New Research Challenges President Bush’s Call to Privatize Medicare & Underscores Need for State and Federal Premium Oversight

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Data Shows Nation’s Largest HMOs Increase Profits by Diverting Money From Patient Care

New research by a nationally recognized healthcare journalist exposes the fact that the nation’s six largest HMOs increased their earnings and profitability while dramatically decreasing spending on medical care, according to the Foundation for Taxpayer and Consumer Rights (FTCR). As a result, “patients spent more for less coverage,” said Jerry Flanagan of FTCR.

In just the first half of 2003, the nation’s six largest HMOs increased their earnings by $3 billion over 2002 levels and nearly doubled their 2001 earnings. The new data coincides with President Bush‘s support of a Medicare prescription drug plan that will force more seniors into HMOs.

The six HMOs (Anthem, Wellpoint, PacifiCare, Health Net, United Healthcare and Aetna) have on average reduced the amount of money they spent on medical care by more than 4% since 2001. Adjusted for inflation of 4% annually for medical care, this represents an actual average decrease of 12% compared to 2001 levels. Among the six largest HMOs, Aetna reduced medical spending most dramatically — by 15% since 2001, which when adjusted for inflation, represents a 23% decline.

“The nation’s largest HMOs are bleeding the health care system dry to pay for increasing profits, overhead and advertising costs,” said Jerry Flanagan, a consumer advocate for the Foundation for Taxpayer and Consumer Rights. “Health plans should not be allowed to divert billions of dollars away from patient care simply because there is no oversight of how our premium dollars are spent. This new data underscores the absurdity of President Bush‘s claims that privatizing Medicare will result in more affordable health coverage for seniors.”

The new analysis is published by Ron Shinkman in this month’s edition of Healthcare Leadership & Management Report. It compares the medical loss ratios (MLR) — the percentage of premiums spent on medical care — of six of the largest, for-profit, publicly-traded health plans. The data was gleaned from SEC filings. Click here to view the report.

In 2002, the nation’s six largest HMOs diverted an average of 17% of every health care dollar to profit, overhead, salaries and advertising while the government run Medicare program spends approximately 2% on non-medical expenses.

According to Hoover’s Inc., a market research firm, the latest 12-month net income growth rate for:
* Aetna was 397.1%;
* PacifiCare was 227.4%;
* Anthem was 115.5%;
* United Healthcare was 39.1%;
* Wellpoint was 34.4%.

FTCR has called for state and federal legislation to require HMOs to get approval for rate increase like auto insurers are required to do in California since 1988 under Proposition 103. Similar regulation of health insurers would allow an independent arbiter to deny rates if profit and overhead costs are deemed to be excessive or unfair. California consumers have saved $23 billion on auto insurance premiums under Prop. 103.

“HMOs have been allowed to game the health care system by diverting more and more money away from hands-on patient care. As a result, business owners and consumers can no longer afford skyrocketing premiums and out-of-pocket costs,” said Flanagan. “The perfect storm of slow job growth and increasing health care rates has resulted in a record number of middle class Americans who can no longer afford health care coverage.”

Since 2000, health care costs to employers have increased between 12% and 30% or more annually. Small businesses of less than 50 employees have been hit the hardest. Since 2000, out-of-pocket costs for workers (co-pays and deductible) have increased by 50%.

According to data released by the U.S. Consensus Bureau in September, middle class families with an annual income between $24,999-$74,999 experienced the greatest increase of uninsured rates in 2001.

Anthem and Wellpoint, which recently announced a merger agreement to form the nation’s largest HMO with 26 million members, diverted a higher percentage of premium dollars away from patient care than most other health plans — 18.5%.

“HMO mergers have resulted in consumers paying more for less care. We expect the same from the proposed merger of Anthem and Wellpoint,” said Flanagan.

The Foundation for Taxpayer and Consumer Rights (FTCR) has called on federal and state regulators to investigate the merger that will provide a $335 million payout to Wellpoint CEO Leonard Schaeffer.

Health plan officials claimed that reductions in spending on medical care are not due to profit increases or golden parachutes for company executives but occurred because of seasonal changes in hospitalization rates and slower than expected increases of medical costs.

However, these arguments failed to explain that in contrast to their commercial health plans, the six HMOs spent an additional 10% or more on medical care for Medicare and military personnel contracts. Furthermore, a 2003 PriceWaterhouse Cooper survey found that hospital services costs increased about 6% annually over the last ten years while health plan rates increased by 12.4% and pharmaceuticals went up 21.3% per year.

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The Foundation for Taxpayer and Consumer Rights FTCR) is a non-profit and non-partisan consumer advocacy organization. For more information, visit us on the web at or

Ron Shinkman is a veteran healthcare journalist, having served as a reporter and Los Angeles Bureau Chief for Modern Healthcare magazine (1996-2001) and healthcare reporter for the Los Angeles Business Journal (1994-1996) and the Orange County Business Journal (1992-1994). In June 2001, he formed his own firm, RFS Consulting, based in Sherman Oaks, California. He continues to write about healthcare issues for a variety of organizations and publications. In February 2003 Shinkman was named editor of Healthcare Leadership & Management Report, a monthly publication of the American Governance & Leadership Group. The AGLG produces seminars and arranges for speakers on issues pertaining to the governance of hospitals and health systems.

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.

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