The Ultimate Self-Referral: Health Care Reform, AMA-Style

Tilting their
heads upward, delegates to the annual convention of the American Medical
Association (AMA) last June gazed at an enormous closed-circuit television
screen in the Grand Ballroom of the Chicago Hilton. Suddenly, Newt
Gingrich's face filled the blank space, and from the moment he began to
speak, the usually staid crowd let loose shouts of approval and waves of
applause. Holding aloft a copy of the AMA's hot-off-the-presses proposal,
"Transforming Medicare," Speaker Gingrich told his audience exactly
what it wanted to hear. "Unlike Ira Magaziner, we have actively reached
out to ask the AMA to be at the table."

In Washington a few months later, after a much ballyhooed, closed-door
negotiating session with the House GOP, the AMA's leadership marched to
the microphones to offer its public blessings for the GOP's
Orwellian-titled Medicare Preservation Act of 1995.

The AMA's
endorsement generated front-page headlines, and its public stamp of approval
offered Gingrich much-needed political cover to re-engineer the nation's
most popular health program. In turn, the AMA's move secured the
GOP's support for key items on the association's legislative wish
list and guaranteed it the kind of access to power that it has not enjoyed in
Washington for some time.

But there was a seeming paradox in this entente. Under the GOP's Medicare
legislation, more of the elderly would be likely to enroll in private managed
care plans that many physicians have fought for years. Indeed, ominous
rumblings from the medical markets dominated the mood of the same 1995 AMA
gathering that gave Gingrich a tumultuous reception. Doctors rose time and
again to attack the "bottom line" medicine of the managed care
industry. At one point James S. Todd, M.D., the association's executive
vice president and the highest-ranking staff member, declared that the AMA
wanted "to turn the policies of this House into the policies of
Newt's House." Moments later he asked, "Whoever would have
imagined that the noble practice of medicine would be shoved around by
cutthroat competition in a rough-and-tumble marketplace?" And then,
sounding a bit like a fiery labor militant, he added, "Physicians want to
be treated as professionals, not as commodities, not as medical merchandise
to be bought and sold . . . by market traders who are more concerned with
profits than patients."

Todd's angry rhetoric echoed the AMA's decades-old opposition to
managed care, but it sounded oddly anachronistic, even disingenuous. Although
many traditional, fee-for-service practitioners still oppose managed care, the
AMA now wants physicians to create their own insurance plans. On the surface,
it looks as though the AMA has thrown in its lot not just with the GOP, but
with the managed care revolution. Or has it? The Republican program for
Medicare also had a lot else to offer the physicians, including a new option
for medical savings accounts (MSAs) that many physicians see as the last, best
hope for restoring traditional, fee-for-service medicine.


Managed care plans, broadly defined, now cover two-thirds of all
privately insured Americans and have been putting ever greater financial
pressures on physicians. An indication of the impact is an unprecedented
decline of 3.8 percent between 1993 and 1994 in the median annual income of
American physicians, which slipped from $155,700 to $150,000 according to AMA
data. In areas of California where managed care now thoroughly dominates the
market, some medical specialists have reported declines of 30 percent in their
income over the past two years.

Not all physicians, however, are similarly affected. Some entrepreneurial
physicians have profited handsomely by developing networks or by winning large
managed care contracts. In addition, many primary care doctors-- general
practitioners, family practice physicians, internists, pediatricians, and obste
trician-gynecologists who provide women with a wide array of basic medical
services--have actually seen their incomes and the value of their practices

Specialists typically feel the pressure from managed care most directly because
the plans control their costs partly by minimizing referrals for specialized
care and driving tougher bargains with specialists over the rates they are
paid. Many kinds of specialists, particularly surgeons, are in oversupply;
thus, plans are in a buyer's market and can force fees (and incomes) down.
Specialists can reasonably expect even sharper reductions in earnings as
managed care plans increase enrollment and the use of specialist care falls.
According to an estimate by Jonathan P. Weiner of the Johns Hopkins School of
Public Health reported in the Journal of the American Medical
(JAMA) in July 1994, the United States may have a glut of
165,000 specialists by the year 2000.

Doctors know that many managed care plans, mainly the commercial HMOs, retain
as much as 30 cents of every premium dollar for administration and profits. The
physicians, of course, believe this money belongs rightfully to them. Hence the
"if you can't beat 'em, join 'em" strategy: regain
income now being lost to managed care by creating insurance plans that
physicians own and run directly. The AMA, as its leaders would be the first to
acknowledge, is pursuing its traditional aims, just in a new way.

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Physicians' interests have guided the AMA's political activity
for decades, informing its historical opposition to private managed care as
well as to national health insurance. Physicians have feared that both
government and corporate intrusion into the doctor-dominated medical market of
the past would limit their incomes and autonomy. While the AMA's
opposition to government is legendary, its antipathy to "corporate
practice" and "prepaid medicine," as managed care used to be
called, is less well understood. Since the turn of the century, American
physicians have opposed organizations that hired doctors as salaried employees
or paid them per member (or by "capitation," in today's
terminology). In the 1930s, medical societies were so hostile toward physicians
who worked for prepaid medical groups that they blacklisted them, barring them
from access to hospitals.

As prepaid medical care spread across the country and took on new forms in the
past three decades, the AMA's initial, virulent opposition gradually
softened. More of the AMA's own members increasingly worked for HMOs and
other managed care plans; the organization risked losing membership if it
simply continued denouncing such plans. By the late 1970s, the AMA was saying
that HMOs and fee-for-service practitioners delivered care of comparable
quality. In June 1992, as support grew for comprehensive reform, the AMA even
reached out to the managed care industry in search of a tactical alliance. In a
speech to the Group Health Association of America (GHAA), the trade group
representing HMOs, Todd acknowledged that the AMA had been "slow in
recognizing and accepting the benefits of HMOs" because of
"traditional beliefs and conventional wisdom, which, as we all know, is
often more conventional than wise." While enumerating some of their
differences, Todd beseeched his audience to remember that "the things that
unite us are stronger than the things that separate us" and that together
they must "convince the public that single-payer systems are not in the
nation's best interest."

Despite this conciliatory rhetoric, the AMA continued to battle the managed
care industry on several fronts. During the struggle over the Clinton health
plan, for example, the association sought legislative provisions that would
have curtailed the power of managed care organizations. In the spring of 1994,
the AMA even forged a united front with a new and most unlikely set of
allies--liberal congressional Democrats who supported single-payer health
reform over managed competition. The focus of the coalition's efforts was
the Patient Protection Act (PPA), a bill that proposed numerous federal
regulatory protections for consumers and physicians in their dealings with
managed care organizations. In a May 1994 press conference in Washington,
Lonnie Bristow, the AMA's current president, joined Senator Paul Wellstone
of Minnesota, an ardent single-payer advocate, to unveil the PPA. Wellstone saw
to it that much of the PPA was included in the Senate Labor Committee's
version of the Health Security Act. These provisions would have hamstrung
managed care plans by sharply limiting their power over physicians. In the
House, the Ways and Means Committee health bill, which was similarly influenced
by the AMA, would have forced health plans to accept and pay for the services
of any physician who met the plans' standards ("any willing
provider," as the phrase goes in policy circles). The HMO industry argued
that the PPA, which it referred to as the "Physician Protection Act,"
would have robbed health plans of the ability to determine who worked for them
and, as a result, would have undermined their ability to guarantee high-quality
health care at a reasonable cost.

In short, the AMA was willing to ally itself with the managed care industry to
fight single-payer plans and then to ally itself with single-payer advocates to
curtail managed care plans. Taking its case against the role of managed care in
federal health reform to the public, the AMA ran a series of black-and-white
print advertisements that associated the Clinton plan with coldhearted
corporate managed care. One advertisement asked readers to ponder whether they
would prefer to get their medical care from an M.D. or an M.B.A. The
association also mailed its members a list of simple questions about health
reform to discuss with their patients. Many of these talking points were
targeted at managed care ("Will I still be able to see my own doctor? Will
I have to pay extra? And will my doctor and I be free to treat my

After the collapse of health care reform in Washington in September 1994,
national attention quickly shifted to the states, where some 20 medical
societies were trying to pass anti-managed care legislation. These state
societies, often with the assistance of the AMA, hoped to accomplish in state
capitals what the AMA had been trying to achieve in Washington. After some
initial successes in passing both "any willing provider" and
"patient protection" laws, state medical society victories slowed to
a trickle. In 1995 doctors suffered an unexpected and stinging defeat in Texas,
when newly elected Governor George W. Bush, Jr. vetoed a watered-down version
of the PPA in response to opposition by the managed care industry and its

At the national level, too, Speaker Gingrich would not embrace the kind of
regulatory anti-managed care legislation that the AMA had sought in the past.
But there was another alternative that a small but growing faction within the
AMA had been urging the association to adopt: a physician-friendly, pro-market
strategy. By the time Speaker Gingrich addressed the AMA's June 1995
meeting in Chicago, various elements of its new strategy were falling into


While Medicare provides a large share of physicians' incomes, many
doctors have an intense dislike of the program because of the limits that it
places on their fees and the organization of their practices. The Republican
interest in moving the elderly out of Medicare into private insurance thus
strikes a chord with many physicians. If seniors moved into private health
plans, doctors would no longer be subject to Medicare's fee schedules. The
risk, of course, is that doctors would instead become subject to control by
managed care plans. That is why two alternatives to traditional managed care
are so important to the AMA: doctor-controlled health plans and MSAs.

The AMA lobbied the GOP to use the Medicare legislation to address two major
obstacles to physician-run plans. First, the association wanted a relaxation of
antitrust regulations that inhibit physicians as well as hospitals from
cooperating with one another. These antitrust exemptions may not only enable
doctors to set up their own plans; they may also enable them to join together
so effectively in a region that other plans are locked out. And, second, the
AMA wanted physicians to be able to form plans without accumulating the
financial reserves that state laws typically require of health insurance plans.

The GOP Medicare legislation answered both of these demands. Moreover, the GOP
would supply the new doctor-owned plans with another key ingredient--a steady
pool of paying customers. Indeed, under the Republican proposal, the doctors
could reap enormous profits at the expense of the Medicare program by
channeling healthier patients into their own plans and encouraging sicker
patients to stay in Medicare. Private managed care plans generally have an
interest in cherry-picking healthier enrollees; doctor-run plans may, however,
have better information and more influence in steering patients.

MSAs also represent an opportunity for physicians to escape from
Medicare's limits. The MSA proposal would allow the elderly to use the
average value of their Medicare policy to buy an insurance policy with a very
high deductible ($6,000) and to deposit the remaining funds in a tax-free
account, which could be used to pay for uncovered medical costs. The advantage
to doctors is that they would face no limits on charges to MSA enrollees.

Because of the high deductible, MSAs are expected to attract seniors who expect
lower-than- average costs during a year. As a result, the Medicare trust funds
would likely lose money on the MSAs; according to the Congressional Budget
Office (CBO), the net effect on Medicare would be a loss of $2 billion through
2002. CBO, however, projects that only 1 to 2 percent of the elderly would
enroll in MSAs. If the doctor-controlled plans and MSAs together siphon off
many of the healthy elderly, the Medicare program could be in deep trouble. In
testimony before the House Ways and Means Committee last September, Karen
Davis, a medical economist and president of the Commonwealth Fund, noted that
if "the healthiest 50 percent of Medicare beneficiaries . . . were to take
vouchers, the cost to the program could be extraordinary. For example, if 18
million beneficiaries collected vouchers of $5,000, the cost would be $90
billion--yet these beneficiaries currently cost the Medicare program virtually


The basic structure of the Republican proposal thus offers physicians a
big opportunity to recoup their economic position. Even so, the physician-owned
insurance plans face some daunting obstacles.

Not far from the ballroom where Gingrich praised the AMA's blueprint for
"Transforming Medicare," the AMA's new Capital Resource Project
set up a booth at which delegates could pick up copies of an AMA "Guide to
Forming Physician-Directed Managed Care Networks." Business advisers were
also on hand; one of the purposes of the project is to match up entrepreneurial
physicians with AMA-approved financial advisers and venture capitalists. In
another meeting room, representatives of state medical societies reported on
their efforts to set up statewide physician-run health plans. At least 21 state
societies had already established or were in the midst of setting up such

Some delegates welcomed the AMA's new direction and made the case that
continuing the fight against managed care was a mistake. One such physician,
Marc Schlessinger, is a young internist at the Dreyer Clinic, a physician-owned
group in Aurora, Illinois. During a floor debate, Schlessinger pleaded with his
fellow delegates to reject anti-managed care laws because they would kill off
financially weak physician-owned plans, leaving the field open to further
domination by insurers. But while appealing to the other delegates,
Schlessinger identified the vulnerability of the AMA's new strategy.
Doctors' pockets aren't nearly as deep as those of insurers. So far
the AMA's Capital Resource Project has approved projects with budgets
between $100,000 and $15,000,000--no match for the resources of the big

Even if doctors and hospitals can break into the Medicare managed care market,
these new organizations will be forced to compete on the terms already set by
large insurers and HMOs. Ultimately, physicians who establish plans must
assemble their own teams of financial officers, husiness managers, actualrial analysts, advertisers, and medical management consultants. to survive, they must become insurers. This is exactly what happened historically to the Blue Shield plans, originally created by physicians but now hardly distingushable from other insurance companies. Similarly, many of the early doctor-controlled HMOs, going back to the 1930s, such as the Ross-Loos health plan in Low Angeles, were ultimately sold to insurers.

Many of the new provider-run groups are bound to be swallowed up by large managed care corporations. That is exactly what happened to MD Health Plan, an HMO established by the State Medical Society of Connecticut in 1987. As MD Health Plan's statewide network of physicians grew, it was eyed by larger national plans that wanted to gain a foothold in the Connecticut market. Origianlly owned by 2,473 physicians, MD Health Plan was sold in 1995 to Health Systems International (HSI), one of the largest for-profit health plans in the nation. HSI paid $101 million for MD Health Plan, whose original investors, all members of the state medical society, profited handsomely. but now the physicians who work for MD Health Plan must satisfy not only their patients and colleagues, but also the investors who own the plan's stock and Wall Street analysts who advise them.

At the Chicago meeting, one of Speaker Gingrich's most popular applause lines summarized where he and the AMA are headed: "We're saying, we have a general vision of a free-market health care system in the information age where every senior citizen becomes a customer. Now, you help us figure out the details."

While forming doctor-owed plans may eventually yield profits for some entrepreneurial physicians, such plans do not hold out much promise of a substantially improved health care system for most Americans. Ironically, the doctor-owned plans bring to mind questions raised in a 1994 AMA report, which found that "managed health insurance plans present inherent conflicts of interest for physicians" and urged doctors to examine their role in conflicts between quality care and the bottom line. Under the Republican Medicare plan, will finacially weak doctor-run plans provide high-quality services? Will doctor-run plans allow patients the free choice of physician--including doctors with high-cost practice patterns? The answers aren't clear, but the very same economic pressures that drive traditional managed care plans to cut costs and control patient choice will also set the pace for physician-run plans. The AMA may have decided to go down the road of market-based medicine, but it is not at all clear whether that approach will make physicians masters of their own fate--much less solve the health problems that the elderly and other Americans face.

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