Exchanges between healthcare providers and insurers: a case study.

As suggested by Wallace (1987), we focused on a homogeneous set of activities in order to control for spurious variability among insurance providers. Thus, selected patient cases were homogenous with respect to ailment and time. Physicians and financial officers throughout the region were interviewed to identify a "discrete ailment" that is common but does not generally occur concurrently with other ailments and requires multiple visits to resolve. Lower back pain was the ailment most frequently identified to meet these criteria. Full case files for 62 patients who experienced lower back pain and contacted the practice were collected. To insure anonymity, arbitrary case numbers were assigned to patient cases.

Using the Current Procedural Terminology (CPT) codes (American Medical Association, 2000), every interaction between the patient and the healthcare provider was analyzed to determine whether it was a lower back pain complaint. Given the focus on the billing and collection cycle, a channel interaction was defined as an event that triggered a receivable between the healthcare facility and the insurance provider. Then the charges associated with treatment, amount reimbursed by the insurance company, and receivable age were collected. Receivable age was measured as the number of days between the date the charge was submitted to the payer and the date payment was received. Reimbursement fraction was measured as the percentage of the original billed charges that were reimbursed to the physician practice. Holding constant the healthcare facility, ailment, and time period, significant variability among insurance providers across reimbursement fraction and/ or receivable age increases the complexity in managing the billing and collection cycle. This finding would be an indication of extent to which environmental uncertainty in the channel is present.

The Physician-Insurance Provider as a Distribution Channel: Evidence

Assessment of Channel Variables

The starting point for most ongoing channel relationships is the legal contract. The contract serves as the mechanism for aligning channel partners' interests and specifying the terms of the relationship (Lusch and Brown, 1996). If channel coordination is to be successful then each participant must understand the goals and demands of the relationship. A well-designed contract creates incentives to comply with the terms of the relationship, enhancing channel co ordination (Jeuland and Shugan, 1983; Lai, 1990; Moothy, 1988). The explicit contracts vary considerably in length, features, restrictions, and conditions (Frazier, 1999). The terms are a function of the transactional attributes, environmental and competitive conditions (Heide et al., 1998; Williamson, 1996). Contracts are instrumental in defining the responsibilities between the physician and insurance provider. Interviews with healthcare administrators indicate that it is imperative to have a well-specified contract. The practice manager identified it as the most important variable in the relationship. The contract serves as the framework upon which successful coordination occurs. It is the tool healthcare and insurance administrators use to structure each participant's responsibilities and rights. Without a good contract, communication breaks down and the risks for irreconcilable conflict are high.

As stated previously, channel relationships are social systems, and inherent in social systems are power and conflict issues. While the issues of power and conflict are resident in almost all social systems, including most channel partnerships, they are particularly acute in healthcare. As one example, the reports of channel collapse where the physicians divorce themselves from involvement with all types of insurance providers consistently claim that conflict and power issues are at the source of the decision (Sharpe, 1998a, 1998b; Shute, 2002). "A firm's power in a dyadic channel relationship is its potential for influence on the other firm's beliefs, attitudes, and behaviors. This potential is tied to the other firm's dependence or need to maintain the channel relationship to achieve desired goals" (Frazier, 1983: 159). The potential for influence between the physician and insurance provider is primarily dependent on size. A large physician practice in a community has a stronger ability to influence contract terms and resolve conflict favorably relative to a small practice. Likewise, when an insurance company holds policies with large employers in the region it holds considerable potential for influence. It is the power balance between the healthcare and insurance provider that signals the extent to which eventual conflict may occur. When two channel partners have high joint power, there is a high probability the relationship will be successful in promoting trust, commitment and positive relational behaviors (Gundlach and Cadotte, 1994; Kumar et al., 1995; Lusch and Brown, 1996). However, the converse does not hold--if low joint power exists then it is likely that little interest exists in making the relationship successful (Frazier, 1999).

One example of conflict within the physician-insurance provider relationship centers on reimbursement. Insurance regulations generally specify the speed at which claims must be processed. However, the time limit refers to a "clean claim" and if there is any error in the claim form, regardless of the source of the error, the clock is reset. Hence, receivable turnover can be a consistent source of conflict. Whereas the existence of conflict is not sufficient evidence that the channel framework is applicable, how it occurs and is resolved does suggest that underlying theory from the channel domain can be instrumental in the healthcare payment domain. Conflict is viewed as a continuum where at one end is mild disagreement and at the other end is a crisis state (Pondy, 1967; Brown and Day, 1981). In a healthy dyad both conflict and cooperation generally coexist as each organization's boundaries become blurred (Alter, 1990). To understand how conflict impacts the dyad it is necessary to examine the process from its initiation to its pinnacle and finally its resolution (Frazier, 1999). Physicians contract with several insurance providers simultaneously. The quality of the relationships is heterogeneous, as are the states of conflict. Our interviews indicate that conflict is inevitable but the physician practice staff works consciously to manage conflict as part of their long-term relationship with the insurance provider. Each incident is considered in the context of the history experienced throughout the relationship. In those relationships with high degrees of cooperation, conflict is managed as a balance between their viewpoints. Alternatively, where the relationship is less cooperative, each incident can be a separate confrontation. These experiences are analogous to those encountered within the traditional manufacturer-distributor channel dyad.

Both power and conflict can be mitigated by inter-firm communication. As our interviews revealed, efforts to create an open communicative atmosphere between the physicians and insurance providers are an effective mechanism for minimizing conflict. It is assumed that open and fair communication will promote trust, leading to improved relations and simple conflict resolution. Often both sides will share environmental intelligence in order to reduce decision-making uncertainty. Inter-firm communication is a central construct in traditional channel relationships, with intelligence sharing an important variable in communication strategies between channel partners (Huber, 1990).

To summarize, channel partners must develop a relationship where the benefits are greater than the costs. When this inequality is reversed, the relationship breaks down and changes occur in the mechanism for acquiring goods and services (Williamson, 1985). To sustain a positive cost-benefit equation, the channel dyad must contain explicit elements of contracting, as well as communication systems that create trust and commitment in order to manage conflict, create synergies, and scale economies. We have presented the fundamental variables inherent in the traditional channel partnership and demonstrated a correspondence to the physician-insurance provider relationship. These variables can serve as a framework that leads to a better understanding of the physician insurance relationship.

Measurement of Environmental Characteristics

Asset Specificity. Through interviews of personnel at the facility, we discovered that the practice requires one billing clerk for every physician to manage the contractual relationship with the six insurance entities. The Chief Financial Officer at the physician practice claims that there has been an increase in administrative staff at this level due to the demands and complexities inherent in collaborating with numerous insurance providers. Billing clerks generally work with only one or two providers and they need specialized skills to interact successfully. Specifically, the clerks need to develop relationships with their correspondent staff at the insurance provider in order to facilitate problem resolution. They also must be proficient with the idiosyncratic procedures demanded by each insurance provider. This demand for human capital corresponds to the asset specificity construct outlined in transaction cost analysis.

Environmental Uncertainty. Of the 62 patient case files collected, one was eliminated from analysis because the patient was self-pay, five were eliminated due to switching insurance companies mid-treatment, five were eliminated as they had no available billing records and one was eliminated because the patient had a complex medical situation where lower back pain was but one of many ailments being treated simultaneously. As shown in Panels A and B of Table 1, the remaining 50 patient cases led to 122 channel interactions. Insurance company names are kept confidential, thus P1-P3 and H1-H3 are used for the PPO's and HMO's, respectively.

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