HMOs and the Risk to Their Own Health
Michael Schrage’s article on bankruptcy risks in the HMO industry (“Are HMOs Too Big to Go Bust? Just Ask Your Favorite Failed S&L;,” Times Board of Advisors, Feb. 11) raised a lot of important issues about competition in health care. But his doomsday scenario--HMOs grow “too large to fail,” necessitating a government bailout of the industry as competition erodes profit margins--is wrong for two reasons.
First, health maintenance organizations thrive today precisely because of increased competition in the health-care industry, not despite it (as was the case for the S&Ls;). HMOs have proven themselves among the most capable at delivering health care at a reasonable price. They have grown in size because they are much more efficient at providing health care than traditional fee-for-services arrangements. Hence, if anything, HMOs should be the least likely to fail among current health-care providers.
Second, the S&Ls; failed because federal deposit insurance meant that the government was responsible for any bad loans that the S&Ls; couldn’t cover. This crucial subsidy gave S&L; operators an incentive to gamble on risky projects--such as questionable real estate loans--with high rates of failure because it was not their money on the line if the loans weren’t repaid.
There is no comparable guarantee in the health-care industry. If HMOs don’t charge enough for their services, they lose money and have to either raise premiums or cut back on the services provided, plain and simple. Those responsible for the debts of the HMO should it fail are the owners and stockholders of the firm--the “residual claimants”--not the government and taxpayers.
As Schrage points out, when an HMO fails, the subsequent disruption in service is costly for the patients involved. But the most serious problem posed by this--that unknowing patients could lose their health insurance--could be addressed by legislation that requires the remaining HMOs and other health insurance providers to accept the patients from a failed HMO with no preexisting condition exclusions and at the same premium levels as their existing clientele.
This would be similar to current continuation-of-coverage provisions, which enable employees to maintain health insurance coverage after leaving an employer. The premiums for these people would probably be higher--otherwise why would their former HMO have gone out of business?--but they would be no higher than what was paid by everyone else with health insurance. This also would address the issue of health insurance providers selecting only the healthiest patients and refusing coverage for those at greatest risk.
Finally, the trade-off between price and quality in health care raised by Schrage is a real one. However, he is wrong to say that the problem exists only for HMOs. Increased patient cost-sharing means that--for the first time--people see the direct trade-off between premiums and quality of care: If you want better quality and more frequent care, you have to pay for it.
Schrage also raises the specter of huge public subsidies for health care as premiums go through the roof. But those subsidies already exist in the form of tax-deductible employer-provided health insurance and the very expensive Medicare and Medicaid programs.
Contrary to his prediction that the future holds greater calls for government subsidy, the rapid growth in the elderly population means that the subsidies provided through Medicare will of necessity be scaled back in the coming decades. Either that or the health-care providers will be squeezed even more. Otherwise, government provision of “free” medical care for the elderly will soon consume such a large fraction of tax revenue that there will be little money available to spend on anything else.
ALEC R. LEVENSON
Economist, Milken Institute
for Job & Capital Formation
Santa Monica
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Schrage’s article is very scary. The mess we are in is a direct result of Alan Enthoven, professor of economics at Stanford, and others like him who preached about how effective market forces would be in controlling health-care costs.
What occurred was that about 25% of the for-profit HMOs drained into the greedy pockets of stockholders and into the obscene salaries of the CEOs in the health insurance industry rather than back into the health-care system.
In the process, only one thing could and did happen: Quality health care deteriorated.
Schrage’s prediction is right on. I believe that we have passed the point where high quality can be maintained as more and more dollars are drained from the system.
Unfortunately, Congress looks only to the bottom line of the financial statement and is willing to ignore the bottom line of the quality of care statement, which is paralleling the declining costs of health-care dues. It is a disaster in the making.
In business, the corporate CEO’s allegiance is to the stockholder and not to the sick patient.
HARRY SHRAGG, M.D.
Brentwood
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Schrage’s vision of the profiteering and bankruptcy saga is already today’s reality. One must not forget that these great profits being raked in by many of today’s HMOs and IPAs are really at the expense of tomorrow’s medical advances. By opting to achieve some illusionary savings in health care, you may simply be passing yet more debt-obligation on your children and theirs.
JOHN T. CHIU, M.D.
Corona del Mar
