The US HMO industry is facing a number of challenges.

Health maintenance organizations (HMOs) in the US are at a crossroads. While the entire managed care system in the US has been the subject of severe criticism by regulators, legislators and consumer activists, HMOs have been selected as the managed care sector that is particularly vulnerable during these economic times. Moreover, health care industry analysts believe that, unless major changes in the HMO industry are brought about, many HMOs might very well meet their demise.

Weiss Ratings, Inc recently conducted a compare-and-contrast study of all financial services industries in the US and HMOs fared dismally. For example, 16% of banks and thrifts were rated in weakened condition. Only 1.9% of Blue Cross and Blue Shield Plans in the country were rated as weak. Life and health insurers came in at 25.9% in terms of financial instability and the percentage of all financial industries that were categorised as in weakened financial condition was 18.4%. But HMOs outdid them all. According to Weiss, the percentage of HMOs rated as in weakened condition is an alarming 40.9%.

In fact, the HMO industry suffers both from the highest failure rate of all financial industries covered by Weiss and the highest percentage of companies still vulnerable. In the four years from 1997 to 2000, a total of 52 HMOs failed and, based on the most recent Weiss data, 192 companies were rated D+ or lower, representing a large 40.9% of the 469 HMOs that the organisation has rated.

According to Weiss, the financial weaknesses in the HMO industry are currently concentrated among smaller HMOs (those with fewer than 100,000 enrollees). Weiss said that, while both large and small HMOs have experienced a sharp rise in medical costs per enrollee, the large HMOs have been able to offset the increase by boosting revenues as a quicker pace. “In a recession, however, most HMOs – regardless of size – will encounter renewed cost pressures,” said Dr Martin D Weiss, chairman of the ratings organisation.

So clearly, HMOs need to bring about major changes in order to survive. A recent study by the Connecticut-based Conning & Co, however, offers some insights as to what form those changes may take. Entitled, Managed Care 2001: Legal, Regulatory and Political Issues, the Conning report puts the HMO scenario into perspective.

“Managed care companies and HMOs, under siege by regulators, legislators, physicians and patients, are likely to implement some substantial changes in the near future,” says Conning. “Class action lawsuits and the enormous publicity surrounding physician control of patient care decisions have already had tremendous impact, and pressure is mounting to pay providers faster.”

In addition, says Conning, the costs of complying with the provisions of the Gramm-Leach-Bliley Act, which demands strict privacy requirements regarding patient information, and the Health Insurance Portability and Accountability legislation are likely to force smaller, less technically astute organisations out of the business or, more likely, into mergers with larger, better capitalised companies.

The Conning study says that, because policies that allow more ‘provider autonomy' – the preferred provider organisations (PPOs) model – are selling much better than traditional HMO policies, there is a de facto shift towards more physician and provider control. This movement, moreover, is market driven, independent of regulatory changes, lawsuits and the lobbying of particular interests, says Conning.

The study points out that many of the challenges facing the managed care industry have previously hit the property and casualty insurance industry, including rapidly rising loss costs and increasing expense levels, and that it's inevitable that some of the same effects are being experienced by manage care companies, particularly HMOs.

“A lot of what we've seen in property and casualty is coming to pass in managed care,” says Samuel Levitt, vice president at Conning and co-author of the study. “Obviously, there are many differences, including public policy and ethical issues that surround the delivery of health care, but similar kinds of changes are inevitable. And one of the biggest is going to be industry consolidation,” he says.

Consolidation of the HMO industry, according to Conning, will be driven by three factors. The first is pressure on margins. While managed care organisations are achieving substantial rate increases, costs are also increasing rapidly, in some cases more substantially than prices, says the consulting firm. The second is the cost of litigation, the issue most responsible for the division in the House and Senate efforts to pass a Patients Rights Bill, according to Conning. The third, says the consulting firm, is the cost of complying with HIPA and the Gramm-Leach-Bliley law.

Major challenge
“Implementation of the sweeping administrative simplification rules under the 1996 HIPA legislation pose a major challenge to the industry,” says Levitt. “In the near term, the cost of implementing the standardised date and transmission protocols will drive many insurers into the arms of larger, better capitalised companies. Ironically, market forces are doing much of what the legislators are hoping to accomplish with laws and providers are hoping to accomplish with lawsuits,” he says.

One of the most controversial issues that will affect the managed care industry overall, and HMOs in particular, is the move towards constructing a Patients Bill of Rights. The purpose of a Patients Bill of Rights would be to allow patients access to various forms of health care, including specialty care services, and to ensure privacy of information, two elements that legislators have found contradictory.

The privacy issue is a particularly thorny one. Late last year, the Secretary of Health and Human Services released regulations calling for severe financial and criminal penalties for parties who collect patients' health data and illegally distribute that information to other parties or who collect that data for the purpose of selling the information. The regulations are complex and run to about 1,500 pages. Right now, those regulations are in a holding pattern as are Senate and House versions of the Patients Bill of Rights.

It is unlikely that a federal approach to patients' rights will be addressed in the near future, especially with the President and Congress concentrating on the war on terrorism. But the matter is being addressed on the state level.

For example, in New York, which has its own version of a patients' rights law, six HMOs covering 7.5 million New Yorkers have ‘entered into agreement' with State Attorney General Eliot Spitzer, after a two year investigation by Spitzer's office, in which the Attorney General alleges uncovered improper handling of claim denials by the HMOs.

The investigation was conducted between 1 January 1999 and 30 June 1999 by the Health Care Bureau in the AG's office. According to Spitzer, the plans were found to be in violation of the 1997 Managed Care Bill of Rights, by not providing specific reasons for denying patient requests to cover extended hospital stays and recommended treatments for mental illnesses, such as anxiety, depression and substance abuse. Spitzer contends the HMOs used vague explanations for denial of claims such as deeming procedures or treatments to be ‘not medically necessary,' or denied extended hospital stays, stating ‘care could have been provided in an alternate setting'.

Cutting costs
Spitzer said these companies may have issued these abbreviated explanations in order to make the external explanations process more difficult for consumers, or in order to cut costs and, while he was “loathe” to release the exact number of cases that his Health Care Bureau found to be improperly denied, he said that in half of the cases in “certain subsections”, the companies did not provide adequate reasons for denial of claims.

The HMOs which have entered into the agreement are: Aetna/US HealthCare Inc/Prudential Health Plan of Hartford, Conn; Excellus Health Plans Inc of Rochester; Group Health Inc of Manhattan; HIP Health Plan of Greater NY Inc; Oxford Health Plans of Trumbull, Conn; and Vytra Health Plans of Long Island, Inc.

The original filing by the AG also named Prudential Healthcare, which has since been acquired by Aetna US Healthcare.

Under the terms of the agreement, the HMOs must:

  • ensure that companies hired to conduct external reviews comply with the terms of the agreement;
  • notify consumers and healthcare providers that in cases where the company fails to comply with the statutory deadlines for processing an appeal, the denial of the claim will be automatically be reversed;
  • send denial notices to health care providers who submit claims for services provided;
  • comply with two-year monitoring by the Health Care Bureau to ensure the terms of the agreement are being upheld; and
  • contribute an aggregate $1m to cover the costs of the investigation.

    While this agreement cites these six specific HMOs, Spitzer said his office is currently looking into possible violations by other insurers, and expects to enter into similar “unprecedented” agreements with most of the HMOs in New York State within a year.

    Therefore, if President Bush and Congress cannot come to terms with a Patients Bill of Rights, we may see more of this type regulatory action at the state level.