National HMOs Having Trouble Digesting All Their Acquisitions

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HARD TIMES for the clinical laboratory industry have lasted for at least three years. Now it appears that national HMOs may be in for an extended period of financial difficulty.

Earnings reports from major HMO corporations disappointed Wall Street. Cigna, Aetna and PacificCare Health Systems reported bad financial news in recent months. Operational struggles at United HealthCare and Prudential are widely known.

Not Good For Lab Industry

These developments may not be good for the clinical laboratory industry. If HMO giants are losing money, it will be tough for these companies to ease the reimbursement squeeze laboratories have endured in recent years.

This is an important issue to the laboratory industry, because it is the declared goal of these companies to develop a national network of healthcare systems. Certainly the impact of the national sole source lab testing contract between Cigna and SmithKline Beecham Clinical Laboratories demonstrated that, in certain regional markets, a lot of money was at stake.

Three key problems plague the major HMOs. None will be quickly resolved. First, data integration is now recognized as a critical success factor. Attempts to interconnect various clinical, financial and data storage systems in each region with the national parent are proving to be expensive, time consuming and unsatisfactory.

This has an insidious side effect. Without good information, many of these HMO systems are unable to accurately track costs and establish appropriate prices. Since healthcare premiums are negotiated once a year, it can take an HMO a long time to recover from pricing mistakes.

Second is the increasing complexity of the managed care business. Five years ago, managed care was a simpler business. New forms of competition have emerged and more sophisticated products are hitting regional markets. For example, hospitals and physicians began developing their own managed care products. At the same time, public demand for less restrictive plans and more choice require more complex administration while increasing medical costs. National HMOs must respond to these dynamics in regional markets throughout the country, making it tougher for headquarters to address regional problems in a timely way.

Third, a national company does best when it standardizes its product. Efforts by national managed care companies to standardize are running into firm resistance at the regional level. Cigna Healthcare President H. Edward Hanway summed it up, “You certainly can’t take a McDonald’s approach to healthcare, because it is still very much a local business.”

Uncertain Future For Labs

If the financial difficulties now becoming visible among the national HMOs continue into future years, it will not be good for the clinical laboratory industry. The managed care plans will try and maintain financial health by continuing to cut reimbursement to all providers, including laboratories. Since more reimbursement cuts are still ahead in Medicare and Medicaid programs, it means that clinical laboratories will see little relief on the laboratory reimbursement front in the near future.

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