Broker management issues
Low customer retention
Quoting and underwriting delays
Marketing campaign issues
Increasing claims costs
Multiple offices and branches
Decrease in service quality
In the late 1990s many Health Plans posted negative profits; just in 1997, 60 percent of HMOs lost money — about $900 million industry-wide. Most observers predicted rough times for managed care organizations, especially smaller ones. Oxford Health Plans, an industry leader in the late 90s, lost $291 million in 1997, and by the first half of 1998, the plan had wracked up a whopping $553 million in losses. Industry analysts attributed Oxford’s problems to computer and record-keeping difficulties.
Nevertheless, during the last several years most HMOs reported an increase in profitability. This can be partially explained by the fact that many HMOs are changing benefit structures, revising or terminating provider contracts, and dropping out of unprofitable markets such as Medicare or unprofitable regions. Also, profitability continues to improve as insurers raise premiums and restructure policies to reduce costs.
While this bodes well for the industry’s overall health, rising premiums have forced many consumers to select more restrictive health plans or opt not to purchase insurance at all. Employers are very unhappy about double-digit increases in premiums several years in a row. Analysts say very soon things have to change. If this happens, do you have a backup plan for how to minimize your profit losses?
Price wars among medical insurers marked the 1990s. In this decade, however, managed-care firms no longer seem to be buying contracts at below-cost rates as they turn their attention to profitability. Last year was profit-positive for many Health Plans, and part of the reason for the profit gain is that HMOs raised their premium revenue per commercial plan member by an average 19.8 percent. It was the third straight year of double-digit increases in premiums.
Some industry analysts believe HMOs were able to get employers to pay that much partly because there are fewer competitors in the market, others think that the main reason health insurers are making more money is that they uniformly overestimated the costs of covering medical claims.
For example, according to the latest study by HealthLeaders, medical losses among only North Carolina health maintenance organizations have dropped from 92 percent of premiums in 1999 to 80 percent in 2003. Since medical losses make up the brunt of health insurance costs, with administrative spending a distant second, that has paved the way for increasingly healthy bottom lines. During the same four-year period that medical-loss ratios have been declining, earnings at N.C. HMOs, not coincidentally, have jumped from a loss of $6.60 per member per month to a profit of $17.56, according to HealthLeaders. “The industry overestimated the rate of medical inflation in the past couple of periods,” said Charlie Pitts, chief executive of United Healthcare of the Carolinas. “All the vectors pointed toward (increases) in the high teens, low 20s, but it actually came in beneath that.”
Health Plans cannot expect their profits will keep rising as they keep raising the premiums: this strategy drives away more and more employers who cannot afford high premiums and are forced to drop their benefit coverage programs.
HMOs seem to be running out of places to trim fat from the system. The loophole is we are going to get to the point in several years where premiums will be high, and employers will not want to pay this much. Then HMOs/PPOs will have to go through another cycle of cost-cutting. The only way to cut costs in the end will be to provide fewer choices to patients in the long run. Then there will be another round of complaints, and a new cycle will begin.
On the other hand, HMOs need to raise prices. And they need to educate buyers about the consequences of 10 years of cost cutting. HMOs have cut back not just fat, but also bone and muscle. The single biggest threat to the industry lies in the fact that consumers do not realize the economic value of managed care. The reason? Most enrollees receive healthcare coverage through their employers.
There may be a few factors at the root of HMO losses.
To begin with, there is a kind of natural selection occurring as big companies merge and leave smaller HMOs without the resources to compete.
- Accountability and Productivity Issues
Today we have plans with dozens, if not hundreds, of medical groups managing so many different plans that there is little accountability. Some medical groups may be participating in so many HMOs, that they rarely consult the various requirements of each individual plan in which they take part. There is a huge decline in productivity.
- Decentralized Multiple Guidelines
In order to please consumers, HMOs have contracted with wide numbers of physician groups. The result is that there is no loyalty between the HMOs and physicians, and no working to share information. There can be 10 sets of guidelines to follow, 10 eligibility processes, and 10 drug formularies to consult; every time decisions have to be made, someone has to figure out which procedure to follow.
- Escalating Drug and Technology Costs
Recent technological and medical advances and Food and Drug Administration drug approvals have also put pressure on HMOs to augment their services in the face of rising costs. Unfortunately, new drugs and technologies come with steeper price tags.
- Demographic Changes
There is the unstoppable demographic change in the United States, with an aging population of baby boomers requiring more health care services than ever before.
- Unpredictable Situations
The unpredictability of the managed care market has prevented HMOs from reaching their cost containment objectives, for instance, the unexpected severity of the 1997 flu season pushed costs above the demand picture projected by many HMOs. We never know what will be the next SARS.
Despite tremendous profit losses in the late 90s, overall revenues rose 77 percent during the same period. The disparity between net income and total revenue is due mainly to competitive pricing, escalating claim costs, and growing administrative expenses. Moreover, nearly one-third of health plans that earned money, both nonprofits and for-profits, also suffered operating losses.
Losses exceeded profits in every size category in 1999, except the very largest which include those with more than 500,000 members. There was also a clear pattern — the smaller the HMO, the higher the likelihood of losses: 37.2 percent of the HMOs with 250,000 to 500,000 members reported losses; 39.3 percent of the HMOs with 100,000 to 250,000 members; and 56.6 percent of the HMOs with fewer than 100,000.
“I believe profits are good for individual companies and good for the industry,” Pitts said. “Profits facilitate reinvestment in systems or other administrative functions, and that in turn brings value back to the consumer.” The N.C. Department of Insurance, which has discretion over HMO rates, usually signs off on annual requests for rate increases. The department has an incentive to OK rate increases in so much as fiscally unfit insurers can pose a much bigger problem than healthy ones.
Insurers also are helping to slow medical losses in more progressive ways, such as through disease-management programs, incentives for using generic drugs, preventive care, and improving customer service. At UnitedHealth, Pitts argues that a $2.2 billion investment in new information-technology systems by the company’s parent since 1998 has vastly improved efficiency and customer experiences.
If raising premiums strategy will no longer bring you profits in the future, what is your alternative plan to increase profitability?
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