To wring our hands or gnash our teeth in anticipation of the demise of the managed-care industry is, to paraphrase Mark Twain, a bit premature. Managed care itself is alive and well. But some of its components aren't.
For example, the traditional HMO segment is in distress. These plans have met their match in the resurgent consumer movement that's tilting toward PPOs and like products. And the full impact of this phenomenon is still being played out in the marketplace.
As healthcare reform moves from a revolution to an evolution, my organization, the Association of Managed Healthcare Organizations, believes the healthcare industry is entering a new era that will combine the cost-containment successes of HMOs with the wide choice and easy access of PPOs.
With HMO rates increasing at a double-digit clip in 1998, PPOs and HMOs often are priced comparably. But PPOs have the added advantage of being more patient- and provider-friendly.
That's why our industry is launching a long-term national branding campaign to call attention to the benefits of PPOs as primary delivery networks.
Looking back a few years ago, conventional wisdom said PPOs were merely transitional products to be used while consumers were being weaned from traditional indemnity coverage to HMO nirvana. But it hasn't worked out that way because of obstacles like access, choice and, of course, cost. Additionally, when HMOs have attempted to replicate the success of the PPO model by creating point-of-service programs that expand access, costs usually have been significantly higher than either the traditional HMO or the PPO product.
In access and choice, HMOs cannot compete with PPOs. And with the projected HMO rate increases, the financial playing field is leveling significantly.
Fast forward to the present. According to a recently published survey by benefits consulting firms William M. Mercer and Foster Higgins, since 1993 enrollment in PPOs has increased at a rate twice that of traditional HMOs. PPOs now account for more enrollees than all traditional HMOs combined and are the most prevalent form of healthcare coverage in the U.S., the survey says.
What's going on? To begin with, a few of our HMO cousins are "sick," and others are being merged, purged and recombined. One only has to look at Oxford Health Plans' predicament to see that when something seems too good to be true, it probably is. Virtually unfettered choice and high quality seem inconsistent with the HMO model as practiced.
Oxford isn't the only HMO having trouble. The nation's largest HMO, Kaiser Permanente, reported a combined loss exceeding $30 million in 1997. And the list of ailing HMOs continues to grow, even in these times of prosperity.
However, PPOs continue to be reasonably profitable and certainly are not in the dire straits of our HMO relatives.
The issue is simple: HMOs are not PPOs, and PPOs are the product of choice for the next millennium.
One reason is that Americans don't just want choice; they demand it. George Bregante, chief operating officer for Beech Street Corp., an Irvine, Calif.-based PPO, said: "America is a nation founded on choice. As is often the case in other industries, American consumers are still searching for more choices in the way they make their healthcare decisions."
HMO "experts" initially believed that Americans would tolerate and eventually accept limited healthcare choices, particularly if savings were substantial. But it hasn't turned out that way.
Along with life, liberty and the pursuit of happiness, Americans see quality healthcare as an essential and inalienable right. The HMO industry has learned the painful lesson that their enrollees typically will not accept the rationing of any goods or services they perceive as essential.
Now that the cost differentials between traditional HMOs and PPOs are insignificant, consumers are less tolerant of the restrictions on choice imposed by the traditional HMO model. One need only read a daily newspaper to feel the heat of the consumer backlash against HMOs.
Compared with HMOs, PPOs offer less-restricted access to physicians, less interference with practitioner practice patterns and a more flexible benefits structure for payers. Unlike HMOs, PPOs have not been accused of denying appropriate care or restricting patients' access to medical information.
PPOs remain the top choice of America's large employers who choose to self-insure their workers and assume the risk for their coverage and for reinsurance, according to the Mercer survey.
In addition, business continues to demand cost-containment. There is no going back to the cost-plus method. Compared with HMO fees, PPO costs are becoming more affordable.
HMOs based some of their early success on "cherry picking" enrollees who were largely young, healthy and unlikely to consume many services.
Since then, older and sicker populations entered the HMO rolls through Medicare and Medicaid contracting. And HMOs worked to increase market share by offering their plans to a wider range of people, particularly through POS plans. As they did, the actuarial advantages provided by the original sheltered population evaporated. So did most of their cost benefits.
On the other hand, PPOs always have attracted patients, regardless of their health, and that will not change. Even with broad populations covered, PPOs will not have to increase costs at anywhere near the HMO rates-for 1998 or the foreseeable future.
The marketplace demand for wider choice and cost-containment will only accelerate the trend toward PPOs and PPO-like products. Industry momentum is toward network-based managed care and away from the traditional HMO.
The only question is, how quickly will the affordable choice provided by PPOs completely overtake the antiquated HMO model? We think sooner rather than later.*q
Kalish is executive director of the Fort Lee, N.J.-based Association of Managed Healthcare Organizations, a national trade association representing the network-based managed-care industry, including PPOs, provider-sponsored organizations, exclusive provider organizations and specialty networks.