Exchanges between healthcare providers and insurers: a case study.

Comparison of receivable age and the reimbursement fraction among the insurance providers provide our measures of environmental uncertainty at the patient level. The data related to these two variables were first aggregated by insurance provider and are presented graphically and in table format in Figure I. As illustrated in Figure I, on average, receivables from the insurance entities were paid by the second month following submission of the charge (36.88 days), with a consistent 32.31 to 35 days for the PPO's and the broader range of 28.7 to 57.2 days for the HMO's. The average reimbursement fraction was 76%, with greater variation occurring among the PPO's (70% to 92%) versus a more narrow HMO range of 69% to 77%.

Figure I illustrates the relationship between receivable age and reimbursement fraction. The average for both variables for all insurance entities is 36.88 days and 76% reimbursement fraction, which defines the origin. The (x,y) coordinates for each entity thus indicate its position relative to the average for all entities. For example, H1 has the slowest receivable turnover (57.20 days) with a close to average reimbursement fraction (77%). By contrast, H3 has the fastest receivable turnover (28.70 days) but also has a reimbursement fraction that is near the average of all six insurance providers. Quadrant 1 (Q1) is the most attractive quadrant from the physicians' perspective and only one provider, P1, resides there.

In summary, the physician practice does experience asset specificity and environmental uncertainty in the insurance provider relationship. The dedication of specific human resources who specialize in individual insurance company procedures is evidence that the relationship carries with it explicit costs. Environmental uncertainty is present, as demonstrated by the diverse receivable and billing history each insurance provider experiences with the physician group. The variation among both reimbursement fraction and receivable age is symptomatic of the diversity within which the physician group must manage its practice. When each insurance provider has unique interaction with the physician practice, it creates uncertainty for the physician attempting to treat individual patients.

Discussion

Conflicting goals, compounded by escalating healthcare costs, have created frustrations in the healthcare funding system. Symptoms that this disconnection is acute have emerged as evidenced by the growing phenomenon where physicians sever direct ties with insurance providers and create an alternative funding mechanism based on patient retainers with fee-for-service arrangements. This shift has the potential to change the nature of healthcare delivery, possibly limiting access to quality healthcare. Therefore, it is important to conduct research focused on the healthcare funding system to begin to understand the mechanisms by which the system can move towards goal congruence before a major collapse occurs.

This article asserts that the healthcare funding system mirrors a distribution channel where substantial coordination is necessary to ensure seamless product or service delivery to the marketplace. Distribution channel research is a rich resource that provides a superior framework in which to interpret the healthcare funding system. Adapting it to the healthcare funding system offers new perspectives in which the system can be analyzed and solutions proposed. Consistent with prior research on distribution channels, the focus in this study is on a single dyad within the distribution channel (Frazier, 1999)--the physician and insurance provider. Interviews with healthcare administrators were conducted to assess whether the environment surrounding healthcare funding at one representative physician practice is consistent with the distribution channel framework. Using patient-level billing records, data were collected to determine the extent to which environmental characteristics present in traditional channel relationships are present in the physician-insurance provider dyad. The data collected using these two complementary research methods indicate that the channel framework is applicable to the healthcare funding system.

The channel literature has relied upon transaction cost analysis to identify the governance mechanisms coupled with environmental characteristics that lead to the most efficient channel partnerships (Rindfleisch and Heide, 1997). Viewing the physician-insurer relationship as a channel partnership offers opportunities to explore the governance mechanisms and resultant transaction costs in a rich theoretical framework. Documenting the existence of both environmental uncertainty and asset specificity within one representative physician practice implies the applicability of the transaction cost analysis framework as the foundation for future research. The next step is to develop a formal direct test of the transaction cost framework to explore explicitly how the various governance mechanisms impact costs in the physician-insurer relationship. There has been no comprehensive examination of the structure of the physician-insurer relationship. When physicians say they would rather "... work at a discount than battle the bureaucracy" (Sharpe, 1998b: B1), they have identified an implicit cost of the relationship that can be meaningfully explored using the transaction cost analysis framework.

Cannon et al. (2000) suggested that the exchange problems are greatest in environments where uncertainty is combined with relationship-specific adaptations. Exchange success in such an environment demands both careful contracting and strong normative bonds. Termed the plural form of governance (Cannon et al., 2000), it recognizes that contracts alone are insufficient to define and manage the relationship. Rather, a combination of contracts and relationship building must be elements of the successful channel partnership. The interviews with healthcare administrators revealed that elements of relationship building such as communication, trust, and conflict resolution are essential factors in their successful insurance provider relationships and lacking in the problematic ones. Thus, costs and benefits in the healthcare funding system need to be defined broadly to encompass both tangible and intangible constructs.

The Commitment-Trust Theory (Morgan and Hunt, 1994), as it relates to channel partnerships, offers a rich avenue for future research to examine the physician-insurer governance mechanisms and resultant transaction costs. Trust, communication, decision-making participation, and compatible cultures are all perceptive and intangible, but critical, variables affecting the channel relationship and related transaction costs (Burns, 1999). The Commitment-Trust Theory demonstrates that variables such as communication, shared values, opportunistic behavior and relationship benefits are antecedents to the development of trust and commitment within the channel dyad. The strength of trust and commitment within the relationship then affects outcomes such as cooperation, functional conflict, decision-making uncertainty and propensity to terminate the relationship. The data presented in this article demonstrate that a complete understanding of the nature of the relationships within the healthcare funding channel requires measuring the tangible and intangible costs. Furthering this process to make the opaque transactions costs transparent is the next necessary step towards charting the healthcare funding channel, its costs, benefits, and global solutions. Adapting the Commitment-Trust Theory to this setting can be instrumental in addressing these research questions.

A single case study approach was employed here to assess the applicability of employing a proven theoretical framework to a new domain. While appropriate for this purpose, the issues in healthcare funding are complex and to explore them fully will require multiple research methods and larger sample studies. Replication and extension to other healthcare contracting arrangements and constituent dyads are needed before generalizable conclusions can be made.

(1) Distribution channel activities can be performed by a single organization. However, for purposes of this paper, we restrict the definition of a distribution channel to one in which multiple organizations must cooperate to produce, market, and deliver the product or service to the end user.

(2) The scope of this paper excludes Medicare, Medicaid, and Workmen's Compensation insurance arrangements. These three types of healthcare funding operate under different regulations than employer provided insurance programs.

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