Health Insurers Planning Double-Digit Rate Hikes

California health insurers are planning double-digit premium increases in 1990, putting renewed pressure on employers to either trim coverage or pass the added cost along to their workers.

The giant Kaiser Foundation Health Plans has announced its largest increases in basic rates since 1980: 19.6% for the Northern California region and 17.5% for the Southern California region. Kaiser is the nation’s largest health maintenance organization and by far the dominant HMO in California, with about 4.5 million members, more than half of the California market.

Blue Cross of California is planning a 20% increase for individual members. Its rate hike for group coverage may be even higher, but spokesmen declined to discuss that issue. Some other so-called “fee for service” insurers are expected to implement rate increases of up to 30%.

The unusual factor behind Kaiser’s rate increase is that the HMO is growing “extremely rapidly,” said Dr. Michael J. Martin, the San Francisco-based director of project development for Mercer-Meidinger Hansen Inc., a benefits consulting firm. Kaiser operates its own clinics and hospitals. Its increased enrollment is forcing it to build more facilities.

Last year Kaiser Northern California raised rates 12.9% and the Southern California region had a rate hike of 9.6%. Those increases were lower than those of most other HMOs last year.

Even with the whopping rate increases in 1990, Kaiser will remain the lowest-cost HMO in California and most of the nation, Martin said.

Generally, HMO rate increases are expected to be in the range of 15%--about the same as the rate hike in 1989, said Russell Nash, a consultant on health care and insurance for McKinsey & Co. in Los Angeles. Cypress-based Pacificare, which has about 400,000 members in Southern California, said it expects to raise rates in the range of 14% to 18%. The rate of increase will vary with different employer groups, depending on the ages of group members, the geographic spread of the group and the benefits received, said Michael Lombardi, Pacificare’s vice president for marketing.

Maxicare Health Plans Inc., with about 150,000 members in Southern California, expects to raise rates in the range of 17%, a spokesman said.

Maxicare, once the nation’s largest for-profit HMO, filed for Chapter 11 bankruptcy protection last March. The company recently won agreement from its creditors on a plan of reorganization and is expected to ask for the approval of the U.S. Bankruptcy Court in Santa Ana next month.

About the only good news is that the 1990 increases for some HMOs will be lower than they were this year when organizations felt “an incredible need to play catch-up ball,” said Charlie Schetter, a health care consultant with McKinsey & Co. Some rates increased 25% to 30% in 1989 as HMOs tried to make up for the highly competitive years in the mid-1980s when they elected not to raise rates, or to keep increases very low, for fear of losing business.

Lynda C. Badum, an associate with Fringe Benefit Planning of Newport Beach, said she expects that some of the smaller HMOs in California will still be playing catch-up in 1990 with increases higher than 20%. Small plans, like Metropolitan Life Insurance’s HMO, “started at much lower rates and are now going higher to make up,” she said.

Among the reasons that HMOs are continuing to raise rates is that they “are becoming more popular and are taking on a more diverse risk,” Badum said, explaining that more HMOs are getting older members who are sicker and cost more to serve.

Kaiser’s Northern California region gained 126,000 members in 1988, bringing total membership to about 2.3 million, said Bob Hughes, Kaiser’s spokesman for that region. It expects to add about the same number this year, he said. The increased membership has forced the region to speed up its 10-year, $3.5-billion plan to build more facilities, he said. General inflation in medical costs has also contributed to the strain.

“We have also made a concerted effort to improve our services. We are increasing our ratio of physicians to members,” Hughes said.

The recruitment of physicians in itself is costly, said Janice Fowler-Seib, spokeswoman for Kaiser’s 2.2-million member Southern California region. The region has added about 700 doctors in the last two years and expects that it will need another 500 in 1990. “That is the equivalent of three medical school graduating classes. There is a tremendous expense in recruiting competent physicians and we need medical support staff,” she added.

Kaiser has taken steps to control its growth in recent years. It no longer accepts individual members and has stopped advertising in some areas.

In a sense, Kaiser is a victim of its own success. It is gaining members, health care consultants say, because of its history of stability during a troubled period for HMOs and because of its low cost. Next year, Kaiser’s rates will still be about 13% to 15% below its HMO competitors, Hughes said.

Despite troubles in the industry, HMOs remain popular, health care consultants said, because their cost and rate increases have been less than those of indemnity--fee for service--insurers, who allow members to choose their own doctors and pay the bills after a certain deductible.

While some experts expect indemnity insurers to increase rates by 20% or more again in 1990, a dissenting opinion came from McKinsey & Co.’s Nash, who said he expects most indemnity insurance rate hikes to be less than 20%, because the profitability of most insurers has improved in the last two years.

Nash said he thinks the employers will react to the increased rates in several ways, including more aggressively negotiating for lower rates and studying more closely the factors that are driving up their particular premium costs and fine-tuning their plans as a result. For example, if employers find that offering drug and alcohol abuse recovery programs are driving up costs, they may redesign those plans.

“They will also be asking employees to make trade-offs. If you want to have full access to providers instead of staying within the network (of specifically designated doctors and other providers) you will have to pay more,” Nash said. Employers may continue to ask workers to pay more of the premium, he added.