Maxicare’s Ills Fuel Debate Over Benefits of HMOs

Times Staff Writer

Dr. Howard Greenwald of USC figures he is out the $2,000 he spent on stock in Maxicare, the big health maintenance organization that filed for bankruptcy last week. But he doesn’t blame his bad investment only on Maxicare.

“Any for-profit HMO is going to be in trouble,” says Greenwald, the director of USC’s graduate programs in health services administration. “HMOs in general have not been able to cut costs as much as promised.”

Although Maxicare is widely thought to have brought many of its fiscal problems on itself--chiefly through costly acquisitions that put it deeply in debt--it is also part of an industry in which three of every four companies lost money in 1987.

The industry’s fortunes are starting to improve, but its troubles have been seized on by critics in the medical community as evidence that the HMO is a bankrupt idea. Even supporters agree that HMOs have much to learn if they are to remain a major force, and some doubt that so-called managed care is suited to a business enterprise.


“As a function, it has a real future,” says Charles Schetter, director and head of McKinsey & Co.'s health-care consulting practice. “As a business, it has a limited future.”

The HMO approach to health-care protection dates to the 1930s and in the early 1970s won official government endorsement as part of a national strategy to attack skyrocketing medical costs.

Discount Rates

For a predetermined fee, the HMO agrees to provide health care for little or no additional cost. The HMO then arranges care with doctors and hospitals, often at discount rates. The earliest plans were typically nonprofit organizations that employed doctors directly and gave inexpensive care but few choices.


The number and size of investor-owned, profit-making HMOs exploded in the 1980s. Annual membership increases of 20% and more in the mid-1980s have left 31 million Americans enrolled in 643 different plans.

The two biggest are Maxicare, a profit-seeking, Los Angeles-based HMO whose doctors are self-employed and whose members pick their own physicians, and the much different, nonprofit Kaiser Foundation Health Plans, based in Oakland.

The Kaiser model of nonprofit HMOs has generally succeeded, experts say, because it can control its costs by employing its own doctors and often operating its own hospitals. But the Maxicare approach has proven far more popular because of the choices it offers, and the for-profit entities quickly grew to account for some 60% of all HMO plans.

The troubles began with the rapid growth, industry analysts agree. The burgeoning ranks of investor-owned HMO organizations slashed their premiums to win market share even as they were failing to corral the out-of-control costs of providing medical care.

Instead of encouraging “preventive” medicine that would keep overall costs down, the lure of “free” office visits--highlighted in HMO advertising campaigns--brought patients in droves for minor or imagined ills, says Dr. Brant Mittler, a San Antonio cardiologist and a voluble critic of HMOs.

USC’s Greenwald says the for-profit HMOs give doctors little financial incentive to limit their treatment. Meanwhile, the HMOs wooed younger consumers who would need less medical care, which meant that the older employees posing the biggest health-cost burden to corporations tended to stay enrolled in the traditional--and costly--insurance plans.

“As costs continued to rise, HMOs were caught with fixed prices and little real ability to control those costs,” says Schetter. “It’s no wonder they’re in a major squeeze.”

Big Lessons


The squeeze has led to a shakeout, with mergers, consolidations and failures. The number of HMO plans fell slightly last year for the first time, and membership growth has slowed to a crawl.

The industry’s chief response has been to sharply increase its fixed fees, as much as 30% in the past year. Thus, some watchers of the health-care field believe that the worst is over and that Maxicare’s bankruptcy is merely the most visible example of a shakeout that will leave the HMO survivors stronger and better able to carry on a fight against the nation’s crippling medical costs.

“If anything, the rest of the players have learned a big lesson,” says Lynn R. Gruber, a research vice president at InterStudy, an Excelsior, Minn., think tank whose founder, Paul M. Ellwood Jr., was a pioneer of the modern HMO movement.

But it is easier to diagnose what went wrong than to figure out what will happen now. Some health-care experts say that the kind of HMO typified by Maxicare will fade away.

Analyst Bernard F. McDonagh of Piper, Jaffray & Hopwood in Minneapolis says the new, higher fees will make 1989 a better year financially for the surviving HMOs.

But he says that something has to give because, “we want more health care than we can pay for. In my view, HMOs will have a role. But I think we’re going to get back to health insurance the way our parents knew it. We will pay more and more of the routine costs and be protected against catastrophic costs.”

There will also be new efforts to better blend the HMO concept with traditional medical insurance programs.

“The two players out there today (HMOs and traditional insurance plans) are only looking at their part of the problem. We need a new breed of entity that can do what each of these groups does well,” says McKinsey’s Schetter.