An Rx for Disaster?

Financial strains in the nation’s private health-care system threaten to disrupt care for millions, but neither federal nor state officials have comprehensive plans to deal with the industry’s problems.

As health plans struggle to survive in today’s cost-cutting environment, there’s no question workers will pay more for their health insurance--and some will be priced out of the market altogether.

When plans fail-- as one in California and two in New Jersey recently did--consumers face the troubling prospect of being forced to change doctors. For hospitals and doctors, unpaid bills are a growing concern.

Regulation of the industry is patchwork, varying from state to state and, in most jurisdictions, divided among at least two agencies. The result is a regulatory system that is fragmented and full of holes. Officials, generally limited in their expertise, must nonetheless face off against sophisticated corporations.

“The regulatory structure has increasingly fallen behind a very dynamic industry,” said Donna Campbell, California’s general counsel and deputy secretary for business, transportation and housing.

“We know the health plans have been losing money, and we know fiscal solvency is an absolutely critical issue,” Campbell said. “We know it’s something to look at.”

That government regulators are struggling to cope reflects America’s historic reliance on free markets to govern health care. “People buy the idea of getting the government off their backs,” said Rep. Jim McDermott (D-Wash.). “Well, the government is the only protection we have against the free market.”

In the nation’s savings and loan debacle of a decade ago, the federal government had a potentially strong regulatory role because it insured S&L; deposits. Despite that, the government moved too late and taxpayers ultimately paid $360 billion to take over failing institutions.

In the case of health insurance, the federal government has very little authority, and policymakers have been queasy about seeking more ever since President Clinton’s proposal to overhaul the health-care system went down in flames in 1994. Instead, Congress has been debating narrower issues such as the rights of patients in managed-care plans.

But looking the other way might be perilous.

Managed care, where the industry’s problems are concentrated, covers 175 million Americans--20 million of them in California.

Twenty of the 55 companies licensed to provide managed care in California are under stepped-up scrutiny from state regulators, who have required them to report monthly on their financial condition.

Health plans have foundered in New Jersey, Mississippi, Texas and Florida. And New York has become increasingly vigilant in its financial review of health plans in light of the serious financial troubles of Oxford Health Plan, which has a large presence in the state, and the sharp competitiveness in the managed-care market.

Earlier this month, California took over MedPartners Provider Network, a division of an Alabama company that manages physician groups and clinics, and forced it into bankruptcy. Last spring, San Diego-based FPA Medical Management went bankrupt, taking regulators by surprise and disrupting care for some of its 400,000 enrollees in California.

Managed-care stocks have been on a roller coaster. A number of the major health-maintenance organizations took huge write-offs--$900 million in 1998 in the case of Minnesota-based United HealthCare. This makes it difficult for the HMOs to raise the capital they might need as a cushion in case of suddenly rising costs.

“How does it feel,” a top Wall Street health-care analyst, Sheryl R. Skolnick, asked a group of the industry’s top executives at a conference last month, “to be standing on the deck of the Titanic? . . . This is a disaster.”

But Nancy Ann de Parle, head of the federal Health Care Financing Administration, is skeptical that the troubles at MedPartners and other companies are part of a national trend. She senses “a market adjustment,” although she conceded that “it’s not an easy or a comfortable one.”

California’s takeover of MedPartners Provider Network, which covered more than 1 million patients, sounded an early warning for those who worry about the health system’s stability. The bankruptcy--which affected only a division of the company that acts as a wholesale HMO and not its 117 clinics in the state--left hospitals with more than $100 million in unpaid bills.

And MedPartners, although the largest company of its kind in the nation, was a relatively small fish. The company managed physician practices and had a license in California to act as a sort of wholesale health-maintenance organization, an intermediary that signed contracts on behalf of a network of doctors to provide services to HMOs.

The company gambled by accepting fixed payment levels in advance--and it lost the bet.

The truly big fish are the health-maintenance organizations and insurance companies, the firms that contract with major employers to insure their workers. Just five firms--Kaiser Foundation Health Plan, Blue Cross of California, PacifiCare of California, Health Net and Blue Shield of California--cover 17 million people, 85% of Californians who are in managed care.

“If a large HMO went belly up, we would be in horrendous trouble,” warns C. Duane Dauner, president of the California Health Care Assn., which represents hospitals and medical groups.

Larry Leavitt, a senior health policy analyst at the Palo Alto-based Kaiser Family Foundation, says the big HMOs and other health plans have survived by paying physician groups such as MedPartners a fixed monthly fee per patient, leaving the doctors holding the bag if costs for care exceed projections.

“If they can’t do that,” Leavitt says, “then the plans have to face up to the problems themselves, and they will be in the same boat.”

At least HMOs and insurance companies have to conform to state regulations in most of the country. Indeed, state insurance regulators recently toughened their capital reserve requirements for insurers as a way of bolstering them in case of unexpected upsurges in illness.

“We have to [have the financial resources] to pay doctors and hospitals,” said Karen Ignagni, president of the American Assn. of Health Plans, an HMO industry group.

By contrast, there are few rules governing the financial stability of physicians’ groups, which were once hailed as the salvation of managed care because they leave medical decisions in the hands of doctors. This is so even though some insurance companies have shifted much of their risks to them. Most states, for example, do not impose capital reserve requirements on physicians’ groups.

The MedPartners situation is a “terribly tragic story,” Ignagni said. “It shows how health plans can do absolutely the right thing, and if other entities, such as the doctor groups, get into trouble, then the whole health system has a problem.”

Among the most vulnerable companies are physician practice management companies, such as MedPartners, and independent doctor groups.

These physician groups have grown particularly rapidly in California and are just beginning to take hold in other states. Under contract to HMOs and insurers, they take the job of caring for patients for a fixed fee, much as an HMO does.

But that essentially transfers the financial risk to the doctor groups.

The financial condition of these often quite large groups is so shaky that the trade association representing them has recently called for stepped-up financial regulation.

Only when a doctor group fails does the risk revert to the insurer or HMO.

The bigger the insurer, the less likely it is to be vulnerable to financial failure. To maintain their financial stability, however, the bigger firms are likely to raise their premiums. That, in turn, is likely to drive those who had barely been able to afford insurance to join the ranks of the uninsured.

As concern over the solvency of physician practices has grown, several health plans have instituted their own sorts of internal regulation.

Health Net, for example, requires doctor groups to undergo annual audits. If a group appears to be having trouble, the HMO works up a recovery program. About 10% of the 200 doctor groups under contract with Health Net are participating in such programs, the company said.

Despite the market turbulence, federal regulators insist that the MedPartners bankruptcy was an aberration.

The main concern of federal regulators, de Parle said, is to “get to the bottom of why didn’t anyone know what financial shape this company was in.” She predicted that physician networks will soon face more federal regulation.

Part of the problem is that managed-care plans have already realized the savings available by reducing payments to doctors and hospitals and cutting hospital stays. The explosive growth in premiums--15% a year and more in the 1980s--was slashed to a bare 1% by 1996, according to accounting giant KPMG Peat Marwick.

Now prices are rising again as managed-care plans seek to add to their negligible profit margins and consumers demand more flexibility in their health care.

“For so many years the health plans were underpricing their products to gain market share from each other, and now that cost-cutting has come home to roost,” says Jon Gabel, a health-benefits analyst with KPMG Peat Marwick.

The price of health insurance is likely to show annual increases of 7% to 10% for the next five years, according to forecasts by employee benefit analysts at KPMG Peat Marwick and William Mercer. The Federal Employees Health Benefits Plan, a bellwether for the country, saw a 10.2% premium increase this year.

Higher costs for employers will almost certainly mean that workers will have to ante up a bigger share of the cost. Some smaller employers are dropping coverage altogether--the percentage of employees in small businesses with coverage dropped from 52% in 1996 to 47% in 1998, according to a survey for the Kaiser Family Foundation.

Many of those workers are probably unable to afford insurance on their own. For every 1% increase in health-insurance costs, 200,000 people lose coverage, according to the nonpartisan Congressional Budget Office. There are 43 million uninsured Americans today, according to the Census Bureau, an increase of 7 million from the early 1990s.

Jack Lewin, chief executive of the California Medical Assn., which represents doctors, criticized both regulators and industry leaders for dragging their feet.

Far from a mere market upset, Lewin said, health care is undergoing financial strains so profound that they threaten the very nature of the private-market system for medicine. If that is happening in California before other parts of the country, he said, it is because the managed-care market is more mature here and its problems have surfaced earlier.

“We have put profit and financial considerations ahead of patient care as if there was discretion here, as if these were products people could choose not to buy,” Lewin said.

“We are at the point of deciding whether medicine should be a private system,” he said. “And we just might find ourselves going on our knees to the federal government, begging them to take it over.”

* TURBULENCE AHEAD: The health care industry’s growing financial crisis is likely to force more people to switch doctors. A1

* COMING MONDAY: The Health section takes a look at where to find low-cost or free medical care in Southern California.

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Unhealthy Results

The nation’s health-care system is at a financial turning point. Although a decade of managed care has helped curb rising medical costs, it has produced a market dominated by a dwindling group of giant firms struggling to make a profit. California’s takeover earlier this month of the MedPartners Provider Network illustrates the difficulty of making money in a tough and complicated business. If companies get into trouble, doctors and hospitals will have unpaid bills, and patients may be forced to find new doctors. Problems are evident in various sectors of the industry as the following charts indicate:

Credit Quality Deteriorates . . .

Dollar value of not-for-profit-hospital bonds downgraded in quality by major rating services, in billions:

1998: $11.03

*

. . . as Profit Margins Collapse . . .

Net profit margins for the total health-maintenance organization industry:

1997: -2.95%

*

. . . and Many Stocks Plunge

Morgan Stanley index of stocks of 15 major health-care providers (hospital management and nursing home companies), monthly closes and latest:

Friday: 191.12

Sources: Bloomberg News, HCIA Inc., Moody’s Investors Service

The Big Names in Health Insurance Coverage

Nationwide

In million of people covered:

United HealthCare: 14.4

Aetna U.S. Healthcare: 14.0

Cigna: 13.0

Kaiser: 8.6

WellPoint Health Net.: 6.9

Foundation Health Sys.: 6.0

PacifiCare Health Sys.: 3.5

*

California

In million of people covered:

Kaiser: 5.8

Blue Cross of California: 4.7

PacifiCare of California: 2.2

Health Net (unit of Foundation): 2.2

Blue Shield of California: 2.1

Cigna: 1.5

Aetna U.S. Healthcare: 1.2

United HealthCare: 0.8

Source: HCIA

Major Managed-Care States

Of the population that has private health insurance, the percentage that is in managed care:

State: % of population

California: 92%

Arizona: 89

Nevada: 88

Utah: 88

Oregon: 87

Washington: 87

Florida: 84

Maryland: 83

Colorado: 82

Minnesota: 80

New York: 79

Note: “Managed care” includes membership in health-maintenance organizations; preferred provider networks, which have large lists of doctors; and point-of-service plans, which allow members to go outside the usual network for an extra fee.

Source: American Assn. of Health Plans Web site