HEALTH PLAN RATES HEADING UPWARD

Health maintenance organizations are hitting employers with the first significant rate increases since the early 1990s, with more bad news just around the corner.

"Definitely, the trend is upward," said Ed Baird, senior vp for sales and marketing at Prudential HealthCare in Roseland, N.J.

Prudential HealthCare reports rate increases averaging 6% to 9% for managed care plans with July 1 renewals, compared with rate increases ranging from 4% to 6% for the first half of this year.

While HMO rates generally climbed 3% to 5% this year for employers with Jan. 1 renewals, the range of rate hikes for 1999 will be about double that, with rates generally expected to climb 4% to 10%, HMO executives and others say.

Rates also will be increasing for other types of health care plans. Point-of-service plan rates generally will rise one or two percentage points more than HMOs increase, while rates for preferred provider organizations will climb by 6% to 10%. Traditional indemnity plan rates will increase 8% to 12%.

Indeed, rate hikes for the small percentage -- generally 15% to 20% -- of employers that renew July 1 were higher than for employers with Jan. 1, 1998, renewals.

At Santa Ana, Calif.-based PacifiCare Health Systems Inc., larger and national accounts will see rate HMO rate increases of 6% to 8%, though HMO rates for small and midsized accounts could rise 8% to 10%, said Arnold Hebert, senior vp of sales and marketing.

POS plan rates will rise about 10% for all types of accounts, Mr. Hebert said.

But rates are rising much more steeply for some employers, especially small companies with adverse experience.

One such company is South Everson Lumber Co. in Everson, Wash. The company's PPO hit it with a 14.4% rate increase. Denise Hayes, office manager for the 137-employee company, said paying the hefty bills associated with the birth of a child with a heart defect may have contributed to the big rate increase.

Other employers say rate increases have varied widely depending on the location of HMOs. At Conestoga Wood Specialties Corp. of East Earl, Pa., rates for employees covered by HealthSource HMOs in Arkansas and North Carolina climbed 10.5% in May, according to Tim Stayer, corporate human resources manager. On the other hand, Aetna U.S. Healthcare HMOs covering employees in Pennsylvania and Maryland increased rates between 4% and 5%, Mr. Stayer said.

While rising rates are the norm at midyear and for the year ahead, there are big geographic variations. In general, rates are rising most steeply in the West, especially California, where the battle for market share has been the most intense for the past several years.

Midyear rates at Kaiser Permanente, the giant HMO in Oakland, Calif., have been raised, on average, about 11%, said Dean Ward, director of operations of Kaiser Permanente Insurance Co., a for-profit Kaiser subsidiary.

Indeed, Kaiser's Mr. Ward acknowledges that Kaiser's rate increases next year will be among the highest in the country. But the HMO, which reported a $270 million loss earlier this year, kept rates generally flat in 1997, he said, while other HMOs were beginning to bump up rates.

While rate increases will be the highest in California and could hit double-digits in some cases, more modest increases will prevail elsewhere.

At Harvard Pilgrim Health Care, an HMO in Brookline, Mass., midyear renewal rates generally climbed 3% to 5%.

"We are reading about double-digit increases in the West, but we are not seeing this elsewhere," said Barry Barnett, a principal with PwC Kwasha in Fort Lee, N.J., the new name for the benefit consulting unit of Price Waterhouse Coopers.

For example, the Health Alliance Plan, an HMO in the Detroit area with 540,000 members, says rates will rise 4% to 10% next year.

But that increase contrasts sharply with average rate decreases of 1.9% in 1997 and 2.3% in 1996, said Bob Skaggs, Health Alliance's director of marketing.

The new era of HMO rate increases is -- at least for now -- reasonably palatable because, if health care inflation is taken into account, rates for many employers still are not higher than they were a few years ago.

"We have had an extended valley. We shouldn't be shocked if we start to go up a peak," said Joseph Martingale, a principal at Towers Perrin in New York.

Even with a clear turn in the underwriting cycle, employers should be able to negotiate lower rate increases than those that HMOs are demanding.

While some HMOs may propose 8% to 14% rate increases, increases are likely to be between 6% and 8% when the dust settles, said Blaine Bos, a consultant with William M. Mercer Inc. in Chicago.

"A lot will depend on an employer's experience," said Harvey Sobel, a principal and consulting actuary with Buck Consultants Inc. in Seacaucus, N.J.

The biggest factor behind rising HMO rates: the need for managed care plans to bring their balance sheets back to good health after years of artificially low rates -- which were set at those levels to gain market share -- eroded profitability.

"HMOs are attempting to make up for years of underpricing," said Tom Beauregard, a consultant in the Rowayton, Conn., office of Hewitt Associates L.L.C.

"This is the recovery from years of market-share underwriting," agreed John Erb, area vp at Gallagher Benefit Services in Boca Raton, Fla.

While market-share underwriting is the lead cause of higher rates, it is not the only factor pushing up rates. Health care executives and benefit managers say soaring prescription drug costs also are a culprit in the return of health care inflation.

At Franklin Electric Co. Inc., a Bluffton, Ind., manufacturer of electrical pumps, prescription drug costs have been rising 12% to 15% for its self-insured PPO.

James Cole, Franklin Electric's manager of health care programs, cites a triple-whammy effect for the rising costs.

"You have more expensive drugs being prescribed, as well as more utilization. And there is more use of brand-name drugs." Mr. Cole said.

Health care experts cite direct consumer advertising by pharmaceutical manufacturers as a key reason consumer demand for prescription drugs is burgeoning.

"Consumers are being bombarded with advertising by new and different drugs," said Randy Abbott, a consultant and regional health care practice leader with Watson Wyatt Worldwide in Little Falls, N.J.

The result, said Mr. Abbott, is that health care plan participants are much more willing to ask their physicians for prescriptions, and their physicians "seem willing to accommodate patients."

In addition, prescription drug costs are rising rapidly because some new, popular drugs -- the male impotency-combating drug Viagra being one example -- have no lower-cost generic equivalent, said Ferris Taylor, director of marketing at Harvard Pilgrim Health Care.

The big increase in prescription volume may not be entirely a bad thing if drug therapies keep employees out of costly hospitals. But, so far, employers are not seeing a correlation between increases in prescription volume and lower hospital or other medical care expenses.

"If drug treatments are eliminating the need for surgical intervention or other costly treatments, that could be a good thing for health care plans. The reality, though, is that most plan sponsors would be hard-pressed to see any reduction in medical plan costs," Mr. Abbott said.

Employers, in response to rising prescription drug costs, are beginning to shift at least a portion of the costs to employees.

Mr. Abbott said copayments of $7.50 or even $10 are replacing $5 copayments in many cases.

Still, employers, at a time of a booming economy and a tight job market in many parts of the country, are not attempting to pass a significant chunk of health care cost increases on to employees.

"Things have been humming smoothly on health care for the last four or five years. Health benefits have not been an issue. For an employer to suddenly enrage employees. . .you would not want to do that in this job market," Mr. Erb said.

In addition, employers with union contracts cannot, in sync with a turn in the market, immediately impose more cost-sharing requirements.

"If you miss a cycle with unions, you have to wait another three years. Ultimately, there will be more cost-shifting to employees, but things move slowly," Mr. Sobel said.

But some employers with very rich benefit programs do intend to shift at least a portion of cost increases to employees.

South Everson Lumber, which pays 100% of employees' health care premiums, is considering charging employees for at least a portion of its $21,000 monthly health care premium expense, said Ms. Hayes.

To date, the wave of HMO mergers has not had a significant impact on rates, with the biggest short-term effect, in some cases, disruptions of services.

"In the short term, both providers and patients pay a hefty price in terms of disrupted services and confusion, though there has been little or no impact on rates," said Watson Wyatt's Mr. Abbott.

But HMO mergers do mean fewer choices for employers, and that could spell higher rates in certain markets. One key test of the impact of mergers on rates could occur soon in Florida.

In the Florida market, Humana Inc. was known as a price leader. "Humana was very aggressive in its pricing. They saved employers and employees a ton of money," Mr. Erb said.

By contrast, United HealthCare Corp., which recently announced it is purchasing Humana, is better known in Florida for the size of its managed care network, not the lowest price.

Other health care experts say that over the long term, the continuing consolidation in the managed care market could be positive for corporate buyers.

"In a mature market, the survivors will be those with access to capital and the ability to manage information, all of which is good for the consumer," Mr. Abbott said.

Others are less certain that mergers are a positive development for corporate buyers.

"The effects really are mixed," Buck's Mr. Sobel said. On the one hand, mergers give HMOs more clout with providers, which should mean a more favorable fee schedule, he said.

On the other hand, Mr. Sobel said, "Employers will have fewer choices, and HMOs will become tougher in their willingness to negotiate. I would have to say the negatives outweigh the positives."

With rates going up, inevitably questions pop up as to whether buyers can expect a return to the hyperinflation of the mid- and late-1980s, when rates were increasing 15% to 20% each year.

For now, experts say a return to hyperinflation, in an era when roughly 85% of employees and their dependents are in managed care plans, is inconceivable.

"With fees now negotiated, providers no longer can raise charges unilaterally," Mr. Sobel said.

Still, there is disappointment that managed care organizations have not done more to achieve cost savings through quality improvements rather than a focus on squeezing providers for discounts.

"Managed care plans often have relied on discount arrangements to keep costs under control. But they haven't done enough to truly manage care," Mr. Erb said.

Some HMOs, Mr. Erb said, are no more than claims payers. "The move to managed care from traditional indemnity was achieved by squeezing providers to get discounts. Those savings were achieved without a lot of care management," he said.

Others concur that there still is tremendous fat in the health care system and that care delivery can be improved without increasing costs. "The future will truly belong to those who can capture that concept," Mr. Abbott said.

For the immediate future, some benefit managers are concerned about the managed care-bashing taking place in state legislatures and in Congress.

For example, Michael Pikelny, corporate actuary and benefits consultant at Hartmarx Corp. in Chicago, worries that more bureaucracy could result from a House Republican health care task force recommendation that health plans, among other things, establish both internal and external review programs for disputed claims.

So far, though, legislative mandates, such as requiring health care plans to offer women at least two days of hospitalization after giving birth and giving patients direct access to certain specialists, have not yet had a significant impact on costs.

But health care experts say costs could rise sharply if Congress were to pass legislation allowing patients to sue health care plans and employers for damages allowed under state law.