Enrollment by Californians in HMOs Slipping

The percentage of Californians enrolled in HMOs declined last year for the first time in at least eight years, dropping below 50%, a report released Tuesday shows.

The decline, a significant milestone in a state where managed care was pioneered, reflects growing dissatisfaction among employers and workers with health-maintenance organizations and their limited choices. It also reflects a paradoxical resurgence in more expensive health plans that offer greater choices of medical options, such as preferred provider organizations and “point of service” plans that allow patients to seek treatment outside their regular health-care network.

Whether the trend will continue is unclear, according to the Kaiser Family Foundation and the Health Research and Educational Trust, which prepared the report showing a dramatic decline in HMO enrollment to 48% in 2001, from 55% in 2000. The percentage had been growing steadily since 1994, when 35.3% were in HMOs.

With costs rising sharply, including a 9.9% jump last year in California, a return to some form of HMO model--with its lower costs--may occur, said Larry Levitt, vice president of the Kaiser Foundation. “But it’s not happening now. The question now is whether these more expensive options will be favored as health-care costs continue to grow.”

Kaiser’s third annual employer health benefits survey also pointed out another striking fact that seems to fly in the face of conventional wisdom that fewer employers are offering health coverage.

According to Kaiser, the percentage of California employers offering some form of health-care coverage soared from 48% in 1999 to 66% in 2001. Levitt said the surge reflected the booming economy, the dot-com boom and the desire among employers to attract the best and brightest workers by offering good medical plans.

The biggest jump, said the report, occurred among high-wage small firms (200 or fewer employees) whose workers earned more than $20,000. The percentage of those employers that offered health care rose to 75% from 47% during the same period.

Levitt said the boom reflected a strong economy that no longer exists. “Now that we are in a recession we could very well go back to former levels,” he said. “I would also be willing to bet that a lot of those high-wage companies don’t exist anymore.”

Levitt and other experts and observers said the disenchantment with pure HMOs is leading to other forms of health-care coverage as employers scramble to manage costs. Even mid-range and some smaller businesses are moving to self-funded insurance, in which employers avoid upfront premiums and pay only when a medical claim is filed.

Another model gaining favor in other parts of the nation, although not yet in California, is one that allows an employee to contribute pretax dollars to a health savings account that may include an employer contribution as well. Once an employee’s medical costs rise above a certain amount, usually $1,500 to $3,000, insurance covers most of the expenses, Levitt said.

The appeal is freedom of choice, but the downside is higher out-of-pocket expenses, Levitt said.

Even the trade association that represents California health plans acknowledged the shift.

“This trend reflects the desire of some consumers to have more options, more choices, easier access to specialists and their desire to avoid some of the tools that managed care and specifically HMOs use to control costs. Many HMOs have been offering the same kinds of benefits offered in PPOs, which is all fine except for the cost problem,” said Walter Zelman, president of the California Assn. of Health Plans. “Sometimes the public wants to have its cake and eat it too. Our concern is that we not wipe out the low-cost options because for too many people that is the only option.”

From 1994 through 2000, according to Kaiser and Interstudy Publications, the percentage of HMO enrollment in California rose steadily from 35.3% in 1994 to a peak of 54.1% to 55% in 2000. Nationally, HMO enrollment also fell from its peak of 31% in 1996 to just 23% last year.

At the same time, the Kaiser report said, the percentage of Californians enrolled in PPOs rose to 27% in 2001 from 25% in 2000. Point-of-service plans, once considered a dead model by some health-care analysts and experts, rose by the greatest amount, to 25% from 19%.

Levitt said the managed-care industry is well aware of these changes and has been scrambling to adapt.