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Rethinking Health Care
Where have all the profits gone?: State's HMOs and hospitals desperately seek survival strategies
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Business New Haven
10/19/1998
By: Susan Banfield
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No fewer than two-thirds of the health-maintenance organizations (HMOs) serving customers in south-central Connecticut posted net losses for the second quarter of calendar 1998 ending June 30.
That's quite a swing: Less than three years ago, for the quarter ending December 31, 1995, about two-thirds of the HMOs reported profits.
And even though some of the HMO operators may have mitigating explanations for the figures (Oxford Health Plans, for example, says that its quarterly loss reflects one-time restructuring charges that are bumps on its long road back to profitability), the fact remains that most HMOs are struggling.
The first health-maintenance organizations, once referred to as “group practice prepaid pools,” were not-for-profit organizations in which the delivery of care and the pooling of premiums were all in the same hands. Kaiser Permanente, for example, had its own hospitals, and doctors who worked exclusively for Kaiser.
Then, in the 1970s, for-profit HMOs became increasingly common. In these, the organization handling the money subcontracted out the delivery of care to local doctors and
hospitals.
“When HMOs first got started,” Anthem Blue Cross & Blue Shield's Albert May points out, “there were savings to be achieved in the negotiating of contracts.” The days of those initial savings are long past, however, and today's HMOs are under tremendous pressure to find other ways to make a profit.
As Robert L. Natt, president and CEO of Physicians Health Services points out, this pressure comes from “a myriad of sources: the provider community, government regulations, new health-care technologies and advancements and increased competition.”
One of the greatest pressures is the rapidly rising cost of drugs. “All across the country, the cost of pharmacy services is really out of control,” says William Gedge, senior vice president for payer relations at Yale-New Haven Hospital. “The cost of drugs is going up 15 to 18 percent a year.”
Not only are pharmaceutical companies rolling out more - and more expensive - drugs; now they are advertising these directly to the consumer. The result, Gedge points out, is that the average individual has more prescriptions that they receive on a regular basis than ever before.
The bottom line, May says, is that HMOs have become “a very narrow-margin business.”
According to Yale School of Management Professor Theodore Marmor, there are four basic ways by which an HMO can turn a profit. All of these have been and are being employed to varying degrees.
The first way to improve chances of running in the black is get healthier people to sign up - customers who will pay the premium but who use relatively few services. This basic principal is behind the retreat from Medicare risk coverage on the part of a number of area HMOs. Wellcare of Connecticut does not currently offer this coverage; M.D. Health Plan has pulled out of the Medicare market; and Oxford is also dropping its Medicare coverage, at least locally.
Others which continue to offer the coverage admit that doing so is problematic. Although PHS, for example, remains committed to providing Medicare coverage in Connecticut, CEO Natt points out that “Medicare reimbursement rates have not kept pace with rising health care and pharmacy costs.” As a result, “It has become more difficult for us to continue to provide cost-effective quality care and service.”
HMOs that offer Medicare coverage have had to devise strategies to justify and support offering the service. Anthem Blue Cross & Blue Shield's May says his company has coped with the difficulties of offering Medicare coverage by being “very conservative and cautious about where we're going. We recently expanded into New Haven County, but we're not at all in eastern Connecticut.” The government reimburses differently in different counties, he points out.
Cigna, surprisingly, only recently decided to enter the Medicare market. However, Connecticut president and general manager Joanne Steffen notes that her company did so primarily so that it could continue to care for existing members who were aging into the Medicare bracket - and only after thinking long and hard about how best to set up the program.
The second and third ways by which HMOs can make a profit are closely related. Both involve exerting pressure on the doctors and hospitals with whom the organizations subcontract to provide care.
That pressure can be applied either by signing restrictive contracts, by which the health care provider agrees to work exclusively for a particular HMO, or by bargaining hard on rates.
Restrictive contracts have become less common in recent years. In fact, a number of area HMOs cite an opposite tactic: growing their provider networks and offering doctors open (non-binding) contracts.
Cigna has recently increased its provider network to more than 5,000 physicians, as has Wellcare. Both cite this as a tactic that enables them to attract new business.
However, many HMOs are still bargaining hard for the lowest rates with physicians and hospitals. Part of Oxford's plan for returning to profitability is “physician and hospital rate adjustments.”
Wellcare of Connecticut is one of the few that have found it in its own best interest to offer providers a more attractive fee schedule. “This is why we've been able to bring on so many doctors,” says director of sales and marketing Eric Bolduc.
One of the principal reasons hospitals all across the state have fallen on hard times recently is the squeeze placed on them by HMOs. Although New Haven's Hospital of Saint Raphael is one of a dwindling number that reported a profit for the past fiscal year, that hospital's chairman of clinical management, Charles Hollander, M.D., notes that HMOs are “really ratcheting down physicians and hospitals.”
“We've felt financial pressures from all managed care programs,” adds Yale-New Haven's Gedge.
Perhaps the tactic most commonly relied on nowadays by HMOs in their quest to turn a profit is finding ways to deliver health care more efficiently.
Many are looking for ways to streamline their own administrative procedures. “We're really working on our administration,” says Cigna's Steffen, “so that administrative costs are more in line.”
Reduction in administrative costs is also a key element in Oxford's recovery plan, with a goal of lowering them to 14.5 percent of revenues by 1999 (2.5 percent less than was achieved in the first half of 1998).
Most HMOs are also continually on the lookout for ways to make the actual delivery of care more efficient. In some cases this search is in everyone's best interest - as, for example, with Anthem Blue Cross & Blue Shield's emphasis on finding better ways of preventing illness and better ways of treating chronic illness.
In that vein, the company has recently implemented new programs targeted at early detection of breast cancer and at people with asthma and diabetes.
Other approaches to achieving greater efficiencies may be more questionable - as, for example, the part of Oxford's restructuring plan referred to as its “utilization management initiative.”
The goal of the initiative is “to work with network physicians and hospitals to reduce unnecessary utilization.” Such efforts run the risk of discouraging needed use of health-care providers - not just “unnecessary” use.
Some HMOs have determined that, in addition to these four traditional tactics for making a profit, they still need financial bolstering. A number in this area have found that merger with another, often larger, HMO provides the extra financial strength they need.
PHS sees its recent merger with M.D. Health Plan as a key element in resolving its financial difficulties. “By pooling our resources, we are better able to move forward and invest in our future,” says CEO Natt.
Albert May of Anthem Blue Cross & Blue Shield points out definite advantages to Blue Cross & Blue Shield of Connecticut of its merger with Anthem: “It brings us the capital strength that Anthem has as a large company. To gear up for the year 2000, to develop the kinds of tracking programs we're expected to have requires a large amount of capital. Small health plans don't have these kinds of resources.”
Ultimately, however, area HMOs have universally found that even with these various tactics for turning a profit, profit margins have proved so difficult to maintain that they have had to raise rates.
This is perhaps the method of last resort, as the HMOs know how unfriendly a reception still more rate increases will receive from employers. Nonetheless, administrators are predicting fairly sizable increases for the coming year.
Oxford is predicting an average increase of seven percent, Anthem Blue Cross & Blue Shield between five and ten percent. Cigna says the rate of increase will vary depending on location and population group, although Steffen does express confidence that there will be no double digits.
How does all this affect the average health-care consumer? Except for seniors - many of whom will have to scramble as their HMOs unload their Medicare plans - the answer is: not as much as one might expect.
“In Connecticut, workers are insulated from the cost of health care,” says Gedge. He notes that, unlike many states, where employers are requiring workers to pay much higher co-insurance rates, in this part of the country employers will absorb the bulk of the rate increases.
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