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AT FIRST BLUSH, a strategy employed by many employers of paring down the number of health maintenance organizations they offer to employees makes sense.

If employers maintain contracts with fewer HMOs, the more concentrated enrollment should provide them with more leverage to win better rates and conditions. Or so the reasoning goes.

One well-known example of a large employer that adopted this approach is the California Public Employees Retirement System. In the late 1980s, CalPERS imposed a moratorium on the number of HMOs it offered to employees. At the time of its freeze, CalPERS was offering 30 HMOs to employees. Because of mergers and consolidation over the years, the number of HMOs that CalPERS now offers has been reduced to 10.

CalPERS is lifting its moratorium, because it now believes that opening its business to new plans should lead to more competition for its business and result in better conditions and terms.

This revision in CalPERS' thinking also may have been sparked by recent headaches involving its current crop of HMOs.

After a lengthy battle, the giant health care purchaser late last month ultimately agreed to accept a 10.75% rate hike from Kaiser Permanente for 1999, after initially balking at Kaiser's request for a 12% increase (BI, June 22; June 15). CalPERS also was affected by contract battles between Blue Cross of California and Sutter Health, a provider network (BI, June 8).

Whatever the reason, we think CalPERS' revised strategy certainly makes sense.

By imposing a moratorium on any new HMOs, CalPERS essentially was telling the existing managed care plans with which it contracted that their business with the giant health care purchasing agency was safe from change or competition.

Protecting those HMOs it already offered from competition hardly was conducive to keeping rates down or assuring improved service and quality of care, CalPERS officials now apparently realize.

The days when employers offered scores of HMOs to employees are long gone and unlikely to return. There is something to be said about the advantages of concentrating business with a smaller number of suppliers.

But limiting the number of HMOs offered and locking in a handful of HMOs to permanent contracts are two very different things.

No supplier should know that it has a permanent lock on a buyer's business. Inevitably, that leads to complacency, which in turn provides little incentive to provide quality service at a competitive price.

CalPERS is taking the right step, one that should benefit not only the employer but also its employees.

While on the subject of HMOs, we were somewhat disturbed by a message repeatedly heard from the experts interviewed for our midyear health care market report.

That message was that HMOs and other managed care organizations have done a good job of controlling costs by winning discounts from providers but a less-than-sterling job of managing costs by providing quality care.

There is no question that the old days when indemnity plans essentially paid everything doctors and hospitals charged led to a system that was unaffordable. Managed care and the ability of big HMOs to negotiate fees and charges with providers ended health care hyperinflation.

But there is a limit to how much providers can be squeezed. We think a more promising way HMOs can continue to keep costs under control is to be leaders on the quality-of-care front.

Ultimately, high quality of care, which means doing things such as identifying health care problems early on and treating them, results in the lowest costs.