Rx for doctors feeling harassed by managed-care companies: switch jobs for a day with David Olsen, vice president of investor relations at Foundation Health Systems.
Olsen spends his days placating angry shareholders and analysts about the Woodland Hills, Calif.-based managed-care company's dismal performance in 1998 and trying to convince them it will do better this year.
Plenty of investor relations executives at other managed-care companies are in the same fix. A slew of HMOs spilled red ink last year because of higher healthcare expenses, minimal premium increases and other factors. While most HMOs have raised rates and expect a better year in 1999, by no means are they out of the woods.
"It's a minefield of instability," says Barry Scheur, president of Scheur Management Group, a Boston-based HMO consulting firm. "The public markets are very bearish when it comes to HMOs, due to insufficient premium increases."
Physicians are realizing they need to keep an eye on the performance of managed-care companies. HMOs' financial instability, mergers and acquisitions, and business disputes all have an impact on doctors.
Nationally, the American Medical Association is trying to derail Aetna U.S. Healthcare's plans to acquire Prudential HealthCare.
On the local level, physicians in New Jersey face millions of dollars in delayed or unpaid claims following the state insurance department's takeover of HIP Health Plan of New Jersey and the demise of HIP's contract with PHP Healthcare Corp.
In Arizona and other competitive markets, many physicians have felt the pinch of rate reductions ordered by aggressive managed-care companies.
In the long term, Scheur and others believe doctors will wind up doing business with stronger health plans able to spread costs over a larger enrollment base, rather than first looking to cut provider reimbursement. But in the short term, the situation continues to cause concern for doctors.
Of the top 10 publicly listed HMOs, half posted losses last year. The two biggest money losers were Foundation and Oxford Health Plans, which lost $165.2 million and $596.8 million, respectively. Foundation was hit hard by "an unexpectedly large increase in our costs, especially in the Northeast Medicare" market, Olsen says.
Oxford "made a lot of mistakes," says Peter Kongstvedt, M.D., senior partner in the healthcare consulting practice of Ernst & Young in Washington. Among Oxford's major headaches were problems with its computer systems that resulted in delayed claims, angry doctors, and regulatory crackdowns in Connecticut and New York.
As they incurred losses, most HMOs realized that in addition to fixing year-2000 problems, they needed to make their core operations more efficient, he says. In the second half of 1998, plans began retrenching, switching their focus from market share to profitability and raising rates in the low single digits. The results of these efforts won't be apparent until managed-care companies begin reporting their first-quarter earnings.
Foundation is a good example of the retrenchment trend. Like many of its competitors, the company expanded its operations through a series of acquisitions and highly competitive pricing to gain market share. Racked by huge losses in the latter half of 1998, Foundation has bolstered premiums 6%, compared with 3% last year.
"We've lost some business in California because we've held our ground on pricing," Olsen says. "To be successful, you have to price your product in a sound manner so your members get high quality and your physicians are compensated fairly."
The company also will sell its Colorado operations to WellPoint Health Networks and its New Mexico operations to an unidentified buyer. Olsen says Foundation made the moves because it believes that "to be truly effective, you have to be number one, two or three in a medium market and in the top five in a big market."
The company will focus its efforts on states in which it has a significant presence: Arizona, California, Florida and New York. Olsen says the strategy already is paying off with improved cash flow. Analysts and investors seem to agree, boosting their earnings estimates and the company's share price, which closed at $12.88 April 22.
To a great extent, plans will continue to focus on reinforcing their core operations this year, including improving back-office operations such as claims processing, Kongstvedt says. Such costs often contribute heavily to administrative overhead.
"The focus is on back to basics," Kongstvedt says. Plans are "looking to automate to reduce administrative costs while increasing quality. They want to make fewer mistakes and do things more accurately." That should ease the suffering of doctors and enrollees who have experienced billing errors.
Scheur notes that companies are outsourcing functions to improve efficiency. "There is just an explosion of outsourcing (of) back-room operations," he says. In effect, HMOs are becoming marketing organizations that rely on the support of service bureaus and other entities.
On the medical management level, plans are moving away from onerous restrictions, such as forcing enrollees to obtain permission to see specialists, he says. Such changes underscore a larger trend among HMOs, which are becoming more like PPOs and other less restrictive models.
William M. Mercer surveyed 4,200 employees at various companies and found 47% were enrolled in HMOs or point-of-service plans in 1998, down from 50% a year earlier -- the first time HMO enrollment has fallen. By contrast, enrollment in PPOs jumped to 40% from 35% over the same period.
"The pundits are all wrong," Kongstvedt says. "They said that PPO and POS were way stations to HMOs. That's not true: They're very stable products." Scheur says HMOs unable to retool themselves quickly enough for this new reality will be acquired or will go out of business.
Given the poor financial condition of many HMOs, mergers and acquisitions of health plans will continue. Though merging operations is costly, companies eventually realize economies of scale, Kongstvedt says.
"There's not a lot of room for gigantic mergers, but there certainly is the potential out there for absorbing regional players," he says. He explains that even with premium increases averaging 6% to 8% this year, the only way HMOs are going to bolster profitability is by increasing enrollment.
Though the idea of even larger HMOs might frighten physicians, they shouldn't feel threatened, Kongstvedt says.
"Don't panic: Patients still exist," he says. "They're going to need care, and health plans are going to need doctors." He explains that many smaller plans, desperate to compete against larger plans, underpriced their products to employers. When costs started rising, they attempted to lower reimbursements to physicians and other providers.
Larger plans, which are able to charge higher rates and spread costs over a bigger enrollment base, might not be under such heavy pressure to cut rates to providers. Moreover, the administrative costs of dealing with many small plans may be high compared with dealing with a few large plans, and doctors may prefer the latter, Kongstvedt says.
Meanwhile, in state capitals around the country and on Capitol Hill, lawmakers are introducing a variety of measures related to managed care, some of which will handcuff HMOs, says Karen Ignagni, president and CEO of the American Association of Health Plans in Washington.
Many states have or are introducing patient protection legislation that mandates coverage "body part by body part," she says. Others are pushing independent review, making HMOs liable and giving consumers more access to data.
Nationally, a new patient rights bill taken up March 16 by the Senate Committee on Health, Education, Labor and Pensions, would make it easier for patients to get their emergency room bills paid, visit the doctors they prefer and protest when a health plan balks at paying for treatment they think they need.
One sleeper issue, according to Ignagni, is confidentiality. Patient advocates argue that confidentiality of medical records is sacrosanct, but HMOs need the data for clinical and outcome research.
If lawmakers pass legislation with teeth, she says, "it could put a halt to quality assurance mechanisms and best practices," which HMOs say allow them to offer a higher level of care.
Ignagni says businesses are likely to oppose the mandates, which will be a blow to their pocketbooks and preclude their ability to manage health benefits for their workers. But prospects for passage are unclear.
Scheur adds that if a major patient bill of rights were to pass, it "would literally undercut the whole movement of the HMO industry."
Also on the agenda will be improving Medicare and Medicaid risk rates, Ignagni says. Last year, more than 100 health plans scaled back or eliminated their Medicare risk products (see February, page 54).
For example, PacifiCare Health Systems, the nation's largest Medicare HMO, pulled out of some 24 counties in six states. PacifiCare, which depends on Medicare for 60% of its revenues, says the estimated 3.5% Medicare increase it will receive next year as part of its annual rate increase won't be enough to cover rising medical costs. Medicare rates vary, based on such things as geography, case mix and whether care is delivered at an academic medical center.
"Members of Congress will have to decide whether they are going to intervene if they want the market-based program to continue," Ignagni says.
Scheur points out yet another legislative minefield: state regulators worried about insolvencies. He says last year Ohio experienced three insolvencies when weak plans went under. Providers are fighting to get money they claim is owed to them.
"The (state) regulators are preparing for an increase (in insolvencies), so legislatures are probably getting more nervous" and might push to raise reserve ratios, he says.
The trend toward instability could hurt physicians, Scheur says, as plans go under without paying doctors and other providers. He advises doctors to "look very carefully (at those) with whom they do business."