The double-digit premium increases employers are enduring continue to boost HMOs' bottom lines. But with the combined effects of a slumping economy and the fallout from the Sept. 11 attacks, those improvements could be short term.
First-quarter profits at the nation's HMOs climbed 8% to a combined $323 million from $298 million in the year-ago period, extending an industry turnaround that began in 2000, according to a report released last week by insurance ratings firm Weiss Ratings.
Although rising costs remain a challenge, the rate increases-which have ranged from 11% to 18% this year-are outpacing medical inflation at many managed-care companies, said Martin Weiss, chairman of the Palm Beach Gardens, Fla.-based firm.
As a result, HMOs could post their second straight year of rising earnings in 2001. Last year, the industry turned an aggregate profit for the first time since 1996, earning $990 million. HMOs lost $199 million in 1999 and $864 million in 1998.
"The HMO industry is continuing to bear the fruit of the rate increases it has been implementing over the past three years," Weiss said. "This, unfortunately, comes on the backs of consumers but ultimately is necessary to regain stability in the industry."
Despite the combined improvement, HMOs still face substantial challenges. The 32 largest HMOs-those with more than 500,000 members-posted the bulk of the gains, while 195 HMOs, or 41% of the 481 companies surveyed, still lost money in the three months ended March 30. Most were small plans, with fewer than 100,000 enrollees.
Although the managed-care industry has not suffered much direct damage from the events of Sept. 11, Weiss said the recession and the impact of the attacks on the economy could hurt HMOs.
Some 682,000 Americans have lost their jobs-and hence their employee health coverage-since August alone, according to the U.S. Commerce Department. Not only does that drive down HMOs' premium revenue because of the immediate loss of members, but it also will make it tougher for the health plans to continue to raise rates, one of the key factors in their earnings recovery.
Premiums are projected to rise more than 15% in 2002, according to a report released last week by Washington-based consulting firm Watson Wyatt Worldwide. The combination of layoffs and increased demand for healthcare services after the attacks will boost businesses' healthcare benefits costs by an additional 1% to 2% nationwide and by 3% to 5% in the New York area. Watson Wyatt previously had braced employers for a 13.6% increase next year.
The report noted a spike in demand for behavioral healthcare services and prescription medications for anxiety and depression. Use of such drugs is likely to remain elevated as employees and their families cope with future uncertainties, according to the report.
Rising unemployment is also contributing to the cost increases, partly because people who are laid off tend to take advantage of COBRA continuation coverage to undergo healthcare procedures they put off when they were busy working. Employees moving to COBRA typically incur costs at least 50% greater than active employees, the report said.
These trends are a reversal from last year, when a strong economy resulted in low unemployment, a rise in job-based benefits and a decline in the number of uninsured.
According to a report by the Washington-based Employee Benefit Research Institute, the tight labor market that preceded this year's economic slowdown gave employers an added incentive to offer health benefits to attract qualified workers. And although premium hikes were outpacing general inflation and increases in average income, few employers shifted costs onto workers during 2000.
As a result, more than 67% of Americans under age 65-or 163.4 million people-were covered by an employment-based health plan during 2000, up from 66.6% in 1999, the report found. Subsequently, the number of uninsured fell to 15.9%, or 38.5 million, from 16.2%, or 39 million.
EBRI, however, cautioned that these trends could easily change as the combined effect of the recession and rising premiums make health insurance too costly for companies and their employees to afford.
In turn, those trends could affect HMOs. The organizations have suffered the highest bankruptcy rate of any financial industry, with 58 plans failing from 1997 to 2000. But with their return to profitability in 2000, the bankruptcy rate has since slowed dramatically, with only seven HMO failures to date this year.
"However," Weiss warned, "if the current recession deepens, the danger of failure will re-emerge."