For reasons ranging from mergers and acquisitions to outright failures, 83 HMOs ceased operations between January 1999 and January 2000, according to a recent InterStudy HMO Industry Report. As a market sector, HMOs lost more than 400,000 enrollees during the same period, the first annual decline since 1973. The number of HMO enrollees now stands at approximately 81 million. A decade ago, the number was 33.3 million.

InterStudy expects that the number of HMO players, now at 568, and the number of enrollees will continue to drop as unprofitable HMOs leave the industry or drop certain business lines. As an example of what’s to come, authors of the study point to fact that CIGNA has ceased offering HMO products in certain markets – one of several national firms moving out of the HMO market in some areas. During 1999 a total of 29 HMO ceased operations altogether, a clear sign that the reshuffling isn’t over yet.

In an interesting and somewhat surprising development, many HMOs that ceased operations weren’t the newcomers but rather the older plans – those that had been in operation nearly a decade or longer. Of particular interest to the physician sector is the 25.9 % decline is staff-model HMO enrollment and a 2% increase in IPA-model HMO enrollment. Where the choice exists, it appears that managed care enrollees are choosing more flexible plans such as PPOs.

For many HMOs, there has been the shift back toward some financial stability and a slightly brighter profitability picture. In the last 18 months even some of the worst performers saw their profits increase, largely on the heels of hefty premium increases.

Citing increased healthcare spending and increasing medical costs, health plans intend to boost rates for large employers this year by 10% to 15% - the largest price hike since the early 1990s.

In addition, HMOs are finally starting to gain control over spiraling administrative and pharmacy costs. A growing use of the Internet and three-tier co-payment plans, which shift more of the cost for brand-name drugs to patients, will help plans increase their profitability.

Except for Aetna and PacifiCare Health Systems, most of the nation’s leading health insurers saw big earnings gains last year – some for the first time in years. Kaiser Permanente is expected to end 2000 on a profitable note after bleeding red ink since 1998. Analysts also expect Oxford Health Plans to continue its remarkable, three-year turnaround.

Though managed care plans will continue to reap the benefits from premium hikes and tighter cost controls in 2001, the industry’s health could be complicated by threats of new federal regulation, improved bargaining power among providers and a barrage of lawsuits targeting leading HMOs. Aetna, for one, will have a difficult time this year after being hit in 2000 with soaring medical costs, problems with past acquisitions and litigation brought against it by lawyers targeting the managed care industry. The reorganized company, which officially divested it’s financial and international units mid-December, will have to drop some of its low-paying Medicare members, raise premiums and improve relations with angry providers and patients.

As HMOs struggle with a growing image problem, PPOs are expected to continue to gain ground in membership. While HMO enrollment growth is expected to slow to 5% from a peak rate of about 18% in the mid-1990s, PPO membership is projected to grow at an average annual rate of fifteen percent.

On the legal front, no one expects the lawsuits to abate. Although the managed care industry enjoyed a major victory recently when the Supreme Court reaffirmed an HMOs right to encourage physicians to hold down costs through the use of financial incentives, trial lawyers and state attorneys general alike are looking to charge HMOs with everything from denying patients proper care to racketeering. Managed care plans will also likely face increasing political pressure from both Washington and state legislatures as various patients’ rights bills come to life again.

Aetna may expand access to an array of preventive health care benefits as a way of compensating it’s health plan members under fraud and racketeering litigation brought against it by lawyers targeting the managed care industry.

Plaintiffs lawyers had proposed a cash payment as a way of compensating Aetna’s 19 million plan members, all of whom are potential claimants in the litigation against Aetna, which is one of a number of large health plans accused of using undisclosed financial incentives to providers to limit the medical care that patients receive.

Aetna is the only company in preliminary settlement talks and is considering a number of changes in the way it provides managed care as part of the settlement negotiations. Rejecting a proposal to pay money damages, Aetna is considering temporarily suspending co-payments for annual check-ups, immunizations and other preventive services.

Although talks between the company and plaintiffs lawyers could fall apart, Aetna has already begun to make a number of changes that are among the concessions lawyers are seeking, such as fewer restriction for HMO plan members and their physicians. Aetna has not agreed or commented on additional measures outlined in the settlement that include the end to the use of financial rewards to providers who restrict plan members’ access to care and limits on the industry’s practice of capitating fees, the per-member-per-month pay arrangement that can be adjusted to punish providers with high utilization or referral rates.

A hearing to grant class-action status to the suits isn’t scheduled until next month, and a decision on a motion to dismiss the litigation outright is still pending.

Two court cases, one from Texas and the other from Illinois, raise the question of whether states may require HMOs to provide an independent review after they rule that a specific treatment is not medically necessary. A federal appeals court struck down the Texas law, but another federal appeals court upheld a similar Illinois law.

Thirty-seven states now have laws on the books providing an avenue for consumers to resolve coverage disputes with health plans. In the absence of legislation that would allow people to sue their health plan, external review helps to assure that patients receive coverage for medically necessary care. The Texas and Illinois laws both provide for independent review of decisions by a health plan in which the plan concludes that services recommended by a physician are not medically necessary.

In these two high-profile cases, health plans have challenged those state laws on grounds that state external review is "preempted" by federal law. If the high court decides to take up the issue, it could vindicate those state mandates or cause them to be stricken from the books. The Supreme Court has asked the Justice Department for its view on whether of not the court should take the cases and it could be several months before a recommendation is made. Health care attorneys and policy experts expect the court will take up the matter because a split decision among the federal courts will need to be resolved.

The original challenge to the Texas law was brought by four subsidiaries of Aetna. The Illinois petition was filed by Rush Prudential, which is owned by California-based WellPoint Health Networks. Both Texas and Illinois say they are exercising the traditional power of states to regulate insurance and that these powers are not preempted by the federal statute known as ERISA, the Employee Retirement Income Security Act of 1974, which regulates certain employee benefits including health benefits.

The litigation, rather than efforts to pass a patients’ bill of rights, could be the first test of the Bush administration’s policies on an issue contested in Congress last year and debated in the presidential campaign. Texas was one of the first states to guarantee patients an independent review of decision on medical necessity and President Bush is expected to support state laws expanding the rights of patients in disputes with health maintenance organizations.

Ooops!

We goofed! Last month we incorrectly identified Janet Namini’s new position. So, we’re setting the record straight! Janet left the Managed Care Department to become Director of Physician Practice for the Oncology Care Center at the Outpatient Care Center. Our best wishes on your new endeavor!

Mary Gibson