The price is wrong

In an effort to raise their 1999 profits, HMOs are increasing premium rates to employers, fleeing certain money-losing markets, and negotiating more favorable contracts with doctors and hospitals.

Their plans are not sitting well with physicians, who face lower payments and greater financial risk. As a result, an increasing number of doctors are taking action-filing complaints, negotiating new contracts with HMOs or even exiting networks. They're tailoring their responses to the strength of their group or geographic location.

For example, hundreds of physicians affiliated with Aetna U.S. Healthcare, Prudential HealthCare and United HealthCare Corp. have dropped out of networks in a half-dozen states to protest rate cuts.

The 16,000-member Florida Medical Association has filed a complaint with the state Department of Insurance to protest Prudential's decision to "downcode" bills submitted by thousands of Florida doctors for routine office visits. The FMA says it has received similar complaints from physicians regarding downcoding by United.

Physicians in Texas have complained that Aetna has instituted policies to automatically downcode certain office visits. North Carolina doctors filed a similar complaint against Blue Cross and Blue Shield of North Carolina. Investigations in Florida, North Carolina and Texas are under way.

Nationwide, HMOs will seek 8.3% premium increases from employers in 1999 to boost sagging profit margins, according to a survey of 175 HMOs by the Sherlock Co., Gwynedd, Pa. HMOs sought a 4.6% premium hike in 1998 and a 2.6% boost in 1997, according to previous Sherlock surveys. HMOs generally receive less than half the increase they seek from employers, experts say.

For example, spokespeople for Minneapolis-based United and Lovelace Health Plan, Albuquerque, N.M., say they are pursuing new arrangements with medical groups to cut physician payments by unspecified amounts and shift financial risk to doctors whenever possible. Both HMOs also plan rate increases ranging from 4% to 7%.

"HMOs are raising premiums because they are fighting the earnings issue. They have to take heat from employers because they need profits," says Barry Scheur, president of Scheur Management Group, a Newton, Mass.-based healthcare consulting firm.

"Costs for HMOs have been rising. Right now HMO profitability is zero," says analyst Doug Sherlock of the Sherlock Co. "Provider consolidation has increased the ability of physicians and hospitals to bargain up reimbursement with HMOs.

"Some physician groups are dropping out of HMO networks if they don't get the reimbursement they want. Some HMOs are dropping high-cost doctors. Some physician networks are getting stronger and demanding a higher reimbursement take or are leaving networks."

For example, several independent practice associations in Florida, Indiana, Kentucky, Ohio and Texas have terminated their contracts with Blue Bell, Pa.-based Aetna U.S. Healthcare over inadequate reimbursement and poor relations with the HMO. Some physicians have opposed Aetna's effort to create a national provider network (see September, page 14; July, page 3; May, page 2).

Sherlock says his survey indicates HMOs predict a 5.3% increase in per-capita medical expenses in 1999. "Drug costs are increasing for HMOs, and network design changes such as (point-of-service) plans have increased health plans' operating costs," he says. "It is not surprising HMOs are asking for premium increases from employers. What is surprising is that employers are paying it."

Analysts who follow HMOs also are predicting higher prices. A survey of Wall Street analysts by First Call, a Boston-based healthcare information company, indicated the top 13 for-profit HMOs are expected to increase profits 12% in the third quarter of 1998.

"We expect over the course of the next 12 to 18 months that margins should improve as HMOs raise prices," says Charles Boorady, an analyst with Prudential Securities in New York.

After years of pressuring insurers to reduce their costs, some companies are beginning to understand and accept HMO price increases.

At General Motors Corp., for example, "the driving cost factor pushing up our premiums is prescription drugs," says Thomas Cragg, GM's manager for managed-care plans. "Our population is aging, and we see higher use and higher per-unit prices. We have pretty extensive discussions with HMOs. They always provide us with adequate data to justify their rates."

GM primarily contracts with not-for-profit HMOs, including Blue Cross and Blue Shield Network of Michigan, Southfield, and Health Alliance Plan, Detroit. Only 5% of its 1.5 million employees and retirees belong to a for-profit HMO, Cragg says.

"Employers are still demanding savings, but (they) are a little more tolerant of premium increases because costs are going up today," says Fred Perez-McCall, president of Group Practice Consultants in Miami. "If employers genuinely believe the profits aren't there for HMOs, then HMOs will get that 8% to 10% premium increase."

But in exchange for higher premiums, Perez-McCall says employers are asking for greater access to specialists and enhanced quality. "Employers do not want their primary-care doctors to withhold care from specialists. That will increase costs, but employees demand it," he says. "Employers also want accountability they were never able to get before. Many more are scrutinizing quality report cards and HEDIS (Health Plan Employer Data and Information Set) information and setting minimum standards for participation."

In New Mexico, steady increases in medical costs over the past two years led Lovelace Health Plan to raise rates between 4% and 7% this year, depending on the geographic market, says Michael Coyle, M.D., Lovelace's medical director and vice president of managed care.

The health plan is an operating division of Lovelace Health Systems, a medical delivery system that is an indirect, wholly owned subsidiary of Cigna Corp. The Lovelace managed-care organization covers a total of 240,000 people in commercial, Medicare, Medicaid and other insurance product lines.

Lovelace Health Systems also includes a multispecialty group practice of 300 employed physicians, a statewide network of more than 1,700 independent-contract physicians and a 235-bed hospital.

"We've reached the point where cutbacks we have made internally have negatively affected our product and have not well served our customers," Coyle says.

He says physicians request contract renegotiations primarily to address changes in their fee schedules or to establish a network access fee. "We also have been establishing global risk contracts with physicians if their IPA or (physician-hospital organization) is capitalized enough," he says.

Coyle says Lovelace hasn't changed physician fee scales for the past three to five years. Because their costs are rising and reimbursement is flat, doctors' incomes have fallen 5% to 10% annually. In addition, Coyle says Lovelace has actually cut reimbursement to two specialty group divisions within the staff model, but he wouldn't provide the amount of the cut or the number of physicians affected.

"The doctors have already borne the brunt of the cuts. There has been a great deal of physician consolidation because reimbursement has gone down. Many doctors have left New Mexico already," he says. "We don't plan to cut rates right now."

Recently, however, Lovelace has been dropping physicians who demonstrate a "disdain" for managed care, Coyle says. "(Only) a small number of doctors (do so), thankfully, but we are starting to drop those doctors if they are consistently disrespectful to case workers and unwilling to work with our standard policies," he says.

At United, each market and physician group is being evaluated to determine whether contracts require tinkering, says Richard Migliori, M.D., senior vice president for health services operations in Minneapolis.

"Costs are rising. We are looking to share risks with doctors when it makes sense," Migliori says. "Sometimes we ask them to renegotiate the contract on prices if there are changes in the market. Sometimes physicians ask us to renegotiate the contract."

Earlier this year, United announced it would withdraw from certain markets and either drop or attempt to renegotiate provider contracts. The move came after the company posted losses of $565 million on revenues of $4.2 billion during the second quarter of 1998, ended June 30. Still, profits for the first six months totaled $271 million on revenues of $8.2 billion.

While United's Medicare HMOs lost $120 million during the second quarter, Migliori says the company plans to stay in the senior market. But it might withdraw from certain geographic areas.

"We have asked doctors to share the pain because we want to stay in this game," he says. "We think Medicare managed care is an important product for us. So far doctors seem to understand, and we haven't had any destabilizing events in our network."

United's provider network includes 321,000 physicians and 3,100 hospitals. "We have a 5% annual turnover rate with physicians, which is the lowest in the industry," Migliori says. "We don't expect that to change with the efforts we are making to reduce costs."

As part of its effort to build physician trust and improve quality, Aetna has launched a new incentive program for physicians that rewards them financially for meeting quality standards, says spokeswoman Stacey Jones. Aetna declined to comment on possible rate increases and negotiations to cut physician payments.

Jane Galvin, managed-care policy director with the Health Insurance Association of America, notes that HMOs are leaving Medicare markets because they cannot renegotiate rates with physicians, and doctors are unhappy because they are not receiving enough compensation.

Perez-McCall agrees an answer must be found. "For HMOs to continue to grow, they have to find a way for doctors to like them and work with them," he says.