HMO Price Hikes Spurring Rebellion
Major corporations, faced with a second year of double-digit increases in the cost of providing health care for their employees, are deeply worried about how much more they can absorb--and many are starting to fight back.
In California, more than a third of the businesses that belong to a key insurance-purchasing alliance say they will drop or freeze enrollment next year in health plans that do not offer improved care and service along with the higher prices.
And an alliance of businesses in the upper Midwest is even experimenting with eliminating health plans altogether, contracting directly with physicians and hospitals for patient care.
“This is the beginning of the employer reaction,” said David Lusk, a health care expert at the accounting firm Deloitte & Touche. “The employers are not just going to absorb the increases.”
The results could be ominous for the 160 million workers and their dependents who get their coverage through their employers. Some companies are planning to pass the price increases on to their workers. Others may drop expensive plans altogether, forcing employees to find new--and sometimes less inclusive--coverage, or they may require workers to pay more for prescription drugs.
“I have no clue what I’m going to do,” said Bernard Reisberg, chairman of Goodin Co. Minneapolis, a wholesale distributor of pipes, valves and heating and air conditioning equipment. His firm of 220 employees was part of a business group unable to reach an agreement to renew its contract with a major health plan. Now he’s fearful about the rates for health care for the coming year.
The dilemma for companies is that health care is a popular and vital benefit to keep and attract workers. With unemployment at the lowest levels in a generation, many firms don’t want to impose a new financial burden on their employees.
At Ryder Systems, a major transportation firm based in Miami, managers were shocked when health maintenance organizations submitted proposals for rate hikes of 10% to 15% for the year 2000.
“We can’t sustain these increases and we can’t pass it to our employees--they can’t afford it either,” said Stephen Karp, vice president of compensation and benefits.
“We’re looking at all alternatives,” he said. These could include dropping HMOs, perhaps in favor of a national network of preferred providers who would be willing to offer discounts. Or Ryder could seek direct negotiations with doctors and hospitals.
A major national coalition of 35 giant U.S. companies, the Washington Business Group on Health, reported that its members want to control costs but also want to keep health benefits intact, said Dr. Mary Jane England, the organization’s president.
A Growing Number Will Switch Plans
Because increased costs for prescription drugs are cited as the biggest contributor to health care inflation, many of the group’s member firms may go to a new three-tier system for co-payments, she said. A worker, for example, might pay $10 for a generic drug, $15 or $20 for a brand name drug on an approved list or formulary, and $30 for a drug that isn’t on the list.
A growing number of businesses, however, hope to avoid making their workers pay more and will switch health plans rather than accept big price hikes.
Fox Group, the Los Angeles-based entertainment division of Rupert Murdoch’s giant News Corp., has for the first time engaged a consulting firm to help in its negotiations with health plans, which have demanded increases as high as 20% in certain parts of the country where Fox has employees, said benefits director Lynn Franzoi.
Franzoi said that the company is seriously considering dropping the health plans with the highest increases in favor of those that aren’t raising prices as much.
These companies are skeptical of claims by major health plans that premium increases are truly being used to improve the quality of care, by paying doctors and hospitals more and offsetting higher pharmaceutical costs.
“There’s suspicion that health plans have tired of trying to find ways to gain additional efficiencies in their provider networks, and have turned instead to premium increases,” said Chuck Hartwig, a health care consultant at William M. Mercer & Co. in Los Angeles.
When the major health plans operating in California started jacking up premiums by an average of 10% last year, the major purchaser groups that buy most of health insurance in the state hardly blinked.
Two of the biggest groups, California Public Employees’ Retirement System, or CalPERS, which negotiates coverage for about 1 million state and local retired and current workers and their dependents, and the Pacific Business Group on Health, an alliance of 30 major California employers that buys insurance for a combined 400,000 workers, said they had been swayed by the health plans. They had made a convincing case in 1998 that without higher premiums they could not pay enough to doctors, or cover the rising costs of pharmaceuticals.
But once the hikes--some as high as 40%--kicked in last January, the health plans crowed: they issued statements touting renewed profitability; they forecast double-digit earnings growth to Wall Street; they watched stock prices soar.
Then last month, the health plans confidently raised prices again, unveiling hikes for next year as large as 27% in some sectors, and averaging 7% to 11% for many large employers.
This time the business groups decided not to go along as quietly.
“We’re frustrated, because we don’t see the direct result of investments to improve the services that we feel really count,” said Emma Hoo, senior manager of the Pacific Business Group on Health, whose members are some of California’s largest public and private employers such as Chevron Corp., Target stores and the Federal Reserve Bank in San Francisco.
“We’ve seen reports of record profits for the first quarter of 1999, yet they’re coming to us saying they need more money,” she added.
The powerful organization also went as far as to publicly castigate HealthNet and Cigna Healthcare of California, saying that they had “fallen out of favor” with members. The group said about a third of its members are weighing the possibility of freezing enrollment in certain plans or dropping them altogether if prices rise at a double-digit pace next year. Those companies weren’t identified.
But employers and other purchasers representing about 50,000 consumers have already dropped out of managed care plans offered by HealthNet, one of the state’s largest HMOs with 2.2 million members. HealthNet raised premiums for the business groups an average of 7% in 1999 and plans to raise them at least 10% in 2000.
One group member, Wells Fargo & Co., with 90,000 employees nationwide, offered its roughly 30,000 California workers a cheaper alternative to a HealthNet plan, and 2,000 of them switched, the group said.
An Effort to Justify Increases
HealthNet knew some purchasers would drop out when it raised rates, but the company, which has been struggling to stay in the black as medical costs grow faster than forecast, had no alternative, said HealthNet President Cora Tellez, who joined the ailing HMO in November and has been attempting to turn it around.
When she took over, many of HealthNet’s plans were priced below market rates, requiring fairly hefty increases to keep up with inflation, she said.
Tellez said the company has mainly been using the money to pay for prescription drugs, which are increasingly expensive and make up a major part of the higher costs faced by most health plans.
Some managed care firms are beginning to realize that key to preventing membership defections is to be able to justify the increases. Cigna, for example, is working to develop economic and accounting models that would allow the company to show clients just where their money is going, and how much patients from a particular company spent the previous year.
That task becomes more difficult during periods when increased costs come as a surprise, because the rate increases do not appear to be tied to immediate needs.
For example, most health plans did not realize how quickly prescription drugs would increase in price--or how many more drugs patients would begin to use--said Mark Weinberg, president of Wellpoint Health Networks’ individual and small group division.
Drug Costs Rise as Much as 14%
Health plans are paying as much as 14% more per year for drugs ranging from antihistamine to blood pressure medication, Weinberg said.
“By the time you see that it’s there, you now have underpriced the product,” said Weinberg, whose company was praised by the Pacific Business Group as offering patients good value for the money. “We’re seeing today bills from doctors and hospitals that were [incurred] in late 1998 and early 1999.”
Bud Volberding, president of Cigna’s operations in California, said that for the most part employers have accepted the industry’s need for higher rates.
“They’re resistant, of course,” Volberding said. “Nobody likes to have their price increased.”
He refrained from commenting specifically on the statements made by the Pacific Business Group on Health, but said he did not see a groundswell of employer resentment developing in the near term.
“We’re not going to reach a point where employers say, ‘Sorry, nobody gets any increase this year,’ ” Volberding said. “There may be such a year . . . but we’re not there this year.”
