HMO Membership Shows First-Ever Decline in 1998

THE DARK REPORT believes this is early sign of consumer rebellion against managed care

CEO SUMMARY: One of the most closely-tracked surveys of health cost trends was released last week. William H. Mercer Inc.’s report revealed two significant facts. One, enrollment growth in HMO/POS plans actually declined for the first time. Two, costs rose at the fastest rate in five years. Each fact may be early warning to laboratory executives of fundamental shifts occurring in the managed care marketplace.

When the 1998 national survey of employer-sponsored health plans was released last week by William H. Mercer Inc., it contained surprising news.

HMO/POS enrollment as a percent of all employees covered dropped from 50% in 1997 to 47% in 1998. This is the first-ever decline reported for the most restrictive type of health plans.

Further, during 1998, employers saw the largest jump in health benefit costs since 1994. The increase was 6.1%. This was also twice the increase in the Consumer Price Index (CPI), which was 3.4% in 1998.

Rising Insurance Premiums

THE DARK REPORT had earlier documented the trend in rising health insurance premiums. (See TDR, November 30, 1998.) HMO’s socked employers with healthy premium increases for 1999 as a way to recoup from their huge losses during the last 24 months.

For laboratory executives and pathologists, news of a first-ever drop in HMO/PSO enrollment percentages signals a potentially important switch in the evolution of healthcare. Experts attribute some of the decline to the fact that huge numbers of people had shifted from indemnity and PPO programs to HMOs in recent years because of their lower premiums. By 1998, this massive migration wave was over.

But THE DARK REPORT agrees with a number of analysts who believe that enrollees in HMOs are disappointed with their experience. The HMO enrollment decline was actually a result of individual consumers opting to return to a plan with more choice.

One fact supporting this view is that enrollment gains for PPOs have been significant. Enrollment rose from 35% to 40% just in the last year. And over the past four years, enrollment in PPOs is up 60%! THE DARK REPORT interprets this as an expression of consumer choice.

Consumer choice will be the driving force in shaping the parameters of healthcare. And it seems that consumers are unhappy with the service delivered by HMOs. When denied access to the quality and choice of healthcare they deem appropriate, consumers will simply vote with their feet and move to plans offering choice.

Remember another HMO-consumer trend we reported on earlier this year? One reason for 1997 HMO losses was that a significant number of consumers had, in the fall of 1996, elected to pay extra and chose an HMO with an out-of-plan option. Several large HMOs lost money in 1997 as these consumers generated extra medical expenses because they spurned their HMO physicians and exercised their out-of-plan privileges.

These two consumer trends, the increased enrollment in PPOs and HMO out-of-plan options, prove that consumers are already demonstrating their intolerance for health insurance plans that limit care and deny choice.

Should these two consumer-driven trends gather momentum, it will be a positive development for clinical laboratories. As consumers insist on choice, their health plans will place less limitations on the clinical laboratories to which physicians refer specimens.

Effectively, the trend toward increased consumer choice will be a market counterforce to the limited lab provider panels now enforced by major HMOs. But this trend will not play out overnight. It will take several years to work itself through the marketplace.

National Survey

The employer health cost survey performed by Mercer tallied a nationally- representative sample of 4,200 employers with ten or more employees. It is performed annually and closely-tracked by employee benefits managers and the healthcare industry.

Author of this year’s survey, Blaine Bos, a principal at Mercer, said “it’s too early to tell whether the decline in HMO/POS enrollment is a short-term phenomenon or–more ominously–a sign that these managed care plans may not become the centerpiece of the nation’s healthcare delivery system after all.”

Bos referenced the “selling benefit” touted by HMOs, their promise that “if you agree we can limit your access, we will give you higher quality care for less cost.” Bos’ conclusion? “That promise is in question.”

THE DARK REPORT concurs. Another fact backing our view that consumer choice will prevail is the litigation situation. The survey discovered that nearly half of large employers (500 or more employees) declared their concern about the threat of participant litigation.

These employers are proactively preparing for litigation. Some 17% purchased additional liability insurance and another 17% included protection clauses in their contracts with healthcare vendors.

Who do these employers think will file a lawsuit against them? It may be their own employees, in response to HMO denials for care the employee considers appropriate and necessary.

Employee Lawsuits

This is more than speculation. It is a little publicized fact that, while only 3% of all large employers report having been named in a legal action involving health care, more than 19% of employers with 20,000 employees or more have already been named in at least one such lawsuit.

THE DARK REPORT believes this is another sign of market forces moving against large HMOs. After all, why would an employer offer its employees a restrictive healthcare provider option, only to find its employees upset about the quality of healthcare, denial of access, and restriction on choice?

Employers operate in the free market as well. They will react with any of several strategies. One strategy is to force their HMO vendors to loosen restrictions on choice. Another strategy is to drop HMO/POS plans entirely.

Overall, the facts uncovered by Mercer’s annual survey indicate that consumers have yet to exert their collective influence in reshaping our nation’s healthcare system.

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