Managed care does not seem to be winning any popularity contests – as witnessed by audience reaction to the castigation of HMOs in the movie “As Good as It Gets,” or if you tabulate the new laws that regulate health maintenance organizations.
But as the New York Times reports in its January 20, 1998 edition, managed care plans achieved a near monopoly of employer health plans last year. The Times reports that managed care plans enrolled 85 percent of employees in 1997, up from 77 percent in 1996 and only 48 percent five years ago.
The shift to managed care helped to keep overall health care costs flat last year, according to a survey published by the Foster Higgins unit of William M. Mercer benefits consulting firm. According to John Erb, a principal at Mercer, it was the biggest one-year shift out of traditional indemnity coverage since 1994. That surprising migration has been at the root of corporate America’s success in reversing several years of double-digit inflation in the late 1980s and early 1990s.
Total U.S. health expenditures rose an inflation-adjusted 1.9 percent in 1996, according to data presented in the January 13, 1998 edition of the Wall Street Journal. This was the slowest rate of growth in nearly four decades, according to the article. But the report comes amid growing concerns, especially among the nation’s employers, that the many problems in the managed care industry jeopardizes a five-year string of victories in keeping the lid on medical bills.
Health Care Tab Continues to Grow
According to data published in Health Affairs, the total healthcare tab in the U.S. topped $1 trillion for the first time in 1996. That amounted to 13.6 percent of the gross domestic product (GDP), a percentage that has remained steady since 1993. The Congressional Budget Office projects that the growth in health premiums will be 5.5 percent in 1998, up from the 3.8 percent in 1997. They further state that the growth in healthcare spending will soon accelerate, and that national health expenditure will reach 15.5 percent of GDP by 2008.
One factor affecting these increases in the private sector relates to the profit crunch at major managed care companies. The prognosis for managed care companies is, at the same time, growing grimmer. According to Business Week, analysts had projected premium increases of 5 percent to 10 percent for this year, but most plans are settling for increases of 3 percent to 5 percent. Insurers who had been intent on setting up national managed care plans are stumbling, reporting sharply lower quarterly earnings largely due to rapidly rising medical costs.
The primary problem, according to Business Week, is that managed care is turning into a commodity business, where the cost savings have been made and now insurers must compete on price alone in a market where substantial over-capacity exists. According to a Wall Street Journal report, managed care plans are priced lower than traditional insurance. The gap is narrowing, however, as traditional insurers try to price their products competitively.
Many new enrollees, according to the Journal in a January 20, 1998 story, sign up for “preferred provider organizations” or for “point of service” HMOs. But in their drive to attract members, managed-care companies have offered such plans with aggressive prices that threaten profitability. Furthermore, since managed care plans now have 85 percent of employees, many high cost members have joined their rolls and those patients are driving up the portion of premium revenues that the plans must spend on medical care.
Beginning of the End?
Other authors predict the beginning of the end for HMOs. In a Healthcare Forum Journal article published in the November/ December 1997 issue entitled “The Emerging Market,” the author challenges the assumption that HMOs manage care, saying that “the essence of today’s HMO remains pricing — offering competitive prices to purchasers of health care and negotiating profitable prices with providers.” He does not see this strategy as sustainable; in a competitive market, the middleman role will ultimately disappear because it represents another layer of costs.
It is also not clear, according to the author, that HMOs have really been the major factor in bringing about health spending reductions. To a large extent, the loss of health benefits for many workers and low inflation for all goods and services are the real causes. HMOs relationships with employers is also under siege, much as it is with those covered by the insurance products. Employers question whether managed care plans are really saving money and they are troubled by the lack of cost and outcome data. The author sees provider sponsored organizations as the key to effecting systematic health care reforms as a new generation of health care providers begins to adapt to the managed care norm.
Integrated Healthcare Report, in its October 1997 issue, featured a story entitled “Is Direct Contracting the Next Wave?” Their conclusions are worth reviewing. Initially HMOs grew by taking relatively healthy customers in large companies away from indemnity plans. That left the sicker, more expensive patients with indemnity and further drove up indemnity premiums. Not surprisingly, indemnity fell like a rock in a matter of two years. Next, HMOs went after the same relatively healthy employee groups in midsize and even smaller employers. A similar shift out of indemnity happened.
Today, HMOs are turning their attention to capturing Medicare and Medicaid market segments. Competition in many urban markets is now between HMOs and no longer focused on trying to wrest control form indemnity insurance. Soon enough we might see competition that attempts to convince employers that the HMO who is taking 25-30 percent of the premium is actually adding value. The paradigm of “bigger is better” may be reaching the end of the rope. Consumers and employers are beginning to search for other answers.
We as neurosurgeons must be aware of these changing attitudes so that we can respond in a proactive fashion as these alterations unfold in the delivery of healthcare. The road to direct contracting will be a long and arduous trail because many physicians and their organizations do not yet possess the structure necessary to make this a successful venture. In our next column, we will speak more about direct contracting.