HMOs raising prices 5%-7% Highly competitive era of stable premiums comes to an end

October 15, 1997|By M. William Salganik | M. William Salganik,SUN STAFF

After three years of flat prices -- in some cases even decreases -- HMOs and other managed care plans are costing more nationally and locally.

The premium increases range from just under 5 percent to 7 percent in different surveys. They reflect rising medical costs and the addition of older and sicker people.

"The managed care option has squeezed as much as it can squeeze, this side of civilized behavior," said Robert E. Moffit, a health policy analyst at the Heritage Foundation.

The increases may also be related to a greater emphasis on quality due to pressure from employers and consumers who are becoming more demanding about their health care plans.

Greater consumer sophistication is being aided by information provided by accrediting agencies and government offices.

Today, for example, Maryland health officials will release a "report card" with audited data on all the HMOs in the state.

But the premium increases also seek to offset shrunken profit margins. Health maintenance organizations collectively lost money in Maryland last year. Nationally, publicly traded managed care companies had a profit margin of less than 1 percent.

Poor earnings of large health care providers are taking a toll. They have fueled reports that Prudential would sell off its health unit and caused Aetna's stock price to plummet 10 percent in one day and Cigna's 15 percent in two days.

HMO premiums -- virtually unchanged from 1993 to 1996 --began to creep up this year, with increases of 2 percent to 3 percent.

And now, the increases are accelerating.

Premium increases in the Baltimore-Washington area are tracking nationwide trends, said Mark S. Hopkins, regional health care specialist for Watson Wyatt & Co., a benefits consulting firm.

Many in the industry say increases can be expected after several years of a strategy that dictated tight pricing.

"In earlier years, carriers were very reluctant to increase premiums," said John M. Colmers, executive director of Maryland's Health Care Access and Cost Commission. "There was a desire to remain competitive [in pricing] and gain market share."

But now the industry is rethinking that strategy.

"If you look at the results of the HMO industry in 1996, it's pretty clear that that was a mistake," said Thomas P. Barbera, executive vice president of MidAtlantic Medical Services Inc., a Rockville managed care insurer with 1.7 million subscribers under its M.D.-IPA and Optimum Choice plans.

The industry lost about $1 million in Maryland last year, Barbera said. His company ended the year $2.8 million in the red. Premium increases and cutbacks in unprofitable markets returned Mid Atlantic Medical Services to the black this year.

Analysts believe managed care may be following the underwriting cycle of indemnity insurance. The cycle works as follows: Profitable companies hold the line on premiums to retain or get market share. Then profit margins drop, and rates go up again. The companies become more profitable, and the cycle starts again.

"As long as actuaries have been in the business, there's always been a premium cycle," says Jonathan Weiner, professor of health policy and management at the Johns Hopkins School of Public Health.

"Our philosophy is to have a narrow margin, about 3 percent profit," said Barbera of Mid Atlantic. "Some years you make 5 or 6 percent; some years you make zero."

Beyond pricing cycles, some believe pricing is getting less competitive as HMOs consolidate, leaving fewer in the market.

"There were 22 or 23 HMOs trying to get our bucks; now there's maybe 15," noted Robert H. Davis, executive director of the Maryland Health Care Coalition, an employer-oriented group that monitors health costs.

Tracy Cassidy, health care specialist for William M. Mercer, another benefits consultant, said while the overall increases in the region are in line with national figures, there is wider variation locally.

While some employers in the area are seeing moderate increases, in the range of 2 percent to 4 percent, premiums for others are rising 6 percent to 8 percent -- and in some cases, even more.

Aggressive pricing may be responsible for some of the variation in the Baltimore-Washington market.

"I really can't say for sure, but my guess is that this is based on the particular strategy of the HMO," says Elaine Johnston, manager of staff services for Baltimore Gas and Electric Co.

BGE has seen "pretty wide" differences in premium increases among its nine health plans, from as little as 5 percent to 15 percent or more, says Johnston. The higher figures are blamed in part on rate changes related to the utility's pending merger with Potomac Electric Power Co.

Also accounting for variation in price increases are claims experience and contract terms for each employer, says Mark Smolarz, vice president for administration of Prudential HealthCare of the Mid-Atlantic. He says Prudential's increases have generally been about 5 percent, but higher claims have meant increases of as much as 20 percent in a few cases.

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