Fail to Scale: Why Great Ideas In Healthcare Don’t Thrive Everywhere

In the world of fine wine, it is well known that some types of wine grapes grow only in very specific climates and ecologies. The concept borrowed from the French is “terroir” (ter-WAHR). Terroir explains why the finest champagne grapes grow only in a small district in northeastern France, characterized by rolling hills and a chalky limestone subsoil that provides a steady level of moisture and imparts a mineral note to the wine’s flavor.

Health policy advocates have sought for generations to propagate promising forms of health care organization across the country. Yet one finds repeatedly that some forms of organization that prosper in one part of the country fail to thrive in others. Is it possible that the concept of terroir also applies in health care?

The Case Of Kaiser Permanente

Kaiser Permanente’s health plans would be a great example. Kaiser has been a darling of health policy advocates such as Alain Enthoven, Paul Ellwood, and others because of its integrated structure, global risk, and salaried employment model of physician practice. Yet, despite repeated federal interventions, beginning with the Health Maintenance Organization Act of 1973, Kaiser only recently exceeded 10 million in enrollment for the first time in its 71 year history. Moreover, 82 percent of that enrollment is in two states—Oregon and California—where Kaiser originated. The percentage of Kaiser’s enrollment that derives from its origin states is basically unchanged in a decade.

What was the “terroir” that enabled Kaiser to flourish in these states? Kaiser’s growth rested on a combination of the prevalence of large scale multispecialty group practice, a tradition of prepayment for health services (as opposed to indemnity insurance), and large unionized employers tied to trade, ship building, and defense contracting after World War II. As the unionized sector of employment was displaced by growth in other economic sectors, Kaiser’s substantial presence in large Pacific Coast markets (San Francisco, Sacramento, Portland, Los Angeles, and San Diego) lowered the cost of additional enrollment.

Kaiser has presences in other markets like Denver, Hawaii, and the District of Columbia that have grown modestly. But it never achieved West Coast levels of dominance in these markets, and ambitious attempts during the 1990s to become a “national” health insurer ended in costly failure.

Independent Practice Associations

Kaiser’s dominance in Pacific Coast markets encouraged the growth of another innovation — the risk-bearing Independent Practice Association (IPA). In order to defend their franchises against Kaiser’s steady growth, state medical societies in the 1970s encouraged their members to form rival IPA networks that preserved solo practice.

Private practicing physicians using these IPAs and insurgent payers like PacifiCare and HealthNet formed broad regional alliances during the 1980s. IPAs like Hill Physicians, Brown and Toland, and Monarch accepted delegated risk from these health plans through capitated contracts. These IPAs also developed management services organizations that supported small practices and facilitated billing and documentation for these managed care contracts, enabling them to compete for business with the vast Kaiser groups. Delegating risk to physician organized care systems helped some health insurers to keep pace with Kaiser’s growth, at least for a time. Absent the Kaiser threat, it is highly unlikely that these IPAs would have attracted enough physicians willing to support them.

One of the most successful of these risk-bearing physician enterprises, HealthCare Partners (HCP), spawned its own salaried multi-specialty group practice and grew to the point where it was acquired by DaVita in 2011 for $4.4 billion. Yet even with a very successful business model, HealthCare Partners has failed to thrive outside the Los Angeles basin. In Albuquerque, Las Vegas, Philadelphia, and Florida, HealthCare Partners has struggled to achieve either market influence or profitability. Visions of scaling up the HCP model to a national brand have thus far eluded DaVita, disappointing the company’s shareholders and challenging its management. DaVita is fighting a terroir problem.

Provider-Sponsored Health Insurance

Another example of a terroir effect can be found in provider-sponsored health insurance. There have been multiple waves of provider-sponsored health plan development since the early 1970s, characterized by a high failure rate. Adverse selection (e.g., enrolling a disproportionate number of their own patients, or people who are expected to become patients), a lack of capital, a failure to achieve a critical mass of enrollment, and in-house conflicts with hospital and physician subsidiaries have been the the main autopsy findings.

However, formidable provider-sponsored health plans survived the withering market entry process, including Presbyterian in Albuquerque, Select Health for InterMountain in Utah, Geisinger in Pennsylvania, Optima for Sentara in Virginia, and Priority Health for Spectrum in Western Michigan. Many of these plans and their dominant provider systems developed in more rural areas with limited health plan choices. Humana and PacifiCare were the only provider sponsored plans to reach public markets, but only after they were corporately separated from their sponsoring hospitals.

Nationally, about 15 million people were enrolled in provider-sponsored health insurance plans in 2015, two-thirds in managed Medicaid and Medicare Advantage segments. That translates into a total market penetration of about 5 percent of the total covered population (public and private), and about 3 percent of the commercial market.

Yet in Wisconsin, provider-sponsored health insurers today account for nearly 40 percent of the covered population. The very same conditions that fostered Kaiser’s growth played a role in Wisconsin — a long history of multi-specialty practice, plus a collectivist political tradition that inhibited protectionism on the part of solo practitioners, and a strong union-driven health benefits climate plus the factor of a significant rural population with limited health plan options.

Very Little About The Health System Is Actually National

Other candidates for terroir-type explanations of striking regional variation: the wide prevalence of industrial-scale Medicare fraud in certain sunbelt communities like southern California and south Florida, the inability of the investor-owned hospital sector to achieve a significant presence in the Midwest or Northeast, the incapacity of hospital managements and physician communities to work collaboratively in wide swathes of the sunbelt, the limited success of the accountable care organization (ACO) phenomenon in the Midwest or Far West, and the limited development of economic clusters in the life sciences such as are found in Cambridge, Massachusetts, Silicon Valley, and San Diego.

In our experience, there seems to be almost nothing except Medicare that is truly national about our health system. Fort Lauderdale, Florida, Hastings, Nebraska, and Seattle, Washington are actually in different countries culturally and politically. Those significant cultural and political differences have economic and historical roots, and uniquely color the traditions of medical practice and health care organization that prevail in those communities.

The existence of marked regional differences in health system organization and financing is not news to the health services research community. Starting in the 1990s, Paul Ginsburg and colleagues at the Center for Studying Health System Change documented the markedly different development paths taken by health care players in 12 urban markets.

Looking Beyond Economic Factors In Health System Change

For the past 40 years, American health policy has been dominated by economists. Their economic models presume universality in how physicians respond to incentives. These models captivate politicians and their handlers, and seem to come in waves, like memes in fashion or popular culture. Yet, over and over again, mechanistic, marginalist economic explanations of how incentives shape physician behavior play out unevenly in different regions of the country, and have resulted in a lengthening string of policy disappointments.

A failure to understand and respect the role that local culture and market conditions for health system innovation profoundly limits the effectiveness of “single bullet” policy solutions. After a while, veteran policy observers find ourselves saying (as we did with the ACO) “Wouldn’t it be great if, before mounting our trusty steeds and charging up the same box canyon, people would simply ask, ‘What happened the last three times we tried to do this?’ Why did innovations fail in some parts of the country and succeed in others? The checkered record of the CMS Innovation Center might be attributed in part to a failure to understand and respect the effects of terroir on health system innovation.

Perhaps a healthy respect for non-economic factors in health system behavior—often rooted in local and regional circumstances and in institutional culture—might be a corrective for those who see sweeping “national” solutions to complex problems. To paraphrase the famous line from the movie Cool Hand Luke “What we have here is failure to replicate.” Absent a respect for local and non-economic factors, we will continue the wasteful practice of sowing our policy seeds on barren ground.

Authors’ Note

Jeff Goldsmith is National Advisor to Navigant Healthcare. Lawton Burns is James Woo Kim professor at Wharton. Authors would like to acknowledge the assistance of Lauren Crowther of Navigant Healthcare in research for this article. This post first appeared in Health Affairs, crossposted at the request of the authors. 

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5 replies »

  1. Isn’t it interesting that even the VA Health System isn’t really a “system” and that while there may be some good VA Health systems around the country, they certainly aren’t being replicated as much as politicians like to think they are.

    And let’s take this a little further. People try to compare health care delivery internationally. It can’t be done with any credibility. This is because every country, state, metro area and town is different politically, geographically, culturally and economically. So comparing Canadian and U.K. health care provider organizations and payment schemes makes no sense.

    Let the local markets determine the needs and services they need. The real national health care organizations are the suppliers of technology, medical supplies, drugs and medical devices.

    As usual, Jeff has written a well researched article that will make the “economists” think.

  2. Dr. Palmer, Thanks for your response. It’s very reassuring. What’s your guess as to what accounts for the huge variance in per capita Medicare spending among states and even within states? How important is fraud, defensive medicine, differences in approaches to end of life care some of which may be cultural, differences in physical therapy and home healthcare utilization some of which may be unnecessary, more of a money driven mentality in some places than others, differences in how much care is delivered in hospitals and by hospital owned providers, differences in medical input costs (wages, etc.) ? There must be a logical explanation. No?

  3. Barry, I think that the high incidence diseases and conditions like chf, coronary artery disease, copd, asthma, stroke–those illness that have been examined many times in clinical trials– are treated in remarkably uniform ways, with more discipline than the lay person would guess. However, the patients may not tolerate certain meds, like ace inhibitors or beta blockers, and this adds variability; and sometimes cost comes up as a problem. With many other conditions that are less well understood, like idiopathic pulmonary fibrosis, medical practice is entwined with more art…which is as it should be when we don’t know precisely what to do. Research by trying reasonable homegrown ideas is better than trying to please Dartmouth.

  4. It’s pretty easy for me to see and to understand why care delivery models can’t be easily replicated across regions or states. Kaiser, for example, has a huge infrastructure, including dozens of hospitals, in CA that would be prohibitively expensive to replicate from scratch elsewhere, especially without a critical mass of patients to start with. The HMO model is more readily accepted by patients in some places than others. The same is true with for profit hospitals. HCA has half of its hospital network in FL and TX. Even the Mayo Clinic can’t completely replicate its Rochester, MN culture in its AZ and FL satellite facilities.

    What’s harder for me to understand, however, is why the cost per Medicare patient should vary by a factor of close to three between Hawaii and Southern FL. I know fraud is a big issue in Miami-Dade County, FL. I also suspect that defensive medicine is more intense in some places than others based on the perceived hostility of the local litigation environment.

    As a patient, I would hope that the consensus view of how best to treat someone with CHF, ESRD, advanced diabetes, asthma, mental illness, etc. is more consistent across the country than whether providers are part of an HMO, PPO, ACO, IPA or whatever. As for providers, especially hospitals, getting into the health insurance business, they learn quickly that estimating and pricing actuarial risk isn’t as easy as it appears.

  5. Thoughtful, informative and insightful…..a beneficial call for a dose of humility and caution for our health policy gurus. Unlikely they will take note and listen.