Allan Baumgarten's Managed Care Reviews

ILLINOIS

November 19, 2009

Illinois Health Market Review 2009 finds:

HMO and Hospital Profitability Declines;

Economic Downturn Creates New Challenges

Chicago - Illinois health plans and Chicago area hospitals saw their profits decline in 2007 and 2008. They face additional risks from declining insurance coverage and possible reductions in lucrative payments for Medicare Advantage enrollees.

These findings are reported in Illinois Health Market Review 2009, Allan Baumgarten's 11th annual report analyzing of Illinois health care markets and organizations. The report presents a competitive analysis of health plans and hospitals in the state.

Baumgarten, an independent analyst of health care finance and policy, has published annual market studies for eight other states: Arizona, California, Colorado, Florida, Kentucky, Michigan, Minnesota, New York, Ohio, Texas and Wisconsin. Sidebars in the new Illinois report compare Illinois HMOs to their counterparts in other states. The reports for Arizona, California, Kentucky and New York are available for free download. Follow the links from http://www.AllanBaumgarten.com

Baumgarten's new report finds:

Profitability for Chicago area hospitals peaked in 2007 but then dropped sharply in 2008.

Based on an analysis of Medicare facility cost reports for 2008, Chicago area hospitals had net income of just $3.5 million on revenues of $19.169 billion. In comparison, they had net income in 2007 of $1.423 billion or 7.5% of net patient revenues. And while the group as a whole lost money, the Advocate system of 9 area hospitals had an average margin in 2008 of 6.1%.

Exhibit 1

Illinois Hospital Profitability, 2001-2008

Three Chicago-area hospitals closed within the last year, but new hospitals have just opened or are under construction. This new capacity comes at a time when hospital utilization faces downward pressures. As unemployment increases, fewer people have coverage. Those that do have coverage often pay a deductible of $2,000 or more when they receive care. Hospitals also face declining investment revenues (as do the HMOs) and higher costs for borrowing.

Health plan profitability declined sharply in 2007 and 2008.

After five years of steadily improving profits, Illinois HMOs saw their profitability decrease. Average margins went from 6.3% in 2006 to 4.3% in 2007 to 2.5% in 2008. HMO Illinois, part of Blue Cross Blue Shield of Illinois, continues to be the most profitable HMO here, with a 2008 margin of 5.7%.

Exhibit 2

Illinois HMO Profitability, 1993-2008

HMO enrollment continues to fall, although the decline has moderated

After reaching a peak of 2.4 million in 2000, HMO enrollment in Illinois has declined steadily. Most of the loss is from employer group plans, which decreased by almost half in the past 10 years from 2.1 million to 1,150,000. Employers have left comprehensive (and expensive) HMO plans for PPOs and other plans with higher deductibles. And some people have lost their coverage altogether as they lost their jobs. In the past three years, that has been partly offset by growth in Medicare Advantage and Medicaid managed care enrollment.

Enrollment in Medicaid managed care is increasing again as the number of people turning to Medicaid coverage grows. But only one HMO - Harmony - still contracts with the state for Medicaid enrollees in the Chicago area.

Exhibit 3

Enrollment in Illinois HMOs, 1993-2008

Enrollment in Medicare plans has grown but some seniors will need to look for new options next year.

About 54,000 seniors in the state are in Private Fee-For-Service Medicare plans, but those are going away next year. Medicare Advantage plans have been strongly profitable, but Congress may reduce HMO payments in order to help finance reform initiatives.

After years of double-digit increases, HMO premium growth has also moderated in the past two years

HMO premium revenues, measured per employer group member per month, increased by 7.4% in 2008 to an average of $302. That is $98 more per member per month than employers paid five years ago. Premiums increased at double-digit rates between 2001 and 2005, but increased by "only" 6.6% in 2007.

Excerpts from the report, including the popular "Illinois HMOs at a Glance" exhibit can be viewed in the State Reports section of http://www.allanbaumgarten.com.

ILLINOIS