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Terminal Illness
The dwindling ranks of Connecticut HMOs ponder
how to survive the squeeze
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Business New Haven
3/6/2000
By: BNH
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Consumers who once protested any notion of health maintenance organizations curtailing provider choice are already facing fewer choices when it comes to HMOs themselves.
The state's HMO industry is struggling - facing low profit margins, government intervention, and a constant public relations onslaught from doctors livid over constraints on their treatment decisions or fees. Once hailed for introducing prevention and cost-containment to health care, HMOs are no longer the darlings of investors, businesses and consumers who expected a bargain.
Connecticut is what one observer calls a “hyper-competitive” marketplace, with 13 HMOs that provide care for about one-third of the state's population. “That number [of managed-care companies] could be down to six or seven by the end of the year, and three or four after that,” predicts Stephen Glick, president of the Chamber Insurance Trust, which administers an insurance program for chambers of commerce throughout Connecticut.
Some of the state's HMOs have reputations for caring, others, are known for their bureaucracy. Still, industry observers decline to predict whether quality or low cost will prove the trump card in the end.
“Let's put it this way: There's a floor level of quality, and once you meet that standard, price becomes the deciding factor,” says Robert Mains, a research analyst for Advest. “It's relatively easy [for benefit officers and analysts] to measure price, and not so easy to measure quality.”
In truth, most consumers choose physicians based on convenience or personality rather than skill. “Fortunately, most people don't get the chance to find out how good their doctor really is,” says Mains.
Whether HMO companies vanish due to mergers or bankruptcies, small businesses expect less choice to result in higher costs. Health coverage is already expensive, annually costing small businesses about $4,500 per employee with a family, while large companies typically pay less than $4,000.
“The insurance industry suggests that a smaller business unit is more costly,” says Lee Lemaire, chairman of the Connecticut Small Business Federation. “I don't believe that.”
Nevertheless, employers with 50 or more employees can negotiate on services, while firms with fewer than 50 employees pay a uniform rate. Meanwhile, municipalities and powerful union programs that offer a range of services pay about $15,000 per employee. “That burden goes to the taxpayer,” notes Glick.
Employees who work at Brighton Gardens, a Marriott Assisted Living Community in Woodbridge, can choose from two types of health coverage: About 65 percent choose the traditional preferred-provider organization (PPO), and 35 percent choose the HMO plan. Most employees express surprise that the HMO plan costs $5 more per week than the PPO, an independent network of providers who contract to provide health services.
“With the limitations, employees expect the HMO to be less expensive,” says Katrina Young, office manager. Employees are satisfied with their HMO coverage, and Young notes that the HMO set up a special hotline specifically for Marriott employee questions. “Our employees have no problem getting in touch with the HMO,” she says.
Most of the 500 employees at Fire-Lite Alarms/NOTIFIER in North Branford rely on HMO coverage rather than the point-of-service plan, which allows coverage at a lower level of benefits for employees who seek treatment from non-participating providers.
“Ten years ago, we saved a lot of money,” says Carole Lombard, Fire-Lite's benefits coordinator. “I don't think the cost savings will ever be as good as ten years ago.” During open enrollment in November, however, 20 employees left the HMO coverage because the point-of-service plan required a lower co-payment from employees.
Health coverage is essential in attracting skilled workers, employers interviewed for this article say unanimously, while few or no benefits await unskilled workers. “Even if their employer can afford to offer health coverage, the workers can't afford their contribution,” says Glick.
The booming economy requires employers to offer health coverage to retain skilled employees and remain competitive. “We don't see companies dropping coverage,” says Fred German of Business Benefits Consultants in New Haven. “Employers may not be happy with paying premiums, and the employees may not be happy about what they're getting. But no one's dropping coverage.”
No More Growth
One thing is certain: HMOs can no longer anticipate gains from simply increasing enrollment. Nationally, about 85 percent of the population is served by managed care, compared to 30 percent in 1990.
“The market share has plateaued,” explains Mark Goldberg, distinguished faculty fellow at the Yale School of Management. To attract enrollment during the last ten years, many HMOs held down prices below inflation and even costs.
HMOs now typically run in red ink, raising premiums to make up for lost time. Cost increases average up to five percent annually (while inflation runs at just two percent), and average premium increases for managed-care plans are up to nine percent, according to Goldberg.
HMOs also try to recoup costs from the trend of providing wider access to a range of provisions, in response to criticism over choice. “As prices level, competition over quality will intensify,” predicts Keith Stover, lobbyist for the Association of Connecticut Health Maintenance Organizations. For example, he anticipates more outreach, such as reminders for checkups such as those regularly sent by dentists, an innovation already adopted by ConnectiCare.
HMOs have also resorted to ZIP code pricing, with Fairfield and New Haven counties paying higher rates, because of more expensive doctors and care associated with Yale-New Haven Hospital, a major teaching and research center.
Self-Insurance
Statistics from the state's Department of Insurance suggest slight drops in HMO enrollment during the last quarter of 1999. Those decreases don't mean the HMOs are less crowded, though. State enrollment figures do not include employees who are members of so-called self-insured plans, such as Fire-Lite/NOTIFIER, a subsidiary of Honeywell.
Self-insurance is a luxury limited to large firms. Rather than pay premiums, employers with hundreds of workers can self-insure, paying bills on all normal health expenditures and paying a fee to an HMO for its administration, network use and utilization review.
Self-insured employers also purchase “stop-loss” insurance to cover employees with major, unanticipated illnesses. Most of the self-insured business goes to the larger HMOs, according to Mains, who notes that HMOs make less profit on self-insured clients.
About half the total state market is self-insured.
Self-insured firms - regulated not by the state's Department of Insurance, but by the less restrictive federal Employee Retirement Income Security Act (ERISA) - can ignore state mandates on care, such as recent rulings on mental-health parity and Lyme disease treatment.
A strong economy with high unemployment has curtailed employers' ability to ignore popular mandates, suggests Susan Cogswell, spokeswoman for the Department of Insurance. However, all employees could expect less coverage and service if the economy cools.
More mid-sized firms are investigating the self-insured route to health coverage, suggesting evidence of cost containment and the attraction of avoiding state mandates. But Glick says such plans are simply not feasible for firms with fewer than 100 employees - which comprise the bulk of employers in Connecticut. Glick also warns that the plans are easier to create than abandon.
A better option for small and mid-sized firms is to explore partial self-funding, according to Glick, or buying plans with high deductibles, even as high as $1,000, for employee care. Such a plan allow for greater flexibility without risk or liability.
Savvy Consumers
Both employers and employees have gradually become more savvy about searching for quality and low cost in health care. But that education is far from complete, says Glick. Both HMOs and their clients could take better advantage of electronic communication and record-keeping.
Also, employees could bear more of the financial burden for their coverage, prompting them to compare prices and take better care of themselves. Both employers and employees could become “more involved in the process and create more checks and balances,” suggests Glick.
Some small businesses are more lax than their employees. “Some businesses deal with a family member who is a broker, and they feel they're writing health care off their taxes anyway,” says Ken Miller, president of the Printing Industry of Connecticut. “They feel the IRS is paying their bill for health coverage.
Meanwhile, more employees compare health plans and know what competing firms offer in terms of coverage. “These people network,” explains Miller. “They know which shop has the best benefits, and which has coverage that is dwindling. And they move because of it. Fulfillment is a big part of service, and you don't want to upset qualified employees.”
In a volatile market, corporate benefit officers have discovered two opposite strategies for containing costs. Some firms switch health carriers every year, or even more frequently, to take advantage of some HMOs' predilection for offering discounted introductory rates. Other firms try long-term commitments, applying strategies that they use for other suppliers, according to Goldberg, such as making long-term commitments with an HMO in exchange for rate caps and some control over administration.
Businesses also rely on recommendations from one another. For example, the Printing Industry of Connecticut has had trouble establishing an association-wide plan, because it would require the commitment of at least a dozen firms. “Firm A wants to see Firm B, C and D's reaction,” says Miller. “Before committing they want to know, how is the service? How quickly does the HMO pay claims?”
The Two L's
Ironically, HMOs are experiencing their best operating environment since 1993, with costs under control and expanded margins, according to analyst Mains. “The problem is the two L's,” he says, “legislation and litigation.”
Depending on the final outcome, a proposed federal Patient Bill of Rights could result in cost increases of up to 12 percent. If the bill attacks the way HMOs conduct business - prohibiting them from limiting care and encouraging doctors to conduct unlimited tests and treatment - it could pose real risk to the industry, asserts Mains. The HMO industry would support a limited right to sue after administrative or arbitration options have been exhausted. “That would codify what most companies are already doing,” he adds.
At the state level, one source of relief for small businesses would be medical savings accounts (MSAs), available in almost every state except insurance-heavy Connecticut. Both political parties have expressed support for MSAs, but this year's short session may not allow enough time for passage.
These accounts would allow businesses to establish tax-free accounts for employees' normal medical expenses, similar to individual retirement accounts, up to $1,500 per year. Unspent amounts would accrue from year to year.
More importantly, says Glick, MSAs would provide a greater incentive for consumers to make more educated decisions about their health care.
However, HMOs oppose MSAs, fearing reduced premiums and revenue.
A big issue for Connecticut HMOs is adjusting to the set of regulations passed by the legislature during the past three years, says Stover of the Association of Connecticut HMOs. “The state should let the pieces settle and allow laws to become effective before engaging in more legislative activity,” he suggests.
Doctors hope to secure more power with MSAs. For example, more doctors and hospitals will attempt to eliminate the HMO middlemen and negotiate directly with businesses. “In our area, a major doctor group is already working to design its own MSA plan,” says Glick.
Small businesses would also like to see guarantee-issue products extended to sole-proprietor firms. Currently, Connecticut HMOs are not required to accept firms with fewer than two employees. So the sole proprietor pays 50 percent more for health coverage than the cost-per-employee in a firm with more than 50 workers. “Insurers want quantity,” says Lemaire. “Everything in the insurance business depends on volume.”
For that reason, many small firms would like the state to restore multiple employer trusts for health insurance, which allows small firms to aggregate.
New Technology
Analysts are hopeful that advances in technology will drive down costs. For example, technology could create less invasive and less costly forms of treatment. Also, the Internet can play a part to reduce costs and influence care. “The Internet has the potential of influencing health care in ways that analysts are only starting to fathom,” notes Goldberg.
The industry continues to search for ways to reduce costs associated with paperwork. For example, German notes that doctors and businesses typically require one to four employees simply to handle insurance claims, says German.
Still many businesses express sympathy for HMOs. “HMOs are getting a bad rap,” says Lemaire. “They have been given an impossible task. They're expected to pay for enormous progress made in taking care of sick people at prices that don't leave them anything but a deficit.”
Efforts to control costs will not vanish with fewer HMOs in the state.
“This industry has been tested since the early 1990s and now it's being tested again,” says Goldberg. “Some HMOs do well, and some don't. But the need for health care coverage isn't going away.”
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