Policy Report

Funding for this Report was provided by:
The James Irvine Foundation of San Francisco, California.

For more information about policy implications, see our FAQ sheet highlighting the policy brief.

Between 1997 and 2001, the James Irvine Foundation undertook a four year, $6 million Developing Rural Integrated Systems (DRIS) Initiative in four comparatively mature California rural health care markets, with the goal of aiding the development of locally owned entities that could interface with managed care. This paper highlights the policy implications derived from the DRIS Initiative experience, as they relate to the evolution of California's rural health networks.

1. Develop state action immunity legislation that provides guidance to providers on legitimate pro-competitive networking activities in rural areas and outlines provider community benefit obligations.

2. Ensure that the Department of Managed Health Care can offer critical guidance and include enforcement services to review and oversee health plan contracts, particularly for vulnerable rural health care providers, in order to ensure that the scope of risk and reimbursement do not jeopardize health care quality or destabilize the health care safety-net in rural California.

3. Facilitate and provide the necessary technical assistance resources to rural integrated health system networks, in order to develop local capacity to compete effectively in Medicare and Medi-Cal managed care and in order to ensure that efforts to develop managed care in urban settings do not serve as a catalyst to undermine health systems in nearby rural communities.

4. Implement policy that would allow Medi-Cal to join with Medicare's offer of enhanced reimbursement in the Critical Access Hospital program, in order to ensure that all of the potentially eligible small rural hospitals in California have the opportunity to successfully participate in the CAH program.

DRIS was conceived during a time in California when State and Federal public policy was shifting rapidly in favor of managed care as the chief method of financing and providing health care services to publicly insured citizens. It was also a time when CalPERS and other health plans were seeking to contract with California's rural provider networks. Medicare + Choice health plans, spurred by the Balanced Budget Act of 1997 (BBA '97), were also looking to penetrate rural California markets, while urban based health systems saw these same communities as a source for tertiary referrals. Because of their purchasing power, the Medicare and Medi-Cal programs were seen as powerful forces that would drive the development of managed care plans. The enrollment of beneficiaries in these plans, the increased development of provider networks and the use of system savings were expected to result in the expansion of health insurance coverage to uninsured populations in urban as well as rural areas.

In response to this climate, in 1997, The James Irvine Foundation launched the Developing Rural Integrated Systems (DRIS) Initiative, a four-year $6 million project designed to help rural California communities better understand managed care and spur the development of integrated community-based health systems. The DRIS Initiative has been implemented in four rural areas of California: Humboldt and Del Norte Counties, Imperial County, the Ridgecrest/Indian Wells Valley in Kern County and the Lompoc Valley in Santa Barbara County. The California Institute for Rural Health Management (CIRHM), a California not-for-profit organization, was responsible for shaping, implementing and facilitating the DRIS Initiative.

For various reasons, during the ensuing four year period, the expected growth in publicly financed managed care did not occur in most areas of rural California. By the end of the 1990s, both publicly and privately financed managed care were leaving rural California at a heightened pace. The DRIS communities today experience less organized managed care penetration than three years ago when the Initiative started. Without the presence of publicly financed managed care programs, the establishment of sustainable locally owned entities (called Administrative Service Organizations (ASOs)) that would integrate clinical, administrative or financial systems to help them deal with managed care was hindered. Commercially insured residents became the sole target enrollee population for the proposed entities, but these residents have proven to be too few in number to provide a sufficient aggregation of covered lives to make these community-owned rural managed care entities self-sustaining without additional grant funding.

While the environment of managed care in rural California has undergone a number of dynamic shifts, first with the expansion of HMOs into rural markets and then with their recent pullouts, it is expected that managed care will remain a force in rural communities in the form of discounted fee-for-service PPO plans and the performance improvement systems required by third party payors. Therefore, despite HMO pullouts, the formation of rural provider networks and community-wide collaboration between health and social service providers and employers will continue to be important mechanisms to promote cost controls and to improve the quality of and increase access to health care in rural California.

The lack of California statutes and regulations permitting state action immunity from antitrust liability which would have clarified the extent of rural collaboration and allowed rural providers to collaborate more freely, limited the choices and lengthened the development of ASOs in several of the DRIS sites. Absent state action immunity, it was not clear what actions the DRIS providers might participate in without liability, however beneficial these activities might have proven to be in strengthening their local health systems or in assuring access to health care in their communities. These issues presented themselves in the DRIS communities that had close to 100% provider participation in network activities.

To help mitigate this concern, DRIS incorporated broad-based community ownership and charitable activities into the ASO model. DRIS also spent extra time and dollars seeking to allay antitrust concerns by providing guidance on quantifying and clarifying their charitable activities and purposes and in recognizing the limitations of their cooperative activities. However, DRIS requirements are informal in nature and limited in time to the grant period. Without State guidance, the DRIS communities do not have the long term benefit of ongoing legal advice as to the appropriate legal structures and obligations as they might change over time. Having available state action immunity statutes and regulations would provide guidance to rural health care providers on the permissible types of collaborative activities they might undertake. It would also require rural providers to prove consumer benefits on an annual basis. An important benefit to providers granted state action immunity is the recourse to file motions to dismiss antitrust suits that have no substantive basis without having to go through costly and lengthy court trials to prove their case. This policy relief is significant for rural communities that face potential challenges from well-funded parties.

The presence of dominant, nationally owned health plans operating in the DRIS sites made the newly formed ASOs and provider networks vulnerable to insolvency for a number of reasons. Although bringing rural providers together improves their contract negotiations leverage, it cannot be assumed that participating in a rural network results in a level playing field. Rural health system providers do not have ready access to health plan contract specialists to help them evaluate contracts thrust upon them by health plans. The CIRHM consultants encountered health plan contracts that brought into question whether rural providers were being asked to assume greater than reasonable risk levels and consequently less than fair and reasonable reimbursement amounts. These contracts frequently included other unconscionable terms as well. The presence of the DRIS Initiative in the four participating communities made it possible for a team of experts to respond quickly to such contract issues that came up during the grant period. However, rural provider networks need to have ongoing access to expert guidance and enforcement by a State agency that can help them to evaluate health plan contracts being offered to them in order to determine appropriateness of scope, risk and reimbursement as they relate to assuring local health care quality and the potential impact on rura

Most California rural economies simply do not have the capacity to generate and provide sufficient resources to build and maintain the kind of complex infrastructure necessary to allow their health system to participate equally as a managed care partner. The notion of leveling the playing field is predicated on continued access to technical expertise, state of the art information systems and managerial resources.

As managed care in urban markets has expanded to capacity, health systems have drawn away Medicare and commercially insured patients away from adjacent rural communities such as the participating DRIS sites of Imperial County and the Lompoc Valley in Santa Barbara County. Rural health systems do not have the resources on their own to develop competing products or systems even when they are willing to participate in managed care. In order to ensure that the effort to develop managed care in urban settings does not serve as a catalyst to undermine rural integrated systems development, ongoing access to State and Federal government as well as private and corporate foundation funding is critical to ensure the availability of the technical assistance necessary to build and maintain rural health systems.

In California, Medi-Cal not joining with Medicare's offer of enhanced reimbursement for Critical Access Hospitals (CAHs) removed this integrated health systems approach as an option for preserving essential health services for some of the rural hospitals located in participating DRIS Initiative communities. The preservation of rural hospitals in many isolated regions of California is a significant access to care issue for people living in these remote communities. From a different standpoint, strengthening and sustaining these hospitals is critical to the rural economic base because they are also key employers in their communities.

Created through BBA '97, the Medicare Rural Hospital Flexibility Program was initiated to stabilize small rural hospitals that are the sole community provider and are an essential access point to care. Across the country, rural hospitals with 25 or fewer beds but no more than 15 acute beds, may opt to become a Critical Access Hospital (CAH). Conversion to a CAH designation and the enhanced reimbursement that it would allow has the potential to improve the financial bottom-line of these small essential rural hospitals while promoting the formalization of specialty and tertiary referral systems, as well as clinical integration. The prospect of improved financials, however, is often dependent on whether Medicaid (Medi-Cal in California) follows Medicare's reimbursement formula. This is particularly important in California, where CAH eligible hospitals have a significant percentage of Medi-Cal admissions. However, proposed legislation has twice been vetoed that would allow Medi-Cal reimbursement formulas to follow Medicare's for these small struggling hospitals.

• "Collaborating to Build Rural Health Networks: Technical Lessons from the DRIS Initiative", (California Institute for Rural Health Management, September, 2000),
  L. Buada, S. Rosenberg, J. W. Teevans, and S. Weisgrau
  
  
• "Rural Integrated Systems in California: Preparing for Managed Care," Health Affairs, (Sept/Oct 1999) 18(5):237-241,
  S. Weisgrau, L. Buada, M. Campbell, and I. Moscovice

• Luisa Buada , R.N., M.P.H.
• Gail Nickerson, CIRHM Executive Director
• James Teevans, J.D.
• Steve Rosenberg, Principal, Rosenberg and Associates