HMOs are losing ground to preferred provider organisations. Douglas A. Collett, reports.

The health maintenance organisation (HMO) - a structure that has come to be considered by many as a synonym for “managed care” - appears to be losing its share of the US healthcare market to its cousin, the preferred provider organisation (PPO).

For the first time in five years, the combined market share of HMOs and HMO point-of-service (POS) plans declined, according to the National Survey of Employer-Sponsored Health Plans conducted by William M. Mercer Inc. The market share of these models dropped 1% to 47% in 1998. This decline, coupled with a drop in indemnity coverage, contributed to an increase in the market share of PPOs to 40% in 1998 from 35% in 1997.

Based on preliminary enrollment reports, this trend appears to have continued through 1999. A.M. Best expects the HMO market to experience a drop in enrollment this year because of consumers' increasing preference for managed care products - such as PPOs - that provide greater access and choice.The biggest factor determining the future of managed care in the United States will be the impact of rising healthcare costs. Some experts predict that healthcare costs will double by 2007. Healthcare providers believe they have shouldered the burden of containing rising costs up to this point; they are resisting when asked to accept lower reimbursement rates by not renewing with their current health plan contracts. In that event, managed care plans will need to control expenses better or they will be forced to pass increases to policyholders.

Until about 30 years ago, most people had traditional indemnity coverage - also known as “fee-for-service” coverage. An insured paid a set amount up front in the form of a deductible, and afterward the insurance company paid a high percentage of the bill. Insureds went to any doctor they selected and received the same benefits under their plan.

HMOs were developed to address escalating healthcare costs. In exchange for a low co-payment, an HMO requires that you only see its doctors and that you get a referral from your primary care physician before seeing a specialist within the network.

PPO plans offer the option of obtaining service from network providers or out-of-network providers. In addition, most PPO plans do not designate a primary care physician or “gatekeeper,” and instead allow individuals to consult with specialists without preapproval. Most PPOs require participating providers to accept a lower negotiated rate as payment in full for services.

Choosing a PPO plan can help employers limit costs while creating less disruption for employees than switching to an HMO. Because most employers share in the cost of providing medical coverage to their employees, reduced rates from managed care plans translate into lower overall expenses for the employer.

In recent quarters, premium rates for PPOs have increased more sharply than for HMOs. However, the premium gap between the two products has remained narrow enough that employers have been willing to overlook the difference in favour of additional benefits and flexibility. In the future, HMOs may be better able to manage rising healthcare costs, widening the premium gap between HMO and PPO products.

Given today's competitive hiring environment, the quality of health benefits has become critical to attracting and retaining employees. Sharp differences between premium rates for HMOs and PPOs could cause some companies to revert to the more restrictive HMO option. However unlikely that scenario may appear, most PPO plans aren't taking chances. Rate hikes, increased use of utilisation-review/critical care services, altering pharmacy benefits and redefining what is considered “usual, customary and reasonable” are several ways in which PPOs are addressing costs. As PPO plans begin to tighten their belts, some HMOs are loosening their benefit restrictions. Eventually, the two fields may converge.

Faced with projected escalating cost trends and an increasingly difficult social and political environment, managed care organisations in 1999 were forced to re-evaluate their HMO product lines. Actions taken in 1999 ranged from withdrawing from specific markets to a strategic shift in pricing with the focus turning to profit margins, rather than market share.

HMOs' initiatives aimed at addressing pricing and bringing order to an otherwise fragmented system were met with a backlash from physicians and consumers. Underlying HMO principles, based on integration and access, were scrutinised and challenged. A.M. Best is concerned about the ability of managed care companies to work with providers to focus on member issues, which may head off possibly disruptive legislative and regulatory intervention.In 2000, A.M. Best anticipates continued upward pressure on rates as managed care organisations back away from restrictive cost control measures, a response to increased pressure from providers and consumer groups.

Because the HMO industry's early emphasis on controlling costs was based on leverage brought through contracts, managed care organisations and the physician community have developed an adversarial relationship. Consequently, many HMOs now confront resentment and mistrust, reactions that have hampered care management initiatives. Physicians have become increasingly uncomfortable with HMO behaviour they deem intrusive, but insurers say they must better analyse and coordinate clinical protocol activity.

UnitedHealthcare Group, one of the largest publicly traded managed care organisations, last year announced that it plans to discontinue its practice of preauthorisation. Preauthorisation is obtaining certification or authorisation from the health plan for routine medical decisions. A.M. Best views this strategic measure as a positive transitional step to establish better ties with the physician community. It's a move that will likely be emulated by competitors seeking to build better working relations with providers and members.A.M. Best expects these efforts to be complicated by pressure to increase rates in the HMO market as providers balk at the continued sharing of pricing and utilisation risk. Doctors and provider groups lack the scale to absorb losses when services provided exceed contracted payments. HMOs argue that doctors must focus on utilisation management. This will become an increasingly contentious issue as HMOs work to align the clinical decision making process with healthcare outcomes.

Douglas A. Collett is vice president, Life/Health Ratings, at A.M. Best Company.