America's HMOs facing a crisis

The rising costs of medical care and unhappy consumers have put

Once considered the great saviors of the US health-care system, HMOs are now facing their broadest financial crisis since they emerged in the 1980s.

Ascendant during a time of soaring medical costs, managed-care systems were supposed to hold down prices while boosting quality. Today, however, a growing customer backlash against HMOs' level of care has led Congress and more than states to consider letting patients sue their providers.

That, combined with other financial pressures - ranging from the price of new "wonder drugs" to the increasing cost of caring for America's aging population - points to a crisis in America's managed care, experts say, with many HMOs already failing. It's a trend that has pushed health care back into the spotlight more than at any time since the failed Clinton health initiatives of 1994.

"Managed care was going to swoop in and solve the nation's health care problems, but that promise is now going down the tubes," says Martin Weiss, chairman of Weiss Ratings Inc., which assesses HMOs.

"These organizations are waking up to the fact that it is expensive to take care of people," adds Mr. Weiss.

*In New England, Harvard Pilgrim Health Care last week went into state receivership after losing an estimated $177 million in 1999.

*In Texas, 14 HMOs posted their worst-ever financial performance for the third quarter of 1999, losing $87.8 million - two-thirds of their total deficit for 1998.

*Among the nation's 322 smaller HMOs, half continued to lose money in 1999, a net loss of $51 million.

*In the last quarter for which statistics are available, profits for all HMOs dropped 64 percent.

"America is aging and super new technologies and miracle drugs are coming on board," says Douglas Sherlock, a health analyst at the Sherlock Company in Gwynedd, Pa. "But all these things are driving up medical and health costs substantially."

A third key factor in financial problems for HMOs, say experts, has been the pressure for them to consolidate with other HMOs. In many cases, that has caused financial strain as they attempt to compete.

"In order to become big and become a major part of the market, many HMOs tried to hold down premiums and offer benefits at lower prices than competitors," says Mark Peterson, editor of "The Managed Care Backlash," a compilation of 36 articles for the Journal of Health Politics, Policy and Law. "Many, in fact, were holding back on normal premiums over a period of years to do this. Then they found they had to boost prices because costs are soaring and that has hurt solvency."

Too much regulation?

From the HMOs' perspective, overregulation has meant that they have little or no flexibility to lower costs or avoid treatments that are too expensive. Moreover, they say many Americans have become more aware of new drug treatments and technologies through television advertising, and they are demanding such drugs from doctors.

"Many people who decide to push for expensive treatments would not be doing so if they had to pay for them out of their own pocket," says Don Young, chief operating officer for the Health Insurance Association of America. "But they figure, 'What the heck, if my insurance company is picking up the tab, I will go ahead and try it.' They don't realize that those costs are eventually going to come back and bite them as higher insurance premiums."

Not all HMOs are hurting, though. Observers say those that operate on a not-for-profit basis, as well as those that have managed themselves well, have prospered.

"Across the country, a lot of groups have banded together ... but not changed their health-care delivery for the better," says Robby Pearls, head Kaiser Permanente, a not-for-profit provider that has grown significantly in recent years. "What the American public is reacting against is that often such groups don't get their act together very well to serve people better."

Now, with 33 states and Congress deciding this year whether to pass laws on HMOs, observers say a major question is at hand: Do Americans want health care left to market forces, controlled by regulation, or some combination of the two?

"America is entering a crucial period in its discussion of how it wants to conduct its health care," says Susan Pisano, spokeswoman for the Washington-based American Association of Health Plans. "How we answer the concerns before us right at this juncture will determine the future of health care in America."

Both the US House and Senate have passed versions of a national patients' bill of rights - the House version includes a patient's right to sue. Conference committee members will try to iron out those differences in coming weeks.

"How Congress reconciles this crucial point of how and whether people can seek legal retribution for things gone wrong will have much to say about how solvent managed-care organizations will be able to remain in the future," says Don Young of the Health Insurance Association of America.

In some places, the debate has already had an effect. "The threat of these lawsuits has sent stock prices dropping by 20 to 30 percent," says John Colley Jr., former director and chairman of Blue Cross/Blue Shield of Virginia (now Trigon Inc.). "HMOs are in a no win situation."

Deferring to consumers

Fueling the debate are recent class-action lawsuits against 16 HMOs alleging a wide range of improprieties - from denied treatment to inappropriate drugs. Some of these actions resulted in wrongful deaths and injury, prosecutors say. Other critics note that last month, the Institute of Medicine released data showing that the number of accidental deaths under medical care is between 40,000 to 98,000 a year.

To avoid being taken to court, physicians are performing more needless operations.

"If I am an HMO and am being threatened with being sued, losing millions while being turned into a criminal, I am going to stop questioning the procedures that consumers want, no matter how costly they are," says Mr. Colley. "I am just going to pay the bill and turn it over to the employer, which basically is just passing on the higher costs back to the consumers."

This spiralling cycle of higher costs and higher prices has raised concern in the White House and out on the campaign trail that more Americans will be priced out of health care.

Democrat Bill Bradley has called health care "an American birth right" and wants to add all of the nation's uninsured to a program that now covers 9 million government workers and their families. Vice President Al Gore would include families earning up to $41,000 in an existing program for low-income kids, and the Clinton administration is forwarding a plan to provide prescription-drug coverage for the elderly.

Meanwhile, HMOs are taking the offensive to let the public know the benefits of their organizations.

"There are a lot of doomsday scenarios out there," says Ms. Pisano. "But if you look at the history of managed care, not only is it the only system yet devised where the incentive is to do right thing for patients, but it also has continued to evolve to be able to bring best of modern medicine to patients while dealing with changing consumer needs and employer preferences."

Regardless, say some observers, HMOs must necessarily evolve and change to respond to the will of the free market.

"The basic story line is that we have moved in the direction of emphasizing the private market to sort out issues of cost, control, and management," says Mr. Peterson, editor of the health journal articles. "That has brought a lot of instability, unpredictability and turmoil, as well as innovation and new ideas and new institutions.

"They both come together," he adds. "We are likely to see a lot of financial collapse of health-insurance plans, physicians groups, and hospitals before we get to more solid ground."

(c) Copyright 2000. The Christian Science Publishing Society

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