What went wrong with HMOs in 1997?
With 70 million members, why did profits dip?
In most industries, an larger customer base translates to a healthier bottom line. But surprisingly, the HMO industry bucked that truism in 1997.
HMO enrollment grew at a rate of about 12% last year, and HMO membership reached an all-time high of 70 million, according to a new report by InterStudy Publications of St. Paul, MN. But HMO profits, which had begun to drop in 1995 and 1996, took a nose dive in 1997, and the ripples still are being felt by providers and consumers.
So what has happened in recent years, particularly in 1997? Managed Care Strategies asked six experts for their opinions. They list the following major reasons for HMOs' decline in profits:
· HMOs kept their rates too low for too long.
Employers have shifted to HMOs because they see HMOs as the best agent to hold premiums at zero inflation, and managed care competition for their business has kept rates low, says Richard Hamer, director of InterStudy Publications.
"When HMOs are put in that position, natural medical inflation, which is 3% or 4% per year is going to overcome the premium revenue and reduce profitability," Hamer explains.
InterStudy's new report says that HMO premiums rose only 0.5% in the past couple of years, compared with an average 5% increase in 1994, when they were at their height of profitability.
· HMOs now have sicker members than they had in the past.
For years, HMOs mainly attracted healthy consumers who did not have major health problems and liked the low-cost premiums. But as HMOs have replaced indemnity plans at many companies, more people are joining and many of these new members are less healthy than the earlier HMO members, the experts say.
"As you gain market share, you gain a more typical population," says George A. Schneider, CPA-CMCP, a senior consultant with Medimetrix Consulting in Cleveland.
The same trend can be seen in the growing Medicare HMO business.
"HMOs were profitable for a long time because healthier seniors were the ones using these plans," says Francine Moskowitz, MS, president of Alpha Consulting Associates in Woodland Hills, CA.
"If you knew you were going to have a major surgery or medical condition, you wouldn't choose a Medicare HMO," Moskowitz says. "But some have been so aggressive in signing up seniors that they now have a pool of patients that includes more than just the low utilizers."
· It takes time for new HMOs to make money.
New HMOs and the new managed care plans created by provider-sponsored organizations (PSOs) rarely make a profit for the first few years, and these plans may have helped to contribute to the industry's overall losses, says Robert E. Wierman, executive director of Aegishealth Network in Eau Claire, WI.
"Also, the provider-sponsored plans could be having losses because they paid themselves too well," Wierman says.
· Competition has kept rates low.
Besides pressure from other HMOs and provider-sponsored health plans, HMOs have also seen price pressures from indemnity insurance carriers.
"There's a last gasp among indemnity carriers as some tremendous pressure is put on them to offer lower prices because they're losing so much of their market share," Schneider says.
"During this final phase of indemnity, those people are struggling and will be extremely price competitive, and many HMOs are caught in the domino effect," he adds.
· Mergers and acquisitions created market share pressure.
Many merging managed care companies were valued more for the number of customers they had than for their profitability and underlying business model, says Fred Brussee, the national director of Health Plan Consulting for CSC Healthcare of El Segundo, CA.
"They were enthusiastic to gain market share at all costs," Brussee says.
· HMOs had to spend more money on technology.
"They needed a significant investment in information technology to manage information better and to improve the ability to deliver cost-effective care to their members," Brussee says.
· Some HMOs spent a lot of money on top salaries.
HMOs were hugely profitable several years ago, says J. Daniel Beckham, president of The Beckham Co. in Whitefish Bay, WI.
"If you talk to physicians, they will quickly point out that the folks who run HMOs, the top management teams of HMOs, up until a few years ago were making huge amounts of money personally," Beckham says. "They were taking lots of money out of the industry, and that's where the money was going."
· The HMO growth rate is slowing.
In 1995, the HMO growth rate was 16.1%, and in 1996 it was 13%, according to the InterStudy report. Although 1997's growth rate of 12% still is respectable, it's showing that the rate is slowing down a little.
What this means is that a growing percentage of any particular HMO's membership consists of old members, that is people who have been members for more than one year.
HMOs owed some of their profitability in the early 1990s to the six-month grace period they typically have before new members can begin to see a doctor, Schneider says.
"Members who are sick don't like to switch insurance companies," Schneider says. "So with any insurance company, when you get a new member you have a grace period of six months to a year before they figure out how to use the system and before they develop a strong relationship with their provider."
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