HMO Enrollment in California Levels Off as Health Plans and Providers Reframe Their Economic Struggles
October 7, 2002
Copyright © Allan Baumgarten 2002
This Trend Note highlights some of the findings of California Managed Care Review 2002, released this week. It is the second annual edition of the report, sponsored by The California HealthCare Foundation in Oakland. The report is intended to provide a variety of audiences with an objective analysis of market issues and trends and a set of data that will help inform future debates about health policy.
Copies of the report in PDF format can be downloaded at no cost from the Foundation's web site: http://www.chcf.org/topics/view.cfm?itemID=20119. The research for this report focuses on relationships and linkages between four key participants in the health care marketplace: providers, health plans, purchasers, and consumers. While it is convenient to view the health care world divided into four quadrants, this does not mean that everyone inside each quadrant gets along and shares the same objectives. For example, the gap and sometimes conflict between the interests of physician organizations and hospitals has become more conspicuous in the past few years.
Here are some of the key findings from this report:
1. The environment has calmed down, at least in some respects. The first edition of this report, based on research conducted in 2000, described a market in significant turmoil. Doctors claimed that the sky was falling and that inadequate payments from health plans caused the failure of numerous physician organizations. The health plans pointed out that many of the failed provider groups had inadequate capital and poor management. In any event, the situation for provider organizations has improved, and the interval between announcements of the latest failure of a physician group is much longer than it was in 2000.
It is not insignificant that incoming physician leaders of the California Medical Association (CMA) are leaders in and advocates for managed care, and that Kaiser Permanente doctors make up a growing share of the membership. It may sound trite, but the temperature of the rhetoric has cooled, and the California State Assembly seems to be taking a more measured approach to proposals for new mandated benefits.
The environmental change should not be overstated; after all, the CMA remains a plaintiff in a lawsuit challenging many of the largest health plan companies. Furthermore, it is not clear if this relative calm is genuine or if it masks significant underlying problems. In a sense, providers and health plans have muted their differences as they pursued a common goal: capture significant premium increases. The report shows that commercial premium revenue increased by about 10% in 2000 calculated on a per-member per-month basis. Much of the new money coming into the system has improved the profitability of health plans, a large chunk went to hospital systems and some has filtered down to benefit the physicians with improved payment rates.
2. Relationships between health plans and providers continue to evolve. Californias health plans have used a delegated model, where the HMOs transferred premium revenue in the form of capitation to different physician and hospital organizations. That system has not collapsed, as some had predicted a few years ago, but neither is it the same as it was. For example, many hospitals have ended their risk-sharing agreements, though physicians groups continue to accept capitation.
In one recent development, the largest health plans and provider groups announced that they had reached an agreement to implement new payment systems by which performance would be measured using uniform metrics and good or improving performance would be rewarded with more money. While employers embraced the concept of pay for performance, they were less forthcoming in guaranteeing that they would provide additional money in their premiums to finance these new incentives.
3. Both health plans and hospitals are returning to notions of preferred providers and health plans. Many hospitals used their newly found leverage to exit from contracts in which they accepted significant capitation risk. That has been a key factor in the decision of some HMOs to exit the Medicare+Choice market, since their financial model required shifting risk to providers. Some hospitals systems went a step further, and said that they would no longer contract with every health plan in their area, but would seek to develop closer ties to a select group of health plans.
In turn, some of the largest health plans in the state have gone back to the future and reintroduced the notion of a preferred provider and incentives to consumers or employers to use those preferred providers. In what is termed "tiering," some health plans have returned to the old notion of identifying certain hospitals as preferred. At this point, that preference is based on pricing, and cynics suggest that this is an attempt by HMOs to regain some of the economic power they have lost to consolidated hospital systems. At the same time, health plans say that they want to reach a point where tiering of hospitals and clinics would be based on measures of quality. One measure could be progress of hospitals in implementing the initiatives of the Leapfrog Group. Leapfrog is a coalition of major purchasers that has tried to seize the opportunity created by the new attention being paid to hospital safety after the recent Institute of Medicine reports. These health plans are now trying to enlist employers to present benefit plans that strike a new balanceyou can still use all the hospitals in the area, but you will have to pay out-of-pocket to use those hospitals that did not make it onto a preferred list.
4. HMO enrollment is flat in California and many other states. HMO enrollment in California increased by 4.7% in 2000 but not at all in the first half of 2001. Enrollment in commercial plans declined by 126,000 (0.7%) and the number of seniors in HMOs went down by 30,000 through June 2001. Fewer employers are choosing commercial HMO plans and fewer seniors are choosing Medicare+Choice HMO plans (including some who no longer have access to such a plan). The decline in the first six months of 2001 was offset by an increase of 160,000 in Medi-Cal HMO enrollment after years of decline and by the emergence of Healthy Families as a new line of business for HMOs. In 2000, HMO enrollment declined in five of the seven comparison states, which also saw a decrease in commercial and senior enrollment.
For additional information about Baumgartens research on managed care in local markets, go to: http://www.AllanBaumgarten.com