-profit, county (30%), followed by Scripps (21%) and UCSD (13%). entities. The two largest by far are local nonprofit Community When low-income discharges are measured as a proportion Health Group (with 40% of total enrollment) and national of each system’s total discharges, UCSD has the highest rate for-profit Molina Healthcare (31%). The remainder of the of low-income care (37%), followed by Prime (36%), Sharp Medi-Cal market is split among Health Net (11%), Care1st (32%), Tri-City (30%), and Scripps (26%).20 (11%), and Kaiser (8%).23 Two more plans, Aetna and The hospitals providing the highest volumes of safety-net United, are slated to enter the market in 2017.24 care all belong to financially strong systems, but as expected, The California Department of Health Care Services’ these hospitals tend to have substantially lower operating Medi-Cal Managed Care Performance Dashboard shows margins than other hospitals in the same systems with more a large performance gap between Kaiser and the other four favorable payer mixes. In contrast to the other major systems, plans.25 Kaiser, whose members have access to exactly the same Kaiser’s safety-net inpatient role is largely limited to services care network as its commercial members, outperformed all provided to its own, small population of Medi-Cal enrollees Medi-Cal plans in California, with a perfect score of 100 on (see below). Other providers pointed to this unevenly distrib- a composite measure of quality and satisfaction. San Diego’s uted Medi-Cal burden as an unfair competitive advantage largest plan, Community Health Group, earned a score of 60 for Kaiser, with one system executive calling it “an ‘unlevel’ — the state average — while the remaining three plans scored playing field that’s a huge, huge thorn in [the] sides [of the below average. other systems].” However, Kaiser remains the plan with the lowest enroll- Over the past few years, San Diego’s already extensive ment in the county because of its longstanding policy to limit group of community clinics has continued to grow from a its Medi-Cal enrollment to people who meet strict eligibility total of 12 full FQHCs and one look-alike in 2012 to 15 criteria: either having been Kaiser members themselves within full FQHCs currently.21 The number of clinic sites has also the last 12 months or having an immediate family member increased, with some of the largest FQHC organizations who has been a Kaiser member during that period. Not only expanding the most. Family Health Centers of San Diego — does this requirement curb Kaiser’s total Medi-Cal enroll- not only the largest FQHC in the county, but also one of the ment but it also gives Kaiser favorable selection (healthier largest in the state — now operates 23 clinic sites, includ- enrollees, with fewer complex or costly needs, than average). ing three mobile medical clinics, and plans to add three more People able to meet Kaiser’s eligibility criteria are significantly clinics within the next year. Other large FQHCs include less likely to be homeless or have serious behavioral health San Ysidro Health Center (16 sites); North County Health issues, for example, than the average enrollee who became eli- Services (10 sites); Neighborhood Healthcare (8 sites); and gible for Medi-Cal under the ACA expansion. La Maestra Community Health Centers and Borrego Health New Medi-Cal Enrollees Face Large Gaps in Behavioral Health, Specialty Care (5 sites each).22 San Diego is one of only two California counties to organize Medi-Cal managed care through the Geographic San Diego’s Medi-Cal managed care enrollment soared from Managed Care (GMC) model, with the state contracting with fewer than 350,000 at the end of 2013 to more than 670,000 multiple managed care plans and paying each on a capitated by the end of 2015, a 92% increase over the two-year period. 15 The first wave of new enrollment under the ACA expansion trying, but with mixed success given the limited pool of PCPs in early 2014 included about 50,000 enrollees transitioned with these credentials. from the county Low Income Health Program (LIHP) (see The capacity pressures facing community clinics stem below); most respondents said this transition went relatively not just from pure volume growth but also from the more smoothly. Most FQHCs participated in the county LIHP challenging needs of newly eligible Medi-Cal patients com- primary care network and were able to keep a large majority pared to the traditional pre-expansion Medi-Cal population. of their assigned LIHP enrollees once those enrollees gained Not only are new enrollees more likely to have multiple and Medi-Cal coverage in January 2014. Medi-Cal managed complex health problems but many also have broader social care enrollment continued growing significantly in 2015, service issues like homelessness. The leadership of one clinic but unlike many early enrollees who were highly motivated described being “unprepared to take on this vastly more chal- to obtain coverage (described by one clinic director as “the lenging population” because clinic services had been geared low-hanging fruit”), people who enrolled later have tended primarily toward traditional Medi-Cal “mothers and kids.” to require much more intensive outreach efforts to convince Several FQHCs were better prepared, thanks to a longstand- them to apply and more support services to help them com- ing focus on integrating behavioral health into primary care; plete successful applications for coverage. these clinics developed considerable in-house resources and The surge in enrollment since 2014 has put pressure expertise to deal with mild to moderate behavioral health on Medi-Cal managed care plans and safety-net providers issues. For example, since the late 2000s, Family Health to meet the increased demand for a wide variety of services Centers (FHC) has embedded mental health services into (primary, specialty, and behavioral health care) in a timely most of its primary care clinic sites. Every primary care visit manner. Most plans rely primarily on FQHCs to form the includes mental health screening, and FHC clinics handle backbone of their primary care networks (the exception being between 125 and 200 mental health visits a day in-house. Kaiser, which uses its own large network of PCPs and ambu- Neighborhood Healthcare (NHC) also has integrated behav- latory facilities). In preparation for the Medi-Cal expansion, ioral health into its primary care sites. In addition to the many FQHCs — especially the largest ones — had sub- double-certified PCPs mentioned earlier, NHC has a staff stantially expanded their capacity to handle larger patient of psychiatrists, psychologists, and marriage and family volumes. These expansions involved expanding hours as well therapists who work closely with PCPs to do “warm hand- as opening new clinic sites. offs,” where the PCP directly introduces the patient to the However, several FQHCs reported that recruiting enough behavioral health provider during a medical visit as a way to clinicians — particularly PCPs — has posed a major chal- establish trust and rapport and to reduce any stigma or other lenge, especially in a market where the clinics compete against barriers to receiving behavioral health care. large groups affiliated with financially strong systems. To However, even some clinics with strong behavioral health attract more recruits, several FQHCs raised salaries signifi- capacity reported being overwhelmed by both the volume cantly. The largest FQHC, Family Health Centers, launched and the severity of mental health and substance abuse prob- its own family medicine residency program, which now brings lems among new Medi-Cal enrollees. Under California law, in 6 new residents each year, for a total of 18 residents at Medi-Cal managed care plans are responsible for treating any given time. Another FQHC, Neighborhood Healthcare, mild to moderate behavioral health cases, while responsibility recruits PCPs with board certifications in both family medi- for severe cases rests with the county. As in other communi- cine and psychiatry, an approach several other clinics are also ties, the various parties responsible for Medi-Cal behavioral 16 tinction between what’s moderate and what’s severe,” and FQHCs Collaborating More Among Themselves and with Hospitals coordination among the county, the managed care plans, and Competition and lack of collaboration among community safety-net providers has been “spotty,” according to one clinic clinics have long been perceived to be problems in San Diego. director. However, that had begun to change by the time the last study health in San Diego “struggle mightily to make that dis- Low payment rates have long resulted in a shortage of spe- was conducted in 2012, as many FQHCs were starting to cialists willing to treat Medi-Cal patients in San Diego. This step up their collaborations through the San Diego Council dearth of available specialists was exacerbated by increased of Community Clinics (recently renamed Health Center demand following the ACA expansion. One Medi-Cal Partners). This consortium provides coordination and support health plan executive explained why, in the face of increasing for activities such as funding, outreach, specialty referral, and demand, the plan had not expanded its physician network: implementation of health information technology. However, “The [community] physicians who were going to take Medi- the reach and impact of the consortium has been limited by Cal were already contracted with our plan.” A clinic director the fact that the largest FQHC, Family Health Centers, is not observed that there were reasons beyond low payment rates a member. for the specialist shortage in the safety net: “Specialists in In a key development announced March 2016, 12 FQHC the community really don’t like our patients. They are hard members of Health Center Partners have formed a new part- to serve . . . and [many] are no-shows” for appointments. nership, Integrated Health Partners of Southern California Specialties highlighted as having particularly short supply (IHP), to launch an integrated care network for their com- relative to need include neurology, orthopedics, urology, bined 500,000 patients a year.27 IHP will function as an IPA, and gynecologic oncology. As a result, staff at a large FQHC contracting with all Medi-Cal managed care plans (except often resort to directing patients to a hospital ED when no Kaiser) as a single entity, replacing all the separate contracts community specialist can be found to take an urgent referral, each FQHC currently holds with the Medi-Cal plans. The according to that FQHC’s director. first IHP contract with Molina, the second-largest plan, goes Overall, San Diego did not experience the dramatic surge into effect May 2016, and contracts with other plans will in hospital ED use seen in some other California communi- follow. ties, at least in the first year of the Medi-Cal expansion. In The capitated payments that IHP is negotiating on behalf 2014, total ED visits in San Diego increased only somewhat of its clinic members will not cover all professional services, faster than they had in previous years (5% growth in 2014 but rather, a smaller bundle of services described as “primary vs. 2.5% to 3.5% growth in each of the previous five years). care plus,” covering the services “provided within the four This was consistent with the fact that hospital executives in walls of the clinic,” which often include services such as basic San Diego did not cite ED capacity constraints as one of behavioral health. Although the payments from health plans the top pressures facing their systems, in contrast to hospital are capitated, FQHCs are not yet truly assuming financial executives in some other communities. The hospitals with the risk for the Medi-Cal or Medicare services covered by the highest increases in ED volume included three Sharp facili- capitated payment, because the FQHCs remain eligible to ties: Chula Vista (9% growth in 2014), Grossmont (9%), and receive wraparound payments from the state in a year-end Memorial (8%).26 However, some hospital executives noted reconciliation process aimed at bringing their total reim- that ED visits continued climbing significantly in 2015, bursement up to the cost-based payment level to which their raising capacity concerns at some facilities. FQHC status entitles them.28 Because these wraparound 17 payments effectively protect FQHCs from most risk except hospital’s service area. Some major hospitals with large low- for cash-flow risk, one respondent described the current income populations — most notably Scripps Mercy and capitation-plus-wraparound arrangement as “training wheels Sharp Chula Vista — have partnerships with multiple clinics. for FQHCs to practice taking on risk.” (However, another For example, Family Health Centers recently built a clinic site respondent noted that providing care to the uninsured popu- next to Scripps Mercy’s Hillcrest campus to provide primary lation has given FQHCs considerable experience in assuming care for hospital patients who lack an established primary financial risk for patient care.)29 care provider. That arrangement represents one of the most Over the next few years, California is expected to replace common collaborations between FQHCs and hospitals, with the current enhanced, cost-based Medi-Cal reimbursement the latter seeking not just to relieve ED capacity constraints, approach with true capitation for FQHCs. With that tran- but also to prevent avoidable readmissions by linking patients sition slated to begin with a 2017 pilot program in selected to primary care. Scripps Mercy and UCSD also participate in markets, the coming of capitation is regarded as inevitable, a three-way partnership with another FQHC, San Ysidro, for and IHP is a collaborative effort by the majority of San Diego a family medicine residency program, with UCSD providing FQHCs to prepare for that change. One of the key ways in the education and training, Scripps Mercy the funding and which IHP aims to improve the efficiency and quality of care inpatient facilities, and San Ysidro the outpatient facilities. provided by member clinics is by collecting and sharing a Hospitals and FQHCs both perceived the need for more rich set of clinical data. The member clinics have agreed to collaborations overall between the two types of providers, and share those data on an unblinded basis, allowing the group to the need to forge better, more productive collaborations — identify weaker performers and help those clinics boost their but both cited barriers to achieving those goals. According to performance. Among IHP’s top priorities is providing support one hospital executive, a tentative partnership with a neigh- to member clinics with less-advanced patient-centered medical boring FQHC stalled when it became clear that the FQHC home capabilities to help them develop those capabilities. would have trouble mustering enough primary care capacity IHP represents, by far, the most ambitious collaborative to adequately staff a proposed new primary care clinic to be effort in the San Diego safety net to date. It is too early to located near the hospital’s ED. The clinic perspective was cap- tell what impact it may eventually have on FQHC quality, tured by an FQHC director who observed, “The hospitals are efficiency, and ability to assume financial risk. While member not used to the world of clinics . . . and many don’t know how clinics will have strong incentives to work together to boost to partner with us . . . [but] they realize if they don’t do some- their collective performance, one clinic director cautioned thing different so that patients can be seen in an ambulatory that because clinics are used to operating as “fiercely inde- setting, they get a lot of re-treats and readmissions . . . [so] pendent organizations [that] all have very different histories hospitals are coming to the table more [since the ACA expan- . . . [and] also tend to treat different patient populations,” sion]. . . . Hospitals are sharing their data more, and they are productive collaboration among clinics — and the ability of very interested in what we can do together. It’s a new day.” IHP to act as an integrated entity — will face challenges. County Continues Playing Active Coordination Role Over the past few years, FQHCs have been increasingly collaborating with hospitals as well. However, one safety- Historically, San Diego County has demonstrated limited net respondent described these joint efforts as “a patchwork, commitment to the health care safety net, with the County . . . a multitude of small [collaborations]” that tend to Board of Supervisors focusing on keeping county health form between single hospitals and clinics operating in that spending low overall and preventing undocumented 18 immigrants in particular from receiving any subsidized ser- is likely to discontinue the program nationwide in late 2016 vices. The county has not owned a hospital since the 1980s, to focus on alternative payment models, the local participants and it does not operate any primary care clinics. Behavioral in SDCTP have agreed to continue some of the program’s health is the one major area where the county directly pro- most effective interventions. Most notably, the county will vides health services to low-income residents. It owns and continue to provide a bundle of “care enhancement” social operates the Psychiatric Hospital of San Diego County, which services to a subset of frail patients deemed most at risk for provides inpatient care and crisis intervention for people with readmissions, with funding provided by the four systems to serious mental illness. The county also operates several of its replace CMS funding. One respondent observed that partici- own mental health clinics, as well as contracts with commu- pating in SDCTP had shown the systems how cost-effective nity-based providers to provide additional outpatient services the targeted provision of social services could be in prevent- to low-income patients with serious mental health and sub- ing readmissions and other costly outcomes; as a result, the stance use disorders. systems became willing to pay the county to provide these services to some of their most at-risk patients. As reported in the last round of this study, the leadership team that has directed the county Health and Human Another key collaborative effort for the county is Cal Services Agency since the late 2000s has played an increas- MediConnect, a three-year demonstration in seven California ingly proactive role in efforts to improve health and health counties to provide coordinated care for patients dually eli- care in San Diego. HHSA’s Live Well San Diego (LWSD) ini- gible for Medicare and Medicaid across a continuum of care tiative, at first a 10-year plan with the broad aim of improving settings, including medical, behavioral health, long term the health and well-being of San Diego residents, now pro- care, and home health. In Cal MediConnect, the county vides the framework for developing the county operating collaborates with health plans and community-based orga- budget and for collaborating with public and private part- nizations. Unlike SDCTP, however, the results have proved ners on federal grants and other joint efforts. LWSD also was disappointing: Enrollment in the program has been low, and used as a guide for designing care delivery in the LIHP, which disenrollment has been high. That pattern has been evident consisted of a network of FQHCs serving as patient-centered not just in San Diego but across all Cal MediConnect sites. medical homes. Dual eligibles have shown great reluctance to change the The initiatives on which the county is collaborating with regular providers — particularly the PCPs — they already providers and other local organizations include joint efforts have under Medicare fee for service. Many of these provid- that extend well beyond the safety net. One such initiative ers declined to participate in the Cal MediConnect network is the San Diego Care Transitions Partnership (SDCTP), a because of low payment rates. collaboration among the county and four systems — Scripps, The county continues to play an active coordination role Sharp, UCSD, and Palomar — aimed at reducing hospi- in behavioral health issues. It sponsors an annual summit tal readmissions for high-risk Medicare patients discharged on integrating behavioral health and primary care. As noted from hospitals into the community. (As a group, the four above, the county is responsible for dealing with severe behav- systems provide care for more than 90% of Medicare fee-for- ioral health issues for low-income residents, and it has been service patients in San Diego.) SDCTP is the largest among working with Medi-Cal managed care plans, community 27 programs in CMS’s Community-Based Care Transitions clinics, hospitals, and others to determine which enrollees fall Program, and it has been very successful at reducing readmis- into severe versus moderate categories, and to improve care sions and costs for CMS since its 2013 launch. Although CMS transitions. These coordination efforts “are not going terribly 19 well yet” and face challenges related to inadequate funding care until their medical conditions become severe. As one and lack of mental health and substance abuse resources hospital executive observed, “When [undocumented immi- overall in the community, according to one respondent. grants] show up at the ER, they tend to be in bad shape.” While acknowledging the coordination role HHSA plays in behavioral health, respondents from hospital systems Issues to Track expressed frustration about the adverse impact that the coun- ▶▶ Will San Diego’s large hospital systems be able to maintain ty’s limited overall funding of behavioral health has had on strong financial performance in the face of cost pressures their own systems. “When the county doesn’t provide enough from public and private payers? If their operating margins psych beds, those patients who should be [treated at county erode, what will be the implications for the inpatient mental health facilities] end up in our ERs. . . . It’s the wrong safety-net roles played by these systems? setting for them; it’s very disruptive for our staff and our other ▶▶ patients . . . and very costly for the hospital. We’re seeing the How well will the county’s smaller hospitals weather their current struggles? Will these smaller hospitals find ways county shifting a big part of its obligations onto private pro- to remain viable as independent institutions, or will they viders,” asserted one hospital executive. face closure or acquisition? What role will state seismic standards play in these hospitals’ future prospects? Limited Care Options for the Residually Uninsured There has never been significant support among San Diego ▶▶ How effective will the market’s two largest systems be in County’s elected officials or residents for using county funds implementing their population health strategies? How to provide health services for undocumented immigrants. committed, and how successful, will Scripps prove to be Historically, San Diego’s County Medical Services program in its return to commercial capitation? To what extent will (CMSP) for medically indigent adults has maintained more adverse selection prove to be an issue for Scripps in its stringent eligibility standards than many other California commercial risk contracts? counties. It has been open only to US citizens and legal ▶▶ immigrants with incomes up to 165% of federal poverty who Will network-model HMOs continue losing ground to high-deductible PPOs and Kaiser HMOs in the com- have an immediate medical need. CMSP coverage has never mercial market? To what extent will the health plans encompassed primary care; instead, it has been limited to hos- sponsored by Sharp and Scripps be able to reverse — or at pital stays and follow-up visits. These stringent standards still least reduce — that trend? How much impact will compe- apply to the program, which has now shrunk dramatically in tition from these provider-sponsored plans have on prices the wake of the Medi-Cal expansion. At its peak, CMSP had and product choices faced by employers and individual served many thousands of low-income adults annually, but consumers? over the past year, fewer than 400 people reportedly received services from the program. ▶▶ Will the region’s IPAs find ways to keep independent Many of San Diego’s remaining uninsured residents are practice viable, particularly for primary care physicians? undocumented immigrants. When they receive care within To what extent will SharpCare’s new, smaller-scale the county, it is typically at community clinics and hospi- employment model successfully emerge as an alterna- tal EDs; some also continue to cross the border into Mexico tive to existing models of primary care practice? Will for care, according to respondents. However, many undocu- other systems follow suit in sponsoring new primary care mented immigrants go without needed care, or delay seeking models? 20 ▶▶ ENDNOTES To what extent will safety-net providers be able to meet 1. Fallbrook Hospital, a small district hospital in the far northern portion increased demand resulting from the Medi-Cal expansion of the county, stopped providing inpatient services in 2014. The by continuing to expand capacity? Will FQHCs manage downtown Escondido campus of Palomar Medical Center stopped to recruit sufficient numbers of PCPs and other clinicians? ▶▶ providing inpatient services in mid-2015. Will viable strategies be identified for addressing access 2. Scripps’ four hospitals are spread across five campuses. gaps for specialty care and behavioral health care? 3. Annual Financial Data, California Office of Statewide Planning and Development (OSHPD), 2014. Data reflect each hospital system’s fiscal To what extent will the new partnership among FQHCs year. Data on inpatient discharges and market shares exclude Rady succeed in improving efficiency and quality and increas- Children’s Hospital. ing the FQHCs’ collective ability to assume financial risk? 4. State reporting requirements make OSHPD financial data (reported Will collaborations between hospitals and FQHCs con- above) inconsistent with accounting guidelines and hospital systems’ tinue to expand, and will they prove effective in providing audited financial statements. Reports issued by credit rating agencies Moody’s and Standard & Poor’s showed 2014 operating margins by more appropriate, less costly care for low-income people? Scripps and Sharp to be 6.0% and 7.8%, respectively. 5. In previous years, UCSD’s audited financial data diverged significantly from OSHPD data (e.g., in 2010, OSHPD reported negative operating margins, while UCSD audited financials showed a solidly positive margin). 6. The contract between Kaiser and Palomar has a five-year term and is renewed on a rolling basis every year. 7. Chris Jennewein, “Tri-City Medical Center Appoints New CEO from Its Ranks,” Times of San Diego, March 21, 2016, timesofsandiego.com. 8. Paul Sisson, “Scripps Health Expands with Clinics, Insurance Plans,” San Diego Union-Tribune, December 1, 2015, www.sandiegouniontribune.com. 9. Because California’s corporate practice of medicine law prohibits hospitals from directly employing physicians, some hospitals sponsor medical foundations as a way to align with physicians. Under a medical foundation model, physicians either contract with the foundation through an affiliated IPA or belong to a medical group that contracts exclusively with the foundation through a professional services arrangement. University of California hospitals, county hospitals, and some nonprofit organizations such as community clinics are among the entities allowed to employ physicians directly, through exceptions to the corporate practice of medicine prohibition. 1 0. Paul Sisson, “Medicare Pay to Increase for SD Docs,” San Diego UnionTribune, March 14, 2016, www.sandiegouniontribune.com. 1 1. MACRA’s Quality Payment Program has two paths: the Merit-Based Incentive Payment System (MIPS) and Alternative Payment Models (APMs). The vast majority of physicians will be paid under MIPS; small practices are expected to fare substantially worse than large practices on MIPS performance metrics and therefore to receive significantly lower payments. 21 1 2. For managed care contracts that SCMG participates in with the Sharp 2 5. Medi-Cal Managed Care Performance Dashboard, California Department of Health Care Services, March 16, 2016, www.dhcs.ca.gov. system, Sharp Rees-Stealy also holds its own separate professional risk contracts and participates in the hospital risk pool. 2 6. Overall, the hospital with the largest ED increase in 2014 was Palomar 1 3. Because most of Primary Care Associates Medical Group’s members are Medical Center (21%), but respondents suggested that a key factor located in the North Coastal region, which includes Tri-City’s hospital may have been the ED closure of Fallbrook Hospital (a district hospital service area, the IPA also participates in HMO contracts with Tri-City. north of Palomar), resulting in PMC absorbing much of Fallbrook’s ED volume. 1 4. “NCQA Health Insurance Plan Ratings 2015-2016 — Summary Report (Private),” National Committee for Quality Assurance, 2 7. Paul Sisson, “A Dozen Health Centers to Share Patient Management,” healthinsuranceratings.ncqa.org. The overall health plan rating is based San Diego Union-Tribune, March 1, 2016, on a combination of clinical quality, member satisfaction, and NCQA www.sandiegouniontribune.com. Accreditation Survey results. 2 8. FQHCs receive enhanced encounter-based payments to cover a range of 1 5. Under this approach, at the end of the contract year, encounter data is medical and social services; these are called Prospective Payment System used to calculate a risk score for each enrollee based on health conditions (PPS) rates, and are based on historical allowable costs and are updated diagnosed and health services utilized over the previous 12 months. If for medical inflation. enrollees had higher risk scores than expected at baseline, Scripps would 2 9. FQHCs are required to offer services to all people, regardless of ability receive additional payments from the plan; if enrollees had lower risk to pay, and to establish a sliding fee discount program. Besides accepting scores, Scripps would return a portion of its payments to the plan. risk in treating uninsured patients, FQHCs also currently accept risk for 1 6. Because providers are capitated, there is no additional payment tied to some insured patients (e.g., those with Covered California coverage and the submission of encounter data. As a result, providers in the HMO some types of commercial coverage). network are not as focused on submitting complete, accurate encounter data as they would be on submitting claims for payment of services. 1 7. Melanie Evans, “Scripps Health Moves to Reduce Workforce, Expenses,” Modern Healthcare, March 21, 2016, www.modernhealthcare.com. 1 8. SRS joined the Aetna ACO in August 2013. 1 9. The Sharp hospitals participate in the Aetna and United ACOs but not the Anthem Blue Cross ACO. 2 0. 2014 OSHPD hospital data. Overall, Rady has the highest proportion of low-income discharges relative to total discharges in the county. This reflects more expansive Medi-Cal eligibility standards for children than for adults. 2 1. FQHC status allows community clinics to receive benefits including federal grants, enhanced cost-based Medi-Cal payments, and student loan forgiveness for physicians. FQHC look-alikes are eligible for many of the same benefits but not federal grants. 2 2. Borrego also has numerous clinic sites in Riverside County. 2 3. Health Net is being acquired by Centene Corporation, and Care1st is being acquired by Blue Shield of California. 2 4. Under the GMC model, the state does not limit the number of plans that can participate. Plans are eligible to enter a GMC market if they meet financial solvency, network adequacy, and other regulatory requirements. 22 Background on Regional Markets Study: San Diego Del Norte In May 2015, a team of researchers from Mathematica Policy Research visited San Diego to study that market’s local health care system and capture changes since 2011/2012, the last round of this study. San Diego is one of seven markets included in the Regional Market Study funded by the California Health Care Foundation. The purpose of the study is to gain important insights into the organization, delivery, and financing of health care in California and to understand important differences across Placer Yolo regions and over time. The seven markets included in the project — Fresno, Los Angeles, Orange El Dorado County*, Riverside/San Bernardino, Sacramento, San Diego, and the San Francisco Bay Sacramento Bay Area Marin San Francisco Contra Costa Alameda San Mateo Area — reflect a range of economic, demographic, health care delivery, and financing conditions in California. Mariposa Madera Mathematica researchers interviewed over 200 respondents for this study, Fresno with 29 specific to San Diego. Respondents included executives from Tulare hospitals, physician organizations, community clinics, Medi-Cal Kings health plans, and other local health care leaders. Interviews with Los Angeles San Bernardino Riverside Orange commercial health plan executives and other respondents at the state level also informed this report. ▶▶ for the entire regional markets series, visit www.chcf.org/almanac/regional-markets. San Diego * Orange County was added to this study in 2015; the research team had familiarity with this market through the prior Community Tracking Study conducted by the Center for Studying Health System Change (HSC), which merged with Mathematica in January 2014. ABOUT THE AUTHORS ABOUT THE FOUNDATION Ha Tu, Lara Converse, Annie Doubleday of Mathematica Policy Research, The California Health Care Foundation is dedicated to advancing and Paul Ginsburg of the University of Southern California and the meaningful, measurable improvements in the way the health care delivery Brookings Institution. Mathematica is dedicated to improving public well- system provides care to the people of California, particularly those with low being by conducting high-quality, objective data collection and research. incomes and those whose needs are not well served by the status quo. We More information is available at www.mathematica-mpr.com. work to ensure that people have access to the care they need, when they need it, at a price they can afford. CHCF informs policymakers and industry leaders, invests in ideas and innovations, and connects with changemakers to create a more responsive, patient-centered health care system. For more information, visit us online at www.chcf.org. California Health Care Almanac is an online clearinghouse for key data and analysis examining the state’s health care system. For more information, go to www.chcf.org/almanac. ©2016 California Health Care Foundation