Reformed HMOs Gain Amid Rising Healthcare Costs
By VITA REED
HMOs are back.
That’s the word from a recent report on Orange County healthcare by the Center for Studying Health System Change, a Washington, D.C., healthcare policy group.
OC is seeing resurgence in private healthcare maintenance organization enrollment, counter to what’s going on in the rest of the country, the group says.
“HMO enrollment in Orange County remains strong, capturing more than 50% of the private insurance market, as HMO premiums remain lower than those of other options,” the report said.
Among metropolitan areas with 200,000 or more people, the national HMO enrollment benchmark is about 37%.
“The HMO penetration has continued to grow,” said Dr. Keith Wilson, chief executive of Talbert Medical Group, a Costa Mesa-based, physician-owned medical group. “There’s an acceptance of the product in the public that national media sort of weren’t sensitive to.”
A key driver, according to Wilson: “containing the cost of healthcare.”
“The HMO model, when used right, does do a good job of doing that,” he said.
St. Joseph in Orange: hospitals have less risky contracts but still face rising costs (photo)
OC is one of 12 areas tracked by the Center for Studying Health System Change, which is funded by the Robert Wood Johnson Foundation. Its latest report is based on a March visit and talks with more than 110 officials from health plans, employers, hospitals, physicians and policy makers.
The county’s HMO enrollment is up from 2001, when it dipped to 44% from 46% in 1999.
Behind 2001’s drop: disputes between healthcare providers and plan operators over sharing costs beyond what their contracts called for.
In one high-profile case, Orange-based St. Joseph Health System, the nonprofit with three area hospitals, and PacifiCare Health Systems Inc. of Cypress broke off ties after failing to come to terms on a new pact.
Woodland Hills’ Health Net Inc. later left St. Joseph after the hospital operator declined to rework a long-term contract.
HMOs have responded to doctors’ concerns, according to Paul Ginsburg, the center’s president.
“The resurgence of HMOs in Orange County was no accident,” he said. Plans “realized that the future of their HMO business depended on stabilizing the physician groups, and plans raised payment rates and provided management support to help stabilize the medical groups.”
OC’s HMO enrollment numbers reflect the performance of the delegated HMO model, where medical groups take on the risk and responsibility of managing patient care, Ginsburg said.
“Whereas everyone’s been running away from it in other parts of the country, the (California) plans took some steps to help out the physician organizations get over the rough spot that they were in when we were last out there two years ago,” Ginsburg said.
In OC, the most spectacular flameout of a medical group happened about three years ago, when KPC Medical Management Inc. of Anaheim filed for bankruptcy after contracting spats with health plans and management problems.
KPC’s breakdown “and some other things showed the plans that they had to ease up, be willing to pay more,” Ginsburg said.
PacifiCare of California raised rates or took on more risk for costs such as prescriptions and injectable drugs, company spokeswoman Cheryl Randolph said.
The health plan operator also set aside some $14 million for an incentive plan that rewards medical groups that meet certain quality standards, Randolph said.
PacifiCare has come out with a preferred provider organization plan that gives members more choice in doctors. It’s also come up with consumer health plans and prescription coverage for seniors.
But in an era of rapidly rising healthcare costs, HMOs still are popular with employers, Randolph said.
“HMOs are still an affordable option,” she said.
“HMOs are definitely alive,” said Carol Dreyer, medical administrator of the Orange Coast Orthopedics and Sports Medicine group practice in Santa Ana. “As far as we’re concerned, they never were dead.”
Capitation, or the practice of paying a medical group a set amount of money per month for care, also has persevered, according to Dreyer, who is president of the Medical Group Management Association’s OC chapter.
Even so, hospital operators have demanded and won contracts that call for more sharing of costs that go beyond capitation levels.
“On the hospital side, we have seen a shift from a capitated (rate) to more of a per-diem rate,” PacifiCare’s Randolph said. “That may have helped relationships.”
HMOs, which traditionally are more restrictive in terms of medical care usage, gained popularity in California and other areas in the 1980s and much of the 1990s as employers sought to cap runaway healthcare costs.
The tide started to turn in the late 1990s, when HMO operators faced hostility from consumers and politicians, who weighed in with “patient protection” acts.
A booming economy and a tight labor market also forced businesses to use healthcare coverage as a carrot,leading to more interest in generous PPO plans.
HMOs still have their challenges. Higher premiums have narrowed the gap between HMOs and PPOs, leading some employers to opt for the latter. PPOs can better handle patient cost-sharing, including paying a higher portion of the total bill, if, say, a worker gets care from a doctor or hospital not in the employer’s network.
On hospitals, the report noted their financial health is better, due in part to higher payments from health plans and the shedding of risk contracts, as was the case with St. Joseph. But it also said hospitals now face “sharply rising operating costs and strained capacity.”
Those costs include a nursing shortage that’s been going on for at least three years and could be worsened by pending state-mandated nurse staffing ratios, researchers said.
“Competition for nurses among hospitals has been fierce, with reports of signing bonuses and car allowances not uncommon,” the report said. “One hospital system reported staff nurse salaries approaching $80,000.”
Overall, OC registered nurses earned an average salary of $55,024 last year, up from $50,810 in 1998, according to the California Employment Development Department.
