HMO Decline Predicted As PPOs Gain Enrollment

Hefty premium increases are expected to slow the annual rate of increase in HMO membership

CEO SUMMARY: Managed care analyst Michael Casey believes HMO enrollment will peak, possibly in 2000. PPOs (preferred provider organizations) are gaining members at an increasing rate. Within California, the provider revolt over deficient reimbursement levels is escalating. Orange County’s largest medical group, with 500 doctors, announced it would not accept new HMO contracts and might possibly cancel existing contracts.

EXPECT LOTS OF CHANGE to the managed care health insurance industry during the next 24 months. Several economic and social trends are reshaping the HMO model for healthcare services.

“First, although the number of enrollees in HMOs nationwide increased during 1998 and 1997, the year-to-year rate of increase in HMO enrollment is declining” stated Michael Casey, Managed Care Analyst at Medical Data International, Inc. of Irvine, California.

“Second, the most recent data shows that enrollment in PPOs (preferred provider organizations) is increasing faster than enrollment in HMOs,” added Casey. “I believe this trend will continue, for a number of reasons.

“Third, hefty increases in HMO premiums for 1999, 2000, 2001 are causing both employers and consumers to look differently at their health insurance options,” said Casey.

“Fourth, many physicians, hospitals, and other healthcare providers are unable to remain financially solvent at the reimbursement offered by many HMOs,” observed Casey. “Their difficulties must be addressed by HMOs, otherwise HMOs will not be able to operate in certain markets.”

For clinical laboratory executives and pathologists, this means more changes in the way managed care companies contract and reimburse for laboratory testing and anatomic pathology services. But some of these changes may lead to better HMO contract terms and reimbursement for laboratory services.

Michael Casey is the author of the 2000 edition of the annual Health Maintenance Organization (HMO) Penetration Rate Survey, produced in each of the last seven years by Medical Data International (MDI) Casey’s study reported that the nation- wide penetration rate for HMO enrollment climbed to 30.5% for 1998, compared to 27.5% in 1997. Statistical data for 1999 will not be available until later this year.

“1998 was clearly a year for continued gains in HMO enrollment nationally, as 33 of the nation’s 50 states showed increased HMO enrollment,” said Casey. “In California, 55% of the population is now in an HMO, compared to 47% in 1997. By comparison, HMO enrollment is 38% in New York State and 33% in Florida.

HMOs Grow In Urban Areas

“This steady movement into HMOs means that, as of the end of 1998, 80% of the nation’s population centers now have at least one-third of their residents enrolled in an HMO. As of 1997, only half of urban regions had enrollments of one-third or more.”

Standard Metropolitan Statistical Areas (SMSAs) with the highest proportion of HMO enrollment are: Sacramento–82%, San Francisco–72%, Rochester, New York–68%, and Buffalo–64%. On the low side, New Orleans and Wichita have HMO enrollments of just 24%. Alaska has no HMO enrollees.

Casey feels this may be the high-water mark for the HMO movement in the United States. “If you follow the changes that HMOs are announcing around the country, you can see a common theme to these changes. Consumers want their own doctor, and they want the ability to chose their
specialists. HMOs are responding to this consumer pressure by loosening gatekeeper restrictions and easing out-of-plan requirements.

HMO Models To Evolve

“As this trend continues, I predict that all HMO models will be reduced to what is, in effect, a modified PPO (preferred provider organization),” added Casey. “Consumer interest in PPOs is picking up. Data shows that, in most areas, PPO enrollment has begun to increase faster than HMO enrollment.”

For laboratory executives and pathologists, Casey has an interesting recommendation. “The Internet is fundamentally changing the way patients, physicians, and providers interact with each other. Traditionally, laboratories and anatomic pathologists have had minimal direct communication with the patient. But increased involvement by consumers in their own healthcare will require labs to change this situation,” explained Casey.

“I would encourage medical laboratories and pathologists to develop direct-to-patient services,” he continued. “If this is done in cooperation with the referring physician, it will strengthen the bond between patient, physician, laboratory, and pathologist.”

Rapid Evolution

Casey believes ongoing evolution away from managed care as we knew it in the 1990s will continue at a rapid pace. “Within five years, we probably won’t be using the term ‘managed care’,” mused Casey. “Consumer expectations for a higher level of healthcare, combined with the demands of patients and their families for more responsive health services, will shift responsibility away from the managed care company and back to the physician and his patient.”

Casey sees continued, even escalating battles between HMOs and providers. “The main issue is money,” he said. “On one hand, in many regions HMOs have squeezed provider reimbursement down to unsustainable levels. Providers legitimately want to see reimbursement increased.

“But on the other hand, HMOs are struggling to cope with two other factors,” continued Casey. “First is the year-to-year increases in basic healthcare costs attributable to more demand for services by patients. Second is the spiraling expenditures for drugs as new, life-enhancing therapies reach the market.

“HMOs are in an impossible situation. When healthcare costs began increasing in the mid-1990s, HMOs failed to accurately anticipate these increases and build the higher costs into their premiums,” explained Casey. “That failure led to the huge losses posted by managed care companies in the 1997-1998 period.

“HMOs are still playing catch-up. Their premium increases are once again approaching double digit levels,” he noted. “But this hardly keeps them financially even with the overall increase in healthcare costs. It leaves the HMOs little or nothing to pass along to providers.”

Large Doctor Groups Rebelling Against HMO Contract Terms

CALIFORNIA CONTINUES TO BE THE NATION’S bellwether for the ongoing evolution of managed healthcare. In Southern California, some physician groups are beginning to rebel against poor contracts

Orange County’s largest medical group recently announced that it would no longer accept new HMO patients from the 17 managed care companies it currently serves. It is also considering cancelling these same contracts and withdrawing as a provider to these HMOs.

St. Joseph Health System’s (SJHS) 500 physicians represent the largest medical group in Orange County. Its physicians serve 422,000 patients. SJHS says it loses $45 million per year on its HMO physician contracts and that capitated reimbursement is inadequate to provide proper healthcare. SJHS also notified PacifiCare Health Systems that it was terminating five of its 14 contracts between September and December 2000. This affects 40,000 of the 115,000 PacifiCare patients served by SJHS.

Over in Newport Beach, Greater Newport Physicians also sent notice to PacifiCare that it would not renew its contract for 2001. Greater Newport Physicians currently serves 40,000 PacifiCare patients.

Michael Casey, Managed Care Analyst at Medical Data International, says that low capitated reimbursement is behind these provider cancellations. “In 1993, capitated rates in California were typically $45 per patient per month. By 1999, these rates had dropped to $29, a level which is one-third below the national average, despite California’s high cost of living,” stated Casey.

The actions of St. Joseph Health System and Greater Newport Physicians are early signs warning that providers in California may start to withdraw from financially-unsustainable managed care contracts. As this occurs, California’s healthcare system will go through another cycle of restructuring and change.

Clients and regular readers of THE DARK REPORT know that low levels of provider reimbursement in California have caused widespread bankruptcy and financial failure for physician group practices throughout the state. (See TDR, October 11, 1999.) This comes on the heels of widespread bankruptcies among California clinical laboratories during 1996-1998. These events demonstrate that California’s system of managed care is failing to meet the financial and operational needs of its healthcare providers.

HMO Premium Increases

During the last 30 days, Foundation Health Systems, PacifiCare, Cigna, and Aetna each announced premium increases of 8% to 12% for 2001. Casey believes these aggressive price increases will contribute to the decline of HMOs and managed care as we know it today.

“As HMO premiums go up, PPOs become more attractive to both consumers and employers,” he said. “Why? Because, for about the same amount of money, PPOs give consumers more choice over their healthcare, while removing employers from potential liability and claims that they restrict care.

“One criticism of closed-panel HMOs is that the patient is denied the ability to shop for the best care and choose the doctor they want,” explained Casey. “Who chooses the HMOs for employees? It’s the employer. Thus, employers found themselves party to lawsuits filed by patients against HMOs claiming denial of care.

Sizeable Investment Dollars

“Assuming that the premium for a PPO is about the same price as that of a closed panel HMO, employers have plenty of incentive to permit, even encourage, their employees to enroll in PPOs,” noted Casey.

“This is one reason why the yearly national rate of increase to HMO enrollment is decreasing while the national rate of increase to PPO enrollment is growing,” he added. “Both employers and consumers, faced with the problems of HMOs and higher HMO premiums, are deciding that PPOs represent a valid alternative.

THE DARK REPORT concurs with Michael Casey. It has already published its observations that HMO losses in 1996 and 1997 were due, in a large part, to consumers adding the out-of-plan option during open enrollments in the fall of 1995 and 1996, then using those out-of-plan options during the following year.

This was incontrovertible evidence that the middle class American consumer was dissatisfied with the national experiment in closed panel HMOs. More evidence comes from the regular series of announcements by major managed care companies they they are discarding prior approval procedures and scrapping limitations on gatekeeper referrals.

HMOs Morph Into PPOs

What THE DARK REPORT considers notable is Casey’s opinion that HMOs will morph into modified PPOs during the next few years. THE DARK REPORT predicts this will be accompanied by a decline in capitated provider reimbursement arrangements for hospitals and physicians.

However, even as physicians and hospitals see more fee-for-service contracts, there will continue to be capitated arrangements for laboratory testing services. As long as laboratories are willing to do capitated deals and try to fill up their unused lab capacity, payers will have little incentive to shift their capitated lab contracts into fee-for-service testing agreements.

Top Service In The Region

As a full-time analyst of the managed care marketplace, Michael Casey’s observations and predictions indicate there will be plenty of changes in the way HMOs conduct business.

It remains to be seen, however, whether these changes will be beneficial to clinical laboratories and pathologists. In many regions of the country, the dominant HMO can still dictate terms to providers.

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