Health Plans Seek to Address Consumer Ire

Health maintenance organizations, part of a bold experiment in medical care launched about two decades ago, are desperately trying to reinvent themselves in the face of unprecedented consumer backlash and a vastly changed economy.

The powerful forces wreaking havoc on HMOs have in turn begun to affect hospitals and the nursing home industry, where a wave of bankruptcies has already begun amid predictions of many more to come.

The insolvencies have begun to spark massive consolidation and are likely to result in more closures of emergency rooms and trauma centers for treating critically ill and injured patients.

Princeton’s Uwe Reinhardt, considered by many to be the dean of American health economists, put it simply at a recent gathering of health-care company executives and investment bankers:

“Well,” he told them, “shift happens.”

Consider these recent examples:

* The nation’s largest insurer, Aetna Inc., is showing such poor financial results that it has become a takeover target, and top executives have decided to split the company in half, separating its health-care unit in a desperate bid to survive.

* Harvard Pilgrim Health Care, one of the few HMOs that has consistently received high marks from patients, doctors and hospitals, has been forced into receivership by its home state of Massachusetts.

* Two of the nation’s largest nursing home chains, Sun Healthcare Group Inc. and Vencor Inc., declared bankruptcy within weeks of each other last fall.

* In Cleveland, where four of the region’s leading hospitals are in bankruptcy, the high-level trauma center at prestigious Mt. Sinai Medical Center has been closed and its teaching program shuttered.

Real Transformation Is Seen as Critical

The pressure won’t let up, predicted Jay Gellert, president and chief executive of Woodland Hills-based Foundation Health Systems, until a new model for providing and paying for health care is developed.

“Fundamental changes are required to go forward,” said Gellert, whose company covers 5.8 million Americans in 21 states and has endured several years of losses or low profits. “Without a real transformation, I seriously question whether it’s possible for this business model to continue.”

At its core, Gellert and others say, the problem is that the managed-care business model is based on viewing employers and the federal government--which are the major purchasers of health plans--as the most important customers.

But the market has changed. And while it’s true that most of the actual purchasing of health plans is handled by employers and the government, those choices are increasingly guided by consumers, not corporate bean-counters. Within two years, many in the industry predict, the changeover will be almost complete--with employers continuing to subsidize basic health care but consumers choosing their own plans and paying for extra coverage out of their own pockets.

Meanwhile, a number of ills continues to plague the industry: the squeezing of payments to doctors and hospitals to keep employers’ premium costs low, and, perhaps most important, the alienation of patients at precisely the wrong time.

But changes are occurring, albeit slowly. Oxford Health Plans, a well-regarded New York HMO that is trying to recover from severe financial difficulties, is developing new types of coverage aimed at consumers who are willing to pay more in exchange for greater freedom and better access to hospitals and specialists.

Other managed-care companies have decided to focus on better customer service. The chairman of Aetna, in rebuffing a recent takeover offer from smaller rival Wellpoint Health Networks, promised that the company would attempt to improve its relationship with doctors, hospitals and consumers.

Industry’s Been Traumatized

Any attempts by managed-care companies to reinvent themselves, however, will have to take place within a sector of the economy that has been severely traumatized.

The health-care industry has been turned on its head in a little more than a decade. Employers in the recession-bound late 1980s and early 1990s demanded--and got--low-cost health insurance for their employees. This spurred a period of ferocious competition among insurers who undercut premiums to gain customers.

As companies grew, they became the darlings of Wall Street. But investors and others misunderstood that the rapid expansion of health plans, physician groups and hospital chains answering the call for cheap insurance weren’t being managed in a way that would allow them to be stable once the market matured. Add to that the onerous financial burdens placed on hospitals and doctors as the federal government slashed payments for Medicare and Medicaid services and the HMOs, partly in response, tightened their grip by raising premiums and cutting fees for medical care.

That has fueled consumers’ outrage at perceived mistreatment by the system, prompting political backlash and the rise of class-action lawsuits against managed-care companies based on the model used against the tobacco industry.

The booming economy has only intensified consumer frustration, which a decade ago was tempered by the understanding that hard times required sacrifice. Today, workers in a tight labor market desire more comprehensive benefits, but employers have been slow to respond. A concrete example can be seen in the failure of health plans to develop products that distinguish them from other companies.

Rather than become, say, the plan best known for its psychiatric services, or the company that allows consumers the most ease in choosing and switching doctors, plans have instead tried to win new business by offering employers low premiums, better interaction with human resource departments or promises to adjudicate claims more quickly than competitors.

The hollowness of such distinctions could soon be very clear.

“Technology will make the things that [HMOs] think are points of differentiation transparent,” said Gellert. “So we have to differentiate in other ways.”

For now, just about everybody--health plans, doctors, hospitals and consumers--is being squeezed.

Bankruptcies are becoming so common among hospitals, medical groups and nursing homes, for example, that a small industry has grown up around them, employing dozens of turnaround artists, investment bankers and attorneys.

Last year, within the hospital sector, Moody’s Investors Service issued 64 downgrades, and it has 19 institutions on a watch list of further reductions in their bond ratings.

“We are expecting more bankruptcies,” said Lisa Martin, who tracks nonprofit hospitals for Moody’s.

Like others in the once red-hot health-care arena, many hospitals are in trouble because they expanded too fast, buying competitors and taking on debt.

At the same time, income was squeezed as health insurers and the federal government ratcheted down payments.

At present, not one hospital on Moody’s list of 500 nonprofits qualifies on its own for its AAA credit rating (a few have high ratings because they have purchased insurance policies on their bonds) and most hover near the bottom of what Moody’s considers to be investment-grade securities.

When hospitals go under--as large systems in Detroit and Pennsylvania have done spectacularly over the last few years--losses can be immense. Creditors of the eight-hospital Allegheny Health, Education & Research Foundation chain in and around Philadelphia lost $1.4 billion, said analyst Patrick Hurst, whose firm, Houlihan, Lokey Howard & Zukin, worked on the case.

Others warn of more mergers and some shutdowns of hospitals and nursing homes over the next several years and continued rocky times for the entire industry.

“I’m predicting that 800 hospitals will close in the next 60 months,” said Thomas Prince, a health economist at the Kellogg Graduate School of Management at Northwestern University in Chicago. “And I see more nursing homes and health maintenance organizations going out of business than I do hospitals.”

So as health plans struggle to reinvent themselves, they may find themselves propping up providers along the way--raising reimbursement rates to doctors and hospitals and even changing the very methods by which they are paid.

Already, plans such as Santa Ana-based PacifiCare Health Systems, which operates the Secure Horizons plan for seniors among others, have pulled back from their reliance on a method called capitation, in which physicians are organized into groups and paid a set monthly fee to provide all services, including hospitalization, laboratory work and pharmaceuticals.

Now the company, which had the strictest controls on payments in the industry, is offering to pay for more of hospitalization and drug costs.

Additional help, particularly for nursing homes and others that rely on Medicare payments, is forthcoming from Congress, which late last year voted to ease some of the cutbacks imposed by the 1997 Balanced Budget Act.

But while the federal government may be able to increase its payments, private health plans do not have the luxury of a budget surplus for higher fees to doctors and hospitals.

In the end, most experts believe, the system will right itself. But the road to repair will be a difficult one.

“We’ve seen a lot of industries go through this,” said Mark Harrison of investment bank Shattuck Hammond Partners. “Automobiles, steel . . . have all gone through transformations.

“They’ve come out of it fine in the end but with some casualties along the way.”