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SPECIAL REPORT – Healthcare: COMEBACK KIDS

COMEBACK KIDS

As Cost Containment Becomes

a Big Concern of Business,

HMOs Stand to Gain

By VITA REED

Not too long ago, health maintenance organizations were like a boxer who took a few too many shots to the head, thanks to a combination of fierce competition for members and public backlash against cost containment.

But rising healthcare costs and a slowing economy could bring HMOs off the canvas, according to industry observers.

“When the economy softens, employers and employees tend to choose basic healthcare, not bells and whistles,” said Sheryl Skolnick, a managing director and healthcare analyst with Fulcrum Global Partners in New York. “Employers no longer need to use health insurance as a recruitment and retention tool.”

Using benefits for attracting and retaining employees “has died totally,” according to Michael Wilson, a principal in William M. Mercer Inc.’s Orange office. “A year ago, two years ago, (benefits were important) for attraction and retention. I don’t hear that much now.”

HMOs haven’t had the most fragrant reputation in recent years. Back in the 1980s, employers and Wall Street hailed operators such as Santa Ana-based PacifiCare Health Systems Inc. and others as the key to affordably halt double-digit cost growth.

That changed, however, during the late 1990s. News media outlets were replete with “horror stories” detailing alleged delays or denials of care by HMOs. In response, politicians lined up with “patients’ bills of rights” designed to regulate how HMOs dealt with their members.

HMOs also had to contend with demands from hospitals and doctors to pay more to care for patients. That has played out in Orange County often in the past 18 months, particularly the contract battles between Orange-based St. Joseph Health System and insurers like PacifiCare and Health Net Inc., a Woodland Hills-based HMO company.

Those factors, coupled with a humming economy and a tight labor market, made the genre less attractive to some in the investment and the benefits community.

Now, however, the U.S. economy has cooled considerably, including the ongoing technology stock meltdown. And some believe that employers might look with less jaundice at HMOs.

Pocketbook issues will be important, observers said.

“In my experience, the primary driving factor is cost. You just can’t ignore that,” Wilson said. A certain plan may tout its service and quality, but healthcare purchasers don’t want to hear about such things if the price is 25% higher, he contended.

“To the degree that they are able to remain more efficient, HMOs will be dominant,” Wilson said. But he said that would be a challenge because capitation, or the practice of paying hospitals and doctors a fixed amount of money per month per patient to provide healthcare services, has fallen out of favor with more than a few providers.

One way HMOs can keep an economic advantage is to introduce multi-tiered networks, Wilson suggested. Under those setups, employees could have some degree of latitude in terms of what level of healthcare services they receive, with more comprehensive or flexible plans coming at a price.

Analyst Skolnick also mentioned multi-tiered networks as a way that HMOs would respond to today’s economic climate.

“Health plans will be looking for 100% market share within larger employee groups. Also, we will be seeing some cost shifting down to employees. With 100% market share, (HMOs) can have a bare-bones and a most generous plan, and price them appropriately.”

In such a situation, Skolnick said, the health plan could price the richer benefit plan in a way that puts the onus to choose a plan on the worker.

“They could price at a level where the sickest won’t choose it,” she said, noting that if a large employer has several health plans with similar pricing, and one has richer benefits, “every single (sicker employee) will go to it. That’s called adverse selection.”

What is not known, however, is whether employees used to having easy access to the system would be willing to accept a health plan that places more restrictions on them.

In some cases, according to Skolnick, employers could be blunt: “It’s a choice of that or nothing. (Employers) are saying, ‘We’re pulling in our horns. You’re lucky to have a job,here you are,’ ” she said.

Cost sharing is playing a more important role for HMO benefit purchasers, said Janice Head, vice president and service area manager for Kaiser Permanente’s Orange County operations. For instance, Kaiser, which has around 335,000 members in OC, has increased co-payments for prescription drugs and doctors’ office visits.

“It costs us more to buy the drugs,we have to pass it on in our premiums,” Head said. “It’s dawning on folks that they should make the cost of healthcare more visible to the consumer.”

In the past, Head said, health consumers were used to paying a $5 co-payment and getting the rest of their care for free. “I definitely see a shift away from that. As employers bear more of the costs, they’re looking for ways to increase (worker) awareness.”

On the issue of choice, Head said: “Choice may become less important than costs. (Employers) will be weighing that more carefully.”

A few years ago, HMOs could concentrate on aggressive management of costs via controlling members’ use. But those days are finished, according to Paul Feldstein, a professor at the University of California, Irvine, Graduate School of Management who specializes in health economics.

“(Today,) HMOs have increased costs because of state rules and patients’ rights (laws). They’ve also moved away from capitation. Because of that, they have a limited ability to cut costs,” Feldstein said.

Many HMOs, in order to quell member hostility, have instituted policies that allow direct access to specialist doctors, rather than requiring them to go through a primary care “gatekeeper.”

But Feldstein said that comes with a price tag: “If you allow free access, you are going to have increased costs. In my opinion, HMOs will have to learn to manage care.”

By “managing care,” Feldstein said, he was speaking about the roughly 5% of the population who use 50% of the healthcare benefits. “These are mainly seniors, but it’s also the chronically ill. A lot of HMOs didn’t want to touch these people.”

As for specific cost-controlling strategies, Feldstein mentioned “risk app-raisals,” or processes that health plans could use to identify in advance people who have chronic diseases. He said doing such appraisals would allow plans to have a better handle on how to care for chronically ill individuals.

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