Only Large HMOs Succeed While Overall Membership Shrinks

Edition: October 2001 - Vol 9 Number 10
Article#: 1077
Author: Robert Neil

As profits, expenses and memberships remain unstable, it's clear the HMO industry is no longer the strong saving force that entered health care more than a decade ago. A number of managed care companies have gone from promising to lower costs dramatically, to assuring providers they won't file for Chapter 11 this year.

Which insurers a hospital deals with can have a dramatic effect on that facility's entire operation, and therefore the contracts it signs with suppliers. The bad news is that in today's market, it's very difficult for a hospital to completely avoid a struggling HMO, and financially strapped health plans are the ones that can give providers the hardest times. It's not just the annual reimbursement negotiations—better known as ''battle station time'' in some facilities—that force hospital administrators to be creative with budgets, but also the daily fight to get insurers to simply pay claims on time.

Given the number of publicized payer-provider battles around the county in the last year, it might be surprising to learn that a recent report found that, as a whole, the nation's HMOs turned a profit in 2000. The revelation is sure to raise a few hospital executives' eyebrows, but on closer inspection, the study's numbers show a minority of plans accounted for most of the profits, while the vast majority of HMOs continue to struggle.

According to Weiss Ratings Inc., Palm Beach Gardens, FL, which studied 492 HMOs, the 31 largest companies (those with more than 500,000 members) reported a combined net profit of $1.2 billion in 2000. Meanwhile, the remaining health plans – those with fewer than 500,000 members – accounted for an aggregated net loss of $258 million.

The payer industry is one in which only the strong survive, and the prophecy is playing out now. Consolidation, which began several years ago, is paying off for companies that had the money or clout to merge with or acquire other plans. We're not at a point where only a handful of operations control the entire landscape, but we're very close.

As small plans work to avoid death, and some large operations maneuver out of less attractive markets, providers choices are tougher than ever, and a quick look around the country shows the problems are in a number of regions.

In the Washington, D.C. area, George Washington University Health Plan, Bethesda, Md., is preparing to close its doors after nearly 30 years in business. Officials say the plan, which serves more than 70,000 members in the capital, Maryland and Virginia, couldn't compete with the region's larger managed care companies.

Further south, in Georgia, Aetna U.S. Healthcare, Blue Bell, PA., plans to pull its HMO plans from Augusta and Macon by the end of January 2002. A company official was quoted in the Atlanta Business Chronicle saying, ''Following a strategic review of our business, with an eye toward increasing profitability, we decided to withdraw HMO products from those markets.''

In the Lone Star State, the University of Texas Medical Branch at Galveston was forced to downsize its HMO – UTMB HealthCare Systems – after several years of losses. The company's membership dropped from 80,000 to 40,000 earlier this year after the plan declined to renew four major commercial contracts because employer premiums were simply too small to cover expenses. In 1999, the provider-owned operation lost $7.3 million, and in 2000, the downturn was $3.3.

To add insult to injury, in June 2001, the University's board of regents granted Humana Inc., Louisville, KY, contract to cover university employees rather than selecting its own HMO. Officials sited cost considerations for the decision.

In Houston, the problem is a little different, but still stays with a familiar theme. The locally based Memorial Hermann Hospital System, one of the largest hospital networks in the state with 11 facilities in the metropolitan area, plans to terminate contracts with Blue Cross Blue Shield of Texas Inc., Richardson, Texas. Costs also are sited as the reason; however, the move could turn out to be a negotiating tactic. Last year, Memorial issued a similar threat to United Health Care of Texas before ultimately coming to terms on a new deal.

A payer-provider battle also has begun in Northern California, but there it's the HMO threatening to walk away from a hospital's business. Citing losses, Health Net Inc., Woodland Hills, Calif., one of the state's largest insurers with 2.5 million members, says it will pull its Medicare HMO plan from Sutter Health by the end of the year. Sutter is one of the biggest hospital networks in the state and a dominant system in the San Francisco and Sacramento areas.

But, perhaps the most interesting development is in the same region, where Stanford University Hospital and Clinics has had enough of managed care and has cancelled all HMO contracts. Officials have thrown back the clock, saying they no longer want to be in the capitation business, and will focus on PPO agreements starting at the end of this year.

Bucking the managed care system might have seemed suicidal five years ago, but it's not as drastic a move in today's market, where HMO contracts can severally drain a hospital's financial resources. Additionally, managed care may have grown as big as it's going to get, and providers are finding more patience opting for non-HMO alternatives such as PPOs, which have seen a rise in membership nationally.

According to the research group InterStudy Publications, St. Louis, HMO enrollment decreased by 0.9%, or more than 700,000 enrollees, between July 1, 1999 and July 1, 2000. Statistics from January 1999 show membership peaked at 81.33 million and has since fallen to 79.42 million. At the same time, PPO membership has been increasing. Regulations for reporting PPO membership are not as strict as HMO requirements, so it's difficult to get industry agreement on how much PPO enrollment has grown, but there's no question more consumers have been opting for the less restrictive plans.

A lot of hospitals will be watching to see how well Stanford does without HMO contracts, and if the system performs even modestly well, other providers could follow the move.

ABOUT THE AUTHOR: Robert Neil is an Orange County-based health care analyst and business writer who specializes in supply chain and managed care issues. He may be reached through his Web site: