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Goals 2000: For HMOs: Administrative Retooling; For MDs: Managerial Competency

MANAGED CARE November 1999. © MediMedia USA

Goals 2000: For HMOs: Administrative Retooling; For MDs: Managerial Competency

Richard Hamer
MANAGED CARE November 1999. ©1999 MediMedia USA
LOOKING FORWARD

Richard Hamer

The two main players in the managed care industry have their work cut out for them for the next several years. While HMOs retrench, physicians need to become more constructive participants.

The biggest wild card facing the industry in the next few years is what physicians and other providers will do to be constructive players in this game of limited budgets. There haven't been any strong statements from the physician community about this.

What we're getting from physicians, instead, are complaints that they don't have a blank check to do anything they want. The issue isn't their salaries. The issue is: How do they manage the business of providing health care? How will they do it within the constraints that we all face?

We're entering a period where the public will be more critical of providers. HMOs have been the punching bag for a long time. Now, the public's going to look at providers.

In addition, the entire industry will probably become more honest with consumers and say, "This is what it costs. You can have this option if you're willing to pay more for it."

We have also gotten through our national debate on capitation. It's not going to be seen as the solution for controlling the medical-loss ratio. And gradually we will realize that it never really was much of a movement. The HMOs that organized large-scale capitated systems five years ago are still accounting for most capitation today.

As recently as two years ago, people thought that transferring risk to providers in capitation arrangements would help HMOs control medical expenses. That's a stalled trend. It didn't happen. There are a lot of reasons why you don't want to capitate some providers.

The primary reason health plans don't capitate is that it is incompatible with their business model. Multi-product national concerns, organized across broad IPA networks, usually have information systems and management policies designed to serve claims-driven insurance businesses. Their business model is based on discounted fee schedules. To change into capitated plans requires these companies to rethink, reanalyze, reorganize, and then renegotiate each of their provider contracts — there's just too much inertia.

For HMOs

Many of our customers who are consultants say that HMOs want operational solutions — they're looking into how they can improve their administrative efficiency or get a handle on controlling utilization. They have to figure out how to control their medical-loss ratio. They can't just rely on premium increases.

This is different from the last 10 years, where HMOs have sought planning guidance. In the past, many consulting engagements were to examine new markets, keep an eye on competition, and devise ways for gaining market share. That's not so much the case anymore.

In short, HMOs are retrenching, looking for ways to restore their bottom lines. They can do some of that through premium increases, which we've all read about, but they also have to improve efficiencies.

HMOs have to get back to the original principle of the HMO industry, which was to take prepaid premiums and use them to provide preventive services and superior access to primary care.

Too many HMOs have just forgotten about that and have become insurance companies that pay claims. They try to stay within the limits of their prepaid premiums through a lot of administrative obstacles that enrage both physicians and consumers and which, according to our research, are actually contributing to lower profitability among the HMOs.

Our data indicate that as HMO administration gets more intense and closer to the actual processes of care, profitability suffers.

HMOs vs. PPOs

There has been some price convergence. The cost of providing a PPO-based health plan has been going up more slowly in the last two years than the cost of providing an HMO health plan. More recently, HMOs' share of the total commercial market has dropped maybe one or two percentage points while PPOs now have one or two percentage points higher market share. These trends have encouraged some cost-sensitive employers to take a new look at PPOs.

However, while you might be able to view PPOs as the alternative to HMOs, there are many things that consumers can get from HMOs that they can't get from PPOs. The PPO is not just a replacement product for the HMO.

For instance, a large portion of PPOs don't do their own claims adjudication. They don't have any data that help account for quality and efficiency. Many of them can provide utilization review, but their customers don't buy utilization review on a regular basis.

The employer that puts together a PPO-based self-insured plan usually has to go elsewhere to find a case management, pharmacy benefits, or chronic disease management company. While many PPOs do offer those services, many do not, and many employers choose not to buy them.

So HMOs remain the primary choice for somebody who wants a comprehensive benefits package with low out-of-pocket expenses.

Medicare market

It should also be pointed out that very few PPOs have anything to do with Medicaid, and none of them has anything to do with Medicare.

HMOs serve both those markets. Our most recent work shows that the reimbursement rate in Medicare isn't really the predictor for market exit that many thought it was. Most HMOs are maintaining their service areas and expect to grow, on average, by 2,500 Medicare enrollees a year.

I realize that this runs somewhat counter to perception. There's a lot of publicity created when plans like Humana and Aetna U.S. Healthcare pull away from Medicare. Before the Balanced Budget Act of 1997, you rarely saw HMOs doing that. But even after the act, most HMOs stayed in the Medicare market and plan to stay in.

Until the act passed, that market grew at about 24 percent a year, topping out at 35 percent in 1996. Last year, it was an 18-percent growth rate, but there's nothing wrong with that.

Right now, health care is a miserable business for those in the trenches. Nobody is making any money and financial instability is very common. However, managed care is not going away because no government wants to become an insurance company.

Richard Hamer is the director of InterStudy Competitive Edge, one of the foremost trackers of HMO trends.

Articles in the Looking Forward Series:

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