HMO FILES FOR BANKRUPTCY IN CALIFORNIA, trumpets the headline of the business section of the October 5, 2001 edition of the Las Vegas Review-Journal. Tower Health, a California-based health maintenance organization that provided coverage to more than 6,000 people in Southern Nevada, suddenly ceased operations and filed for bankruptcy in early October with little notice to Nevada policyholders.
Is this just another indication that the healthcare system in Nevada – and nationwide, for that matter – is in serious need of a transfusion of new plans and ideas to help keep the cost of healthcare down? After all, managed care organizations were developed to prevent healthcare costs from spiraling out of control – and healthcare costs have continued to spiral out of control, so much so that now even the HMOs are going bankrupt. Clearly the managed healthcare system, including health maintenance organizations and preferred provider organizations, has failed.
Or has it?
“Managed care organizations such as PPOs and HMOs arose as one solution to rising healthcare costs, but it is unrealistic to think that one solution is the answer,” said Mary Hoover, chief operating officer at Universal Health Network (a PPO) in Sparks, Nevada. “Managed care organizations contract for discounted medical services which are market-driven. HMOs take it a step further and control access to specialized medical care. PPOs and HMOs are limited in controlling all the issues.”
“The short answer to why health care costs are going up now is because the cost of care is going up,” says Don Stengele, director of corporate communications at Anthem Blue Cross/Blue Shield. “As our population ages, it will consume more healthcare resources. And the more resources that are consumed, the higher the costs are to our society.”
Peter O’Neill, vice-president for public and investor relations with Las Vegas-based Sierra Health Services, agrees. “Managed care is, in fact, still doing what it set out to do at the outset,” he said. “Costs are rising in our healthcare system as we have it now, but if it were not for the prevalence of managed care, the costs would be skyrocketing even further.”
These sentiments are echoed by Troy Smith, vice-president of insurance services at Hometown Health of Reno. “Managed care experienced a dramatic increase in enrollment from 1988 through the 1990 time period,” he said. “At the time healthcare costs were averaging about an 18 percent increase each year. Through the 1990’s, however, healthcare cost [increases] were primarily below the 3 percent range. So for the last decade there has been a dramatic ability by managed care to be able to control costs.” But he adds, “Most recently that impact has been greatly diminished and we’ve seen costs increase dramatically.”
Smith, O’Neill and Hoover all agree that if the managed healthcare system had not been developed, the cost of healthcare today would be completely prohibitive for the average consumer. Guy Perkins, the chief insurance examiner for the life and health section of the Nevada Division of Insurance, explains: “What managed care is about, of course, is contracting with providers and suppliers of equipment and medication at a discounted rate,” he said. “As time has gone on, the discounts have changed considerably. The price of everything, including medical malpractice insurance for doctors, has gone way up, so that at this point premium costs for HMOs and PPOs have gotten very close to each other. [However], the difference in cost between [managed care] and the old-style standard major medical coverage still shows quite a wide spread.”
Why have the costs of healthcare continued to climb even under the managed healthcare system? Many different factors have led to today’s high prices, but the finger of blame is often first pointed in the direction of prescription drugs.
“The increase in costs associated with prescription drugs continues to be a large component of healthcare cost increases, particularly as new drugs come on the market,” said O’Neill. “Prescription drug costs are continuing to go up on the average of about 15 percent to 20 percent per year.” O’Neill feels one of the most problematic reasons for these cost increases is the expense of direct-to-consumer advertising. “You can’t turn on the television without seeing any number of advertisements for prescription pharmaceuticals,” he said. “Claritin, Allegra, those types of drugs that are, in fact, very, very expensive. We don’t believe that those drugs, as manufactured and distributed, are that expensive. However, the costs for advertising are astronomical. Those costs are passed on to the managed care companies and to the consumers. We, in turn, have to pass them on to our insurers.”
Hoover also points to the high cost of prescription drugs, but she said a number of other factors are also responsible for the increase in healthcare costs, including HIPPA – The Health Insurance Portability and Accountability Act of 1996, which requires providers, health plans and clearinghouses to comply with new federal standards.
“Can you think of any other industry that expects a professional to provide services to somebody whether they can pay or not?” Hoover asked. “You show up at an emergency room. You’re dying. It doesn’t matter if you pay or not, they take care of you. …There’s a lot expected and that, I think, is why we have the discounting situation we have. Some people pay, other people don’t; but bottom line is, [hospitals and doctors] are all businesses which have to be able to be financially viable in order to provide a service.”
The continued rise of healthcare costs and the recent bankruptcy of Tower Health might lead one to believe that the managed healthcare industry in Nevada may be on the brink of collapse. Perkins says this is not the case, although the managed care industry has taken a series of hits over the past few years. “There have been failures, [such as] Tower. …There’s no doubt that the profit margins that HMOs and PPOs were enjoying five or six years ago have gone. And that’s because…the expenses were so far ahead of the ability of the [managed care companies] to keep up. Their expenses are well beyond their expectations and it does cut into their profits – there’s no doubt about it.”
Stengele says Anthem Blue Cross/Blue Shield will soon take a different approach to keep his company viable and to keep premiums down for consumers. “In Nevada, starting January 1, we will be introducing a new line of products that are more oriented toward catastrophic coverage than what is traditionally called first-dollar coverage,” he said. “[This] should help keep premiums affordable for many people. Instead of having to pay several hundred dollars a month for benefits we hardly ever use, we can pay less per month, but the umbrella protection is there in case we do get really sick.”
Smith is also confident in the future of managed care as a whole. “I believe managed care will continue to head into more of a consumerism approach,” he said, meaning that for some key employer groups the managed care companies will focus on the needs, choices, and requests of the consumer. However: “I think some of the other employer groups are going to probably come back to request a very strong, traditional HMO-style benefit that has a limited number of providers and limited coverage, but allows them to offer some health benefits to their employees.”
As for the financial future of Hometown Health, Smith said: “Like most of the other health plans across the U.S., in the past we have had our financial struggles and we have been able to recently dramatically improve our financial stability. I think that we will continue to increase enrollment, improve our financial viability, and develop products that meet the needs of our customers. We’re looking forward to a more prosperous future.”
Hoover says she does not expect United Health Services to go the way of Tower any time soon. “UHN has continued to experience a 10 percent growth over the last five years,” she said. “The growth in membership is largely due to employers offering a PPO choice and moving away from the more controlled HMO products. A few years ago we saw HMOs undercutting rates to obtain market share. As they experienced significant losses and implemented increases, the employers were once again shopping for the best prices.”
She went on, “Based on what I know today, I would expect that [United Health Services] would continue along. We are a very stable company; we’ve been here for 10 years with a slow but consistent growth. I would estimate we would continue to do that. Unless there is a major change in regulations for the industry, I don’t see that going away.”
Stengele was a bit more reserved. “The Nevada operations are still enjoying comfortable operating conditions,” he said. “A lot of people don’t realize most health plans operate on only a 2 to 3 percent margin. In Nevada…we’ve been able to reduce our operating costs, and essentially through that reduction actually have a fair financial performance.”
“I think for the most part managed care organizations are holding their own, and are being somewhat successful,” Perkins added. “[but] not nearly as successful as they were. …That is the bottom line for these organizations. They have to control costs in order to offer an incentive for a small employer to buy the product. Right now we’re back into a situation where the healthcare costs are driving up premiums well into the double-digit area, which we haven’t seen since the early ‘90s and the late ‘80s.”
In order to weather the current economic downtrend and continue to be successful, managed care companies in Nevada are going to have to adjust as quickly as they can, Perkins said. “The smaller managed care organizations are certainly going to have a tougher time than the bigger guys with deeper pockets. They’re going to have to continue to adjust their products to fit the realities of the marketplace, which includes the negotiations they are able to carry out with providers. Their contracts are going to become more restrictive.”
Still, the managed care industry as a whole is likely to be a permanent fixture in the Nevada healthcare marketplace. “For us, this is a great state to do business in,” O’Neill said. “There’s such a need for healthcare services that it’s kind of nice to be…operating in the market on the cutting edge of growth and development. We think it’s a good place to be and it’s the right time to be here.”
SIERRA HEALTH SERVICES
On October 24, 2001, Sierra Health Services announced income for the third quarter of 2001 totaling $4 million, or 15 cents per share, topping the expectations of analysts who thought earnings would be posted at 12 cents per share. By comparison, Sierra’s third quarter earnings for the year 2000 stood at $2.7 million, or 10 cents per diluted share.
The increase is hardly accidental, according to Peter O’Neill, vice-president for public and investor relations with Sierra Health Services. “About 12 months ago, the company embarked on a major cost-cutting initiative, a major debt-reduction initiative, and a major initiative to raise the amount of available cash on hand,” he said. “We have reduced our debt by over 50 percent in one year. We have increased the amount of available cash on hand by a similar number. Our revenues are up. All the signs for the rest of the company are very, very positive, in particular here in the Las Vegas market. We have seen our commercial sales growth increase by 15 percent to 20 percent just over the last quarter.”
Part of the improvement in Sierra’s financial condition is due to the termination of services in the Texas market. “The company has historically been very profitable in the Nevada market,” O’Neill stated, “[but] when we tried to duplicate the model that we have in Nevada to the Texas market, we found pretty quickly that…we did not have the market share in Dallas to be able to leverage our contractual relationships with doctors and hospitals. The cost to provide healthcare in Dallas was astronomical.” Sierra Health Services announced at the end of September that it would cease operations in Texas and be fully out of that market by April of 2002.
Additionally, O’Neill said some companies that had tried alternatives to managed healthcare are beginning to return. “Our largest competitors here in the Las Vegas market are not other HMOs or other managed care companies,” he said. “Our largest competitors here are what we call the ‘Self-Funded Plans.’” Rather than contracting with an HMO or health insurer, some large companies have chosen to collect healthcare funds from their employees and assume healthcare risks, paying employee’s medical bills from the pool of collected funds.
“There are no medical cost controls built into that,” O’Neill pointed out. “They basically pay what the doctor or hospital charges. There is no ability …to really be able to manage those medical costs.” As those costs have steadily climbed, many companies that have opted for self-funded healthcare are finding their pool of funds is running dry, and they are turning to Sierra Health Services or one of its subsidiaries for help.
“We have always been very successful in Nevada,” O’Neill said. “All of our product lines we offer in Nevada… actually provide us with over 50 percent of the market share. That’s a pretty astonishing figure.”
