Pressures Force HMOs to Evolve or Succumb
Health maintenance organizations--the crossbreeds of insurance companies and health care providers that were supposed to fix the nation’s ailing health care system--are under such strain that many in the industry are predicting they will no longer keep their present form.
The original, highly restrictive, clinic-based model with a limited list of doctors has already been replaced, some analysts and top executives say.
The change is particularly evident in California, where HMOs cover about 18 million people. With the noted exception of Kaiser Permanente, most major health plans here have backed away from operating their own clinics. Several--including CIGNA, Blue Cross, Health Net and PacifiCare--have recently modified their HMO plans to offer wider choice.
So what will the future look like? In some ways, pretty much like the past.
Consumers will have more choice, but they will pay more for coverage, and in the short run, at least, more people could find themselves without insurance.
HMOs will continue to exist and may even grow, but they will function more like their less-restrictive counterparts, so-called preferred provider organizations, in which the network of doctors is quite broad and there are fewer gate-keeping functions.
The changes come at a time when the managed care industry has been devastated by two years of low or nonexistent profits and intense pressure from consumers and elected officials to increase services.
“What you’ll see is more of a range of products offered by what used to be the classic HMO,” said Bud Volberding, president of CIGNA HealthCare of California. “The HMO of 10 years ago is pretty much gone.”
Instead, experts envision a complex system of insurance plans, some of which will be fairly restrictive and others which will be open-ended, even covering cosmetic surgery.
Some of the scenarios most commonly discussed include:
* Higher premiums. Even the most restrictive plans are raising their rates, most between 2% and 11% for next year.
* Higher deductibles and co-payments. Employers, who rushed the managed care revolution along by refusing to pay the spiraling premiums of the 1980s are likely to once again say no as prices rise. Some companies may drop health benefits altogether.
* More choice. The more expensive the plan, the more choice a consumer will have.
* More protection. Lawmakers at the state and federal level have already begun to increase regulation of managed care plans, and have vowed to do more.
The revolution has not been bloodless.
Dozens of companies have either failed or been acquired by competitors, and the industry as a whole has an average pretax profit margin of just 2%.
Thousands of Seniors Stranded
Thousands of older people in several states have been left stranded by HMOs that dropped out of the Medicare program, and in New Jersey, regulators have taken over dozens of clinics slated for liquidation after the collapse of HIP Health Plan, the state’s fourth-biggest HMO.
“The evidence speaks for itself,” said Alan Hoops, president of PacifiCare of California. “Clearly the financial performance of our industry today, and even to some extent a year ago, is poor. It’s poor from investment standards . . . , not to mention more standard measures of return on capital investment and so forth.”
Health care stocks dropped 40% during the first 10 months of 1998, according to the brokerage firm Morgan Stanley Dean Witter.
And while some rebounded during the November market rallies, Todd Richter, who tracks health care companies for the firm, says traditionally structured HMOs cannot survive.
Instead, he envisions health care coverage that, while it still embodies many aspects of managed care, looks more like old-fashioned indemnity insurance than an HMO.
“It is a very fundamental change,” Richter said. “And it’s already started.”
The single biggest change to the HMO model so far has been in patient access.
Originally, HMOs were extremely tightly controlled and were run on the so-called staff model, in which doctors and nurses worked for the HMO, which also owned its hospitals. Those companies that didn’t own clinics limited their members to small groups of doctors.
Because part of the philosophy of managed care is to save money on serious illnesses by offering preventive care, these in-house clinics provided annual checkups, childhood immunizations and other services not covered by the indemnity plans that had dominated the insurance business up to that point.
Staff, Small-Group Models Extolled
These staff and small-group models, experts agree, comprised the most efficient way of providing care.
But consumers hated it.
Fearing that they would be denied treatments or sent to substandard doctors, consumers fled the staff model HMOs for health plans that offered greater choices.
In order to survive, HMOs offered more choice.
Today, the process has accelerated. CIGNA, for example, recently decided to let primary care physicians make on-the-spot referrals to certain specialists, rather than requiring a written request for authorization.
Blue Cross has created a hybrid plan it calls a “no-deductible PPO.” The plan functions like an HMO on some levels, in that there are no deductibles and preventive care is covered. But doctors operate on strictly enforced discounts, and authorization is required for many types of treatment.
Not surprisingly, satisfaction ratings have shot up among patients in the freer plans.
But there’s a catch. It costs more.
“The public is demanding more and more choice,” said Walter Zelman, president of the California Assn. of Health Plans.
“In order to respond to that demand, managed care organizations across the country have been broadening their networks and giving people more access to more physicians and, slowly, more access to specialists,” Zelman said. “But that runs counter to the ability of a managed care organization to control a network.”
At the same time that internal costs were rising, the companies began to compete madly for customers, continuing to offer more while keeping premiums low.
Add to that the expense of caring for an aging population, the high cost of new pharmaceuticals, new regulatory requirements and the incredibly expensive business of setting up administrative systems to run the whole thing, and the business became, for many companies, unsustainable.
“You just have to raise prices,” said Hoops of PacifiCare. “It’s not rocket science.”
Increased regulation could add more financial pressure.
In Congress, lawmakers have vowed to increase scrutiny of HMOs and other managed care providers, pushing patients’ rights laws that, among other things, guarantee coverage of emergency room treatment even without pre-authorization and the right to appeal denials of medical treatment to an independent review board.
Bob Livingston (R-La.), the incoming House speaker, has said he would support legislation to allow patients to recover greater damages in lawsuits against health plans.
And in California, Gov.-elect Gray Davis has indicated that he will set up a new state agency whose sole focus will be to regulate managed care.
The likelihood is scant, however, that lawmakers will be willing to offer financial incentives to help keep companies afloat.
“I’ve not heard that there’s any interest in any kind of government intervention or an intervention of the public sector to assist the HMO industry in this evolution,” said Assemblyman Martin Gallegos (D-Baldwin Park), who chairs the Health Committee of the state Assembly. “I think the feeling is while, yes, they’re operating on 2 to 3% margins, it’s a $15-billion-a-year industry in California.”
Some of the plans, he said, “bit off more than they could chew,” but that doesn’t mean the government needs to bail them out.
As a result, more consumers could find themselves left out.
Disparity of Health Plans
Even the most optimistic scenarios offer a substantial disparity between the kinds of health plans offered the well-to-do and those that will be available for people of lesser means.
“There will be an increasing diversity between the levels of health care provided the relatively well-off and what the low-income people get,” said Robert S. Woodward, who specializes in health care finance at the Washington University School of Medicine in St. Louis.
Zelman, of the California Assn. of Health Plans, downplayed the significance of those differences.
Consumers, he and others said, will simply budget their funds appropriately and pay for the type of coverage they want.
But Schumarry Chao, a physician who is a leading consultant on health care issues, said there are serious flaws--both from a financial and social perspective--to this hybrid of insurance and managed care.
Not only does it leave people out or force them to choose lesser plans, she said, but it is unworkable financially.
“That model may be sustainable for a few years,” Chao said. “But if there weren’t problems with it, we would never have gone the other direction to begin with.”
