HMOs saw a moderate rise in profits this winter, according to first-quarter earnings reported last month by some of the nation's larger insurers, including Humana and PacifiCare.
But those slight financial gains come on the heels of disastrous 1999 results for many HMOs, results from which some small and medium-size HMOs may not recover, say managed care analysts.
Now that the viability of many HMOs is being called into question, providers are preparing for yet another change in the landscape, specifically, changes regarding with whom they will contract in the future.
Industry observers expect continued consolidation among plans and the emergence of very large plans. Also, as patients demand more open access, PPOs are expected to emerge as a more prominent force. And further out on the horizon, some say, are defined medical contribution plans in which employers give cash directly to employees who then shop for their own healthcare.
Florida providers are perhaps more familiar with the financial struggles of HMOs than anyone. Florida Department of Insurance data show HMOs lost $141 million in 1999, more than double the losses incurred in 1998. The last year state HMOs were profitable was 1996.
In addition, Melbourne-based SunStar Healthcare was placed in receivership and ordered to liquidate in February after state officials determined the insurer didn't have enough reserves to cover its claims; Coral Gables-based Beacon Health Plans was placed under administrative supervision for the same reason.
State solvency requirements are $1.15 million or 10% of total liabilities or 1.25% of annualized premiums, whichever is greatest.
"We've already begun to see an alarming number of HMO failures. This continuing and spreading flow of red ink implies a still broader HMO shakeout in the making," says Martin Weiss, chairman of Weiss Ratings, based in Palm Beach Gardens, Fla.
In April, Weiss, an independent provider of HMO financial ratings, reported weakened third-quarter performance among HMOs of all sizes. These data represent the most recent numbers available. Weiss found that profits plunged from $274 million in the first quarter of last year to $69 million in the third quarter, and nearly 50% of the nation's HMOs lost money during that time.
While previous losses were isolated to small HMOs with fewer than 100,000 enrollees, third-quarter losses were reported for all size groups except the largest, HMOs with 500,000 or more enrollees, according to the report.
In fact, some well-known names are on Weiss' list of weakest HMOs, including Wellcare of New York, Advantage Health Plan in Louisiana and Healthpartners Health Plans in Arizona.
"There is a widespread problem in this industry, cutting across every sector and region," Weiss says.
In Florida, Weiss Ratings names Healthplan Southeast, Community Health Care Systems and Beacon Health Plans as the state's weakest HMOs, based on size, capital, premiums and profitability.
Sean Kenny, national director of managed care consulting for Ernst & Young, expects larger plans to swoop in and pick up the pieces if plans like SunStar go out of business.
"One of the things we're going to see as we see some of the small and medium health plans threatened is a continued concentration of members into the larger (Blue Cross and Blue Shield insurers) and larger health plans. There will be more consolidation and the emergence of very, very large companies," he says.
Arthur Palamara, M.D., a Hollywood, Fla., vascular surgeon in solo practice and past president of the Broward County Medical Association, says he expects that in the future Florida physicians will contract with fewer payers and that PPOs will account for more of the business.
"I think physicians will become more savvy and will be unwilling to accept risk. They're starting to say, 'I cannot work for what you're paying me anymore,"' Palamara says. "The next thing that's going to happen is we may have the re-creation of the cottage industry we had in the '80s," as more insurers move toward open access and PPO plans.
John Erb, vice president at Boca Raton-based Arthur J. Gallagher & Co., a large insurance broker and consulting firm, says HMO enrollment plateaued over the past four years, and in Florida, it actually declined in the past year.
"The focus of most of these (physician) groups in the past was HMOs, but we're seeing a move away from point of service to PPO and from HMO to non-HMO," Erb says.
Palamara and Erb disagree, however, over the role that direct contracting will play in the future. Palamara predicts that as insurance premiums continue to rise, large employers will bypass payers and begin direct contracting.
Erb, however, says that "for 20 years we've been hearing that's just about to happen."
Peter Kongstvedt, M.D., a partner with Ernst & Young, shares Erb's pessimistic view on direct contracting.
"Direct contracting is an idea that's been around for 10 years, but it hasn't gone anyplace, and it's not going to go anyplace," he says.
Erb and Kongstvedt suggest that defined contribution plans are more likely to emerge as a realistic force. With a defined contribution plan, employers provide cash to employees who then go out and shop for their own healthcare program (see related story, page 16). Although such plans are only in the discussion phase, Erb says a number of large employers are seriously considering such a strategy and are ready to move with the first hiccup in the economy. Erb declined to name the companies.
"That's an exciting move for doctors," he says. Their complaint has been that consumers don't get to choose them, the health plan chooses them and the consumer is cut out of the loop. (With defined contribution plans), the consumer can shop around and find the best doctor."