HMO ownership pays off for systems that stick with it

HMOs and PPOs have been financial losers for many hospitals. In fact, problems controlling costs have driven many hospitals to sell or close HMOs and PPOs that they started to channel new business their way. But for those hospitals that invested the time and money needed to manage physician and ambulatory care networks, vertical integration of managed care is paying off.     

Hospital and health maintenance organization financial agreements for inpatient services: a case study of the Minneapolis/St. Paul area.

With nearly a quarter of the population enrolled in Health Maintenance Organizations (HMOs) the Mineapolis/St. Paul metropolitan area provides a unique opportunity for studies dealing with the effects of prepaid health plans on the health care marketplace. This study explores one aspect of that market; discounts obtained by HMOs for hospital inpatient service. Using information gathered from structured interviews with the 7 HMOs and 30 hospitals in the Twin Cities area, the study addressed three areas of inquiry: (1) the nature of discount contracts between hospitals and HMOs, (2) the roles played by each party in initiating the contracts, and (3) factors influencing the establishment of the contracts. While each of the HMOs was found to have at least one hospital contract under which they received inpatient services for other than full-billed charges, the amount of the discount was not substantial in the majority of cases. Other factors such as hospital location and ability to provide a full range of services appear to be as important as financial discounts when HMOs select a hospital for inpatient services. It appears that hospitals played the lead role in initiating hospital/HMO contracts during the formative HMO years, but this initiative shifted to the HMOs as they gained market shares and bargaining power. Hospitals and HMOs agree that the most important factor influencing hospital willingness to consider discount contracts was and still is the surplus bed availability in the area. This surplus of beds has been exacerbated by a continued decline in hospital utilization. These conditions coupled with increased HMO market shares has recently resulted in intensified contract negotiations and further discounts for inpatient services.     

Competition among hospitals for HMO business: effect of price and nonprice attributes

OBJECTIVE: To investigate patterns of competition among hospitals for the business of health maintenance organizations (HMOs). The study focused on the relative importance of hospital price and nonprice attributes in the competition for HMO business. DATA SOURCES/STUDY SETTING: The study capitalized on hospital cost reports from Florida that are unique in their inclusion of financial data regarding HMO business activity. The time frame was 1992 to 1997. STUDY DESIGN: The study was designed as an observational investigation of acute care hospitals. PRINCIPAL FINDINGS: Results indicated that a hospital's share of HMO business was related to both its price and nonprice attributes. However, the importance of both price and nonprice attributes diminished as the number of HMOs in a market increased. Hospitals that were market share leaders in terms of HMO business (i.e., 30 percent or more market share) were superior, on average, to their competitors on both price and nonprice attributes. CONCLUSIONS: Study results indicate that competition among hospitals for HMO business involves a complex set of price and nonprice attributes. The HMOs do not appear to focus on price alone. Hospitals likely to be the most attractive to HMOs are those that can differentiate themselves on the basis of nonprice attributes while being competitive on price as well.     

Systems begin pruning HMOs from holdings. HMO/PPO survey data indicate more health plans may go on selling block

The conflicting pressures of owning provider networks and an HMO are pushing some multihospital systems into selling off their HMOs to focus on care delivery, data from Modern Healthcare's 1996 survey of HMOs and PPOs reveals.     

The best care pays off, not cheapest

The plan is simple for this managed care insurer: you put quality of care first, no matter what, and it pays off. That system flies in the face of the usual press HMOs receive. The charges are heard over and over again: HMOs drive the hardest negotiations to find the least expensive providers. Consumers and others have the notion that managed care means reduced choice and financial hardships for hospitals and physicians under contract with them. At least one major insurer has a different story to tell.     

United Health Care of North Carolina

Physicians. While many of the rural physicians interviewed in North Carolina would prefer not to deal with HMOs at all, they are generally positive about their relationships with United Healthcare of North Carolina. These physicians chose to contract with the HMO to obtain new patients and to retain existing patients. They are satisfied that their participation has accomplished these goals. Their reimbursement arrangements are easy to understand, and most view the payment amounts as satisfactory. The physicians regard the size of the HMOs provider network and the open-access structure of the HMO as positive features that allow them to make referrals without the restrictions imposed by some other HMOs. To date, participation in United Healthcare of North Carolina has imposed few burdens on rural physicians. They are reimbursed on a fee-for-service basis, and their financial risk has been limited. They do not perceive that the HMO has had a significant impact on the way they practice medicine. This situation may change in the future if enrollees from United Healthcare of North Carolina and other HMOs constitute a greater proportion of their practices and if these HMOs move toward capitated reimbursement. The attitudes of rural physicians toward United Healthcare of North Carolina also may change if the HMO attempts to more actively manage the care provided to its enrollees. United Healthcare of North Carolina plans to eliminate physician risk sharing (in the form of withholds) and replace it with bonus payments. As one HMO executive said, the plan wants to “put incentives where they belong.” If rewarding good performance instead of punishing poor performance yields intended consequences, it may provide United Healthcare of North Carolina with a competitive advantage in rural areas. First, because such a change offers an opportunity to augment a physician's income instead of diminishing it, physicians might prefer to contract with the HMO rather than with other HMOs. Second, because bonus payments depend on performance, United Healthcare of North Carolina providers may produce outcomes that allow reductions in premium prices or expansions of benefits compared with the HMOs competitors. Hospitals. Rural hospitals cited similar motivations (attracting and retaining business) for participating in United Healthcare of North Carolina and similar levels of satisfaction with their relationships. In their experiences, the HMO has been fair in its negotiations and reimbursement. Although they contract with multiple HMOs, these rural hospitals do not perceive that HMO participation has had a significant impact on hospital operations. Because these hospitals, like many rural hospitals, rely heavily on Medicare (and, to a lesser degree, on Medicaid) as revenue sources, the future impact of managed care on their operations will depend in large part on the extent to which significant proportions of their Medicare and Medicaid patients enroll in HMOs.     

2001 benchmarking guide

Our fifth annual guide to benchmarking under managed care presents data that is a study in market dynamics and adaptation. New this year are financial indicators on HMOs exiting the market and those remaining. Hospital financial ratios and details on department performance are included. The physician group practice numbers show why physicians are scrutinizing capitated payments. Overall, hospitals in markets with high managed care penetration are more successful in managing labor costs and show productivity gains in imaging services, physical therapy and materials management.     

Solving the Medicare equation. Are margins the most effective way to measure a hospital's fiscal health?

Citing soaring hospital profit margins, lawmakers froze Medicare hospital reimbursements for this fiscal year, the first such freeze in history. Critics counter that profit margins don't paint a fair picture of hospitals' financial condition. They complain that recent rosy forecasts by congressional Medicare advisory commissions mask the fact that many hospitals lie on the brink of financial ruin.     

Contracts between hospitals and health maintenance organizations

This article describes the contractual relations that are emerging between health maintenance organizations (HMOs) and hospitals. Six HMOs in four large metropolitan areas provided information on 102 hospital contracts. The authors found that the HMOs are becoming more aggressive in placing hospitals in competition with each other for HMO patients. Staff and network HMOs are able to obtain a higher concentration of patients and substantially larger discounts for inpatient services than are individual practice association (IPA) plans in this study.     

Factors related to the provision of hospital discounts for HMO inpatients.

Using 1986 AHA hospital survey data, we analyzed hospital-HMO contract provisions, hospital operating characteristics, and market conditions for a national sample of 801 hospitals with HMO contracts to determine the factors related to provision of a discount and the magnitude of the discount if present. Seventy-eight percent of the hospitals reported that at least one of their HMO contracts provided a discount for inpatient services. Risk-sharing provisions, the number of hospitals within a five-mile radius, the proportion of the population enrolled in HMOs, and the number of HMOs operating in the metropolitan statistical area (MSA) were directly related to provision of discounts. Public hospitals were less likely than other facilities to provide discounts. For the magnitude of the discounts, risk-sharing provisions and the number of hospitals within a five-mile radius were again related, as was the number of HMOs operating in the MSA--but this time the number-of-HMOs variable had an inverse relationship. The results suggest that increased HMO market activity does result in price competition for hospital services but that hospital discounting strategies are extremely complex and may not follow conventional market theories. Hospitals appear to be using contracts both to stabilize their relationships with HMOs and increase market share, and they are increasingly giving discounts to achieve those ends.     

A hospital administrator's guide to successful HMO negotiations

Many issues must be considered when hospitals negotiate with HMOs. Hospital administrators can improve negotiations with HMOs by understanding the philosophy and terminology of alternative delivery programs, as well as their hospital's own operating requirements.     

Implications of HMOs for Rural Providers and Consumers

The impact of the six HMOs studied on rural providers has, to this point, been relatively small. To expand their provider networks in rural areas, the HMOs have been responsive to provider concerns, implementing payment arrangements and utilization management approaches that are acceptable to most rural providers. However, at some sites, changes in HMO and provider relations appear to be on the horizon. These changes include the acceptance of greater financial risk by rural providers and the more aggressive management of costs by the HMOs.
With respect to employers, the impact of HMOs have been largely positive. The presence of HMOs in the rural study areas has provided rural employers with new options for structuring health benefits programs. According to some rural employers, health insurance costs have been reduced, or at least constrained, as a result. Rural employers have dealt with employee concerns about access limitations by demanding that HMOs offer broad provider networks and products that permit the use of non-network providers subject to co-payments and deductibles.
The impact on rural employees, as evidenced by their responses as well as the views of their employers, has been mixed. Rural employees generally appreciate the broader benefit coverage offered by HMOs as well as reduced paperwork and, sometimes, lower required out-of-pocket contributions toward premiums.
However, as with their urban counterparts, rural employees are concerned about restrictions on access to providers of their choice and financial incentives in physician payment arrangements that may discourage the provision of services or the arrangement of referrals.     

The determinants of HMOs' contracting with hospitals for bypass surgery

Objective. Selective contracting with health care providers is one of the mechanisms HMOs (Health Maintenance Organizations) use to lower health care costs for their enrollees. However, are HMOs compromising quality to lower costs? To address this and other questions we identify factors that influence HMOs’ selective contracting for coronary artery bypass surgery (CABG). Study Design. Using a logistic regression analysis, we estimated the effects of hospitals’ quality, costliness, and geographic convenience on HMOs’ decision to contract with a hospital for CABG services. We also estimated the impact of HMO characteristics and market characteristics on HMOs’ contracting decision. Data Sources. A 1997 survey of a nationally representative sample of 50 HMOs that could have potentially contracted with 447 hospitals. Principal Findings. About 44 percent of the HMO‐hospital pairs had a contract. We found that the probability of an HMO contracting with a hospital increased as hospital quality increased and decreased as distance increased. Hospital costliness had a negative but borderline significant (0.10<p<0.05) effect on the probability of a contract across all types of HMOs. However, this effect was much larger for IPA (Independent Practice Association)‐model HMOs than for either group/staff or network HMOs. An increase in HMO competition increased the probability of a contract while an increase in hospital competition decreased the probability of a contract. HMO penetration did not affect the probability of contracting. HMO characteristics also had significant effects on contracting decisions. Conclusions. The results suggest that HMOs value quality, geographic convenience, and costliness, and that the importance of quality and costliness vary with HMO. Greater HMO competition encourages broader hospital networks whereas greater hospital competition leads to more restrictive networks.     

The impact of healthcare reform on HMO administrators

Over the years, congressional legislation toward healthcare reform has evolved, moving toward channeling indigent populations into managed care plans. Health Maintenance Organizations (HMOs) will have to respond to increased competition caused by this shift enrollment as each entity attempts to funnel these patients into its own provider network. It is likely that some HMOs may bid too low when contracting for patients, putting these organizations at risk for financial insolvency. This paper discusses the impact of Medicaid waivers on HMO administrators. HMO executives need to develop a strategy for monitoring the financial integrity and contractual performance of new and existing HMOs in light of changes taking place with respect to healthcare reform. The transition to managed care and the shift in enrollment pose many challenges for directors of HMOs as will be discussed by analyzing lessons learned from Medicaid managed care plans in Arizona and Oregon.     

Price competition and hospital cost growth in the United States (1989-1994).

In recent years, most health care markets in the United States (US) have experienced rapid penetration by health maintenance organizations (HMOs) and preferred provider organizations (PPOs). During this same period, the US has also experienced slowing health care costs. Using a national database, we demonstrate that HMOs and PPOs have significantly restrained cost growth among hospitals located in competitive hospital markets, but not so in the case of hospitals located in relatively concentrated markets. In relative terms, we estimate that HMOs have contained cost growth more effectively than PPOs.     

Estimating the budget impact of new technologies added to the National List of Health Services in Israel: stakeholders' incentives for adopting a financial risk-sharing mechanism

BACKGROUND: The Israeli National List of Health Services (NLHS) is updated annually according to a government allocated budget. The estimated annual cost of each new technology added to this list is based on budget-impact estimations provided by the HMOs and the manufacturers. The HMOs argue that once a new technology is reimbursed, extensive marketing efforts by industry expands demand and renders the allocated budget insufficient. Industry claims that HMOs, in order to secure a sufficient budget, tend to over-estimate the number of target patients. We provide a framework for a financial risk-sharing mechanism between HMOs and the industry, which may be able to balance these incentives and result in more accurate early budget-impact estimates. OBJECTIVES: To explore the current stakeholders' incentives and behaviors under the existing process of updating the NLHS, and to examine the possible incentives for adopting a financial risk-sharing mechanism on early budget-impact estimations. RESULTS AND CONCLUSIONS: According to the financial risk-sharing mechanism, HMOs will be partially compensated by the industry if actual use of a technology is substantially higher than what was projected. HMOs will partially refund the government for a budget that was not fully used. To maintain profits, we assume that the industry will present a more realistic budget-impact analysis. HMOs will be less apprehensive of technology promotion, as they would be compensated in case of budget under-estimation. In case of over-estimation of technology use, the budget re-allocated will be used to enlarge the NLHS which is in the best interest of the health technology industry. Our proposed risk-sharing mechanism is expected to counter balance incentives and disincentives that currently exist in adopting new health technologies in the Israeli healthcare system.     

Hospital competition in HMO networks

We develop a framework for analyzing bargaining relationships between hospitals and HMOs under selective contracting. Using a unique dataset on hospitals in the Los Angeles area from 1990 to 1993, we estimate the determinants of actual negotiated prices paid to hospitals by two major HMOs. We find that a hospital's bargaining power, and thus its price, decrease when the HMO can readily turn to alternative networks that exclude the hospital. We simulate the effect of hypothetical hospital mergers on bargaining power and find that some hospital mergers, even in urban areas with many nearby hospitals, can lead to significant price increases.     

Effects of HMOs on the creation of competitive markets for hospital services

Why do health maintenance organizations (HMOs) use particular hospitals, and do they concentrate patients in hospitals where they obtain low prices? We answered these questions with a study of six HMOs in four large metropolitan areas in 1986. A two-part model was estimated for the probability that a hospital would be used and the demand for general inpatient admissions at hospitals that were used. Four staff-network plans in our study do shop for hospital services on the basis of price more than was generally believed. However, two independent practice association (IPAs) plans use more hospitals in the community and do not concentrate patients effectively at hospitals that offer the lowest prices.     

HMOs are reduced to being prepaid indemnity health insurers

When you go into negotiations with a managed care organization, you need to understand the economic and financial forces that are at work on HMOs and PPOs as well as the financial condition of your organization.     

The Southern California HMO marketplace: growth, innovation, and integration

The 1980s have been a period of rapid growth in the Southern California HMO industry. Much of this growth is related to the emergence of network-model HMOs and, more recently, IPA-model HMOs, as a major competitive force that provides an alternative to the massive and rapidly growing Kaiser plans. The growth of the industry has been made possible by and, at the same time, has facilitated the development and growth of multispecialty medical groups and hospital-based IPAs throughout Southern California. This development has brought the HMO industry and the practice of prepaid medicine into the mainstream of health care and had led to the extensive involvement of community hospitals and independent physicians and physician groups in prepaid medicine. The coming decade will be marked by further growth and by continued integration of physician practices, hospitals, and HMOs into more efficient, high quality, vertically integrated systems of health care.