Purchasers of healthcare continue to win rate reductions from managed-care companies, particularly in the hotly competitive California market.
But there are signs some purchasers are worrying that the cuts are too much of a good thing.
More employers are voicing concerns that deeper price and cost cuts could begin to affect quality, said Gary Frazier, vice president and senior healthcare services analyst at C.J. Lawrence Deutsche Bank Securities Corp.
At least one big employer is developing a model that will demonstrate whether a plan's balance between quality and cost is appropriate, while others are keeping a sharp eye on health plans' percentage of revenues devoted to the delivery of care.
For now, the emphasis for many California employers is still on cost. Two major purchasers say that although they are keeping a watchful eye on the cost vs. quality balance, there is still room to achieve efficiencies that will drive prices further down.
In January, for the second consecutive year, Pacific Business Group on Health won an average premium reduction of 4.3% from 13 HMOs. PBGH includes 28 private- and public-sector purchasers.
Another large purchaser, the California Public Employees Retirement System, or CalPERS, which covers nearly 1 million lives, got an average premium reduction of 5.2% for 1995 from the 17 HMOs with which it has contracts.
Even smaller employers are benefiting from the competition among HMOs. In March the Health Insurance Plan of California, the state's small-employer insurance purchasing pool for businesses with three to 50 employees, said the average HMO premium offered to pool members would fall 5% for the year beginning July 1. About 85% of the 85,000 individuals insured by HIPC choose HMOs.
Room for improvement. But as to whether competition and price cuts are eroding quality, Margaret Jordan, vice president of Healthcare and Employee Services at Southern California Edison, said, "I don't think we're there at all. There is still tremendous room for improvement in the delivery system to improve both the cost and quality picture." Edison is a PBGH member.
Fred Steinmetz, manager of CalPERS' HMO contracting and policy development unit, said, "I think there's still a lot of room for movement in rates" without any danger of affecting quality. "It's very premature to say price reductions are affecting quality."
For health plans, "the move to capitation has generated a lot of cost savings (including) a reconfiguration of relationships with hospitals," Steinmetz said. Along with new technologies, "efficiencies are being achieved that are outpacing rate reductions. All that has to work through the system before you can say quality is being affected," he said.
Nevertheless, employers are being "vigilant" about cost and quality, Jordan said. She told a symposium at a Group Health Association of America conference in June that employers are asking, "When we push on price, at what point does it hurt quality?"
As employers insist on lower prices, they expect that managed-care companies are responding by reducing redundancies and improving their processes, Jordan said in an interview. That should lower costs for those companies.
But since the managed-care companies have to earn profits and reinvest money, "How," she asked, "do we make sure they aren't putting an inappropriate amount into those buckets first" instead of into appropriate care?
Ratios of care. A number of employers track plans' medical-loss ratios, or the percentage of revenues that are used for medical care rather than administrative costs and profits. The higher the ratio, the more a plan is allocating to healthcare costs.
Medical-loss ratios reported by HMOs "swing widely," Jordan said, prompting employers to ask, "Is the right amount of money going for healthcare?"
For example, according to a summary prepared by the California Medical Association, in 1993-94 some for-profit health plans had medical-loss ratios in the 70% range-such as WellPoint Health Networks (70.2%) and HMO California (69.4%). Others had ratios in the 90% range, led by not-for-profit Kaiser Foundation Health Plan, with 96.5%.
However, medical-loss ratios are not an absolute measure of whether or not a health plan is spending enough for healthcare. "We probably would have a hard time trying to chase down what is the right amount" to allocate to healthcare costs, Jordan said. And besides, the numbers can be "cooked" by the health plans, she said. "But we can at least ask plans about them, and a number of employers are doing that."
Like other purchasers, Edison weighs a plan's medical-loss ratio in combination with other quality and outcomes measurements. These include a plan's National Committee on Quality Assurance accreditation; the NCQA's Health Plan Employer Data and Information Set "report card"; Edison-specific performance goals and standards; and Edison's joint quality-measurement projects with other employers, said Suzanne Mercure, benefits administration manager.
Edison has been contracting with HMOs for just six months, ever since it terminated its pioneering company health plan-begun in the 1920s-and moved 55,000 employees, retirees and their families into six HMOs and two point-of-service plans (Nov. 21, 1994, p. 27).
A low medical-loss ratio is a red flag to Steinmetz. When he sees one he asks, "Is there something wrong with the way that particular plan has put itself together that reflects an attempt to avoid appropriate care?"
But to consider the medical-loss ratio alone in evaluating a plan is "not sophisticated," Steinmetz said. For example, a plan that is growing rapidly can generate a lot of revenues on a temporary basis, which can drive down the ratio, he said.
A balanced model. CalPERS is developing a sophisticated model that will demonstrate when a plan's balance between quality and cost is where it should be, Steinmetz said. The model is centered around a series of performance reports that now focus on customer service areas, such as waiting times, and HEDIS reports.
In the future, the model will include best practices for such procedures as cardiac rehabilitation. It will also include reports from a consumer initiative "which is directed at getting direct feedback from our membership about whether they feel our plan offerings are in balance," Steinmetz said.
Another part of the model will include hospital measurements. CalPERS and the Office of Statewide Health Planning and Development are "working to develop a user-friendly instrument to be used by the patient" to report information about hospital care, he said.
"Our initiative over the next several years is to develop tools to report on quality and access, and identify problem areas," Steinmetz said. All this information will be fed into a model, which also will include demographics and cost data.