Many of the challenges facing the managed care industry have previously hit the property/casualty insurance industry.
Legislation and terrorism have added to
the managed care industry's weakened condition
By Phil Zinkewicz
Many of the challenges facing the managed care industry have previously hit the property/casualty insurance industry.
--Conning & Co. study
The managed care industry in the United States has been failing in health for some time. Now, two recent studies indicate that managed care companies, particularly HMOs, had better re-evaluate their operations if they hope to move off the "critical" list. Moreover, one reinsurance expert says the dire situation for managed care companies is being further exacerbated by a reinsurance market that is retrenching.
Weiss Ratings, Inc., recently conducted a compare-and-contrast study of all financial services industries in the United States, and HMOs fared dismally. For example:
* 1.9 % of Blue Cross and Blue Shield plans in the country were described as weak.
* 16% of banks and thrifts were rated in weakened condition.
* 25.9 % of life and health insurers were rated financially unstable.
* 18.4 % of all financial industries were categorized as being in a weakened financially condition.
But HMOs outdid them all. According to Weiss, the percentage of HMOs rated as in weakened condition is a whopping 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.
According to Weiss, the financial weaknesses in the HMO industry are currently concentrated among smaller HMOs (those with fewer than 100,000 enrollees). Weiss says 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 at a quicker pace. "In a recession, however, most HMOs--regardless of size--will encounter renewed cost pressures," explains Dr. Martin D. Weiss, chairman of the ratings organization.
Meanwhile, a recent study by the Connecticut-based Conning & Co., offers some insights as to what HMOs may have to do to change that scenario. The Conning report Managed Care 2001: Legal, Regulatory and Political Issues, puts the HMO picture 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 organizations out of the business or, more likely, into mergers with larger, better capitalized companies.
The Conning study says that, because policies that allow more "provider autonomy"--the preferred provider organizations (PPOs) model--are selling much better than traditional HMO policies, there is a de facto shift toward 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/casualty insurance industry, including rapidly rising loss costs and increasing expense levels. It's inevitable that some of the same effects are being experienced by managed 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."
HMO industry consolidation
Consolidation of the HMO industry, according to Conning, will be driven by three factors. The first is pressure on margins. While managed care organizations 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 division in the House and Senate efforts to pass a Patient's Rights bill, according to Conning. The third, says the consulting firm, is the cost of complying with HIPA and the Gramm-Leach-Bliley law.
"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 standardized data and transmission protocols will drive many insurers into the arms of larger, better capitalized 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."
Patient's Bill of Rights
One of the most controversial issues that will affect the managed care industry overall, and HMOs in particular, is the move toward constructing a Patient's Bill of Rights. The purpose of a Patient's 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 data for the purpose of selling the information. The regulations are complex and run about 1,500 pages. Right now, those regulations are in a holding pattern as are Senate and House versions of the Patient's 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.
Threat of terrorism
Both the Weiss and Conning studies were completed before the World Trade Center terrorist attacks, and those attacks have had a major impact on all insurance lines. Those attacks sent the reinsurance industry around the globe reeling and there has already been serious retrenchment among reinsurance companies on the property/casualty side, with rates rising and contract conditions restricted. Add to that the latest big-city anthrax scares, with Americans everywhere concerned about bioterrorism, and health care executives are beginning to worry about the fine print in their reinsurance contracts. Standard wording in reinsurance contracts states that incidents related to "acts of war, declared or undeclared" are not covered in reinsurance policies.
The reinsurance picture regarding managed care companies is becoming serious, according to Charles Crispin, president of Evergreen Re, a Stuart, Florida-based managed care consulting firm that provides reinsurance brokerage services, technical data analysis and reinsurance claims advocacy services to HMOs, health care provider groups and large employer groups. He has developed proprietary approaches to reinsurance decision-making programs, including the Evergreen Expected Net Cost and Theoretical Solvency Analysis, which he says give organizations the tools to approach reinsurance and contracting decisions from both a financial and operational perspective. Crispin also has developed Evergreen Re's annual managed care indicator study, a comprehensive research project that surveys provider involvement in managed care risk contracting.
"The first thing that must be done is to put the HMO situation into perspective," says Crispin. "The Weiss organization is a very fine rating agency, but they are viewed in the industry as being extremely conservative in their analyses. In my view, the HMO industry, in terms of profitability, is much stronger than it was two years ago. HMOs have instituted policies--higher pricing, more co-payments, etc.--that have turned the industry around. Also, the National Association of Insurance Commissioners (NAIC) has, in the last couple of years, applied its risk-based capital formula to HMOs, which reduces the risk of insolvency."
However, Crispin points out that the recent anthrax scares and the threat of other forms of bioterrorism have caused reinsurance companies to rethink their approaches to HMOs. "They're looking carefully at contract wordings, for example. On the issue of claiming responsibility, we have had instances of people sending threatening letters to Planned Parenthood organizations across the country. But those instances are clearly the acts of sick individuals," he says. "Bioterrorism is another matter because some reinsurance contracts exclude events resulting from acts of war or acts of terrorism. HMOs could find themselves in a serious situation if reinsurers decide not to pay claims even though no one is claiming responsibility. The disputes will very likely end up in the courts."
Crispin says that HMOs and their reinsurers are not really concerned about catastrophic claims, resulting from bioterrorism. Rather, he says, the bioterrorism scare could lead to increased utilization of HMOs overall. "Let's just consider the anthrax situation," he suggests. "It has been well publicized that anthrax brings on flu-like symptoms. We are now well into the normal flu season. In the past, when people developed the flu, very often they just rode the illness out. But now, people who exhibit flu symptoms will be running to their HMOs and to hospital emergency rooms to make sure they haven't contacted anthrax. That drastically increased utilization could become very costly to HMOs."
Crispin says that the workers compensation industry could also be affected by the threat of bioterrorism, and reinsurers are looking at that possibility as well. "If a person contracts anthrax on the job, as in the situation with post offices, would that be a workers comp claim? There's likely to be a good deal of costly adjudication on that issue.
"As for the effects of potential or perceived bioterrorism on the reinsurance marketplace for HMOs," continues Crispin, "the primary effect will be on pricing. We are likely to see reinsurance rate hikes of as much as 50% or even more. The small or highly-leveraged HMO could fail as a result. Perhaps we will see the need for the creation of new insurance products specifically related to anthrax or other forms of bioterrorism."
Increased utilization
But Crispin emphasizes that the real problem for HMOs is the threat of increased utilization. "Immediately after the September 11 attack, there were wholesale cancellations of elective surgery and specialized exams. Those cancellations improved the profit picture for HMOs because utilization was down. But with the expected increased utilization of HMOs, the profitability picture could change dramatically and that will affect reinsurance. Also, there will be a demand for more and different types of drugs such as Cipro, for example," he explains.
Crispin says that for HMOs to survive in the current uncertain environment, they will have to have a broad reach into reinsurance markets and carefully construct their reinsurance arrangements. "In any business environment, particularly now with the unexpected pressures on financial and reinsurance markets related to the September 11 incidents and corresponding concerns related to bioterrorism threats, optimizing the use of capital and maximizing predictability of financial results are among the most important goals for any health plan executive." *