Make HMOs justify increases

February 16, 2005|By Peter L. Beilenson

SOME HAVE argued that Maryland HMOs must pass the cost of the newly enacted 2 percent premium tax on to consumers because of the natural physics of how business costs are borne.

Price is determined by what the market will bear. And competition shapes what the market will bear.

The airlines, for example, suffering fuel price increases, have attempted to pass on these added costs to customers. Because of intense competition among the airlines, however, these attempts have largely failed.

HMOs have raised rates significantly and continuously for several years, typically by more than 10 percent a year, often by more than 20 percent. Except for the political attention, the proposed 2 percent rise would be comparatively negligible.

But do the HMOs need to pass on this cost? Hardly.

Maryland's two largest for-profit HMOs, Aetna and UnitedHealth (MAMSI/Optimum Choice), recorded handsome profits in 2004. UnitedHealth's profits rose 42 percent in 2004 over 2003 and 34 percent in 2003 over 2002. Its stock is up 50 percent in the last 12 months.

At Aetna, net income more than doubled in 2003 over 2002. (It hasn't yet reported 2004 income.) Its stock price has doubled in the last year.

CareFirst BlueCross BlueShield is profitable as well. Its profits are placed in a reserve account and invested in such things as Treasury bonds. CareFirst has roughly $1 billion, far in excess of Blue Cross or state mandates. That's enough to provide free insurance for 333,000 Marylanders for a year.

These successes are reflected in CEO pay. UnitedHealth paid its CEO, William W. McGuire, a $6 million salary in 2003, when he exercised $84 million in stock options; Aetna paid CEO John W. Rowe $17 million in salary and exercised options that year.

For perspective, if Mr. McGuire were paid only $1 million, UnitedHealth could offer free insurance to nearly 30,000 Marylanders for a year with the difference.

Health care costs are rising, so are these numbers simply in line with this bigger problem? No.

At least some of these burgeoning profits come from reduced medical payouts. Health insurance companies cynically use the term "medical loss ratio" to account for payouts. When a customer of CareFirst or Optimum Choice goes to the doctor or hospital and is cured, the insurance company calls this a medical loss. It's a loss because the insurance company pays the claim.

As a business, the goal of the insurance company is to reduce the medical loss as a proportion to the premiums paid in. The lower the medical loss ratio, the better.

At UnitedHealth, the medical loss ratio declined from 83 percent in 2002 to 81.4 percent in 2003. At Aetna, the ratio of health care costs to premiums was 77 percent in 2003, down from 83 percent in 2002.

To restate these numbers, for every dollar in premiums that Marylanders pay to these companies, UnitedHealth pays 81 cents for health care and Aetna pays 77 cents. The rest goes to CEO pay, the personnel doctors call to make sure the insurance company will pay for the health care they render, and profits.

From the consumer's perspective, this means that premiums are going up without additional benefits, people aren't getting the medical attention they need, care providers are being shortchanged or a combination of all of these.

Maryland Insurance Commissioner Alfred W. Redmer Jr. should have considered these facts before he pre-emptively authorized, and in effect encouraged, all Maryland HMOs to raise their premium rates. The Maryland Citizens' Health Initiative recently asked Mr. Redmer to rescind this decision.

There should be a public hearing to learn why the insurance companies think these increases are necessary, and the public should be given an opportunity to rebut their claims. If Mr. Redmer refuses to do this, then it may be time to replace him with an accountable, elected insurance commissioner, as state Senate President Thomas V. Mike Miller and House Speaker Michael E. Busch have suggested.

Dr. Peter L. Beilenson is the health commissioner for Baltimore City and chairman of the Maryland Citizens' Health Initiative Education Fund Inc.

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