Cost-cutting moves take toll on HMOs' financial health

THE BALTIMORE SUN

As Maryland companies try to control rising health-care costs, the state's health maintenance organizations are going through a shakeout.

In Maryland, where 1.9 million residents belong to HMOs, some businesses are demanding lower insurance premiums if the previous year's claims warrant it. Others are granting employees limited coverage outside HMO plans. Still others are experimenting with self-insurance plans, which cut into HMO profits.

Meanwhile, HMOs are being buffeted by the widespread perception that the health-care delivery system has written a nationwide prescription for economic ruin.

"HMOs are all things to all people," said Dr. Jonathan P. Weiner, who teaches health policy and management at the Johns Hopkins School of Public Health. "To private-practice doctors, they're considered socialized medicine. To consumer activists, they're considered big business.

"The truth is actually somewhere in between. HMOs are really very complicated -- they are really a microcosm of what's happening in health care today, and as such have become everybody's lightning rod."

Avoiding that lightning will call for a higher degree of flexibility and nimbleness. But corporate cost-cutting already is taking its toll -- this year, two large Maryland HMOs have changed hands, part of an industrywide consolidation.

Even as HMO enrollments rose, heightened competition brought financial troubles to CareFirst, which merged into Blue Cross and Blue Shield of Maryland in March, an action overseen by state regulators. The Johns Hopkins Health Plan, finding it increasingly difficult to offer a bevy of health-insurance products and meet rising overhead costs, sold its well-managed HMO business to Prudential Insurance Co. in May.

The era of HMOs existing as free-standing businesses appears to be winding down. Consolidation with an insurance company or an HMO network is the name of the game.

Nearly a decade of cutthroat price competition among HMOs depressed profits throughout the industry. As recently as 1988, for example, 36 percent of all HMOs in the United States lost money, according to Interstudy Inc., a non-profit health-care policy firm.

HMOs have reversed that trend in recent years. By 1990, only 17 percent of the nation's HMOs were unprofitable. But HMOs still face intense pressure: They must keep their premium increases below those of traditional insurance indemnity health plans, or risk losing favor.

And they must cope with fierce competition. One example: In late July, Prudential pulled out of Cecil and Harford counties following a business disagreement with its health-care provider there, Upper Chesapeake Health System Inc. Within weeks, four other HMOs flocked to the area, vying to serve its 15,000 HMO customers.

What does all this mean to customers of the 21 HMOs serving Maryland?

"What's really happening is that health-care costs will continue to increase -- that's virtually a given," Dr. Weiner said. "The degree to which these costs are passed through to patients depends largely on decisions made by the employers."

About 85 percent of HMO customers get their coverage through employers, who do not always pass through premium increases, Dr. Weiner said. "Clearly there's a threshold level, and I think most large corporations in America have hit that level."

In response, some employers have essentially started insurance firms of their own. These "self-insured" plans entail putting money into a pool, which is used to pay health claims.

"In Maryland, organizations like MD-IPA and HealthPlus have been much more flexible in working with employers, allowing them to self-insure . . .," said Dr. Roger S. Taylor, head of national health care for the Wyatt Co., an international employee benefits consulting company. "Those HMOs that are more flexible with both the benefits and the ways they set their premiums for employers are increasingly more popular with employers."

Self-insurance, which works best for large companies, allows employers to save money by not having to deal with state bureaucracy and its attendant paperwork, Mr. Taylor said.

"You might say Maryland is a good example of why employers are so interested in self-funding," he said. "The Maryland legislature has been very active in trying to regulate health-care coverage, control managed care options and mandate certain benefits on insurance plans."

An HMO often is paid to manage the pool, but such services are less lucrative.

"The only benefit we're getting from that is a reimbursement of our administrative costs and some profit margin," said Nannette G. Henderson, president of the Maryland Association of Health Maintenance Organizations and of Greenbelt-based HealthPlus.

Another cost-cutting trend is for companies to demand lower premiums from HMOs, based on previous year's claims. Firms also are granting employees limited coverage outside HMO plans, as long as the employee kicks in a co-payment covering up to 40 percent of the treatment.

Administering these different plans has had a profound effect on HMOs, Mrs. Henderson said.

"I think you're seeing HMOs in some aspects becoming more like insurance companies, and this is reflected in the number of HMOs which have been taken over by insurance companies," said Mrs. Henderson, whose HMO was acquired by New York Life three years ago. "Therefore, I think its going to be difficult for those HMOs who are not affiliated with major insurance companies to keep ahead of the market."

A concept that has been around since the 1930s and proliferated in the 1980s, HMOs have picked up some detractors along the way.

"It seems the noticeable thing that people are commenting about in their HMO coverage is the quality of care they receive," said Brad D. Lint, of the Maryland Citizen Action Coalition.

"You will get a situation where a physician who's under contract may feel that a certain medical procedure is necessary and is an important part of the treatment regimen for his or her patient, but the review organization that scrutinizes the treatment says no," Mr. Lint said. "And it becomes a case where the patient has to pay for the care out of their pocket, or they don't get it."

Mrs. Henderson acknowledged there have been instances where a treatment may have been reviewed and denied because of an HMO's cost-containment procedures. But she said patient care has not been compromised.

"Obviously, we would disagree strongly with the quality of care issue," Mrs. Henderson said. "All HMOs have committees or other controls in place to monitor the quality of care. The state of Maryland also audits the quality of care provided by HMOs, usually on an annual basis.

"If there were that many consumers who were unhappy with it, I don't understand why so many people flock to HMOs from year to year, and why we can keep such a high retention rate among current members," Mrs. Henderson said. "HealthPlus, for example, retains 99 percent of its membership on a year-to-year basis."

HMOs will continue to be the health-care delivery system of choice for most businesses -- warts and all, said Eric R. Wagner, an analyst with Price Waterhouse. "HMOs, I think, are increasingly accepted as the alternative to tradition health insurance," Mr. Wagner said. "They've proven over the last decade that they can deliver quality health care for a lower premium, and at the same time they can maintain a lower rate of increase in their premiums than traditional health insurance."

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