Legal issues in contracting with HMOs. 1

The Health Maintenance Organization Act of 1973 established a 5-year $325 million program of federal assistance to aid in the planning and organization of HMOs. The Act also required employers to offer their employees the alternative of an HMO membership to existing health benefits plans. Health Maintenance Organizations are defined by the following characteristics: 1) they are total health care delivery systems; 2) they consist of a voluntarily enrolled population; 3) agreed-upon services are provided by a prearranged and prepaid fee; and 4) the organizations bear the risk of providing the services for the prearranged fee. HMOs differ from existing health care delivery systems in that the system is closed, i.e., physicians and referral services are limited to those participating in the organization. HMOs must have a 1/3 consumer membership on their policy-making boards. Most also have physician representation on the boards. There exists a financial incentive to reducing the use of hospital services. HMOs are required to provide all services, including abortion and sterilization, but a hospital which takes care in negotiating its contract with the HMO will be exempt from having to do so.     

A survey of mental health service coverage within health maintenance organizations.

This 1978 national survey of all operating Health Maintenance Organizations (HMOs) provided information on the current status of mental health services utilization and service coverage within HMOs. It achieved a 68 per cent response rate. Approximately 90 per cent (108) of the HMOs offered mental health services through basic or supplemental coverage plans; HMO organization characteristics reflected relative heterogeneity; the mean monthly costs for basic health plan coverage (physical and mental health services) were $33.85 (for individuals) and $95.15 (for families); HMOs reported lower physical and mental health hospital utilization and higher ambulatory utilization when compared to more traditional forms of health insurance coverage. The present coverage and uitlization of mental health services within HMOs reflect greater variability of benefits and utilization within HMOs. There is need for further studies of mental health utilization in relation to organizational structure and delivery pattern relationships within HMOs.     

Primary care gatekeepers in HMOs

The most pressing issue in health care delivery today is inflationary cost increases. The gatekeeping role of primary care physicians, particularly family physicians, may lower health care costs through a more judicious use of specialty referrals, expensive tests, and hospitalization. The study of such an impact is most readily carried out in the practice setting of health maintenance organizations (HMOs), where there is a defined patient population. Incomplete data and lack of sensitive indicators of the gatekeeping effect are limitations of this preliminary study. The results show, however, that the internal organization of an HMO does not influence hospital and ambulatory care utilization rates, with the exception that HMOs staffed by a group of salaried physicians (staff HMOs) reported higher ambulatory care utilization. No significant differences were demonstrated in hospital or ambulatory care utilization rates among the HMOs using more primary care physicians or family physicians than others. The results indicate that ambulatory care utilization rates are proportional to the number of physicians per 1,000 members. The results also suggest that there may be an inverse relationship between hospital utilization rates and the number of primary care physicians, especially if they are family physicians. Further studies need more specific indicators to evaluate the effect of the gatekeeping role in health care delivery.     

Changing patterns in mental health service coverage within health maintenance organizations

This 1982 national survey of all operational health maintenance organizations (HMOs) provides information on the current status of mental health services, benefits, costs, and utilization within HMOs, updating and augmenting a 1978 study. Approximately 94 per cent of the responding HMOs offered mental health service coverage; over one-half (54 per cent) offered alcohol and drug abuse service coverage. The present coverage benefits and utilization of mental health services within HMOs continue to reflect greater variability vis-a-vis other health services within HMOs. Over one-half (57 per cent) of the HMOs provided for 30 days of inpatient mental health coverage (per member per year). Three out of four (77 per cent) of the health plans provided for 20 ambulatory visits (per member per year). The mean mental health hospital utilization rate was 32 days (per 1,000 members per year). The mean mental health ambulatory utilization rate was 0.33 encounters (per member per year). Further studies should investigate the combined influence of organization characteristics, mental health service organization characteristics, and service benefits on the costs and utilization of HMO mental health services.     

Assessing the evidence on HMO performance

HMOs contract to provide physician and hospital services to enrolled populations in return for fixed periodic payments. Total costs for HMO members are shown to be lower than for those enrolled in conventional insurance plans. But the explanation for this and related differences cannot be attributed solely to matters of efficiency, quality, or even consumer self-selection or physician satisfaction. Although public policy assumes that HMOs will encourage beneficial competitive responses by traditional health care providers, too little is known to predict the nature and extent of such probabilities.     

Rapid change to HMO systems: profile of the Dane County, Wisconsin, experience

Dane County (Madison), Wisconsin, has experienced a dramatic transformation of its health services into competing closed-panel health maintenance organizations (HMOs). The change occurred literally overnight after the state, as the dominant employer, implemented price competition. In 1983, 22 percent of the 24,000 state employees in Dane County were enrolled in closed-panel HMOs; in 1984 about 85 percent enrolled in one of seven major competing physician HMO plans. In 1985 state employees basically stayed with the HMO they had chosen in 1984, and the only major shift was continued movement away from the standard fee-for-service plan. The Dane County HMO plans were less costly than fee-for-service plans to the state and to the state employee. Fee-for-service state enrollees self-reported greater use of inpatient hospital services and self-reported poorer health than employees selecting HMOs when controlling for age between the two groups. This article describes these changes, why they occurred, and the initial impact on employees as an example relevant to HMO development that may occur elsewhere.     

The rise and fall of a Kaiser Permanente expansion region

Prepaid group practices (PGPs) multispecialty groups that vertically integrate the organization, financing, and delivery of health services to a specific population—were once viewed as the most cost‐effective and efficient model for achieving national health care reform (e.g., McNeil and Schlenker 1981 ; Saward and Greenlick 1981 ). Policy reformers who extolled the benefits of health maintenance organizations (HMOs) in the late 1970s and early 1980s emphasized in particular the cost and quality advantages of PGPs vis‐à‐vis solo and single‐specialty fee‐for‐service (FFS) providers. A comprehensive review of comparative empirical studies (HMOs versus FFS) since 1950 concluded that the total costs for HMO enrollees were 10 to 40 percent lower than those for comparable enrollees with conventional indemnity insurance ( Luft 1978 ). Although PGPs did not originate as a competitive response to fee‐for‐service indemnity health insurance, many proponents viewed them as a promising means of helping contain rising medical costs, encouraging a more rational allocation of health care resources, and improving the access to and delivery of quality services ( McNeil and Schlenker 1981 ).     

Do HMOs Have Monopsony Power?

Objective: To determine whether health maintenance organizations (HMOs) have monopsony power in the markets for ambulatory care and inpatient hospital services. Data Sources: A pooled time-series of data on all HMOs operating in the United States from 1985 through 1997. Information reported to InterStudy on HMO market areas and enrollment is linked to financial data reported to state regulators and county characteristics from the Area Resource File (ARF). Study Design: We use a two-stage design to test for the existence of monopsony power. First, we estimate regression equations for the prices paid by HMOs for ambulatory visits and inpatient hospital days. The key independent variable is a measure of the importance of an individual HMO as a buyer of ambulatory care or hospital services. Second, we estimate regressions for the utilization of ambulatory visits and inpatient hospital days per HMO enrollee, as a function of HMO buying power and other variables. Principal Findings: Increased HMO buying power is associated with lower price and higher utilization of hospital services. Buying power is not related to ambulatory visit price or utilization per member. Conclusions: Our findings are not consistent with the monopsony hypothesis. They suggest that managed care organizations have contributed to a welfare-increasing breakup of hospital monopoly power. The role of HMOs as buyers of ambulatory services is more complex. We discuss possible reasons why buying power may not affect price or utilization of ambulatory visits.     

THE HMOs

New areas of practice are open to innovative social workers in an existing and expanding comprehensive health care delivery system-the health maintenance organization (HMO). In this article, four health plan models are described that document the experience of social workers in established HMOs. These illustration demonstrate the necessity and opportunity for expanded social work roles in humanizing and coordinating patient services in complex multidisciplinary health care delivery systems.     

The HMOs: new models for practice.

New areas of practice are open to innovative social workers in an existing and expanding comprehensive health care delivery system--the health maintenance organization (HMO). In this article, four health plan models are described that document the experience of social workers in established HMOs. These illustrations demonstrate the necessity and opportunity for expanded social work roles in humanizing and corrdinating patient services in complex multidisciplinary health care delivery systems.     

Gaining strategic advantages through partnerships with public health departments

Public health officials have advocated in public health and public policy journals for collaboration with private sector health care organizations for nearly a decade. There has been little written in the management literature on this topic, however. There are several important areas in which public health departments have expertise that could be valuable to private sector health care organizations, including health maintenance organizations (HMOs). These include the delivery of services in some geographic areas and to some special populations, provision of preventive and health promotion services to HMO members, performance of epidemiology services, assistance in accreditation, and repair of the damaged image of HMOs. HMOs and local health departments in many parts of the country are already entering into contracts for these purposes. Such partnerships between HMOs and local health departments can improve the health of the members of HMO plans and contribute to improving the health of the community.     

Evaluation of the Effect of a Consumer-Driven Health Plan on Medical Care Expenditures and Utilization

Objective. To compare medical care costs and utilization in a consumer-driven health plan (CDHP) to other health insurance plans.
Study Design. We examine claims and employee demographic data from one large employer that adopted a CDHP in 2001. A quasi-experimental pre–post design is used to assign employees to three cohorts: (1) enrolled in a health maintenance organization (HMO) from 2000 to 2002, (2) enrolled in a preferred provider organization (PPO) from 2000 to 2002, or (3) enrolled in a CDHP in 2001 and 2002, after previously enrolling in either an HMO or PPO in 2000. Using this approach we estimate a difference-in-difference regression model for expenditure and utilization measures to identify the impact of CDHP.
Principal Findings. By 2002, the CDHP cohort experienced lower total expenditures than the PPO cohort but higher expenditures than the HMO cohort. Physician visits and pharmaceutical use and costs were lower in the CDHP cohort compared to the other groups. Hospital costs and admission rates for CDHP enrollees, as well as total physician expenditures, were significantly higher than for enrollees in the HMO and PPO plans.
Conclusions. An early evaluation of CDHP expenditures and utilization reveals that the new health plan is a viable alternative to existing health plan designs. Enrollees in the CDHP have lower total expenditures than PPO enrollees, but higher utilization of resource-intensive hospital admissions after an initially favorable selection.     

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.     

Utilization of allied health personnel in HMOs

Health Maintenance Organizations (HMOs) have become a significant component of the health care delivery system and thus provide employment opportunities for allied health professionals. This study investigated the utilization of selected allied health services and personnel in a national sample of HMO settings. Significant utilization of allied health services were reported both through provision of services in-house and through contractual arrangements. Smaller HMOs tended to use several allied health services in-house, while larger HMOs used both in-house and contractual services. Younger HMOs tended to utilize contractual arrangements while older HMOs utilized in-house services. Staff and group HMOs tended to have the highest utilization of health manpower with the larger, older HMOs employing more of those personnel.     

Health maintenance organizations: improvements in the regulatory environment

Health maintenance organizations (HMOs) can help slow rising health care costs. State regulatory statutes are needed that will protect critical interests of HMO members while freeing HMOs from needless statutory requirements. A model HMO regulatory law is designed to strike a balance between protection of members and freedom for HMOs to deliver programs that can reduce health care costs.     

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.     

The benefits of HMO community benefits programs

Managed care is becoming the dominant mode of health care coverage, and health maintenance organizations (HMOs) are playing a key role in the delivery of health care within the evolving, cost-competitive system. However, in this cost-cutting arena, do HMOs have responsibility for health services to communities which extends beyond their enrolled populations? Do HMO community benefits programs have significant impact on the uninsured or the related problem of paying for uncompensated care? The Massachusetts Attorney General believed so and developed the first set of voluntary guidelines in the nation for HMOs to follow in developing community benefits programs. This study reports on the initial year of the program and raises important policy questions regarding the responsibility HMOs have to the communities apart from the population they contract with, and the extent to which communities benefit from HMO community benefits programs.     

State HMO Accreditation and External Quality Review Requirements: Implications for HMOs Serving Rural Areas

The purpose of this article is to analyze state regulations regarding health maintenance organization (HMO) accreditation and external quality review; to briefly describe states' experiences implementing these regulations; and to discuss the implications of these regulations for HMOs serving rural areas. The incorporation of HMO accreditation and external quality review requirements into state HMO licensure processes and state employee contracting raises many policy issues, including several that are especially relevant to HMOs serving rural populations. A key issue is whether the linkage of accreditation and external quality review requirements to HMO licensure will be an additional deterrent to the development of new HMOs or the expansion of existing HMOs into rural areas. Other issues relate to the costs and benefits of accreditation for HMOs serving rural populations, and the potential impact of HMO accreditation requirements on efforts to expand managed care enrollment of rural Medicaid and Medicare beneficiaries and rural state employees. Nine states were identified that have regulations requiring HMOs to seek accreditation or to undergo an external quality review as a condition of licensure. Four states were identified as implementing requirements that an HMO be accredited in order to serve state employees. Many of these requirements are still in the early stages of implementation. Several states with the requirements have significant rural populations and will provide opportunities to evaluate their impact on HMOs serving rural areas, rural providers and rural consumers.     

Workers' compensation cost shifting: an empirical study.

It has been suggested that health maintenance organizations (HMOs) overdiagnose work-related injuries and illnesses to increase their income. This study compared the Workers' Compensation experience of 2,176 Boston postal employees enrolled in a large HMO with that of 3,473 employees enrolled in a large fee-for-service health insurance plan. It controlled for the potential confounders of age, gender, job classification, type of injury, and duration of employment. It found no difference in the incidence of injuries: 5.93% for HMO enrollees and 6.25% for fee-for-service plan enrollees. Medical costs averaged $475 for HMO enrollees and $838 for fee-for-service plan enrollees (p = 0.018). Total costs averaged (09 for HMO enrollees and $1388 for fee-for-service plan enrollees (p = 0.063). In our cohort, there was no evidence of cost shifting. It appeared that the HMO provided less expensive medical care for injured postal workers.