The High Price of Health
The Outlook for HMOs

by George Anders Anders is author of 'Health Against Wealth:  HMOs and the Breakdown of Medical Trust,' Houghton Mifflin, 1996 and is senior special writer for The Wall Street Journal.

If you focus strictly on the enrollment numbers, it would be easy to believe that managed care is enjoying its greatest prosperity ever. The Minneapolis research firm of InterStudy recently tallied a record 70 million Americans who get their health care from the best-known type of managed care plan, the HMO, or health maintenance organization. That is more than the number of people who regularly watch or who eat at McDonalds, or who voted for Bill Clinton in 1996. With HMO enrollment climbing 11% a year, it isn't hard to envision the day when more than 100 million Americans will belong to such plans.

Formats of HMOs vary widely, but they all share a few crucial traits. They deliver health insurance to the public at relatively affordable prices -- on the condition that members deal exclusively with a pre-selected network of doctors and hospitals. Those medical panels are meant to provide cost-effective care that meets the HMO's own quality standards. HMOs traditionally have been keen advocates of preventive care, such as flu shots, cholesterol checks and cancer screenings. At the same time, though, HMOs usually have tried to reduce frequencies of surgeries, hospitalizations and some expensive prescription-drug usage, on the belief that those services are widely overused.


For all their rapid expansion, HMOs like the ones featured on FRONTLINE's "The High Price of Health" have a long way to go before they become America's favorite way of getting medical care. According to a recent survey by Robert Blendon at the Harvard School of Public Health, some 48% of Americans say they personally have experienced problems with HMOs' care, or have close friends or relatives who have run into such difficulties. Complaints include difficulty getting access to medical specialists, problems with emergency care, and excessive red tape when trying to file grievances or appeals.

Some of that public indignation is spilling into the political arena -- leading to calls for tighter regulation of HMOs. Since 1996, at least two dozen states have taken action against the perceived excesses or flaws of managed care. Consumers' groups and the medical lobby are calling for enactment of additional bills, both at the state and federal level. One of the most sweeping initiatives in the U.S. Congress is the Patient Access to Responsible Care Act, introduced by Rep. Charlie Norwood, a Georgia Republican and licensed dentist who argues: "If we can protect trees and animals, why can't we protect patients?"


Not surprisingly, the managed-care industry is fighting what it perceives as potential over-regulation that could undermine its ability to save money on health care. The HMO industry's main trade association, the American Association of Health Plans has denounced the Norwood bill in particular, suggesting that it could push up the cost of health care to the point that millions of Americans would be forced to go without medical insurance. Political analysts believe that managed-care reform will remain a hot issue in Congress and state legislatures for at least the next several years, with lawmakers trying to find compromise language that will satisfy consumers' and doctors' groups without offending insurers and the corporate employers who pay most health-care premiums.

Fundamentally, the debate about managed care reflects a national tug-of-war regarding the appropriate level of medical spending. For years, most Americans have contended that the national health budget -- approximately 14% of total economic output -- is too high. Yet at the same time, people want access to top-flight care for themselves and their loved ones. That image of quality includes not just sheer medical competence, but also the chance to be a special patient, getting care in convenient settings with considerable personal attention.

As a result, top executives of America's HMOs sometimes find themselves caught in the middle. If they obey the call for national austerity, they are bombarded with patients' requests for exceptions, and are widely portrayed as stingy and unfeeling. If they go in the other direction and accommodate all of members' wishes, health plans find they must charge sky-high premiums, or operate at a loss. Malik Hasan, the featured HMO leader in The High Price of Health, has been one of the corporate chieftains most willing to talk publicly about these tensions. But the chief executive of Kaiser Permanente confided in a Wall Street Journal interview at the end of 1997 that the stresses associated with his job have risen greatly in recent years. Kaiser, the oldest and largest HMO in the United States, reported its largest-ever loss for 1997, running a deficit of $270 million, as costs grew unexpectedly rapidly and premiums failed to keep up.

In the short run, the HMO industry is trying to restore financial stability by raising prices. In the mid-1990s, HMOs made some people think that they had vanquished medical inflation -- as rates to big employers increased just 0.5% to 2% a year. But the managed care plans "paid dearly for competitive pricing in 1997," says John Erb, a benefits consultant at William M. Mercer Inc. "Many lost money and margins were slim for most of the rest. Corporate employers surveyed by Mercer at the start of 1998 said they are budgeting for 7% rate increases in their health care costs this year. While that isn't as steep as the double-digit boosts of the 1980s, it does suggest that HMOs haven't been able to slow down medical costs as much as they once hoped.

This vexing news for consumers, of course, is seen in a brighter light by the investment community. Many HMOs are for-profit, publicly traded companies, and their stocks have surged in the early months of 1998. The financial advisory firm of Sherlock Co. found that HMO shares, on average, climbed more than 15% in January and February 1998, recouping some of their underperformance of the previous year.

What remains to be seen, though, is just how much extra Americans are willing to spend for better healthcare. The Kaiser Family Foundation recently reported an all-too-telling survey of Americans' ambivalent attitudes on these issues. Some 1,200 people across the country were asked if they supported the types of reforms included in most pending HMO bills. As much as 80% to 90% of respondents initially said they wanted to see pro-consumer safeguards such as better appeal rights and easier access to specialists. Then respondents were asked if they would be willing to have health care premiums increase a few dollars extra each month to achieve such measures. Favorable responses dropped below 50%. When pollsters asked if people would stomach premium increases of $15 a month or higher, barely one-quarter of the public still had an appetite for reform.

Those numbers suggest that for the next few years, managed care may be a lot like the Southern California freeways -- a system that no one really likes, but that everyone puts up with.

 

 
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