Loosening their grip;
Foundation for Taxpayer & Consumer Rights Corporateering
  Home | Volunteer | Donate | Subscribe | FTCR Websites | Books | Site Map   
Main Page
Press Releases
In the Media
Medical Malpractice Stories
HMO Arbitration Abuse Report
Casualty of the Day
 - Corporate Accountability
 - Insurance
 - Citizen Advocacy
 - The Justice System
 - Billing Errors
 - Energy
 - About FTCR

Read Making a Killing

home / healthcare / in the media

Modern Healthcare
Apr 15, 2002

by Laura B. Benko

Loosening their grip;

As HMOs' popularity continues to erode, more plans turn to less-restrictive rules. But with costs rising, what's next?
It has been two years since UnitedHealth Group essentially ripped up the managed-care rule book by shedding its preapproval requirements and granting doctors final say over how they treat their patients. Since then, HMOs nationwide have been responding to growing political and consumer pressure by easing up on vexing rules and cutting back on the red tape that has long infuriated both patients and physicians.

Harvard Pilgrim Health Care, Boston, for example, has loosened its restrictions on everything from elective surgeries to lengthy hospital stays, while Hartford, Conn.-based Aetna is rolling out new ''open access'' HMOs that allow patients to see specialists without a referral. And then there's Blue Cross of California, which, amid much hoopla, vowed last year to reward its physicians for providing high-quality care instead of controlling costs.

But these changes-which some healthcare executives laud as a new era in managed care-may be coming with a price: Insurance premiums are expected to rise 13% to 16% this year, an increase that HMOs attribute partly to the greater freedoms granted to members. And some industry observers see this resurgence in costs as the beginning of the end for HMOs as they're now known.

''HMOs are in full retreat,'' says Bryant Armstrong, a healthcare consultant in the Dallas office of Hewitt Associates. ''They're not dead by any means, but their day as the prominent provider is over.''

Managed care once was viewed as the savior of the nation's healthcare system. In the late 1980s, faced with fast-rising medical costs, employers turned to HMOs in droves. For a while, it worked. As employees switched to more tightly run plans, costs stabilized and premium increases slowed to just 1% in 1996-the smallest annual rise in a decade-from 12% in 1988.

Though employers loved the big savings, hospitals and doctors balked when HMOs began to deny coverage for medical services the health plans deemed unnecessary. Providers also banded together, using their improved bargaining clout to prevent many insurers from wringing further savings from their reimbursement rates.

At the same time, consumers started to rail against ''gatekeeping'' tactics-long a tenet of HMO operations designed to limit visits to specialists by requiring patients to get referrals from a primary-care physician. The managed-care industry soon found itself in the midst of a full-fledged backlash.

''Attitudes toward the industry have deteriorated badly,'' says Larry Levitt, a vice president at the Kaiser Family Foundation, a healthcare research group based in Menlo Park, Calif. ''HMOs are having to respond to those attitudes, as well as to real-life market pressures now that consumers are voting with their feet'' and defecting to more-flexible plans.

Indeed, mounting evidence shows that consumers have grown weary of tightly managed care. In a recent Kaiser Family study, 70% of respondents in ''loose'' health plans, or those with fewer access restrictions, gave their insurers a grade of A or B. That number, however, dropped to 53% for those in ''strict'' plans, or those with rigid preapproval and referral requirements.

What's more, the percentage of Americans enrolled in HMOs has dropped from 31% in 1996 to 23% today, its lowest level since 1993. Meanwhile, PPOs, which have always offered greater flexibility but at a higher cost, now cover 48% of consumers, up from 28% six years ago.

Consequently, many HMOs have been forced to rethink their preauthorization and referral requirements. Once the hallmark of managed care, these restrictions were key in helping HMOs reduce costs by controlling access to expensive services. But with HMOs being criticized for rationing care-and losing membership to less-restrictive plans-many insurers are scrapping the notion of gatekeeping altogether.

PacifiCare Health Systems, Santa Ana, Calif., is creating PPOs in several markets, both to offer an alternative to its traditional HMOs and to reduce its reliance on Medicare+Choice, long the bread and butter of its business.

And over the past 18 months, Harvard Pilgrim has stopped requiring patients to seek prior approval for about 20 procedures, including hysterectomies and cataract surgery. Part of the shift may have to do with new state regulations that require health plans to send detailed letters to members and physicians for each utilization-management decision made, favorable or unfavorable. Providers suggest that some plans in Boston have relaxed their preapproval requirements to avoid the administrative burden and costs associated with these new rules.

Regardless, industry research shows that reports of HMOs relaxing their restrictions is more than anecdotal and has been occurring since the late 1990s. According to the American Association of Health Plans, the percentage of hospital admissions that required preapproval from HMOs fell to 35% from 42% during the three years that ended in 1999, the last year for which data are available. Some 90% of patients could see a dermatologist or a cardiologist without a referral, up from 77%. Yet many health plans and industry observers argue that these concessions, while appeasing members, are driving up costs at a disturbing rate.

When Blue Cross and Blue Shield of Florida recently removed several preapproval and referral requirements from its HMOs, costs spiked dramatically, says Beth Stambaugh, spokeswoman for the Jacksonville-based insurer. The Florida Blues consequently reverted back to its original cost controls and is planning instead to offer a hybrid plan called Empower, which comprises a series of HMO and PPO options that can be mixed and matched to best fit each individual's needs-but at higher premiums.

Aetna, likewise, has seen its profits eroded by soaring medical costs, fueled in large part by its recent efforts to scrap the most restrictive of its managed-care controls (March 18, p. 38). Last year, spending on medical care ate up 90% of the insurer's HMO premium revenue, up from 86% in 2000, as it relaxed its much-criticized preauthorization requirements.

To offset these costs, Aetna has had to raise its premiums an average of 19% for renewing members-an increase so steep that it has scared away millions of enrollees during the past year.

''There's a contradiction built in to consumers' demands,'' Levitt says. ''They're very worried about costs. At the same time, they are demanding forms of managed care that are least able to control healthcare spending.''

Losing their cost advantage

Double-digit increases such as these have narrowed the cost gap between HMOs and PPOs to an average of $300 per year, from $1,000 in the mid-'90s, Hewitt's Armstrong says. The reduced savings are fueling a migration away from HMOs, which have seen their enrollment dip to 79.5 million last year from a peak of 81.1 million in 1999.

''HMOs no longer have as much of a competitive advantage in terms of pricing,'' Armstrong says.

Others, however, don't buy the argument that granting patients greater freedoms is driving up HMOs' costs.

Jamie Court, executive director of the Foundation for Taxpayer and Consumer Rights, a Santa Monica, Calif.-based consumer advocacy group, asserts that the main reason HMOs are eliminating prior-approval and referral policies is that they found members rarely sought care they didn't need. In other words, the restrictions were generating negative publicity and demands for greater legislative oversight while having little effect on costs.

''These 'improvements' are clearly an attempt (by HMOs) to pre-empt legislative action at a time when Congress is debating a patients' bill of rights,'' Court says.

A study published in the Nov. 1, 2001, New England Journal of Medicine found that members of Boston-based Harvard Vanguard Medical Associates made the same number of visits to specialists-an average of about once per six months-after the HMO dropped its referral requirement in 1998 as they did before the policy shift. What's more, members visited their primary-care physicians less often after the shift than before it-1.19 times per six months vs. 1.21, according to the study.

The high price of management

UnitedHealth was among the first to acknowledge that its efforts to closely ''manage'' care were actually costing more than they were saving. The Minneapolis-based insurer says it did away with its preapproval requirements in November 1999 after discovering that its 1,200 review nurses were denying fewer than 2% of treatment requests.

In the first 12 months after its policy change, UnitedHealth not only saved roughly $110 million in annual administrative costs by reassigning its review nurses to other jobs, but it also reported a 26% decline in the number of complaints to its consumer affairs department. The policy change also has provided the insurer with a huge boost in good will: Its membership has grown 21% during the past two years to 17 million.

Likewise, Blue Cross of California contends that limiting services may have run its course as a way to contain costs. As a result, the Woodland Hills-based insurer last year dramatically changed the way it rewards physicians for their work. Under its former plan, medical groups could earn bonuses of up to 10% of their payment based on how well they controlled costs by limiting referrals and hospital stays. Now physicians' bonuses are based on how well they perform on several quality measures.

In the long term, the company hopes to see medical costs drop as doctors adopt earlier and more appropriate treatment interventions. But for now, it anticipates a jump in expenses tied to increased provider payouts, says Blue Cross spokesman Michael Chee.

Many plans also are shifting to more intense management of members with serious diseases-with the hope of saving costs in the long term. Harvard Pilgrim, for instance, has hired hundreds of nurses to monitor and call patients who are at high risk for future illnesses or have not complied with their treatment regimens. That 0.5% to 1% of the population accounts for roughly 20% to 25% of health plans' medical costs, says Roberta Herman, M.D., Harvard Pilgrim's chief medical officer.

No one knows how many patients will respond to the personal intervention, whether it will dramatically improve their health, or how much money it will save. But officials say they must test new ways to rein in costs.

''Our traditional strategies were not as effective as we'd hoped they were going to be,'' Herman says. Now, ''on balance, we believe we're going to get a lot more value by investing less on utilization review and more on case management.''

Still, it's hard to believe that HMOs are giving up on efforts to control spending, especially with the growing financial burden of new medical technology, the aging population, class-action lawsuits and rising pharmacy costs. And it's unlikely employers, which pay most of the bills, are going to play dead.

Richard Corlin, M.D., president of the American Medical Association, says HMOs are still bearing down on providers and patients in other ways, particularly through contracting. Some plans, he says, are refusing to budge on reimbursement rates that are often woefully low, while others continue to shift the financial responsibility to providers by paying a monthly capitated fee-which he says implicitly encourages providers to limit tests and procedures.

Others suggest that while health insurers are relaxing their restrictions on the front end, they're simply tightening cost controls on the back end. Some HMOs, for instance, no longer require prior approval for a patient to be admitted to a hospital operating room, but do require preapproval for the same patient to be moved to a recovery room after the operation.

''It's a game of advertising and perception,'' says consumer advocate Court.

There's no question, however, that HMOs are having to evolve to meet consumers' demands for increased flexibility while, at the same, responding to pressure from employers to bring down costs.

Several insurers are tackling this complex dilemma by launching a new type of HMO/PPO hybrid-one that nudges patients toward an approved list of hospitals but lets them pay for the privilege of going elsewhere. These ''tiered'' health plans are designed to force consumers to make more cost-conscious decisions when choosing where to get their healthcare.

Premera Blue Cross of Seattle is applying the tiered concept to its network of doctors. Starting in June, physicians who accept the insurer's standard payment rate or have expenses at or below a regional average will be part of every insurance policy offered. Doctors who opt for higher payments or whose expenses exceed the average will be in another group. Those who don't negotiate any discounts with Blue Cross will be in a third.

''We'll never solve the healthcare cost problem by restricting choice,'' says Premera spokesman Scott Forslund.

Kaiser's Levitt says he believes that the line between HMOs and PPOs will continue to blur. However, managed care-in whatever form it takes-will remain viable as the search for affordable healthcare continues, he says.

''No one really likes a 'Mother may I?' approach to healthcare,'' Levitt says. ''But we can't go back to the Yellow Pages method of going to whomever you want and getting whatever you want. That's crazy.''

back to top

©2000-2004 FTCR. All Rights Reserved. Read our Terms of Use and Privacy Policy | Contact Us