Financial Woes Threaten in Regions Where Managed Care Dominates
The financial woes of health-maintenance organizations and their affiliated doctor groups loom biggest in regions where managed care has made the biggest inroads, where a dwindling group of players dominates the marketing of health care.
California, Oregon and Colorado are bastions of managed care, as are Michigan, Wisconsin, Minnesota, New York, Pennsylvania and part of New England.
But the South, except for Florida, is still a bulwark of traditional fee-for-service medicine, as are rural states such as North and South Dakota.
The geographic variations are striking. In Los Angeles County, for example, 38% of Medicare beneficiaries are enrolled in HMOs, and in Orange County the total is 42%. But the entire state of Mississippi does not have a single person in a Medicare HMO--there are none operating in the state.
Fee-for-service medicine, in which a patient selected any doctor, was the traditional pattern in American medicine. California followed this pattern, too, but was the birthplace for the Kaiser system, the prototype HMO in which patients were treated by Kaiser doctors at Kaiser clinics and hospitals. It became a standard system of treatment for many Californians.
Three generations have become accustomed to getting health care at Kaiser clinics, a legacy of the time when Henry J. Kaiser offered good health benefits to attract workers to his shipyards to build the vessels that helped win World War II.
When labor was in short supply, Kaiser decided to offer health services to workers at his shipyards and steel mills. The first programs were started in 1942, for the Portland region, and for Richmond and Fontana in California.
“The plans had almost closed when in late 1945 the decision was made to open them to the public,” according to historian Paul Starr’s book “The Social Transformation of American Medicine.”
“With an almost missionary zeal, Henry Kaiser believed he could reorganize medical care on a self-sufficient basis, independent of government, to provide millions of Americans with prepaid and comprehensive services at prices they could afford,” according to Starr’s book.
Even before Kaiser, there were two daring physicians in Los Angeles, Donald Ross and H. Clifford Loos, who opened the Ross-Loos Clinic in 1929 to care for workers of the Los Angeles Department of Water and Power. It was a pioneering prepaid contract. The workers paid $2 a month.
California “has always been a part of the country open to experimentation and new forms of health care,” said Patrick Hays, president and chief executive of Blue Cross & Blue Shield Assn.
There are outposts with a strong tradition of managed care--in the Seattle area and in Minnesota. But with the notable exception of California and a handful of other places, managed health care, with its use of HMO networks and restrictions, is a comparatively new phenomenon for most Americans.
Until the mid-1980s, managed health plans and HMOs were still called “alternative delivery systems,” recalled Karen Ignagni, president of the American Assn. of Health Plans, the HMO industry group. “They represented something different, not the way medicine was traditionally practiced.”
Instead of receiving health insurance that would pay for them to go to any doctor, who could order any test (and almost any treatment), patients’ freedom of selection would be managed. They would have to stay within networks of member doctors and hospitals and obtain advance approval for surgeries and expensive tests and procedures.
The modern era of HMO growth began in 1973 when President Nixon, worried about health-care inflation, persuaded Congress to pass a law providing grants to stimulate their creation. The law also opened the corporate door for HMOs by requiring that any company with health-care insurance for its workers had to offer a choice of an HMO to provide their health coverage.
Managed-care penetration in the national market soared in the late 1980s under the stimulus of runaway inflation in health care, when insurance costs were rising 15% and 20% a year at many firms. Corporations, eager to control costs, turned to HMOs to get fixed contracts to provide health-care coverage.
Government action also helped spread managed care in some cases. In places such as Florida, with high payment rates from the federal government to care for Medicare patients, HMOs were drawn to the lucrative market. But the federal rules required an HMO to have a mix of customers, with 50% from the non-Medicare population. This regulation assured that HMOs would be available to large numbers of Floridians of all ages, not just those enrolled in Medicare, which covers people over 65 and the disabled.
“HMOs had to develop the commercial side of the market,” said Ken Thorp, professor of health policy at Tulane University.
In some metropolitan areas such as San Francisco, Minneapolis and Rochester, N.Y., “big employers that were savvy purchasers wanted to reorganize the marketplace, and they did it by turning to managed care,” Thorp said. Outfits such as Pacific Business Group on Health, which operates in the San Francisco area, have been successful bargaining for big companies. The big employer coalitions found they had the clout to demand big discounts from the HMOs and other health plans they were dealing with.
Bigness begat more bigness, as the presence of major buyers in the marketplace stimulated the development of major sellers of health care. A wave of mergers and acquisitions in the ‘90s narrowed the ranks of health plans.
The biggest single buyer in the state is California Public Employees’ Retirement System, or CalPERS, representing a million active and retired public workers and their families. Just a decade ago, CalPERS members could choose among 20 HMOs; today the number is 10.
“Consolidation is occurring all over; people are concerned everywhere,” said Margaret Stanley, who runs CalPERS’ health-care programs. “But no one has a magic answer to change it.”
