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Watch out for tougher contract negotiations
When managed care companies catch a cold, providers and consumers may expect to get the sniffles sometime soon after. So the fact that 1997 was an unprofitable year for HMOs may continue to hold some ominous portents for the rest of us.
How bad was it?
A new study by InterStudy Publications in St. Paul, MN, shows that about half of all HMOs were profitable in 1997, with an average margin of minus 1.2%. Compare this to 1994 when 90% of all HMOs were profitable, with an average margin of 2.4%. (See chart on HMO profitability, p. 74.)
"It neatly continues a trend from 1996 and 1995 where we started noticing that HMOs were not turning in the profits they had before," says Richard Hamer, director of InterStudy Publications, a firm that specializes in research and reports for market-driven health care.
Before 1994, HMOs had five years of high profit margins. "This was unusual and interesting to us because HMOs have always had a sort of cycle in profitability of three years down and three years up," Hamer says. "So some people were starting to wonder if HMOs had defeated the underwriting cycle, or if managed care is somehow different."
Instead, the cycle might have changed, although the jury is still out on what the profit declines in 1997 will mean for 1998 and 1999.
Managed Care Strategies asked six managed care experts to discuss why HMOs lost money in 1997 despite their continued growth, and what this will mean for providers in the second half of 1998 and in 1999.
A variety of problems led to 1997's collapse in profits, and one of the most notable is that HMOs had kept premium increases stagnant in the previous few years, Hamer says.
InterStudy reports that medical costs had increased from 3% to 5% between 1994 and 1996, but HMOs kept their premium inflation near zero.
Other experts point to the growth in HMOs as part of the problem. While HMOs held a smaller share of the marketplace, they had healthier consumers because people had not begun to use their services. Now HMOs cover more than 70 million people, and many more HMO members are getting sick and being hospitalized. (See story on why HMOs are losing money, p. 75.)
"It's pretty well-recognized that the people who enrolled in managed care plans in earlier years were the ones who did not use health care services very regularly," says Francine Moskowitz, MS, president of Alpha Consulting Associates in Woodland Hills, CA.
"As HMOs' market share grew across the country, people who would not ordinarily choose to be in the plans were forced to join them, and those were high utilizers of health care services," Moskowitz says.
At least one expert says 1997 may be the beginning of downward cycle for HMOs.
"The managed care industry is obviously going through some very rough waters, and I don't think it's going to get any better," says J. Daniel Beckham, president of The Beckham Co. in Whitefish Bay, WI, a strategic planning and consulting firm for health care providers.
Beckham predicts HMO profits will be hurt even more in coming years as providers form provider-sponsored organizations (PSOs) to contract directly with Medicare and employers and attract consumers away from HMOs. This will cause Medicare HMOs to lose market share. "The first thing to go will be profitability, and the second thing to go will be the managed care industry," Beckham says.
Not everyone shares this view, however.
George A. Schneider, CPA-CMCP, senior consultant with Medimetrix Consulting in Cleveland, says HMOs may be out of favor now, but the good ones will last and eventually come out ahead.
Schneider provides help with financial assessments, readiness assessments, and organizational development for HMOs, PSOs, and provider networks. Previously, he served as the chief financial officer for Physicians Health Services in Shelton, CT, and Coventry Corporations Group Health Plan in St. Louis. He also was the chief executive officer for four state Medicaid start-up HMOs.
"It will be a three- to five-year trend at most, and then those PSOs will run back to the HMOs to help them out because they understand medical care but they don't understand the risk they're getting into," Schneider says.
Meanwhile, HMOs have been scrambling in the first half of 1998 to prevent future losses by raising rates and renegotiating with providers.
"A lot of health plans, in order to establish themselves and to build market share, were lowballing," Beckham adds. "And the expectation was that once the pool of enrollees was sufficiently large, the providers would knuckle under and accept significantly lower reimbursement for services they provide."
But this probably won't happen, Beckham says, because providers have reached their limit to how much they are willing to cut their fees. "Providers have discovered they are more essential to the scheme of things than the health plans are."
Hamer says he is optimistic that HMO profits already are starting to climb because of their recent premium increases, and he predicts the premiums will rise by 5% to 6% in 1999, following an average 4% increase this year.
In many cities, the HMO rates have increased 5% to 8%, other experts say. But in some areas, HMOs are asking for double-digit increases.
HMOs in Wisconsin have been raising rates as high as 10% to 12%, says Robert E. Wierman, executive director of Aegishealth in Eau Claire, WI. Aegishealth Network has two hospitals and a large multispecialty clinic. The hospitals are Sacred Heart Hospital in Eau Claire and St. Joseph Hospital in Chippewa Falls. Aegishealth shares risk with Group Health Cooperative, an HMO partner in Eau Claire that has 15,000 covered commercial lives and about 8,000 Medicaid lives.
Wierman says he's also seen a trend of HMOs asking providers to take more discounts.
"Whenever HMOs can, they are renegotiating," Wierman says. "I'm not certain how receptive hospitals are to that."
When the HMOs come to providers with the same song and dance about bringing them greater volume in exchange for greater discounts, providers are more skeptical, Wierman says.
"The HMOs may promise the world and say they'll bring all this volume, but we have to say, 'Show me the volume,'" Wierman adds.
"There's a lot more driving those premiums than pressures of medical inflation," Beckham says.
"There's executive compensation, expectation of investors, and the word on the street is that health plans are looking at 18% to 20% increases in premiums this year," Beckham adds.
HMOs also will continue to pressure providers into accepting risk for the total cost of care, says Fred Brussee, national director of Health Plan Consulting for CSC Healthcare of El Segundo, CA. Brussee is responsible for product and staff development and previously was the president and chief operating officer of RightChoice Managed Care, the managed care subsidiary of Blue Cross and Blue Shield of Missouri, based in St. Louis.
Brussee also says payers will focus more cost-cutting attention on pharmacy and outpatient benefits, which have grown in recent years as managed care squeezed inpatient and physician costs. Brussee also predicts the following trends:
· increased efforts to strengthen controls around increases in pharmacy benefit costs;
· further growth in pharmacy benefit management;
· a narrowing of a network of pharmacies to extract better discounts on drugs;
· stronger member incentives for early detection and treatment;
· more emphasis on wellness programs;
· a focus on demand management programs, in which consumers are encouraged to talk with health care providers before seeking care.
· tougher negotiations with physicians and hospital panels;
· increased incentives to provider members who have a proven ability to deliver the highest-quality, most cost-effective care.
"I think 1998 is going to be a brighter year for a lot of HMOs because there have been steps taken to improve their costs," Brussee says. "Everyone in the market has raised prices significantly above their cost trend for 1998, which means they'll get their margins back up to where they should be."
[Editor's note: For more information about InterStudy Publications' 1998 reports on HMO trends, profitability, and regional market analysis, you may contact InterStudy at P.O. Box 4366, St. Paul, MN 55104; call (800) 844-3351; fax (612) 854-5698; or visit the Internet site at www.hmodata.com.]