A recent issue of the American Medical Association's American Medical News reported that Florida physicians "will ask for state laws assessing interest fees on delayed reimbursements" from HMOs. Doctors and hospitals in New York earlier had toyed with the same idea. Is this their way of showing respect for the market?
To be sure, the HMO industry's excuse for the delays in payment is a bit lame. The industry blames the delays on "computer problems," which appear to have become the modern adult's analogue of a child's "the dog ate my homework." The truth is these delays are enormously profitable for the HMO industry; therefore, they are apt to be deliberate.
To appreciate the potential size of this profit, consider an HMO with 1.5 million enrollees. Assume 10% of these are Medicare beneficiaries for whom the government pays HMOs $300 to $800 per month, depending on where beneficiaries reside. If this particular HMO collected an average monthly premium of $500 per Medicare beneficiary and $140 per person for all other enrollees, its overall average premium revenues would be about $175 per enrollee per month. On average, HMOs tend to pay out about 80% of their premiums to doctors, hospitals and other providers. With this medical-loss ratio, our hypothetical HMO would pay providers about $2.5 billion per year, or $6.9 million a day.
It follows that, if the HMO paid all bills only 30 days after receiving them, its accounts payable account would at any time show a balance-the "float"-of about $207 million. In effect, this float is like a long-term, interest-free loan granted involuntarily by the HMO's creditors. If the HMO invested the proceeds from this loan in financial instruments at an average annual interest rate of, say, 7%, it would earn annual interest of $14.5 million.
That revenue is pure gravy, because the float is financed with an interest-free loan. In the New York City area, where payment delays of 60 to 70 days reportedly have been de rigeur, our HMO's annual interest on this float would amount to between $29 million and $34 million dollars.
Given the HMO industry's shrinking profit margins, that interest revenue could boost this HMO's bottom line 10% to 30%, and possibly more. One would think, therefore, that if the payment delays are truly caused by computer problems, the HMO industry's executives are not praying all too fervently for an early resolution to these problems.
Physicians, hospitals and other providers that involuntarily make these interest-free loans to the HMO industry either must borrow these funds or bear the opportunity costs of devoting their reserves to this float rather than investing them at interest.
This raises the question whether the deal is "fair" to these healthcare providers and whether, as some physicians and hospitals now advocate, the coercive power of government should be enlisted to set things "right." But what has "fairness" got to do with markets?
In virtually every segment of a competitive market economy, the terms of trade credit are considered an integral part of the overall "price" negotiated between sellers and buyers. These terms, therefore, are left to the contracting parties. Why should it be different in the private healthcare market?
Physicians and hospitals who enlist the coercive power of government on their side are implicitly arguing that the private market doesn't work in healthcare. If they believe that to be so, they should state that case explicitly. In the process, they will invite the government to make itself feel at home.
In fact, of course, doctors and hospitals are protesting nothing other than the law of supply and demand. If doctors and hospitals were in short supply, the insurance industry could never get away with the trade-credit terms it now imposes on providers. On the contrary, it would wring its hands over the high prices extracted by doctors and hospitals.
Insurers get away with their credit terms only because the health system now suffers from pervasive excess capacity. In such a buyer's market, the prices paid doctors and hospitals must be expected to go down. Long delays in payment are but one manifestation of such price cuts.
Government regulation may be a way to recapture the float for doctors and hospitals. An alternative would be a little self-help. Doctors and hospitals could form their own HMOs and compete head-on with the insurance industry, repatriating the float in the process.
After the demise of President Clinton's healthcare reform plan in 1994, the conventional wisdom was that the American people had rejected government as the chief arbiter over healthcare and had embraced market principles instead.
Ironically, ever since that time the most staunchly Republican segments of American society (such as physicians and hospital executives) have entreated the government for this or that regulation designed to reduce the discomfiture of the market-now to regulate trade credit, of all things.
More ironic still, even the most staunchly Republican governments (such as New Jersey's) have jumped at the opportunity to gain popularity by heaping ever more regulations on healthcare-such as stipulating the length of stay in hospitals. One can only imagine the bewildering hodgepodge of state and federal regulations this ad-hoc approach ultimately will beget. Ira Magaziner must be chuckling with glee.
Reinhardt is a healthcare economics professor at Princeton University.