Price wars among HMOs prove good medicine for spiraling health care costs

May 01, 1994|By John Fairhall | John Fairhall,Sun Staff Correspondent

WORCESTER, Mass. -- After paying out more money year after year for health insurance, Patricia Wood received a remarkable surprise in February: Her annual premiums dropped nearly $400.

The 53-year-old widow from Worcester County is benefiting from a health-care price war, an unheard-of event in most areas. Here in central Massachusetts, health maintenance organizations are so hungry for business that they're trying to lure customers with free fitness-club memberships, restaurant gift certificates and coffee mugs.

"It's a buyer's market now," says Philip G. O'Brien, a hospital executive in Worcester County.

What's happening here bolsters the argument of those who say market competition can hold down health care costs -- without the heavy hand of regulation that President Clinton believes is needed.

Most of the health reform proposals in Congress -- including Mr. Clinton's -- encourage the use of HMOs, which limit costs by controlling patients' care and restricting their choice of doctors and hospitals. But a battle is under way over whether government regulation is needed to contain prices.

In this old industrial area, HMOs dominate the health care market to an extraordinary degree. Prodded by cost-conscious employers, up to 60 percent of workers are enrolled in HMOs, the highest concentration of any region, local officials say. The resulting price competition among HMOs has given employers and consumers such as Ms. Wood relief from the high rate increases of the past.

Ms. Wood is a clerk at Hubbard Regional Hospital, which, like employers everywhere, has been squeezed by rising health insurance costs. But this year, the hospital invited the largest and least-expensive HMO in the region, Fallon Community Health Plan, to compete for its business.

Soon after, two other HMOs that had been serving the hospital's workers cut their rates and courted workers with coffee mugs and restaurant gift certificates. Hubbard saved $100,000 in insurance premiums. Its workers, who share the cost of insurance, also saved.

Sticking with the same HMO she had in 1993, Ms. Wood saw her weekly insurance premiums plunge from $14.74 to $7.64 -- which will give her $369 more in take-home pay this year. The timing couldn't have been better. Living alone on a modest salary, she says she was "panicking" at the prospect of higher insurance rates. "Believe me, when it went down I was ecstatic."

Carol Barbour, a Hubbard insurance clerk, fared nearly as well. She switched from an HMO that had cost her $13.86 a week to another for which she pays $7.64, a $6.22 reduction. "I'm getting the same benefits, and my office visits are actually $2 cheaper," she says. Her new HMO plan charges $3 per doctor visit, compared with the old plan's $5.

Hubbard's experience highlights the key ingredients of successful HMO competition: a dominant HMO such as Fallon to act as a price leader, savvy employers who pressure HMOs to contain costs while maintaining quality, and a high proportion of consumers enrolled in HMOs.

When these conditions exist, employers throughout a region can reap financial benefits. HMO rates in Massachusetts rose an average of 3.2 percent in 1994, less than half the national average of 7.1 percent. And in central Massachusetts, some employers' insurance rate increases were smaller -- and some, like Hubbard, experienced declines.

"What we're seeing is the benefits of competition," says Robert L. Hughes, president of the Massachusetts Association of HMOs.

But White House officials and some health economists doubt that the insurance market nationwide can become competitive enough to restrain prices in the long run. They say that reforms are needed to stimulate competition -- such as requiring insurers to offer standardized benefits -- and that competition should be bolstered by government-set limits on insurance premiums.

Ira Magaziner, the architect of the Clinton reform plan, acknowledges that insurance-rate increases are shrinking in some regions. But he said he believes that phenomenon is temporary, and he attributes it to the health and insurance industries' fear and expectation of government reforms.

"I think a lot of what we're seeing out there now is in anticipation of health reform," he says. "I think we need to keep the pressure on if we're going to see action. So we think . . . that health care reform action has to have some premium cap backup mechanism to competition.

"The other reason we think there has to be some backup to competition is in many rural areas of the country, in under-served areas, there isn't any competition," Mr. Magaziner says. "So you FTC need some form of backup."

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