Is HMO-style managed care gradually losing its ability to manage costs?
It still controls costs better than traditional fee-for-service medicine and at least somewhat better than less-structured forms of managed care such as PPOs and point-of-service plans, according to some recent surveys.
But costs to employers-key players in the healthcare wars-continue to escalate.
New York-based Buck Consultants, for example, conducted a midyear survey of 61 health plans and third-party administrators. Respondents expected costs for the rest of 1999 to rise somewhat faster than increases projected in a survey conducted in January (July 26, p. 26).
Costs are expected to jump between 6% and 12.1% this year, depending on the type of plan, the survey found (See chart). That compares with the earlier survey's projected increases of 5.6% to 12.6%.
For HMOs, costs are expected to rise 6%, compared with an earlier 5.6% estimate. Similar increases are expected for POS plans and PPOs (See chart).
The cost of providing prescription drug benefits is now expected to soar by 17.6% this year instead of the 14.6% increase predicted in January.
Ironically, only indemnity plans are expected to have less of an increase-at 12.1%-than the January estimate of 12.6%.
Organizations participating in the mid-year survey included Aetna U.S. Healthcare, numerous Blues plans, Cigna HealthCare, Kaiser Permanente, Oxford Health Plans, Prudential HealthCare and United HealthGroup.
Harvey Sobel, a Buck principal and consulting actuary who helped produce the survey, says reductions in Medicare and Medicaid reimbursement rates are "forcing providers to shift costs to commercial patients," thereby ratcheting up employers' costs. Other contributing factors are federal and state mandates requiring coverage for such areas as mental healthcare, increased regulatory scrutiny of providers and hospital consolidations, and higher medical malpractice costs.
Pharmaceutical costs increasingly are seen as a major villain in this upswing.
Prescription drug spending grew twice as fast as total healthcare spending from 1993 to 1998, according to a recent study by the National Institute for Health Care Management Research and Education Foundation, a not-for-profit research group based in Washington.
"I don't think anybody had looked at this before," says Ed Neuschler, the foundation's senior director of policy and research.
Third-party payers, including employers and health plans, are being hit with most of that increase. Spending by this segment shot up 130%-from $20.1 billion to $46.3 billion-from 1993 to 1998, compared with a jump of just 17%, to $24.8 billion, in out-of-pocket payments by consumers.
Excluding prescription drug costs, the cost of medical care increased just 26.2% during the five-year period, Neuschler says. Prescription drugs accounted for 37.6% of the overall increase.
Managed-care companies are scrambling to hold these costs in line. One response has been to use multitiered payment systems that require enrollees to make higher copayments for brand-name drugs. The goal is to spur the use of less-expensive generic versions. So far, though, prescription increases seem to have the upper hand.
The Healthcare Financial Management Association and Watson Wyatt Worldwide recently surveyed 587 healthcare organizations and nearly 300 employers. Respondents said medical inflation is being caused by an aging population, technological advances, new pharmaceuticals, labor costs, legal liability and increased utilization.
Employers said they expected median healthcare cost increases of 7.5% this year.
Not surprisingly, the survey identified managed-care companies as the healthcare organizations most likely to try to pass cost increases to employers. Nearly two-thirds, or 64%, of managed-care companies expect to do so, the survey found. In a time when most HMOs need to boost their profit margins, only 21% said they would try to absorb the increases.