HEALTH CARE
     

Yet most HMOs posted small profits or even showed losses in 1997 (see Page 64). It has been a good ride for Virginia businesses for several years. In 1997, premiums inched up only 2 percent. In 1996, they actually dropped a fraction. "We had a period of three years during which rates were stable," says Mark Pratt, executive director of the Virginia Association of Health Plans. Even that doesn't seem to be enough. As Catherine Hammond, vice president of the Virginia Hospital and Healthcare Association says: "Everyone wanted cost containment, and last year the Health Care Financing Administration reported we had the lowest increase in health care spending in 37 years. Here we've achieved cost containment, and no one is celebrating. Instead, they're expressing dissatisfaction about the benefits."

It's a bit late to pop the cork on cost containment. By most accounts, premiums are expected to rise this year. "In the last several years the entire industry has seen a lot of artificial pricing for competitive reasons," says Steven G. Sowers, who directs the benefits division of Glen Allen-based Hilb Rogal and Hamilton Co. To enroll more members, these new-to-the-neighborhood HMOs offered employers a very affordable package. Prices have also stayed low because HMOs pushed providers to streamline and focus on efficiency. Every provider in the chain has cut out some of the fat.

But once the fat is gone, it's gone forever. And employers and other purchasers have to pay for what's left. Analysts are predicting premium increases of about 7 percent to 9 percent this year, notes Pratt.

That makes data on profit margins for HMOs useful to consumers, HMOs and analysts. If an HMO appears to have a good measure of profitability, it is less likely to have rate increases over and above what is normal," Sowers says. He's telling his clients to be prepared for rate hikes.

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Trigon-affiliated HMOs didn't have a great year in 1997, but they fared better in 1998. The company consolidated its six HMOs into three. All were profitable, which led to a consolidated HMO profit margin of 2.7 percent. That's quite a turnaround, considering that in 1997 its Priority Healthcare Inc. reported losses of 3 percent, and Physician's Health Plan -- which was acquired by HealthKeepers Inc. last November -- reported losses of nearly 8 percent. Even HealthKeepers barely climbed into the black, with a profit margin of 0.72 percent.

"We worked hard to make some improvements in our operations. We focused hard on the basics -- how we contract with physicians and working with physicians to ensure appropriate care is being delivered in the right place at the right time," says Ellen C. Harrison, who is president of HealthKeepers and is responsible for all of Trigon's HMOs.

Trigon's HMOs also developed a disease-management program to target high-cost medical conditions and assigned case managers to ensure that care is delivered to those patients. Premiums rose 6 percent to 8 percent, and the company predicts about the same for this year. Consolidating the HMOs achieved some administrative and legal efficiencies of scale. Two of the company's three HMOs operate in a partnership with a regional hospital, and the third provides benefits statewide.

Trigon is seeing customers migrate away from indemnity products toward managed-care plans. Cost is part of the reason, but Harrison says the company has heard the message from employers: "Don't lowball. They want price stability." And they want a stable HMO. They don't want to have to jump to a different plan and disrupt employees' relationships with their physicians.

Cigna Healthcare of Virginia posted a profit margin of 8.11 percent for 1997, and Bowman said third-quarter numbers for 1998 reflect a 6 percent profit margin on revenues of $105 million. The company also grew its Medicare HMO product. "On a revenue per member, the number is big but the margins are less," Greg Bowman, president and general manager of Cigna Healthcare of Virginia, explains.

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Despite less-than-stellar profit margins for most managed-care companies, new HMOs continue to join in the competition. Carilion Health Plans in Roanoke actually started in 1993 as a physician-hospital organization, a PHO, leasing its network to other HMOs. Carilion obtained its commercial HMO license in 1996 and last year decided to pursue the commercial market. Carilion's first members enrolled in January.

The company entered the market to keep closer control of the purse strings. "We had been talking with our partner HMOs about sharing risk with them to help align the incentives of the physicians and hospitals. They had been reluctant to do that, so we needed to do it on our own," says Carolyn H. Chrisman, chief operating officer.

In a way, the new HMO is competing with other HMOs that continue to lease the PHO network. But Chrisman does not see it that way. "There is only 7 percent managed-care penetration here." She wants to maintain existing relationships and enroll new HMO customers.

In other words, she thinks the market is big enough. According to the Virginia Association of Health Plans, more than 1.66 million Virginians were enrolled in an HMO in 1997. HMO enrollment statewide has been steadily increasing and in 1997 reached 25 percent of the population, a figure close to the national average.

It's neither cheap nor easy to start a new HMO. If it hadn't been for the nearly $4 million in revenues from provider contracts, Carilion Health Plans would have ended 1997 with an even greater loss than the 23.1 percent it posted.

Carilion is marketing itself as a regional player. It is owned equally by physicians and hospitals, providing the HMO "more physician input into the day-to-day decision making.

"The plans that have the best opportunities are those that can make decisions over the way care is provided and how to improve the health of the community they're in." Chrisman says. "It's a little scary going into this, but there is tremendous potential."

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The idea is that HMOs can avert more serious -- and more expensive -- illnesses by promoting preventive care. Managed care will result in managed costs. HMOs get plenty of criticism, but their ideas have spread. Hospitals and community health organizations have taken on many managed-care features.

When those efforts are seen as financially motivated, however, the result can be backlash. Case in point: the "drive-through deliveries" fallout. Legislators stepped in to mandate coverage.

HMOs have responded to the criticisms. Some have eliminated the gatekeeper concept, which requires specialist referrals to come through the patient's primary-care provider. Changes like that could result in "another efficiency spree," says Bill Cimino, communications director of the Medical Society of Virginia, a physicians group. "A variety of reforms could lead to some more administrative efficiencies. If some of the precertification requirements were lessened or if a patient doesn't have to go back to the primary-care provider to get a referral, that would result in one less office visit charged."

HMO profitability, or lack thereof, clearly affects physicians, says Cimino. He's seen cases where physicians have to take out lines of credit to meet payroll while waiting for insurance reimbursements. That's not the patient's problem, but if it happens often enough, a physician will be less willing to renew a contract with that HMO, leaving patients with less choice.

The HMO Profit Picture

¹ In millions rounded to nearest $100,000
Source: State Corporation Commission Bureau of Insurance
(1997 figures; 1998 figures to be released in June)

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© May 1999, Media General Business Communications, Inc.
publisher of Virginia Business Magazine