HMOs Shut Out of Latest Trend in Health Care

Not long ago, some of this city’s most influential corporations embraced HMOs as a way to cut medical costs. Now the same companies are telling those health insurers to, in effect, get lost.

While conceding that they helped HMOs gain a dominance in Minnesota matched in few other states, these employers now complain that the creatures they helped invent have grown so big they are stifling competition and medical innovation.

And the corporations--including the likes of General Mills Inc., Honeywell Inc., Pillsbury Co., American Express Co. and Dayton Hudson Corp.--have hit on a time-honored, potentially far-reaching solution: cutting out the middleman, a.k.a. the insurance companies.

In an effort that strikes at the heart of the managed-care industry, these employers in January will begin purchasing medical services for 400,000 people directly from organized groups of doctors, hospitals and clinics--leaving the insurance companies out in the cold.

The Minnesota experiment is perhaps the most important example of a backlash building across the country by employers, doctors and hospitals against insurers that, they contend, are gaining too much influence over medicine.

Their plan, like more modest efforts beginning in California, would swing the pendulum back toward the doctors and hospitals.

Several large California medical groups, for example, have been trying to recapture some of their bargaining clout by obtaining state licenses that will allow them to act much like HMOs.

“The doctor groups are saying, ‘Why do I need you, HMO? Why do I need you as an intermediary?’ ” said John Gray, chief executive of California Advantage, a medical group formed by the California Medical Assn. that hopes to contract directly with government agencies or private businesses.

Among others mulling a similar approach is the gorilla of California health care shoppers, the California Public Employees Retirement System. Said Margaret Stanley, health benefits chief for CalPERS, “There’s been a lot of concern about how much money some of the HMOs are taking out of the system in profits. We’re looking at trying to use as much of the health care dollar as possible for health care.”

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“The Twin Cities is 10 to 20 years ahead of the rest of the country” in its health reform efforts, said Leonard D. Schaeffer, chief executive of Woodland Hills, Calif.-based WellPoint Health Networks and Blue Cross of California, one of the nation’s biggest HMOs.

Critics here complain that Minnesota’s three biggest insurers have swallowed up smaller insurers and physician groups, snagging nearly 80% of Minnesotans enrolled in managed care, gaining worrisome control over pricing and steamrollering would-be competitors.

In California, the market share numbers increasingly resemble Minnesota’s. About 72% of HMO members--or 9 million people--are served by California’s five biggest insurers. If two pending mergers are completed--PacifiCare’s acquisition of rival FHP, and Foundation Health’s merger with Health Net’s corporate parent, Health Systems International--three health plans would control 70% of all HMO members in the state. (The third is Kaiser Permanente.)

Moreover, Twin Cities employers complain that the big insurers are wasting millions of dollars to pay for billboards, prime-time TV commercials and other business expenses that would be better spent on health care.

“Doctors have been griping for years about being beat up by the health plans. Now they have an opportunity to see if they can deliver,” said Fred Hamacher, a vice president at Minneapolis-based Dayton Hudson, a retail store chain.

Then again, some health care experts question whether putting doctors back in charge is the answer. After all, they argue, it was physicians’ spendthrift ways in the 1970s and 1980s that contributed to years of double-digit insurance premium increases, driving thousands of fed-up employers into the arms of HMOs.

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Under the Minneapolis plan, about 15 groups of doctors, hospitals and clinics, including more than 90% of primary-care doctors and specialists in the Minneapolis-St. Paul area, will provide a standard benefits package and comparative information on cost, medical quality and customer service. Employees will get vouchers to buy medical coverage from any one of the groups, whose prices will differ.

The idea is to encourage people to shop for health care as they would shop for a new computer or car--by comparing price, quality and service, said Steve Wetzell, executive director of the 24-member employer coalition, the Buyers’ Health Care Action Group.

“At most U.S. companies, employers do most of the decision-making by choosing which health plans will be offered and what the cost to employees will be. With our program, employers will stop acting as workers’ protectors, and consumers will have to think more responsibly,” Wetzell said. “We’re relying on consumers to reform the market by acting as informed and rational purchasers.”

Proponents of the Minneapolis plan say mergers and price wars have created problems for employers and consumers alike. For example, cutthroat pricing by health plans has led many employers to switch HMOs in pursuit of better deals, disrupting doctor-patient relationships.

Others complain that the system tends to reward doctors and hospitals for cutting prices but little else.

James Reinertsen, president of HealthSystems Minnesota, a group of doctors and hospitals, explains that in an HMO with a network of 6,000 doctors, his 450-doctor group--even if it were to achieve high childhood immunization rates or improve survival rates for stroke victims--is likely to receive the same payment as a medical group that doesn’t achieve those results.

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“We could be the highest quality and lowest-priced provider within a given health plan, and our experience would be blended in with lots of groups that were medium or low in price and quality,” Reinertsen said. “If we work very hard to improve our quality, the employer doesn’t see that value.”

The coalition’s system “changes that dynamic dramatically,” he said, “by providing direct contact between the consumer and the care system in their neighborhood. . . . The employees will see the differences in care systems which heretofore have been blended together and all priced the same.”

But the effort to upend the current balance of power in Minnesota health care has not come easily.

“The health plans have reacted pretty negatively,” Hamacher said. Indeed, one big insurer approached some of the group’s member companies and offered a deal: Quit the coalition and we’ll lower your insurance premiums, said one knowledgeable source who asked not to be identified.

Minneapolis’ big health plans, such as Blue Cross and Blue Shield, and Allina Health Systems, strongly dispute employers’ claims that insurers are wasting health care dollars and impeding quality.

In fact, by some measures, Minnesota’s HMOs compare favorably to health care companies in other parts of the country. Minnesota-based health insurers, which by state law must operate as nonprofit organizations, spend just 10 cents of each dollar on overhead costs, contrasted with 15 to 25 cents by for-profit HMOs in California, notes Allan Baumgarten, a Minneapolis health policy consultant.

The big HMOs contend that the business group, which had previously encouraged the health plans to consolidate and become more cost-efficient, is now punishing them for their success. They say they deserve praise, not grief, for fostering competition and innovation.

Moreover, insurers and other skeptics question whether the medical groups are large and sophisticated enough to assume such unfamiliar tasks as claims processing, contracting and data management--while holding down costs.

But the business group is willing to give doctors and hospitals the chance to prove themselves. After all, in 1997, the first year of the new program, employers’ premiums will drop 9% on average from the prior year, Wetzell said.