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Tough
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By
Leigh
Morgan What’s in the future for managed care? The possibilities include more corporate consolidation, more consumer choice, and more Internet marketing. But as health plans nationwide spend a second year in the red, experts say one thing is certain—HMOs will have to raise rates in order to survive. Only time will tell how much patients are willing to spend to keep the current managed care model alive. For the second year in a row, more than half of HMOs lost money, according to a study released last month by Weiss Ratings Inc. The study covered 576 of the nation’s 650 HMOs and revealed that after substantial gains in the mid-1990s, HMOs nationwide suffered a net loss of $490 million last year, with 56 percent of the companies reporting red ink. In 1997, 57 percent lost money. “Profitability has been declining, and HMOs are going through a rough time,” said Melissa Gannon, Weiss’ vice president. Financial losses have forced seven HMOs out of business in the last two years, she said. “We’ll see more HMOs fail before rates go up and consolidation increases.” California follows national trend HMOs in California are some of the largest in the nation, Gannon said. But size doesn’t necessarily relate to profitability. Overall, numbers for the Golden State are consistent with national trends, she said. Data from 38 HMOs compiled by the California Association of Health Plans (CAHP) shows that 60 percent of health plans in the state earned profits of 2 percent or less last year. “This is an extraordinarily slim profit margin,” said Walter Zelman, the association’s president and CEO. Take investment income out of the picture and profit margins waver even more, ranging from -2 percent to a high of 2.4 percent. Moreover, nearly one-third of health plans that earned money also suffered operating losses, Zelman said. “That’s true for both nonprofits and for-profits,” he said. “It belies the image of these for-profit behemoths.” Explaining the losses There may be a few factors at the root of HMO losses in the state, said Wanda Jones, a healthcare futurist and president of New Century Health Care Institute. To begin with, there’s a kind of natural selection occurring as big companies merge and leave smaller HMOs without the resources to compete. Escalating drug costs also may be cutting into HMO profits. “HMOs that tried to gain market shares by offering prescription drug coverage saw an average 12 percent increase in drug prices between 1997 and 1998,” Jones said. These added costs afflicted the industry as a whole, but smaller HMOs didn’t have enough reserves to weather it. “Now they are either dropping drug coverage or searching for a merger partner to survive,” she said. Pat Schoeni, director of public affairs for the National Coalition on Health Care, said that although HMOs “aren’t failing left and right,” heavy Medicaid and Medicare populations will continue to capsize smaller HMOs as the government scales back reimbursement rates and lawmakers push for expanded benefits. Add to that the unexpected severity of the 1997 flu season, which pushed costs above the demand picture projected by many HMOs. Consumer concerns As HMOs struggle to balance solvency with patient care priorities, consumer vigilance is essential, said Diana Bianco, staff attorney at the West Coast Regional Office of Consumers Union. “HMOs’ initial claim was to save money, and they were admittedly able to cut the fat from the healthcare budget. But where are they going to cut from next, and at what price?” she said. HMOs also promised to cut costs through prevention, Bianco said. “I’m not sure we’ve realized that promise. HMOs are going to have to make changes in order to regain the public trust.” That means everything from emphasizing preventive care and improving customer service to getting on board with some reform legislation, Bianco said. HMOs that are forced to close their doors have a responsibility to ensure that continuity of care is not entirely disrupted and that patients are informed about how their care will change, Bianco added. Future rate hikes Experts agree that healthcare premiums will likely spiral up again. Schoeni expects across-the-board rate increases of 7 to 9 percent in the next year. Insurance rates are still increasing at about twice the rate of general inflation, she added, and most healthcare premiums for private insurance will move into double-digits by 2000. “The question is, will the public be willing to pay for this? There are people who say yes,” Schoeni said, especially with the substantial consumer leverage of aging baby boomers and their appetite for health care. HMOs need to raise prices, Jones said. And they need to educate buyers about to the consequences of 10 years of cost cutting. “HMOs have cut back more than fat, but bone and muscle, to the point where California’s premiums are 25 percent less than the rest of the country, she said. “It’s resulted in shortages, including shortages of nurses.” More choice, higher price Experts predict large indemnity plans will continue to move aggressively into the HMO industry, at the same time diversifying to include PPOs and point-of-service (POS) products. That will mean more choice for consumers, but at a higher price. Douglas Sherlock, senior healthcare analyst for Sherlock Co., a healthcare investment banking firm, said the single biggest threat to the industry lies in the fact that consumers don’t realize the economic value of managed care. The reason? Most enrollees receive healthcare coverage through their employers, Sherlock said. “Consumers don’t realize how much more expensive indemnity products or POS products are,” he said. Zelman agrees. “Those who don’t pay the bills say, ‘Why not get the most expensive allergy medication? Why not have the most expensive—rather than the most uncomfortable—test? Why not have all the access we want to specialists?’ There’s a real tension between the public’s demand for expanded benefits and the reluctance on the part of those who pay for these benefits to foot the bill. HMOs are squeezed in the middle.” HMOs will persist, Sherlock said, but the shape they take will depend on the almighty dollar. “Issues of HMO industry survival will always lie in the willingness of consumers to enjoy the benefits and pay the costs,” he said. |
