Although the stock market has risen a breathtaking 10% since July, shares in the biggest HMOs -- those heartthrobs of mutual fund managers -- have fallen twice that much. Behind the negative earnings reports that have knocked an astounding $11 billion off the combined market value of the five largest for-profit HMOs, the news is numbingly repetitive: Market saturation has held premiums flat against inflation while medical costs grow.
Why? The constituencies that most inspired the mediations of HMOs -- unmanaged patients and unmanageable providers -- have asserted themselves, changing the equation of control. Thus, the emergence of patient and provider power, and the negative impact of both on HMO medical costs, leads us to an eternal question: Which came first, the consumer or the marketeer?
After a decade of housecleaning imposed by the economic discipline of managed-care contracting, providers have recognized that their ultimate target market is not the HMO but rather those with the access to healthcare coverage (or cash) whom the HMOs seek to insure. This recognition stems from the most profound movement in healthcare today: the emergence of the patient as the true consumer.
Freedom of choice is a core consumer value. It drives everything from brand proliferation, to continuous product innovation, to the emergence of the superstore as mass retailing's logical endpoint. It is nowhere more sacrosanct than in the choosing of doctors and hospitals.
Demand by consumers to regain provider choice has compelled HMOs to open their once-restrictive plans to retain market viability. Almost all their enrollment growth over the past few years has occurred within point-of-service plans. As recently as 1992, only 5% of all insured employees were covered by these any-doctor, any-hospital plans; by 1996 that number had mushroomed to 19%, nearly the same share as in the most restrictive plan types. Growth at Oxford Health Plans, Wall Street's highest flier and biggest crasher of the past year, has embodied this trend in overdrive, with 86% of its enrollees now in its POS plan.
POS plans represent a defensive product strategy that erodes a key strength of the traditional HMO: its ability to trade patients for price concessions and utilization control.
The process of opening HMOs to more providers, reducing cost control, is accelerated by the recent rush of hospitals and physician groups, alone or as integrated systems, to market themselves directly to consumers. Such marketing efforts have a "pull-through" effect on consumers, forcing HMOs to include all well-marketed providers in their plans. This dynamic parallels emerging marketing strategies in the pharmaceutical industry, which spent $800 million on direct-to-consumer advertising in 1997, a tenfold increase over 1992. Again, the idea is consumer pull-through: If patients know about and demand specific drugs, then physicians, the traditional targets of drug promotion, will be compelled to prescribe them.
This rise in consumer marketing reflects a society of increasingly older, more affluent, more educated consumers taking charge of their healthcare.
Such empowerment is galvanized by increased coverage of medical news in the popular media, the proliferation of medical information in the Internet and the advent of medical savings accounts. The nation's clearinghouse for clinical literature, Medline, went live on the World Wide Web in late June; within six weeks, it was receiving 1 million consumer visits a day. Granting patients access to clinicians' literature radically alters the medical delivery landscape. It corrects the asymmetries of information commonly cited as a fundamental impediment to a functional consumer medical marketplace. And by ceding to patients control over routine medical spending, MSAs are the clearest break from the consumer disempowerment inherent in the traditional HMO, which presupposes that consumers are unable or unwilling to manage their own care.
All of this sets the stage for the final act of the drama: the end of the HMO as paternalistic insurer and provider adversary. Resentment over interference in the process of care has inspired provider retaliation. Development of integrated networks to effect consumer pull-through is only the first punch; the knockout punch is the formalization of those networks into full risk-bearing organizations with less infrastructure than HMOs, designed specifically to circumvent them.
In business school parlance, this is a classic forward-integration strategy. It collapses the historic, inefficient barricade between medical financing and delivery. And it appeals to consumers because it provides an overdue clarity regarding precisely which providers they are choosing when they choose a health plan.
With providers poised to run both through and around HMOs, the managed-care industry as currently structured will prove to be a transitory phenomenon. Commercial HMOs were founded to profit from a correction of runaway costs and medical utilization. Much of their now jeopardized profitability, as with other segments of the healthcare system in the 1990s, has been sustained through merger-driven consolidation of bargaining power rather than meaningful innovation. Combine this with the dissolution of restriction on provider choice, take both to their logical conclusion and the entire HMO industry could end up looking like traditional indemnity insurers: low-growth, low-margin businesses, relegated to mass marketing, transaction processing and risk finance.
How can HMOs avoid this unglamorous fate? By living up to their names and managing care rather than aggravating providers. Plans have imposed a harsh, but necessary, fix for much of what was wrong with the healthcare system. Now a handful of visionaries at selected HMOs might be able to invigorate their companies' diminishing relevance by taking the next step: developing methods to truly manage care, not just control its costs.
The treatment of the most serious and actuarially expensive illnesses remains archaic and costly, driven in too many instances by physician memory and paper charts. End-stage and other spheres of catastrophic care in particular are horrendously unmanaged, resembling nothing more than a high-technology folk dance performed for aggrieved families by dueling subspecialties.
Amid the coming onslaught of provider-based competition and rising medical costs, this is the central challenge for HMOs: Can they evolve from next-generation providers of health insurance into architects of medical-management intellectual property? Can they market those tools successfully to the real care managers, the networks of physicians and hospitals? In the long run, the aggressive development of such tools is HMOs' only recourse for adapting and thriving as transformed businesses tomorrow.
Kleinke is vice president of corporate development for HCIA, a Baltimore-based healthcare information company.