The explosion in newly created HMOs is expected to reverberate through this year.
Before last year's resurgence, the number of start-up HMOs had been fluctuating, despite a period of record enrollment in the managed-care plans.
"All different kinds of organizations are seeking the ability to create an HMO or HMO-like organization" because of the price-pressured healthcare market, said Peter Kongstvedt, a partner and healthcare consultant in the Washington office of Ernst and Young. "You're going to see some good old American entrepreneurialism."
Last year, start-up HMOs grew to 31 from 12 in 1992, according to the Group Health Association of America, a Washington-based managed-care trade group. There already have been 11 HMOs launched this year as of March 31, outpacing last year's rate, the GHAA said. Analysts estimated some 20% of the plans are provider-owned, accounting for just 10% of the HMO market share.
Before 1992, the number of HMO start-ups ranged from 27 in 1988 to as low as three in 1991 (See chart).
Analysts cite market pressures and the growing interest in integrated delivery of care in preparation for reform among the reasons for the increases in HMO start-ups.
Fewer hurdles."In many jurisdictions, barriers to entry into HMOs are coming down," said Doug Sherlock, owner of Philadelphia-based Sherlock Co., which provides financial advisory services for managed-care plans.
States such as California and Florida are moving toward programs that include health insurance purchasing cooperatives and health alliances, which will allow HMOs to market directly to consumers rather than employers.
"In California and Florida, small-group reform is establishing alliances with providers," Mr. Sherlock said.
Those states already have high HMO penetration. In California, for example, nearly 11 million people, or 35% of the state's population, are enrolled in some 40 HMOs. Meanwhile, Florida's 35 HMOs have about 2.4 million enrollees, or more than 17% of the state's population.
At the beginning of this year, there were 545 HMOs providing care for 45.2 million Americans, the GHAA said. Enrollment in HMOs grew 9.2% last year. By the end of the year, enrollment in the nation's HMOs is expected to top 50 million, the GHAA said.
Strong HMO enrollment and a national economic recovery also are accelerating the growth in HMOs. While healthcare reformers in Congress wrestle with whether there will be regional alliances at the national level, analysts said there will continue to be alliances in some form at the state level.
Lower capital costs is another reason cited for the increase in HMO start-ups. Health plans' capital costs have fallen largely because of lower interest rates and the growing enrollment.
More for-profits.Analysts said about a fourth of all HMOs were for-profits in 1985, and the GHAA now estimates that one in three HMOs are for-profit. More for-profit HMOs can be expected by the turn of the century. In fact, the shift may be so great that for-profit HMOs actually may outnumber not-for-profits, analysts said.
"The IRS is increasingly troubled by the lack of charitable characteristics of HMOs," Mr. Sherlock said. "You pay in advance for healthcare. You can buy a car and get it on time, but you can't do that with healthcare."
Among those expected to take advantage of the HMO boom are providers. Physicians and hospitals had a negative view of HMOs in the early 1980s, observers said, because the plans had trouble managing their operations. But hospitals have a golden opportunity to ride the wave of HMO mania, analysts said.
"Hospitals are only nibbling on the edges when they create physician-hospital organizations," Mr. Sherlock said. "The PHOs are a natural platform into HMOs that are risk-bearing."
Some observers said the GHAA's statistics are underestimated. They cited some states like New Jersey and Pennsylvania where there are as many as 20 applications in state health departments by businesses, healthcare providers and other organizations seeking HMO status.
Too late?At least one analyst said many hospitals could be coming too late to the HMO table to have any impact on the market.
"You are seeing much more desperation on the part of providers and facilities," said Barry Scheur, owner of Scheur Management Group of Boston. "Providers such as hospitals are seeing competitive pressure among themselves and pressure from the payers' demands for lower pricing."
Many hospitals not already involved in ownership of HMOs aren't willing to pay the price to start one, Mr. Scheur said.
Hospitals in major markets would need between $4 million and $50 million to start an HMO, Mr. Scheur said. "A Des Moines HMO would need $4 million to $5 million, and areas like Boston, Minneapolis and Los Angeles would need $50 million."