Two new studies show HMO premium increases slowed dramatically last year, another indication of declining healthcare cost hikes.
The authors said HMOs are holding the line on rates because they're getting more efficient. But, they said, costs could drop more if HMOs could tackle to the ground the gorilla of high hospital inpatient utilization levels.
A survey by Milliman & Robertson, an actuarial consulting firm, showed the average monthly HMO premium in 1993 rose 2.7%, to $158.25. That's a sharp contrast to growth of 9.3% in 1992 and 12.3% in 1991.
The survey is based on responses from 300 chief financial officers providing rate information for 40 states.
Minnesota results similar.Although Minnesota wasn't part of the Milliman survey, independent Minneapolis-based consultant Allan Baumgarten has been analyzing that advanced managed-care market for five years. The average increase in premium revenues per member per month for commercial HMOs in Minnesota last year was 5.8%, down from 7.5% in 1992, 14.5% in 1991 and 16.9% in 1990.
The studies use different yardsticks, but both reflect the same downward trend. "There's a lot of pressure from employers to hold down premium increases. HMOs are willing to do that because of their interest in maintaining market share and holding on to these groups," Mr. Baumgarten said. "Whether that can be sustained for more than a few years, I'm not sure."
Three HMOs-Allina Health System, HealthPartners, and Blue Cross and Blue Shield-have 78% of managed-care enrollment in Minnesota, and an even higher percentage in the Twin Cities area, he said.
"In a market like Minnesota, where three HMOs have such a large share of the market, I think that at a certain point, they can sort of ignore some of the market pressures and raise rates," Mr. Baumgarten said.
Reaching level of costs.David Ogden, author of the Milliman & Robertson study, believes any slower growth in HMO premiums could cut into profit margins.
There are several reasons for the smaller increases, said David Axene, a Seattle-based partner in charge of Milliman & Robertson's healthcare management practice.
One of the most important is, "HMOs are learning to do things better," he said. Milliman & Robertson's Seattle office develops practice guidelines to help physicians deliver care more cost-effectively while improving quality, he said. "As HMOs are learning how to do a better job of managing care, healthcare costs go down, and eventually their premiums better go down," he said.
The second reason for slowing price increases is "extreme competitive pressures in the market right now," Mr. Axene said. For example, there are 14 HMOs in Seattle. "A health plan has an insatiable desire to attract members, and as the products and networks start to look pretty much the same, performance is the differentiation. And performance sometimes shows up in prices," he said.
In addition, some of the better HMOs are producing report cards in response to employer demands for accountability, Mr. Axene said. "In the past, employers assumed that managed-care plans were a good thing, but now they're requiring performance measurements."
On a report card, the thing the customer sees first is the premium, Mr. Axene noted.
Too many providers.Another reason for smaller premium increases is an oversupply of providers. Because of that, he said, "HMOs are getting better deals from doctors, and at the doctors' expense, some of the prices are coming down."
The chance of government intervention may have been a factor, too. Mr. Axene said, "I believe sincerely that the threat of healthcare reform has caused managed-care plans to want to look better" by increasing their efficiency and lowering prices.
Despite HMOs' efficiencies, costs could go down further if hospital utilization levels drop. Mr. Ogden, of Milliman & Robertson's Milwaukee office, said medical delivery systems operating under "best observed practices" should have inpatient utilization levels of about 170 days per 1,000 enrollees, regardless of geographical location (See chart).
Total annual hospital utilization ranges from 168 days per 1,000 enrollees in Oregon to 459 days per 1,000 enrollees in Delaware, the Milliman & Robertson study showed.
Even in the "managed-care heaven" of Minnesota, utilization rates were at 235 days per 1,000 enrollees last year, Mr. Baumgarten said.
Nevertheless, "HMOs are much better than the norm" in inpatient utilization, said Mr. Axene, whose Seattle practice establishes Milliman & Robertson's inpatient utilization benchmarks. For example, the nationwide inpatient utilization average for patients under age 65 outside of a managed-care setting is 450 days per 1,000 enrollees, he said.
"HMOs are trying to find that magical way of getting down to 170-180 (days)," he said. "They've done so much better than anyone else, but they haven't figured it all out yet, though we have a lot of high-performance programs that are there," or have achieved that level in portions of their business, he said.
In California, inpatient days per 1,000 have dropped below 200. When a provider gets below 200, it becomes what Mr. Axene calls a"water-walker."
What brings inpatient utilization rates down is teaching physicians how to be efficient and then motivating them or giving them incentives to be efficient. "When both of these events are in place, the organization tends to develop better results," he said.