David Whelan

The White House continues to demonize the insurance industry for big rate increases as it pushes for health reform. It called the CEOs of five big HMOs on the carpet today in a White House meeting with Health Secretary Kathleen Sebelius. Afterwards, two of the participants–UnitedHealth chief Stephen Hemsley and WellPoint honcho Angela Braly–held a conference call organized by the industry lobby America’s Health Insurance Plans.

Their astonishing message: it’s not our fault and we can’t do anything about it.

They contend that the premium increases–as high as 39% in California for some WellPoint plans–are simply a reflection of underlying cost trends. “We’re often the bearer of bad news in rate increases,” said Braly. “The true cost drivers are hospitals, physicians and prescription drugs.” Hemsley said that he tried to get Secretary Sebelius to understand, “the level of profitability, the level of margins and actually how modest they are.” He pegged his company’s profit margin at 2.2% last year. Aetna, Cigna and HCSC also were at the White House meeting.

Let’s parse this message a bit.

The HMOs are saying: don’t blame us, blame the patients who go to the doctor, and the doctors and hospitals who bill us more every year. But this is an abdication of responsibility. The whole point of the managed care revolution in the 1980s and 1990s was to improve the quality of care, while containing excessive spending. In George Anders’ excellent 1996 book on HMOs, Health Against Wealth, he devotes a chapter to the industrial company Allied Signal. Allied moved its 50,000 employees to a Cigna HMO plan in 1988 after experiencing a 39% jump in medical costs the year before. The aggressive Cigna plan slowed spending growth to 6% the next year and kept it flat for several years afterward.

So what are HMOs doing now if they’re no longer tamping down costs? It’s a good question. The backlash against micromanaging patients’ health in the mid-1990s led companies to shift from closed HMOs to looser PPOs with higher reimbursements and broader networks. Since then, cost containment has come to focus on prevention programs, rather than denial of care. But it is not working: this year premiums for existing HMO customers are jumping by a median of 10% to 12% nationwide, with much bigger hikes in some cases.

UnitedHealth’s Hemsley is correct that insurance is a low-margin business. But the more relevant figure is just how much goes down the drain in administrative costs. Last quarter UnitedHealth, which runs a tight ship, took in $26 billion in premiums and paid out 86 cents of each dollar to doctors, hospitals, pharmacies, etc. The 14 cents of every dollar left over is split up. But most goes to administrative expenses–like processing claims and paying salaries. The rest goes to taxes and then the 2 cents left over is profit. So while the profits are small as a portion of the total spent on health care, the total middleman share is large.

If HMOs can’t contain costs, as Hemsley and Braly claim, what value do they add? Increasingly, the big HMOs are less focused on clinical health care and operate more like financial companies that manage contracts among customers and networks of doctors and hospitals. This is undoubtedly worth something–but 14 cents on the health care dollar? It is not like most ordinary people have a big choice of plans, since the structure of these plans is institutionalized by tradition, employee expectations and state regulations. If HMOs are not able to do anything to hold down out-of-control health spending, then the industry has lost a lot of the ambition and usefulness it once had–something that reformers no doubt recognize.

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This entry was posted by Adam V. Russo on Friday, March 5th, 2010 at 4:36 pm and is filed under Health Care Legislation. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.