HMOs Must Adapt or ‘Perish,’ Experts Say

Although the managed care industry may prove "reasonably prosperous" next year, many critics say that HMOs will soon have to "reinvent themselves, or perish," the New York Times reports. Health insurance premium increases next year should provide "bigger profits" for many HMOs, but higher costs to install high- technology equipment, pay for new drugs and modernize facilities will likely "tak[e] their toll." Hospitals and physicians have also "rebell[ed]" against "inadequate payments," while employers have "rail[ed]" against rate increases. In addition, Congress could pass new patients' rights legislation allowing patients to sue HMOs, placing the industry under "great pressure" to revamp its operations. "The very model that the health plans function on is being called into question by the plans themselves," Kenneth Tannenbaum, a health care consultant with Tillinghast-Towers Perrin, said. According to Wellpoint Health Networks CEO Leonard Schaeffer, managed care firms must assess the cost and efficacy of changing new technology, especially expensive new drugs. Michael Barrett, a senior analyst at Forrester Research, said that "a real collision is brewing" for managed care companies. He said, "Employers don't want to see a return to double-digit rate increases. Doctors and hospitals are getting higher reimbursements, and consumers are not inclined to play patsy for cost shifting." He added that many HMOs will need a "significant amount" of funding for information systems improvements to "keep customers happy" and curb costs. However, with profit margins slim, many HMOs "do not have any ready means of raising it," Barrett said. In addition, managed care companies have faced a "raft of lawsuits" from patients, with lawyers seeking class-action status and charging that "the system does not deliver the quality of care that it says it does."

Facing a Black Hole of Costs
Facing "consumer resistance" against efforts to manage costs by delaying and denying payments for care, some HMOs are offering a wider range of plans and focusing on preventive measures to "safeguard" those at risk of contracting expensive illnesses. Industry experts say that insurers must shift to policies that allow consumers to develop "customized" health plans. Some insurers also have begun providing consumers with "personalized" Web pages to track their medical claims, Health Futures President Jeff Goldsmith said. Tannenbaum added that HMOs will have to "spend heavily" to "Web-enable" their communications with providers, consumers and payers. "Health plans are trying to control costs by delivering information online," Jack Reichman, director for health insurance at Standard & Poor's, said, adding, "The new systems cost $200 million to $300 million." However, he indicated that "there is little choice," saying, "Those that don't invest will ultimately have higher costs." In addition, managed care firms must comply with new federal regulations requiring "standardized computer language and privacy and security measures to protect patients." The Times also reports that if the economy "sours," the pressures on HMOs will only increase. "When corporate employers' cash flow begins to decline significantly, the plans will be in serious trouble," Goldsmith said. Schaeffer added, "If the economy slows even a little bit in 2002, the CFOs will come out of their offices. Right now, the sales guys are in charge." Reichman said that 10% to 15% of employers may require "something like defined contributions" next year, rather than "swallow further rate increases," which would force individual members of health plans to "make their own money stretch" to cover medical costs.

Taking It 'on the Chin'?
Meanwhile, many hospitals have "aggressively demand[ed]" higher payments after years of "being squeezed" by HMOs, and some hospitals have refused to contract with some insurers this year. Many hospitals and physician group practices also will avoid capitation arrangements. "Physician enterprises are in a serious mess," Goldsmith said, adding, "In the West, a lot of health plans drove them into bankruptcy." In California, more than 100 medical groups have filed for bankruptcy protection during the last three years. For-profit hospital chains, however, have boosted their revenues and earnings by streamlining their operations. However, although stock prices of HCA Healthcare, Tenet Healthcare and other large hospital chains have "soared" this year, recent cuts in Medicare funding have left the future uncertain for the industry. Rick Wade, a senior vice president of the American Hospital Association, said, "A third of the 4,800 hospitals are doing real well. About a third have taken it on the chin from the Balanced Budget Act cuts and state Medicaid cutbacks, and the rest are in the middle with profit margins of 1% to 5%, not enough to go to the bond markets with." He added that most hospitals need "big amounts" to update their facilities. Nurses and other hospital workers also remain in short supply, and unions regard health care as "the last great frontier" for them to organize, Wade said. However, he added that while unions have staged strikes around the nation, the hospitals "do not have a lot of options for coming up with the money." Goldsmith said, "This industry has been in a recession for two years." But with hospitals beginning to slash administrative costs, eliminate highly paid administrators and consolidate departments, Goldsmith said, "I'm cautiously optimistic for next year about both hospitals and health plans" (Freudenheim, New York Times, 12/18).