HMO love affair over?

Published on

Relationship between money, health hits skids


Employers’ recent love affair with managed care — a slimmer, younger, less expensive version of traditional insurance — has wound up like many affairs: with blame and recrimination.

The romance began at the beginning of the decade. By decade’s end, it had soured, with managed care the butt of jokes, the villain in Hollywood dramas and the favorite whipping boy for politicians and lawyers.

Managed care promised to be the perfect partner for employers wanting to escape from double-digit health inflation — and for insurers fearing a government-run medical system. So what went wrong?

For one thing, employers wanted a bargain, and market-hungry insurers initially were eager to give them one.

“Employers were so busy looking out for their own interests in controlling costs, that the consequence was there was less and less money available for care,” says Helen Halpin Schauffler, professor of health policy at University of California-Berkeley.

Employers, who say quality was not sacrificed for cost, are still generally happy — and not about to jilt managed care so long as it continues to slow growth in health care spending.

Yet there are plenty of critics, who say the backlash to managed care also arose from:

* Consumers who felt pushed into managed care by employers.

* Inflexible health plan rules and poor customer service.

* Financial arrangements by health plans that create incentives for doctors and hospitals to delay or deny care.

* The rapid rise of bottom-line-oriented for-profit insurers and the resulting industry consolidation, with multi-billion dollar mergers and highly paid chief executives.

* While more than half of large companies offer more than two plans, most small companies offer a single option.

“In almost every other area of life, Americans are being offered more choice, in telephone services, in financial services, in grocery stores,” says Paul Starr, professor of sociology at Princeton University. “But in health care, employers have been asking people to accept fewer choices.”

While politicians, consumer groups, patients and lawyers are blaming health care executives for excessive zeal in cutting costs, for unnecessary delays, greed and denial of care, health plans are fighting back.

They argue that employers and consumers got what they wanted — lower cost, better quality care — and risk losing that to increased regulation.

“The country decided back in the early Clinton days that we didn’t want government to control the health care system,” says Leonard Schaeffer, CEO of insurer Wellpoint Health Networks. “The private sector was asked to do that and was successful in dramatically reducing the rate of health premiums.”

Now he and others fear regulation — particularly that passed by Congress earlier this month increasing health plans’ legal liability — will raise costs and encourage employers to drop insurance coverage.

Already the percentage of insured people who get their coverage through employers has fallen from 69% in 1987 to 65% last year, according to the Employee Benefit Research Institute.

“I sit in meetings where my counterparts in large corporations are beginning to say, ‘What’s after managed care?’ ” says Randy MacDonald, executive vice president of GTE. “If we get too much legislation and we ultimately are told we are (legally) liable for something we do voluntarily, why would we do it?”

Consumer groups say such laws are long overdue: “Every other industry is liable for the quality of their product except HMOs and other insurers,” says Jamie Court of the advocacy group Consumers for Quality Care.

A great idea

Cost cutting was exactly what employers ordered when they began the exodus in the late 1980s from traditional insurance, out of frustration with spiraling health care inflation. After years of rising costs, HMOs suddenly looked like a great idea to employers.

“There was a general feeling in big business of ‘Enough already, let’s try something,’ ” recalls Burke Stinson of AT&T.

Under managed care, costs were to be controlled by the plans, which would dole out money to networks of doctors and hospitals. Plans limited patients to select groups of doctors and second-guessed referrals to specialists, irking patients used to less-restrictive traditional insurance.

Still, employers rushed to sign up, shifting the majority of workers to some form of managed care in just 10 years.

“The managed care revolution was a top-down revolution,” says Robert Blendon, professor of health policy at Harvard University.

Employers reaped benefits as the growth in health care spending slowed from an average of 11.5% a year from 1987 through 1992 to 3.7% from 1993 through 1996, government data show. At the same time, consumers spent less out-of-pocket for health care, from 23.4% of total national health spending in 1986 to 16.5% a decade later.

Yet many workers didn’t perceive a direct economic benefit.

In fact, many employees saw their share of the health care premium rise by mid-decade, especially in small firms, where it jumped from 12% of the total premium to 33% by 1996, according to research published in Health Affairs.

As employers demanded lower rates, insurers obliged. Money was saved by reducing payments to doctors, hospitals and other providers and by reducing the amount of time patients spent in hospitals. Now, a number of medical groups in California and Texas are filing for bankruptcy, while health plans are raising rates to recoup their own losses.

Employers say low cost and high quality can go hand in hand. They prod insurers to boost quality, with the threat of withdrawing their business if they don’t. “Over the last five years, we’ve dropped more than 20 plans because they didn’t meet our criteria,” says MacDonald at GTE.

Wall Street loved the growth of managed care, fueling the industry consolidation and transformation to for-profit status.

In 1981, 88% of HMO enrollees belonged to non-profit plans. By 1999, only 36% were in non-profits. During the past decade, HMO stocks generally outperformed the market, but have recently taken a significant downturn.

The dramatic shift from non-profit, community-oriented HMOs to Wall Street powerhouses was not anticipated by the policymakers who championed health maintenance organizations during their formative years in the 1970s.

Instead of non-profit “doctor-run” HMOs hiring salaried physicians, for-profits have taken over, forcing doctors to join by dint of their huge market share, says Alain Enthoven, a professor at Stanford University.

“The fatal flaw with (many for-profits) is they didn’t win the loyalty, commitment and responsible participation of the doctors,” Enthoven says.

So now the American public, used to getting what it wants, but always reluctant to pay more for it, has said managed care has gone too far. They don’t want plans deciding how long they can stay in the hospital, or whether they can take an expensive allergy medicine.

There is evidence that quality has improved under managed care, although not for all patients. Some patients, particularly the chronically ill, may do less well under managed care, studies show.

Yet on a number of measures, care has improved, just as the original backers of managed care envisioned during 1970s.

“The industry was asked by employers and consumers to provide both quality and affordable coverage,” says Charles Kahn of the Health Insurance Association of America. “Over the last 10 years, the industry’s proved it can be done.”

Experts share ideas on how managed care plans should evolve

Managed care delivered on some of its promises — most notably holding down cost increases for several years — but experts now say it has to enter the next stage of its evolution. A few ideas on what should be done:

* “The challenge for managed care plans is to show that they don’t put people’s lives at risk to save money. We need some ground rules, such as you can’t arbitrarily deny certain kinds of treatments,” says Robert Blendon, health policy professor at Harvard.

* “We need a four-pronged strategy: Get the uninsured into the system. Cut the error rate; stop unnecessary overuse and misuse; then find a mechanism to control total system cost,” says Dr. Henry Simmons, president of the National Coalition on Health Care.

* “Plans need better customer service. And consumers should know the trade-offs they make when they join managed care plans, which are not explicitly shown to them now,” says Glenn Melnick of Rand, a Santa Monica, Calif., think tank.

* “Government or employers should offer consumers a defined amount of money, then give the consumers a choice of plans that would include traditional fee-for-service, various kinds of (managed care plans) and prepaid group practices,” says Alain Enthoven, Stanford University business professor.

* “Everyone should have access to an independent third-party review if their plan or doctor denies care or is delaying what they feel is appropriate care,” says Helen Halpin Schauffler, health policy professor, University of California-Berkeley.

* “The most important thing is education. The system is still new to a lot of people. About 65% of people in managed care don’t even know they are in a managed care plan. They need to know what the rules are before they get sick,” says Paul Fronstin of the Employee Benefit Research Institute.

Consumer Watchdog
Consumer Watchdog
Providing an effective voice for American consumers in an era when special interests dominate public discourse, government and politics. Non-partisan.

Latest Videos

Latest Releases

In The News

Latest Report

Support Consumer Watchdog

Subscribe to our newsletter

To be updated with all the latest news, press releases and special reports.

More Releases