Expected HMO premium increase: More money for hospitals, physicians?
How much HMOs keep for themselves is the deciding factor
Health systems negotiating managed care risk contracts this year have reason to be at least cautiously optimistic about the rates HMOs will pay. After years of declining or stagnant per-member-per-month (PMPM) payments to providers, "now there is hope that some HMOs may loosen up more money when it comes to contracting with providers," says Stephen M. Cigich, FSA, actuary with Milliman & Robertson in Brookfield, WI.
Cigich bases this observation on national trends he has observed that point to a slight increase in the rate HMOs charge clients particularly employers. "Given two years of flat premiums, it appears that premium rates will increase somewhat in the next year, something in the 4% to 7% range," he says. This, however, doesn’t mean that PMPM rate increases to providers will go up an equal amount.
On average nationally, HMO revenues and profits over the past several years have been financially unimpressive, based on information in Milliman & Robertson’s 1996 HMO Intercompany Rate Survey, which was compiled from questionnaire responses from 446 HMOs across the country. According to the study, average HMO revenue from July 1995 to July 1996 increased slightly from the previous year, going from $136.9 million to $139.2 million. In the same period, average HMO profits dropped, from 5.6% in 1994-1995 to just 3.3% in 1995-1996.
"It is clear that because HMO profits have been declining over the past few years that some of that increase [in premium rates] is going to go into increased profit margins," adds Cigich, an author of the survey. "They are going to want to recoup some of that to make up for the couple of past down years."
How much of the projected national premium increase will be passed on to providers is unclear. But Cigich says there is room for cautious optimism. "When [HMOs] collect more revenue, they do have more room on what they can offer providers," he says. "As premium rates go up, it’s clear the HMOs are going to be able to pass more of that on to providers. How much of that they will pass on if any of it is difficult to predict." (For history of premium rate changes, see chart, at right.)
HMO officials, on the other hand, put a slightly different spin on the situation. They are still under heavy pressure by employers to keep premium rates low, they say, a situation that puts providers back under the gun to provide more services and more efficient services for less money.
"Margins are tremendously small," says Todd Ringler, a spokesman for the Harvard Pilgrim Health Plan, a not-for-profit HMO in Brookline, MA. "Employers have worked with us to keep rates flat. So we have to look to other ways. Physicians need to meet their targets."
Other HMO officials voice similar concerns. "Our experience is that [employer] rates are holding steady due to competition," says Kevin Heine, a spokesman for Prudential HealthCare in Roseland, NJ. "In the short run, you’re not going to see much of an uptick in [employer rates]. Competitive pressure is forcing HMOs to keep rates steady."
While Cigich stands by his prediction of an increase in the national average HMO premium rate, providers shouldn’t read this as a sign that they can back off efficiency and quality initiatives. "The last thing providers should do is become complacent," Cigich adds. "The delivery of health care still has a way to go to become more efficient, and those health systems that are efficient are going to be the ones that survive."
Survey results show that, at least in the past, providers have taken this message to heart and have done a very respectable, if not impressive, job at reducing costs. Average hospital lengths of stay decreased 13.8% from 1995 to 1996, dropping from 275 days per thousand to 237 days. Average inpatient costs per day also declined, from $1,244 in 1995 to $1,230 in 1996, according to the survey.
This news comes as no surprise to Robert Yood, MD, acting director of the Fallon Clinic, in Worcester, MA. "In my discussions with other groups around the country I’m finding that there is greater pressure on physicians to become more efficient," Yood says. "Physicians are being forced to find ways to deliver the same amount of care for less."
Greater efficiencies will also be gained through continued consolidation, on both the payer and provider side. "The No. 1 conclusion is that larger entities are going to continue to develop, and they are going to continue to prevail," Cigich says. "In the long term, it is still in the best interest of providers to align themselves with larger entities that are putting in place efficient care systems that will demonstrate value to the members five or 10 years from now. As purchasers of health care become more sophisticated, we will increasingly see them asking questions like, I know I can get a good price from this provider, but can they demonstrate to me that my members will not suffer as a result?’"
Other trends identified by the survey point to a growing uniformity in both what HMOs charge in premiums and also what providers receive in payment.
According to the survey, employers paid a national average PMPM rate of $149.67 to HMOs to cover physician and hospital expenses in 1996 (a 0.7% drop from 1995). HMOs typically keep 15% to 20% of this for administrative costs and profit, leaving physician and hospital providers to divvy up a PMPM rate of about $127.22. (See chart, p. 63.)
When broken down by region, two other factors become apparent:
• In regions where managed care competition is fierce, premium rates declined.
• Across the nation, regional premium rates trended toward uniformity. The Pacific region saw the greatest average rate decrease, 1.7%. The biggest increase came from the West North Central region, which saw premium rates increase by 3.2% from 1995 to 1996.
Further study of the regional rates also shows premium rates moving toward uniformity, which suggests that rates paid to providers have moved or will also move to a common ground.
"Ignoring the highest cost region [New England] and the lowest cost region [Pacific], the second highest cost region is only 17% greater than the second lowest cost region," the survey states. (For a comparison of regional averages, see chart, p. 63.)
"When you think about it, that really isn’t that much of a difference," Cigich says.
Compression is also occurring in physician reimbursement. The survey tracked physician payments as a percentage of the resource-based relative value schedule (RBRVS), a financial mechanism used nationwide by the Health Care Financing Administration that takes into account cost differences for practicing medicine in different regions.
"When you look at the numbers, you see an average payment to physicians of around 115% to 120% of RBRVS," Cigich says. "If I were to look at that average two or three years ago, I would see something in the 130% to 140% range. This tells me that there is trend toward physician reimbursement across the country becoming more uniform."
Stephen Cigich, Actuary, Milliman & Robertson, 15800 Blue Mound Road, Suite 400, Brookfield, WI 53005. Telephone: (414) 784-4116. For a copy of the report, contact Cigich at the above address or telephone number.
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