Doctors Prescribe Medicare HMOs as Panacea for Ailing Bottom Lines : Medicine: They feel threatened by insurance industry. Budget bill would let physicians, hospitals bid for huge senior citizens’ market.

Feeling their power slipping away and their incomes threatened, the nation’s doctors are waging a counterattack against the insurance industry by racing to create their own health maintenance organizations for Medicare beneficiaries.

The giant budget bill just finished by Congress--and now subject to intense negotiations with the Clinton White House--not only would push millions more senior citizens into HMOs, but also would clear the way for physicians and hospitals to bid for a share of that huge new market.

When 37 million Medicare beneficiaries get a package in the mail during the first open enrollment season in December, 1997, HMOs run by doctors and hospitals will be listed along with the offerings from Kaiser, PacifiCare, Humana, Aetna, Cigna, Blue Cross and other traditional companies.

Many doctors and hospitals believe that they can deliver better and cheaper care. Physician-run organizations “won’t have to pay large dividends and big administrative salaries as the commercial insurers do,” said James Stacey, a spokesman for the American Medical Assn. The federal budget legislation “gets us into the market and gives us fair treatment,” said Tom Scully, head of the Federation of American Health Systems, the trade group representing investor-owned hospitals.

Gingrich Sweetener

House Speaker Newt Gingrich (R-Ga.) persuaded the doctors and hospitals to back the Republican budget plan by offering them a chance to get quick federal approval of their HMOs, bypassing the state regulatory system that oversees HMOs offered by insurers.

That was the sweetener the GOP needed to get the doctors and hospitals to swallow the bitter financial potion of Medicare reform.

To help balance the federal budget in seven years, the Republicans want to trim $270 billion from future Medicare outlays, cutting the annual growth rate to 6.5%, down from the current figure of 10%. Under the GOP blueprint, payments to hospitals would be reduced by $79 billion, compared with projected spending under current law, while doctors would lose $26 billion in potential fees. Doctors and hospitals could be squeezed even more if the government doesn’t achieve its spending targets.

With the pot of money dwindling, and more of their patients moving into HMOs, the doctors and hospitals are seeking to run the HMOs themselves, eliminating the insurance middleman. “Big insurance companies can’t care for our community like we do,” said a joint advertisement by the doctors and the hospitals that ran in various newspapers when Congress was considering the legislation.

Insurers fought back. Doctors “who set up Medicare managed-care programs would get the gold mine, and consumers would get the shaft,” said Richard Coorsh, a spokesman for the Health Insurance Assn. of America. “Congress, don’t roll back the revolution now,” pleaded an ad by the Alliance for Managed Care--which includes insurers Aetna, Cigna, Prudential and United Healthcare--warning that doctors would form groups without sufficient cash reserves, leaving consumers at risk.

But insurers and commercial HMOs are now resigned to the notion that the doctors and hospitals have won the battle. They feel they got something, too: The bill now requires the federal government to develop national standards for solvency applying to all HMOs, meaning that doctors and hospitals won’t have an edge by getting a lower standard for financial strength and reserves.

Basic Approach

An HMO owned and run by doctors or hospitals would do the same thing the commercial insurers do: approach businesses and offer to provide all medical care for their employees in return for fixed payments each month for each person enrolled. This is the basic HMO approach, and employers welcome it because it can make the cost of their health care benefits predictable as well as shift the risk to the company running the HMO.

Most Americans are now enrolled in some variation of managed care, a broad term for various ways to provide restraints on spending. At the easy end, managed care may allow an individual access to virtually any doctor. But the system may require a second opinion before some types of surgery can be approved. The strict end of managed care involves an HMO--and 50 million Americans are in HMOs now--in which service is provided only within a specified network of doctors and hospitals. The rules also prohibit patients from seeing a specialist without approval and a referral from a primary-care doctor.

Only 10% of those enrolled in Medicare have joined HMOs, although the figure exceeds 25% in California, where managed care has a long and successful history, exemplified by the Kaiser system. Medicare HMOs offer extras not covered by the regular Medicare program, including prescription drugs, eye care and dental care.

The Republicans hope that by promoting HMOs through annual mailings to Medicare enrollees, they can raise the 10% now in HMOS to 50% or even more. They believe that billions of dollars will be saved by delivering care through HMO networks, compared with the current Medicare system in which a person can select any doctor at any time, and go to specialists without the need for a referral.

The new market is compelling: Medicare covers every American older than 65 and the disabled of all ages. With the GOP-controlled Congress promoting HMOs as the best way to deliver health care, doctors and hospitals want the chance to serve that market directly, without going through the insurers.

The younger-than-65 market is dominated by commercial insurers and for-profit HMOs. They contract with employers to provide health insurance coverage and arrange for doctors and hospitals to deliver the medical care. With corporate America successfully demanding a halt to health care inflation, the insurers have been cutting the rates they pay to physicians and hospitals.

Doctors don’t like the way in which the HMOs have ratcheted down their fees. They complain about pressures to reduce referrals and object to insurance company cost-cutters looking over their shoulders. Most threatening of all, the HMOs can arbitrarily dismiss physicians from their networks, instantly depriving them of large numbers of patients.

Issue of Control

Doctors want to “regain clinical control,” said Ed Howard, director of Alliance for Health Reform, a research organization. If the system is controlled by doctors, rather than insurance company business managers, “maybe there is a somewhat more caring tint to [it],” he said.

The for-profit HMOs have stockholders to satisfy and dividends to pay, and their administrative costs--including expenses and profits--are about 20% to 25% of revenues, according to industry experts. Doctors think they can run their systems with an overhead of 8% to 10%, according to Stacey of the AMA.

However, doctor-run networks would still have a costly overhead--the billing systems and expensive computer networks to track patients and procedures. And they would need the computer software to determine, for example, whether one doctor is doing five times as many Cesarean-section deliveries as the typical physician in a community. Insurance company HMOs first “counsel” with these doctors whose practices seem out of line, and then sometimes expel them from the networks.

If doctors were running an HMO, could they summon the determination to fire inefficient colleagues who run excessively costly operations?

“Just because an HMO is run by doctors does not mean it will be different from [for-profit] HMOs,” said Robert Friedland, executive director of the National Academy on Aging, a Washington think tank. “They will still need to be solvent, still need to make a living and have a management structure, still need an MBA, accountants and lawyers to make it work,” he said.

A number of doctors say they are confident they can do the job. “The fear the insurance companies have is that the doctors will do it successfully and then the companies will have real competition and no more big stock options,” said Dr. Richard Corlin, a Los Angeles gastroenterologist and former president of the California Medical Assn. “If we didn’t think we could do a better job for what patients need, we wouldn’t be trying to do it. The issue is not, is managed care good or bad, but are the for-profit HMOs committing abuses for which we need a correction in our policies?”

Currently, HMOs are regulated by the states. The GOP legislative package would enable HMOs run by providers to apply to the states, and if there is no action within 90 days, go to the federal government for certification.

“We’ve always said we welcome the competition,” said Karen Ignagni, president of the Group Health Assn. of America, which represents HMOs. She put the best face on an inevitability: Congress was determined to let more players into the HMO market.

It is estimated that a successful HMO will need at least 100,000 or 150,000 people enrolled to spread the risks because some people will get very sick. And the risks and economics are even trickier for the Medicare-age population, the heaviest users of health care.

The government spends about $4,900 per enrollee on the average. The sickest 10% of the Medicare population can cost the government about $28,000 per person. An HMO is taking the financial risk by agreeing to provide all care for a fixed fee.

“I don’t think it’s as easy as it looks,” said Leonard Schaeffer, president of Blue Cross of California, talking about operating in the tough HMO marketplace. California, for example, “is a very competitive state,” he said.

But a number of doctors and hospitals are looking forward to the battle.

“Let’s cut out the middleman, do away with useless expenditures of funds if we can,” said David Langness, spokesman for the Healthcare Assn. of Southern California, which represents hospitals and some medical group practices.