Study Says California HMOs Spend up to 31% on Overhead : Health care: Industry officials denounce the medical association report, faulting its methodology.
As private industry and government push more Californians into health maintenance organizations to curtail medical costs, a new study released Wednesday suggests that HMOs themselves can be big money-wasters.
The study by the California Medical Assn. found that health plans differ sharply in the portion of their revenue--largely insurance premium dollars--that they devote to providing medical care. Among the state’s HMOs, non-medical expenditures--money spent on advertising, taxes, executive compensation and other corporate overhead costs--ranged from 4 cents of each dollar to 31 cents per dollar.
“We believe that necessary medical care has suffered as a result of the percentage of premium dollars being spent outside the medical field,” said Steven Thompson, a vice president of the physicians’ group.
But HMO industry officials quickly denounced the study, faulting its methodology and calling it a self-serving effort by the CMA to protect doctors’ interests. The CMA released the report as it tries to build support for health reform legislation pending in Sacramento, including one bill that would limit health plan administrative costs to 15% of the premium collected.
Myra C. Snyder, executive director of the California Assn. of HMOs, dismissed the CMA study as a public relations ploy. “What I think they’re doing is trying to end-run the marketplace,” she said. “If you can’t compete in the market then you try to legislate your view.”
Physicians have complained about losing clout--and shrinking incomes--as more consumers enroll in managed health insurance plans. HMO enrollment in California has grown from 8.8 million in 1989 to nearly 11 million today--or about 35% of the state’s population.
The CMA study focused on a widely followed financial yardstick in the health care industry known as “medical loss ratios.” Simply put, the statistic deals with the portion of insurers’ revenue that goes toward patient care as compared to various administrative costs. The medical group said it based its data on publicly available financial reports by the HMOs for the fiscal year 1992.
According to the study, Kaiser Foundation Health Plan, California’s largest health plan with 4.5 million members, spent only 4.7% of its revenue on administrative costs. At the other extreme, Wellpoint Health Networks, a Blue Cross of California subsidiary with 2.8 million members, spent 30.9% of its revenue on administration.
D. Mark Weinberg, executive vice president of Wellpoint, said the use of medical loss ratios was a misleading way of measuring how well a health plan is serving consumers.
“The No. 1 goal of managed care companies is to negotiate lower rates” with doctors, hospitals and other providers, Weinberg said.
Hugh Jones, regional manager for Kaiser’s Southern California region, said medical-loss comparisons between Kaiser and other health plans aren’t always fair. Because of its huge membership, Kaiser enjoys certain economies of scale that smaller health plans don’t have. For example, Kaiser can spread certain costs, like the purchase of new medical equipment, over a larger patient population.
Glenn Melnick, a health care consultant at Rand, agreed that the best measure of HMOs’ effectiveness is their success at lowering per-capita costs for employers and other health-care buyers. “And costs in California are coming down compared to the rest of the country.”
He also faulted the CMA’s methodology of using data from a single year to draw conclusions about the HMO industry. “You can’t look at one point in time and say, ‘Aha, the system isn’t working.’ ”
Even so, at a time of rapid changes in health care delivery, the study is likely to provide fodder for those who question the wisdom of the rush into managed care, especially with the growing influence of large, for-profit medical companies.
“My great fear is that these corporations, because of their power, will cut delivery of care to patients--even necessary care--in order to skim off profits,” said Dr. Thomas A. Raffin, co-director of Stanford University’s Center for Biomedical Ethics.
Medical Expenses
California health maintenance organizations vary widely in the percentage of their premiums that is spent providing medical services vs. other costs.
THE BEST
Tax Percent for Plan status medical care Kaiser Foundation Health Plan Non profit 95.3% Blue Cross of California Non profit 92.6 Contra Costa County Medical Service Non profit 92.3 Lifeguard Inc. Non profit 90.8 Santa Barbara Regional Health Initiative Non profit 90.8
THE WORST
Tax Percent for Plan status medical care WellPoint Health Networks For Profit 69.2% (subsidiary of Blue Cross of California) AmeriMed Health Plans For profit 69.9 Foundation Health Plans For profit 75.3 MetLife Healthcare Network of California For profit 76.4 Community Health Group Non profit 77.5
