Will providers and health plans fight over how next year's HMO premium dollar is split?
Certainly there are enough reasons for a battle royal: tough market competition, angst over Medicare cuts, volatile provider-health plan relations and a sudden burst of interest in union organizing by physicians (June 28, p. 2).
Add to those the fact that managed-care premiums are expected to jump by as much as 10% in 2000-enough to increase bottom lines significantly-and it's clear that hospitals and physician groups will be strongly motivated to seek a bigger piece of the pie.
Hospital industry consolidation already has given many providers significantly greater negotiating clout. In Florida, for example, "with the consolidation that has happened in the hospital arena, they're big enough to just say no," says Kim Streit, vice president of healthcare research and information at the Florida Hospital Association.
That was evident this spring when Columbia/HCA Healthcare Corp., with 56 hospitals in Florida, and Humana faced off over contract rates in the state. Humana ultimately backed down and gave Columbia a reported 15% increase. As a result, Humana, which has 1.3 million enrollees in Florida, had to write off $50 million in first-quarter premium revenues.
The situation "reflects the changed dynamics of our industry," Gregory Wolf, Humana's chief executive officer, said in a written statement issued after the dispute was resolved.
Next year's rate increases for managed-care plans are likely to range from 8% to 10%, says Robert Hoehn, a healthcare analyst at ING Baring Furman Selz in New York. Kaiser Permanente has stated publicly that it hopes to increase premiums by 9% to 10% next year as it tries to rebound from heavy operational losses in 1997 and 1998.
"It's pretty clear that when providers see these increases, they're going to want commensurate increases themselves," Hoehn says.
Other industry analysts agree that a battle is brewing over who will get the lion's share of those increases.
"Medicare margins are decreasing, and (providers) are going to try to get it back (from HMOs)," says John Bertko, a principal at Reden & Anders, a San Francisco-based managed-care consulting firm. But he cautions that overcapacity in many regions will mitigate hospital campaigns for a bigger premium share except when particular provider systems play a dominant role.
Further, Moody's Investors Service warns in a recent report that managed-care companies may have less of an advantage than in the past in negotiating with providers-"a trend that could become a credit factor for managed-care companies over time," the New York-based credit agency noted.
Providers have been consolidating aggressively, "hoping to build the local strength needed to win back some leverage," says Diana Lee, Moody's vice president and senior credit officer, and author of the report.
Lee cites successes such as the recent Columbia-Humana battle and the experience of Sutter Health and other California provider groups, which last summer won better-than-expected contract terms from Blue Cross of California. The latter victory came after a standoff in which both sides threatened to walk away from their expiring contracts (Aug. 10, 1998, p. 62).
Lee predicts deteriorating financial conditions and providers' increasing contracting clout in some mature markets will fuel similar battles at many hospitals and medical groups.
"It's a better pricing environment than it's been in many years," says Harry Anderson, a spokesman for Santa Barbara, Calif.-based Tenet Healthcare Corp. "That should be good news for us."
In a likely signal of things to come, the California Public Employees Retirement System decided in mid-May to award rate increases averaging 9.7% to the managed-care plans that cover its more than 1 million state and public agency employees, retirees and their dependents (See chart). It had approved an average rate increase of 7.3% for 1999.
Many in the industry consider CalPERS, the second-largest healthcare purchaser in the country after the federal government, as a bellwether because of its size and aggressive attempts in recent years to control premiums. The organization processes about $1.7 billion in annual premiums.
In May, however, CalPERS reluctantly awarded an 11.7% rate increase for next year to Kaiser Permanente, the largest health plan on its roster, with nearly 350,000 enrollees. Health Net, with about 219,000 CalPERS enrollees, won a 9.9% increase. PacifiCare Health Systems, with 106,000 enrollees, renegotiated an earlier multiyear agreement to get a 6% increase. The three giant health plans account for more than 80% of CalPERS' enrollment.
Overall, the year-2000 increases are the highest CalPERS has accepted since 1991.
In response, CalPERS, which has squabbled with Kaiser over rates several times in recent years, complained that Kaiser and Health Net failed to offer "a competitively priced plan" and suggested that enrollees might want to "look very carefully" at their choices during open enrollment this fall.
Given Kaiser's market clout in California, the Oakland-based managed-care organization doesn't appear to be quaking over the implied threat. But non-Kaiser hospital systems in the state will likely threaten to take their business elsewhere if players such as Health Net and PacifiCare don't loosen their purse strings.
Sutter Health, for example, is gearing up for another tough negotiating season with managed-care plans in Northern California.
"It's going to be appropriate for a majority of that premium increase to go to those providing medical care," says Sarah Krevans, senior vice president of managed care for the 26-hospital system. "And I'll be looking for that to be the outcome of our negotiations on behalf of our hospitals and affiliated physicians."