After 20 years, HMOs are still challenged to deliver quality - health maintenance organizations - includes related articles

Business & Health, Jan, 1993 by Kenneth M. Coughlin

This year marks the 20th anniversary of the Health Maintenance Organization Act of 1973. The act was created in an effort to contain health care costs, which even in the 1960s and 1970s were rising sharply. In 1969 the total U.S. health expenditure was $65.7 billion. It was $92.4 billion in 1972.

As a private-sector initiative that promised to control health care costs, the HMO Act was strongly supported by the Nixon administration. The act encouraged the formation of group medical practices, called HMOs, that would provide comprehensive health care services for a prepaid annual fee.

Today, 550 HMOs serve 38.6 million members, according to the Group Health Association of America, an HMO industry trade group in Washington. Among employers, 60% offer an HMO, up from 54% in 1986, according to A. Foster Higgins & Co. Inc., benefits consultants in New York.

Since HMOs were introduced, employers, benefits consultants, health insurers, and others have debated whether HMOs have fulfilled their mission to contain health care costs without sacrificing quality. Some of these debates have focused on whether HMOs have transformed health care delivery and provided a blueprint for the coming federal and state health care reform. Although there is little doubt that HMOs play a major role in this country's medical-delivery system, many in the health care industry argue that HMOs have played a far more peripheral role than was suggested by their auspicious beginnings.

But to most health care experts, there is little question that HMOs have altered the face of health care in America. Few can match the perspective of Paul Ellwood, M.D., president of InterStudy, a health policy research organization in Excelsior, Minn.

Ellwood, often referred to as the "father of the HMO," was instrumental in persuading the Nixon administration to use HMOs as the mechanism for restructuring the medical marketplace. Reflecting on the past two decades, Ellwood says HMOs have transformed the American health care system. "Indemnity insurance is essentially dead," Ellwood declares, "and it was HMOs that did it."

But critics and proponents alike express surprise that HMOs themselves have not monopolized the health care market. "Twenty years after the legislation gave HMOs tremendous leverage and marketing advantage, we find these organizations have only a 23% market share, and that market share has been frozen solid since 1988," contends John Erb, a principal at Foster Higgins.

Employers are nonetheless encouraged by the latest efforts of HMOs to measure and manage the quality of care HMOs provide. One reason HMOs have increased their efforts to improve quality is that employers are using increasingly complex selection criteria to choose HMOs. Employers are seeking HMOs that offer value-- high quality health care at a modest price, employee benefit consultants say. In response, HMOs are making unprecedented efforts to furnish employers with data on utilization and quality of care, although HMOs' accomplishments in these areas still fall short of employers' expectations.

Two significant problems have haunted HMOs since the beginning, says Erb. First, consumers' interest in choosing their own physician has been greatly underestimated and unwilling to surrender that choice, many consumers prefer to remain with their doctors under traditional indemnity plans, he says. Second, HMOs, by and large, have not delivered promised cost savings, he says.

Through the 1970s and most of the 1980s, employers paid little attention to the type of HMOs they offered to their employees. And even today, many employers are only just beginning to use strict selection criteria, such as scrutinizing how HMOs live up to cost cutting and quality expectations, to choose among HMOs, Erb says.

Demonstrating value

Charles Slavin, director of policy and development for the Massachusetts Group Insurance Commission, which oversees the benefits for all 250,000 state employees, retirees, survivors, and dependents, says the value of HMOs has been underwhelming. "I don't think HMOs have worked all that well for us on the cost side because we have not saved anything," he says. In 1989, Slavin tracked 1,000 plan enrollees who switched from an indemnity plan to an HMO. "Enrollees who joined an HMO cost us $324 more," he says.

In an effort to promote HMO cost savings, the commission has, over the last six or seven years, worked with various benefits consultants to reduce the number of HMOs offered to employees and to negotiate the best possible rates with those HMOs it continues to offer. Several years ago, the commission was still offering employees a choice of 21 HMOs. Today only 14 HMOs are offered and the policy and development unit may ultimately recommend a further reduction in the number of HMOs.

In another effort to increase cost benefits, the commission is creating a self-insured PPO that will be offered to plan participants in July. The initiative, Slavin says, "is a middle step between our existing HMOs and our indemnity plan." The plan to launch a PPO was prompted in part by the passage recently of a state law that allows Blue Cross and Blue Shield and all other insurers in the state to aggressively negotiate the best deals they can make with hospitals. Observers argue that indemnity plan rates could rise considerably as hospitals try to recoup revenue lost from managed care deals by imposing higher prices for all other payers. "Setting up a PPO is a contingency plan to protect our enrollees from increased hospital cost shifting," says Slavin.