Exchanges between healthcare providers and insurers: a case study.

Generally, distribution channel analysis and research emphasizes the product flow from the manufacturer to the distributor (Rosenbloom, 2000). Manufacturers use a distributor or distributor network to provide marketing and distribution services more effectively and efficiently than they can develop themselves. The distributor may represent several manufacturers simultaneously, which provides retailers with a simple mechanism for stocking inventory as opposed to buying from each manufacturer individually. However, as the tradesman-bus driver alliance illustrated, distribution channels are inherent in organizations beyond the manufacturing setting.

In this article, we contend that the characteristics present in traditional distribution channel relationships are also applicable to the healthcare funding system. Consistent with prior research on distribution channels (Frazier, 1999), we focus our investigation on one dyad within the distribution channel: the relationship between physician practices and insurance providers. The problems in healthcare funding are many, but one commonly cited problem is the relationship with insurance companies (Sharpe, 1998a, 1998b). The evolution of this arrangement has created a patchwork of practices; some are efficient, others impede the delivery of quality healthcare to the patients. There is scant empirical investigation related to the characteristics and the mechanisms by which the physician-insurance company relationship functions. Once we demonstrate that the distribution channel is a framework that can be extended to exchanges within healthcare then the extensive research foundation based on the manufacturer-distributor channel structure provides opportunities to develop a deeper understanding of the issues and variables inherent in the physician-insurance provider relationships.

The remainder of this article is organized as follows. The next section provides background on the healthcare funding system as well as the traditional distribution channel framework. We then demonstrate applicability of the distribution channel framework to the healthcare payment system using two complementary methods. First, we rely upon the distribution channel literature and interviews with healthcare administrators to establish the correspondence between individual variables studied in the channel literature to the physician-insurance provider relationship. Second, we draw upon the assertions from transaction cost analysis (Williamson, 1985; Rindfleisch and Heide, 1997; Frazier, 1999) to describe the environmental characteristics that typify most distribution channel partnerships. The presence of asset specificity and environmental uncertainty, two primary characteristics derived from transaction cost analysis, are measured within the healthcare-insurance provider relationship at one representative physician practice. The paper concludes with a discussion of the findings and implications for future research.

Conceptual Foundation

The Healthcare Funding System

Currently in the United States, the majority of healthcare is funded through employer-provided health insurance. (2) Employers contract with insurance companies to provide coverage to their employees. The employees choose an insurance company from the employer's list and then, generally, the employee's insurance choice dictates their physician option. Healthcare is provided to the employee and physicians receive payment from the insurance company. Conflicting goals among constituents have emerged where employers seek low cost insurance coverage, insurance providers seek profitability within a highly competitive market, employees seek high quality coverage, and physicians seek the autonomy to provide quality healthcare. These conflicting goals, compounded by escalating healthcare costs, have created frustration and mounting protests in public, political, and professional arenas.

Even in this environment, this system has substantial advantages for physicians, primarily by creating a demand for physician services while concurrently reducing fee collection risks. Healthcare administrators assert that provision of insurance benefits motivates patients to seek healthcare services to remedy current ailments as well as to assess overall health status. In contrast, those without health insurance often seek only emergency healthcare. An insurance company relationship also provides a marketing function for physicians through the assignment of physicians as preferred providers. Patients frequently choose their physicians from this list; thus, the designation as a preferred provider widens the base from which the physician practice derives its patients. The insurance company also provides a number of services that assist healthcare delivery. Its financing role creates the mechanism whereby physicians collect fees from the insurance companies under contract rather than collecting the entire bill from each individual patient. Prior to the wide-spread use of insurance, physicians were often reluctant to demand payment from financially strapped patients, resulting in nonpayment for services or slow payment that created severe cash flow problems for physician practices. Insurance companies also serve an advisory role, providing resources and comparative statistics for physicians to help them assess their performance relative to national standards.

The healthcare funding system has survived for decades because it offers benefits to all constituents. Concurrently, however, there are flaws or friction points within the system. Over the past two decades, several funding models have been introduced including health maintenance organizations (HMO) and preferred provider organizations (PPO). The historic fee-for-service system has virtually disappeared. In place currently is a patchwork system that spans the continuum from pure HMO to a generous PPO system. Within a single physician practice patients may utilize insurance options that span the entire continuum. Patient care has evolved into treating symptoms superimposed with the options patients have available from their insurance provider. Physicians are frustrated by the need to tailor treatments individually to meet patients' unique insurance plans. In a system where physicians expect to make autonomous and decentralized decisions, they are confronted with the insurance provider who expects an interdependent and centralized decision-making process. Growing numbers of physicians are responding by restructuring their practices to eliminate their involvement with insurance providers. Their revised practice reduces the number of patients, requiring patients to pay a monthly retainer in return for immediate access and more focused attention from the physician. Some claim they make no more than they did previously but would rather "... work at a discount than battle the bureaucracy" (Sharpe, 1998b: B1) Other physicians claim "... they not only get paid faster--they often get paid more than under managed-care plans, without the administrative headaches"(Sharpe, 1998b: B1). For these physicians, the advantages present in the physician-insurance provider relationship are dwarfed by the costs. If this new physician practice model expands at its current rate, we will see the nature of healthcare fundamentally change. Critics claim this creates a two-tier health system, where the wealthiest patients will receive superior healthcare access and treatment (Pascual, 2001; Sharpe, 1998a, 1998b).

This growing phenomenon is a symptom of systemic problems in healthcare funding. The relationships among all constituents have largely evolved piecemeal rather than created overtly through joint strategic planning. Systematic empirical investigation will be necessary to understand the dimensionality of these alliances. As a starting point, the characteristics that define the physician-insurance provider relationship are instrumental in diagnosing the cost-benefit structure inherent in the healthcare funding system. We assert that the rich research foundation provided by the channels literature supplies the tools to assess the nature of the costs as well as the social system in which the physicians and insurance companies must cooperate. This study represents the first step to assess the channel framework applicability. The channel framework enables the construction of models that explain the behavior exhibited by physicians and insurance companies. Ultimately the framework can help the industry strategically plan how best to coordinate the contracts, interactions, and procedures with all participants within the healthcare payment system.

The Traditional Distribution Channel Framework

Inter-organizational transactions can be discrete or relational (Mohr and Nevin, 1900). Two organizations can interact frequently but as a series of discrete transactions rather than a cooperative channel relationship. A distribution channel exists when the transactions between organizations are relational; the transactions are part of a social system that is ongoing, integrated, and cooperative. It requires the two organizations to coordinate efforts to work jointly towards improving the revenue stream and lowering the costs for both participants. Two organizations that are part of the same supply chain can only be classified as channel partners if they bring specialized expertise or resources together to achieve a mutual benefit rather than interact in a series of independent transactions. The physician-insurance provider dyad represents an ongoing relationship where efforts must be coordinated to provide healthcare to patients. In this context, the relationship is typical of a channel partnership rather than a simple supply chain transaction.

A distribution channel can exist in the sales function as well as the support functions within organizations. The sales channel involves buying, selling, and transferring title, whereas in the facilitating channel the actions of insurance, transportation, financing, market research and other activities necessary to support the sales function are coordinated (Rosenbloom, 2000). Correspondent activities occur within the physician-insurance provider relationship such as the marketing function that occurs when the insurance company promotes its preferred providers to policyholders, and the facilitating functions that consolidate billing, assist in practice management, and provide access to national statistics.

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