Survey predicts troubled times ahead for high-priced HMOs - health maintenance organizations - HMO Special Section

Employer's increasing disillusionment with HMOs has contributed to the growth of point-of-service plans.

HMOs troubled by stagnant enrollment, and employers disillusioned with low-quality but expensive HMOs, have only themselves to blame for their respective problems, according to the latest survey conducted by A. Foster Higgins & Co. Inc., benefits consultants in New York.

John Erb, principal of the firm, says HMOs that want to survive troubled times must now price themselves below indemnity plan rates to increase enrollment. And employers must give their employees better incentives to enroll in HMOs by reducing employee contributions. "It is incumbent on employers to find an HMO that is not going to raise its rate in 1993," Erb says, noting that employers and HMOs must now give employees what they want - "low rates and good quality."

About 35% of 2,409 employers responding to the survey say their HMO rates are higher than indemnity plan rates, while 185 say their rates are about the same. Erb says this trend toward expensive HMOs is disheartening because HMOs were designed to be more cost effective than indemnity plans.

Although HMOs remain relatively unchallenged by PPOs, which in the last two years have also experienced zero-growth in enrollment, point of service, a relative newcomer to the managed care industry, is gaining ground. The number of employers offering POS plans increased from 6% in 1989 to 11% in 1991. And 75 of responding employers say they plan to offer a POS plan by 1993.

According to Erb, the 1991 roundup of industry trends identifies two types of employer-HMO experience: "Employers that are happy because they are with well run and cost effective HMOs; and employers that are unhappy because they are with indemnity plans in HMO clothing."

Some employers are "disillusioned with HMOs" he says, noting that the number of employers offering HMOs has not increased in five years. Moreover, in the next two years, the survey shows that only 1% of employers not offering an HMO now say they will do so.

Given the recession. Erb argues that HMOs should have increased in popularity. But the potential spurt in enrollment, envisioned years ago, has been hindered by employers' contribution strategies. "With HMOs, most employers use equal first-dollar coverage just like they would for indemnity plans."

HMOs that are not priced lower than an indemnity plan will see business dwindle for two reasons. Employers will have no incentive to use them, and employees, particularly union members, will remain indemnity plans.

The Foster Higgins survey is a four-part report on managed care trends in 1991. It was compiled with information from large employers and state governments, whose plans cover 13.8 million employees. The survey shows that in the 20 years since managed care was introduced, only 45% of all U.S. employees are enrolled in managed care. Of that number, only half are in HMOs.

Survey respondents also report that when PPO and POS plans are offered, 36% of total claim dollars are paid to non network providers.

But despite employers disillusionment, Erb says HMOs are still the way to go. He argues that employers have not alternative if they want to reduce costs.

In fact, says, instead of raising employee contributions next year, as 71% of survey respondents indicate they will do, employers should reduce them.

Similarly, he reasons that if an HMO saves 20% over an indemnity plan, employee contributions should reflect that and be 20% less. Essentially, employers should reappraise the criteria used to select an HMO.

Asked about how they selected their HMOs, employers reported that in the 1970s and 1980s they had "no selection criteria," Erb says. The result is that far too many employers "are waking up in the 1990s and realizing they have a mix of good and bad HMOs and the bad ones are not living up to their cost-saving expectations."

To reverse this trend, the goal now should be to back away from HMOs that fail to live up to cost cutting and quality expectations, Erb says, noting that many employers need to streamline the number of HMOs they offer. Only 29% of survey respondents say they are already reducing the number of HMOs on their provider lists.

For their part, employees value health care quality even more than their right to choose medical providers. Faced with a choice among several HMOs, and another type of plan only one-third of employees choose an HMO, according to the survey.

The other two-thirds are reluctant to enroll because they are dubious about, and have little confidence in, the quality of care offered by some HMOs, says Erb.

Employers have "undervalued choice," Erb says, acknowledging that even when faced with a choice between a low-cost HMO and a high-priced indemnity plan, many employees will still choose the indemnity plan. They do so, in part, because they believe the inexpensive HMO is also low on quality. "Clearly, the challenge for HMOs is to keep their rates low while educating consumers about levels of quality," says Erb.

HMO plans are offered by 60% of employers, PPOs by 31%, and POS by 11%. Non managed care indemnity plans - the most common means of providing health coverage to employees and dependents - are offered by 76% of employers. More than half - 55% - of the employees covered by survey respondent's health plans are in indemnity plans, while 23% are in HMOs; 17% in PPOs, and 5% in POS plans.

Registering disatisfaction with HMOs, 57% of employers say they are more satisfied with the cost control aspects of PPOs and POS plans. Only 49% say they are satisfied with HMOs.

The average cost per employee for HMO coverage increased 13.5% in 1991. It rose from $2,683 in 1990 to $3,046 in 1991.

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