"We're now 120 days into this corrective plan," says William E. Carter, acting CEO of QualChoice. "We do see some financial improvements, [although] we'll continue to see a loss into the fourth quarter of 1998. ... But we are reducing the losses." QualChoice officials can attest to the enormous financial pressures driving hospitals, health maintenance organizations and insurance companies in the era of managed care. Earlier this decade medical costs were soaring, and employers demanded change. During the first Clinton administration, under the guillotine of government- mandated health care reform, hospitals began to respond. They cut costs through consolidation, automation and efficiency drives. Consolidation would also give them negotiating strength when the HMOs came to town. Hospital lengths-of-stay were shortened, and many services and treatments were moved from hospitals to doctors' offices or outpatient clinics. Whether they were owned by public companies with shareholder accountability or operated as community nonprofits, hospitals -- for the first time -- got serious about cutting fat. Many were quick to complain about pressure from insurers, but hospital profits have blossomed in the managed- care climate. Margins nationally are the highest they've been in 16 years. In Virginia, despite the April 1 closure of Wise Appalachian Regional Hospital and the bankruptcy filings of two others -- Newport News General and Norfolk Community -- most of the commonwealth's acute-care facilities are sharing in the spoils. While consolidation, greater efficiency and tough bargaining have helped Old Dominion hospitals thrive, the companies that provide coverage to more than 1.6 million people through the state's 30 health maintenance organizations are struggling to break even. Intense competition and pressure to keep premiums low have hurt the bottom lines of many Virginia HMOs. Monthly per-member premium revenues were down slightly, from $126.82 per member per month in 1995 to $125.41 a year later, according to the Virginia Association of HMOs. More significantly, the crucial measure of how HMOs are performing crept up: Medical-loss ratios -- what managed-care companies pay in claims as a percentage of their revenues -- rose from 86.2 percent in 1995 to 90.4 percent in 1996. And the 30 HMOs in Virginia fell from average earnings of 1.2 percent in 1995 to a loss of 2 percent in 1996, the latest year for which statistics are available. "I think it's generally true to say that, for HMOs in Virginia, some are losing money, some are earning a modest amount, but no one seems to be doing too terribly well," says Christopher S. Bailey, senior vice president of the Virginia Hospital & Healthcare Association. The key to understanding the dynamics of health care profits can be summed up in one word: competition. * * * In some aspects, HMOs are the picture of health. In the past eight years, managed-care controls have helped slash utilization rates of Virginia hospital beds by more than a third. Patient enrollment in Virginia's managed-care plans has boomed, soaring from about 200,000 in 1990 to more than 1.6 million in 1997, primarily in the urban markets of Richmond, Hampton Roads and Northern Virginia. HMO market penetration continues to increase steadily -- from 16.5 percent in 1995 to 25 percent last year. And Virginia HMOs have certainly succeeded in their drive for efficiency: HMO members stayed fewer days in the hospital in 1996 -- 244 hospital days per 1,000 patients, compared with 1995, when HMO members stayed 266 hospital days per 1,000 patients, according to the latest statistics from the Virginia Association of HMOs. Yet managed care has not gained the foothold in the commonwealth that it has in other parts of the country. Some chalk it up to a health care system that is largely hospital-driven. Others argue that Virginia's HMO market has not yet matured. In the Richmond area, "There are too many plans relative to their size, and you haven't seen the kind of consolidation that you'd expect," says Robert E. Hurley, a professor in the Medical College of Virginia's Department of Health Administration. "That's made it difficult for price discounting to get bigger," says Hurley, a nationally recognized expert on managed care. HMO profits across the country have been on a steep decline since 1994, and Virginia plans are no exception. Filings with the State Corporation Commission's Bureau of Insurance show many HMOs in Virginia reporting losses for at least that long. Even Trigon BlueCross BlueShield, Virginia's largest health insurer, has felt the pinch. "Last year we had some financial adjustments for one of our plans," says Ellen Harrison, president of HealthKeepers, Trigon's largest HMO in central Virginia. "We have gotten off to a better start this year. There's a better feel for medical cost trends." "The question of [market] maturity is one we're going to look at more closely, and we've aligned incentives with the providers we're working with," Harrison says. "But as competition grows, the difference in products will continue to vary dramatically." They're trying to build market share, says Mark C. Pratt, policy director for the Virginia Association of HMOs. "It's competitive out there. ... If a competing plan is going to sell it for a little less, you've got to try to do what you can to sell the product, too." * * * When first faced with the prospect of negotiating with HMOs, hospitals panicked, according to Hurley, but they've since become savvy. Now hospital consolidation -- from surgery to lab work to physician practices -- has meant more bargaining power. "Being able to flex those muscles ... has stymied the easy pickings [HMO] plans had for a while," Hurley says. Overall, Virginia hospitals had a profit margin of 8.9 percent in 1996, the most recent year for which statistics are available, while the commonwealth's HMOs showed a loss of 2.1 percent. Even hospitals outside major cities posted healthy earnings. Although Wise Appalachian Regional Hospital closed its doors, others, such as Russell County Medical Center, had margins that matched or went beyond urban counterparts. (See chart.) Margins do vary widely among hospitals, with Columbia facilities leading the way. Typically hospitals with better margins operate closer to their licensed-bed capacity. "We have always seen variability [in hospital margins] across the commonwealth, it really defies prediction," says Katharine M. Webb, senior vice president of the Virginia Hospital & Healthcare Association. It was the threat of managed care and federal action, though, that got hospitals moving. "The anticipation of change ... made profit margins even healthier," Webb says. "It forced hospitals to become better business people. ... The proposed Clinton plan scared people into getting themselves in a position to deal with a new world." The Clinton plan didn't happen; the new world did. While he wouldn't discuss his hospital's profits, John Mitchell, a spokesman for the Richmond-based Columbia hospitals, says the good showing of his facilities may relate to the consolidation of ancillary services. "We now operate as a system rather than individual hospitals, and we are always looking for ways to [cut] costs." Sentara is unusual in that it operates both health care facilities and its own HMO, which has 58 percent of Hampton Roads' managed-care market share. Leaders there agree that consolidation and diversification are the tools for survival. "In the early '80s we started to diversify. We have been more than a hospital for a long time," says Deborah Myers, director of corporate communications for Sentara Health System. "We had a very visionary leader and a strong board of directors." Sentara continues to look for more growth opportunities. Most recently, Myers notes, it stepped in after the bankruptcy and closing of Newport News General Hospital. The Department of Housing and Urban Development put out a request for proposals, Myers says. The department was looking for somebody to move into the empty facility. "Sentara responded with a proposal to put a senior center and children's health center at the hospital," she says. "They did select us, and we are still in the middle of finalizing what we might be able to do." According to MCV's Hurley, hospitals have earned their prosperity: Premiums are flat, revenues are relatively flat, but costs are going down. "Frankly, the use of managed care as a scapegoat has made it easier in terms of service cutbacks," Hurley explains. "They have earned profits in the face of the financially constrained environment where employers want lower premiums, so they can't complain about that, and it's the HMOs that are causing the squeeze." * * * The squeeze is definitely on as hospitals and managed-care plans go head-to-head in the battle for profits -- just ask Trigon. When the company examines health care charges, determines they're too high, and threatens to drop a hospital from its network, things can get heated. In late 1996 Trigon warned top brass at the Danville Regional Health System that they would be dropped from the network unless they brought charges in line with expectations. According to the medical center's chief executive, Larry DePriest, it wasn't that the health system wasn't willing to negotiate. It just challenged the numbers Trigon was using. "We disputed their allegations and referred to [Virginia Health Information] data collected and published by the state," says DePriest. "We pointed out that we compared favorably with hospitals of similar size, and we challenged Trigon to present the source of their data. It was proprietary and they wouldn't divulge it to us." Trigon wouldn't tell Virginia Business either, but spokeswoman Brooke Taylor did say that her company evaluates regional numbers and case-mix data. "It was a difficult negotiation," she says. "We always have to balance cost and access, and if the cost of access gets too high, we have to reconsider." Eventually, the two signed a two-year contract. Under the terms of the agreement, neither can discuss details. As Trigon's chief contract negotiator, Samuel R. Rhue probably wishes the James River would dry up. It's no secret that Columbia's strong position in the Richmond market leads managed-care organizations to call it the James Ocean. Rhue knows all too well the legendary phobia Richmonders have about seeking health care services on opposite sides of the river. It's a cultural quirk that, for a numbers man like Rhue, can translate into higher premiums. Customers want their neighborhood hospitals in their HMO's network regardless of costs. Rhue has watched over the years as large hospital chains have swallowed smaller operations, amassing bargaining power that forces insurance companies and HMO plans like Trigon's to take all or none of a health care system into a coverage network. When Rhue couldn't reach an agreement with three Columbia hospitals in western Virginia this past winter, he and other Trigon executives decided to drop the trio from its provider network of 11 hospitals. "We could not reach an agreement," Rhue says. "We just weren't willing to sign a contract at those prices, and so we said, 'You're not in the PPO network.'" Nothing personal -- just a pure business decision. Some angry Trigon customers didn't see it that way. Tempers flared when Trigon announced that those enrolled in the KeyCare PPO would no longer be covered at Lewis-Gale Medical Center, Montgomery Regional Hospital and Pulaski Community. Employers and legislators scanned contracts for a way out of the restriction, and Columbia's top leaders searched for answers. "It created a tremendous frenzy of activity," says Carol Chappell, Columbia's regional director for marketing and business development. "We decided on an exclusive contract with Carilion," Taylor says. Carilion is the region's other major hospital chain. "We were sensitive to the inconvenience it might cause, and we went to our groups in the PPO and offered opportunities for new enrollments if having access to Columbia was important to their employees." According to Chappell, the squeeze has caused several Roanoke-area employers to shop around. "At first the news was devastating," she says. "But in Southwest Virginia, Trigon's decision created a catalyst for change. Trigon was our only major carrier, and by excluding three prominent hospitals, they are going to lose business. It has opened the door for others who are aggressively marketing in the area." Roanoke County employees will be the first to jump ship beginning early this summer. The county dropped Trigon in favor of Aetna/U.S. Healthcare. Taylor says it isn't uncommon for employers to consider new plans at renewal time. "We hope businesses will stay with Trigon, but that doesn't always happen." "There's a lot of tension in the system, ... and some of that tension is necessary to keep the system in balance," Taylor says. "Everyone's been saying managed-care companies have been squeezing the providers. Have they? We have had some impact, but maybe it was an impact that was needed." * * * Expect insurers like Trigon, which became a public company in late 1996, to be increasingly cost-conscious as managed care matures and companies try to turn around the profit picture. "We want the hospitals to do well -- we need hospitals," Taylor says. "And I would think they would want us to do well. ... It's a lot better to be paid a check from Trigon every month than to get a few pigs and chickens. We all have an interest in working together with the consumers to make the system work." Still, there's a long way to go. In many areas there is an overcapacity of hospital beds, and health care costs are rising. Employers continue to pressure insurers to keep premiums stable, and there's likely another HMO in town seeking to gain market share if the premium and product aren't up to snuff. Consumers and providers want broader access. Lawmakers are pushing for guarantees of patient access to any doctor, network or plan on the books. Those mandates, industry leaders argue, drive up costs. Indeed, an estimated 25 percent of family health premiums go to cover the cost of mandated benefits. Even more reforms loom as Congress moves toward what federal lawmakers have called a massive managed-care overhaul and passage of a patient bill of rights. "Coverage has broadened quite significantly, but there's still intense competition in our industry, and so we're all working hard to keep and gain market share," Taylor says. "It's holding prices artificially low in some cases, and that's affecting margins." Last year, Trigon spent almost 85 cents of every premium dollar on medical costs. The remainder went toward administrative expenses. HMOs also say that drug costs are going to increase now that pharmaceutical companies can advertise prescription drugs. Advertising expenses were $167 million in 1997 and are expected to soar to more than $1 billion this year. In addition, hospitals' growing outpatient costs have led Trigon to impose a fee schedule for those services. At the same time, Trigon's administrative costs came down in 1997 from 13.4 percent to 12.4 percent, according to Taylor. In 1995, Trigon had an overall decrease in premiums, but medical costs went up. Trigon and other HMOs are likely to increase their premiums by at least 5 percent sometime this year. "At some point you have to cover your costs in your premiums or you can't stay in business," Taylor says. "But the competition was so intense that you couldn't afford to have a premium increase. It's a balancing act." After Danville's experience, DePriest wonders: "If [HMOs] make a better deal with us, does that accrue to employers or does the insurance company just make more profit?" With Trigon's profit margins now just over 1 percent, the money's not going there, Taylor says. "Customers see it reflected in their premiums," she says. "It doesn't mean the premiums will go down. ... What we are doing when we are negotiating is trying to manage the increase and keep it as low as possible."
|
|||||||
