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The story of the nation's health care system today is the story of managed care, and the story of managed care can be summed up in one word: growth.

Managed health care has taken the nation by storm, particularly in the past five years, and by now is the norm for virtually all large plan sponsors coast to coast.

Traditional fee-for-service medicine still exists, but it is becoming a shrinking sliver of the health care pie.

Total HMO enrollment as of Jan. 1 was 66.8 million, according to the Minneapolis research firm InterStudy. Of those, 7.5 million were enrolled in point-of-service plans sponsored by HMOs.

That's a huge increase from just five years ago, when 36.5 million were enrolled in HMOs, with 1.5 million in POS programs. These statistics, compiled by InterStudy, also show that 10 years ago only 28.5 million people were in HMOs, or roughly 40% of today's enrollment.

Nearly 20 years ago, at the beginning of the HMO movement, there were only 132 HMOs serving 6.3 million people.

These figures do not include other types of managed care, such as preferred provider organizations, and indemnity plans with managed care features, such as gatekeeper access to specialists.

The rate of growth, as measured by the number of enrollees, has accelerated year by year. In 1993, the rate of growth for HMOs was 8.5% according to InterStudy. In 1997, it will be an estimated 13.0%, said Richard Hamer, InterStudy director.

According to consultant William M. Mercer Inc., the percentage of large employers offering a traditional indemnity plan declined to 52% in 1996 from 68% in 1993. During the same period, the percent of employers offering HMOs increased to 57% from 46%.

Managed care has been embraced by benefit managers because it has proven cost-effective and "created the potential for better quality health care," said Robert Dankmyer, vp of corporate benefits at Marriott International Inc. in Bethesda, Md. Fee-for-service medicine offered no such potential, he said.

"A lot more attention can be paid to outcomes and a lot more attention can be paid to best practices," said Mr. Dankmyer. Eighty-five percent of Marriott's employees are enrolled in 160 HMOs and 7% are in POS programs, he said.

Certainly, employers have moved in a big way to managed care plans because they are the clear leader in holding down costs. Last year, for example, HMOs cost an average of $3,185 per employee, $554 less per employee than the traditional indemnity plan cost of $3,739. Large employers can and have saved millions of dollars a year as employees have moved out of high-cost traditional indemnity plans into more cost-efficient HMOs and other managed care plans.

Benefit managers also say -- in explaining HMO growth -- that employees are very satisfied with the care they receive in HMOs.

For example, at Marriott, HMOs always are the most popular with employees on satisfaction surveys, according to Mr. Dankmyer. The company in 1990 introduced a POS option in 32 cities, but it still views its HMOs as "the plan of choice," he said.

Similarly, since starting its managed care program five years ago, Hershey Foods Corp. in Hershey, Pa., has achieved an 80% enrollment rate in managed care with high employee satisfaction, said Richard Dreyfuss, director of compensation and international benefits.

In California, where managed care gained its early foothold, 42.6% of the state population was enrolled in HMOs last year, according to InterStudy. A heavy concentration of the population in managed care, though, no longer is just a West Coast phenomenon: 47.1% of Maryland's residents were in HMOs last year, and in New York, which was slow to embrace managed care but now is a hotbed of HMO competition, nearly 31% of residents last year were enrolled in HMOs.

"It's moved from a fringe part of the employee benefit program to the main part," said Richard Ostuw, chief actuary of Towers Perrin in Stamford, Conn.

Managed care also has branched out to meet employees' varying needs and desires. Through PPOs and POS plans, choice has become the main selling point of many plans.

"Managed care used to equal 'HMO,'*" said Pam Hastie, a principal at Buck Consultants Inc. in Chicago. She defines managed care as any system that exerts a measure of control over the patient receiving health care.

To deal with the increased choice, plan sponsors and employees both have grown smarter.

"I think the speed at which it's changed in the past couple of years is faster than in the past five years," Ms. Hastie said.

"Employees are much more aware than they have ever been. There is definitely more education in areas such as prescription drugs."

But the growth of managed care has not been without its share of problems and anti-HMO sentiment.

Beginning last year, public anger erupted amid reports that HMOs on occasion were denying care to the very sick or needy.

While these "horror stories" have been dismissed as anomalies by HMO executives, the industry acknowledges its practices from time to time have earned it a black eye.

"We need to do a much better job" of reassuring the public, said Kathy Swenson, senior vp of Oakland, Calif.-based Kaiser Permanente. Kaiser, which recently issued a patient bill of rights, believes managed care in general gets low marks in opinion polls for the same reason school systems or politicians generally get low marks -- even though people give high marks to their own schools or public officials. People tend to feel alienated from social forces from which they feel removed.

With 8.7 million members, Kaiser is convinced its members are by and large happy, because few have voted with their feet, Ms. Swenson said. "Ninety-six to 97% of our members still choose the (traditional) HMO product," she said.

Health care plans need to react in positive ways to the negative media attention that has developed recently, said Richard J. Sinni, New York practice leader of Watson Wyatt Worldwide. The plans were extremely popular in the early 1990s but have come under attack recently by providers, the media and Congress. All these adversaries reinforce one another.

"They have to be aggressive and responsive," Mr. Sinni said of HMOs. "I think they have to be a little more proactive than they are."

Enrollment growth and a managed care backlash, though, aren't the only trends shaping the industry. Within the past few years, a wave of megamergers and acquisitions has swept managed care.

Large transactions have included the 1996 purchase by Aetna Life & Casualty, now Aetna Inc., of U.S. Healthcare Inc. for $8.9 billion; the 1994 creation of MetraHealth Cos., a joint venture of Metropolitan Life Insurance Co. and Travelers Corp.; and the subsequent 1995 purchase of MetraHealth by United HealthCare Inc. for $1.65 billion. Earlier this year, CIGNA Corp. bought Healthsource Inc. for $1.7 billion.

Investor-owned consolidations also included the 1996 acquisition of Fountain Valley, Calif.-based FHP International Corp. by PacifiCare Health Systems of Cypress, Calif., for $2.1 billion, and the purchase of Woodland Hills, Calif.-based Health Systems International by Foundation Health Systems of Rancho Cordova, Calif., for $3 billion.

Experts attribute the frequency of mergers and acquisitions in the past five years to the failure of HMOs to maintain adequate profits in hotly competitive markets where the drive for market share has put pressure on rates.

For the top 25% of HMOs -- based on profitability -- profit margins hit 8.2% in 1994 but fell to 2.1% in 1996. The least successful HMOs in the industry in 1994 had a profit margin of 0.8%, but in 1996, their expenses exceeded revenues by 9.2%.

Because of their losses or paper-thin margins, HMOs warned they could no longer maintain the low rates plan sponsors had come to expect.

"I think the easy gains have been made," said Tom Billet, a vp in the Stamford, Conn., office of The MEDSTAT Group, a health care consulting firm.

A clear trend of the past five years is the tendency of employers to band together, hesitantly at first but then with increased confidence, to give themselves more leverage in negotiating with HMOs.

Purchasing coalitions have sprung up in every part of the nation with varying roles and degrees of success, with the ultimate goals of keeping costs down and ensuring quality.

The work of coalitions has led to a much broader network of physicians to choose from in the case of most HMOs, said Larry Boress, vp of the Chicago-based Midwest Business Group on Health.

Purchasing coalitions have been instrumental in helping compel HMOs to compete not only on price but overall value or performance, Mr. Boress said.

In some cases, such as the San Francisco-based Pacific Business Group on Health, this has led to detailed report cards intended for consumer use and readily available on the Internet or via toll-free telephone calls.

"Customer service has really moved up to the forefront," Mr. Boress said.

Purchasing coalitions that have stayed together and worked with managed care networks have been successful, he said, while those that have tried "bashing (health) plans" have failed, he said.

Many coalitions have done much to educate employers during the past five years, but like the MBGH and the New York Business Group on Health, many don't actually purchase health care on behalf of member employers.

"I have very large employers, and they feel alone they have leverage," said Laurel Pickering, managing director of the New York group. "They feel they have more power."

"I think (the coalitions) don't have the clout that's going to be necessary," said Ms. Hastie of Buck Consultants. "I think they're trying to do an awful lot on their own with some very good goals, but when they took on the responsibility of contracting and staying together to buy group insurance, there can be differences of opinion, and it can become political."

Still, purchasing coalitions recently have been instrumental in creating report cards to aid employees in their selection of health plans.

"Part of the philosophy of managed competition is that we need an accountable health care system," said Mr. Hamer of InterStudy.

"The ideal is that health plans eventually compete on the basis of price and quality. HMOs in most cases are quite happy to have their quality scrutinized," he said.

Such report cards, unheard of five years ago, now are seen as a key motivator for positive change among HMOs.

The inspection and measurement of HMO value can be considered a trend in itself. Whereas five years ago virtually all employers pointed to price as the sole criteria driving HMO selection, many large employers now are pointing to value -- the ability to achieve stated goals and demonstrate that employees' health is being improved -- as a criterion.

Some HMOs say they don't mind the scrutiny.

"Our relationship with (coalitions) is outstanding," said Jon R. Wampler, consultant to PacifiCare, which has 3 million commercial members in 14 states. PacifiCare maintains good relations with coalitions in order to improve itself, he said.

"Consumers for the first time will be able to dead reckon instead of putting their finger in the air and guessing which way the wind is blowing," he said.

"Now the employee is much more responsible," said Ms. Hastie. "I can't tell you what responsibility the employer should ultimately have. The onus is really going to be on the employee. They're going to have to make an educated decision."

The task of measuring HMO quality has fallen also in the past five years to a variety of organizations, including Washington-based National Committee for Quality Assurance, a broad-based independent group that accredits HMOs and reports performance data collected under its Health Plan Employer Data and Information Set; the Portland, Ore.-based Foundation for Accountability, a group founded by managed care expert Paul Ellwood and employers; and a host of benefit consulting firms with proprietary measurement tools.

"They're still concerned about cost, but they're absolutely concerned about value now," said Mr. Sinni.

Another clear trend of the past five years, and one that has tended to mitigate the loss of profits in other areas, has been growth of Medicare risk HMOs.

By offering seniors benefit-rich packages in exchange for little or no copayments, and often by including outpatient prescription drug benefits, which Medicare does not provide, some HMOs have found a vast well to tap. In 1992 the product was barely known to seniors, said Kevin Counihan, senior vp of Waltham, Mass.-based Tufts Health Plan.

Today the company has 68,000 retirees in its two Medicare risk plans.

Mr. Wampler said PacifiCare has more than 1 million people in its risk HMOs, including 400,000 alone in California.

"It's a phenomenal growth story," he said, referring to its Medicare risk HMO.