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As the current tide of merger mania sweeps across the health care sector, the composition of the managed care industry is changing from a market made up of large, midsize and small companies to one dominated by a handful of giants.
Soon, close to 70% of all HMO members in California may be concentrated in three large managed care organizations when planned merger activity is finalized. On the national and regional levels, other mega-companies have been formed or are in the planning stages that are expected to attempt to dominate their respective markets.
If the current scenario seems familiar, that's because it all has happened before. In the early 1980's, the market was undergoing a similar upheaval. The insurance industry was dominated by the "sisters": Prudential, Metropolitan, Equitable, Aetna, Travelers, CIGNA and Hartford. Prices were escalating, double-digit inflation and interest rates reigned, and the insurers were undergoing massive system changes designed to accommodate early forms of managed care and administrative simplification.
Today's market is quite similar in many respects. While no insurer or health maintenance organization now could be said to dominate, the trend toward consolidation and large, monolithic health care organizations is clear.
What does all this mean for the employer, the buyer of health benefit plans? Based on past experience and the history of consolidation in other industries, these scenarios may emerge:
Less emphasis on customer service. As these entities combine and grow, some of their energies must of necessity be diverted toward supporting the consolidation and away from their customers. Also, concentrating the majority of customers in a few companies will lessen competitive pressures and the need to differentiate based on service. As these giants seek to streamline their operations, layoffs frequently occur. Consequently, the level of service to consumers may be in question.
A slower rate of innovation. Large organizations typically are slow to respond to the need for change. A company that dominates the market has less incentive to introduce innovation.
Higher premium costs. The early 1980's clearly surpass the current market in the rate of acceleration of costs. Nevertheless, even moderate increases in premium or health care costs will impact today's employer to a greater extent in absolute dollars, as medical costs have become a significantly larger portion of employers' costs. With a lessening of competitive forces, larger companies will have fewer incentives to keep prices low.
A decrease in HMOs' ability to control costs. As the demand for choice and greater access by consumers increases, the HMOs may lose the controls-strict gatekeeper models, for example-that had enabled them to ratchet their own costs. They will begin to look more like their insurer counterparts, especially where price is concerned.
Constriction in provider fees. The large HMOs will feel price pressure from the provider side.
In response to the growing demand from employers to keep rates down and from shareholders to increase earnings, HMOs will demand that providers accept lower fees. Contract and capitation rates already have been squeezed down so low in many areas that the providers simply are unable to compete effectively.
In Southern California, primary care doctors receive capitation payments of as little as $8 a month per member. Providers in turn argue that these payments will not come close to covering their overhead and, as a result, they are forced to leave California or drive up fees for those covered by traditional insurance. More than 2,600 doctors gave up their California licenses in 1994 and headed for destinations where HMO enrollment still is small, according to the Los Angeles Times. As a result, concern for quality of care will continue.
In summary, the future may present decreasing levels of service and employee satisfaction, rising costs, and fewer alternatives. What is the impact on the employer?
First, employers with significant HMO penetration in their plans suffer a double whammy. They see their costs rise on the segment of their population in the HMO and, because they are liable for a fixed "premium" payment to the HMO, they are subject to a non-participating insurance contract where the HMO retains all gains regardless of the employers' experience.
There has been some movement by employers to demand a form of experience rating or self-funding from the HMOs, but the pressure has been relatively light. At some point, however, it seems likely the HMOs will be coerced into providing alternative funding mechanisms to employers, and when that happens, they will find themselves in the same position as those insurers who saw methods like minimum premium as the answer and could not adjust their organizations to the reduced revenue stream.
Second, even if prices are not increasing at the rapid rate of previous years, medical inflation continues to surpass the U.S. Consumer Price Index, and there will be continued pressure on employers to keep their costs of doing business down and obtain maximum returns on income. This focus on profitability and competitive position will have a greater impact on how employers deal with relatively stable medical costs.
In the early 1980s, although medical costs were rising at a much faster rate, they had not yet reached a saturation point with respect to their impact on the big picture for the employer. Medical costs, simply by virtue of the attention they are getting, will force employers to take aggressive measures aimed at controlling them even in a market where they seem stable by comparison with the past.
Third, more employers may want to revisit the option of self-insurance with a new perspective. In the early 1980's, ERISA gave birth to new and innovative forms of health care financing, which led to the development of entrepreneurial third-party administrators and insurance products-such as stop-loss-that would protect those provident employers who, through self-funding, could gain more control of the costs of their employee benefit plans. The "big is better" trend likely will prompt more employers to develop competitive alternatives in a fashion similar to the emergence of the self-funded industry.
New developments in the self-insurance industry are worth a second look from employers who have not pursued this option before. First, providers are beginning to form local and regional alliances or networks designed to compete directly with HMOs. These regional alliances are put together to meet the needs of that marketplace and the employers in that area. This concentrated focus enables greater specificity in the selection of providers, a higher level of accountability, monitoring of utilization data and, ultimately, improved outcomes and lower costs.
Even more promising is the idea of direct contracting, where the provider group bypasses the middleman-HMO/carrier-and contracts directly with the employer.
The second is a shift in the focus of TPAs from one of claims adjudication to one that involves medical practice management. TPAs are establishing the capability to effectively monitor and manage practice patterns, utilization controls, emerging technologies, quality of care and, ultimately, individual satisfaction. New turnkey systems modules are available that will allow many of the functions performed by HMOs to be performed by TPAs for employers at a more efficient cost and efficiently; these systems do more than process claims-they can monitor the entire treatment plan for the patient, identifying duplication of services, drugs that may have adverse reactions and a host of other functions that improve overall care for the patient and obtain the maximum value for expenditures. The entrepreneurial TPA can use this technology in support of already-established, close-to-the-customer relationships. The large health care organizations, with their one-size-fits-all approach, simply cannot compete on this level.
The combination of technology and new areas of expertise will enable the TPA to serve as an effective buying agent for an employer, in setting up and choosing a network, and as the manager of the provider network.
The convergence of local/regional alliance and TPA brings together the best of contract medicine and medical practice management and can provide the self-funded employer with the tools necessary to offer an effective alternative to the HMO market, increasingly dominated by large companies.
Self-funding with an exclusive provider organization can offer competitive and stable pricing, plan participant choice of provider and strong management of the network and plan utilization by the TPA. This concept, which should be dubbed "managed choice," bears examination by employers who remain committed to managing their own destinies.
Robert E. Olsen is managing director of Pacific Risk Management Services, a Fountain Valley, Calif.-based marketer of stop-loss coverage and a unit of PM Group Life Insurance Co.