As costs rise, HMOs losing ground to PPOs

November 19, 2006|By Bruce Japsen | Bruce Japsen,Chicago Tribune

Health maintenance organizations, known for their low-cost medical care, were all the rage 10 years ago.

Now consumers are bailing out of HMOs in record numbers as their costs have risen faster than high-deductible health insurance plans that offer more doctor choices and services.

In particular, HMOs have lost ground to a kissing cousin, the preferred provider organization.

The least restrictive of managed-care plans, PPOs allow health plan members to go outside an insurer's list of doctors and services but at a greater cost to the consumer. A typical PPO might cover 80 percent for a surgery at an in-network hospital but 60 percent at a facility not on the insurer's list.

The shift away from HMOs appears to resolve a long-running debate about whether saving money is more important than retaining control of medical choices. Consumers are indicating that the cost saving is not the only important factor.

"HMOs are highly challenged to show value," said Gary Claxton, vice president and director of the health care marketplace project for the Kaiser Family Foundation, a nonprofit group that studies health coverage trends in the country.

The move to PPOs began as HMOs became increasingly expensive for big employers.

"Employers started to question, `What I am getting for the additional premium if in fact it is costing me more?'" said Larry Boress, president and chief executive of the Midwest Business Group on Health, a coalition of more than 80 employers, including Kraft Foods Inc. and Abbott Laboratories.

"Employees were saying: `We have restricted access, and when I compare rates and find [HMO] rates that were always lower and now are no longer, then they are not as popular,'" Boress said.

For large employers, the cost difference today between PPO and HMO coverage is less than $150 annually on average. That is down from about $400 five years ago, according to Hewitt Associates, a human resources services firm.

Today, one in five insured American workers is covered by an HMO, compared with about one in three 10 years ago, according to Kaiser. Meanwhile, the proportion of workers enrolled in PPOs has more than doubled, to 60 percent from 28 percent in 1996, Kaiser figures show.

Consider Sheet Metal Workers Local 110 in Louisville, Ky., which dropped HMO coverage three years ago for its 850 members and their families.

Union members now choose from three Humana PPO plans.

"The HMO was always the cheapest plan, but the PPO was starting to close the gap rather drastically, and our [workers] did not like the idea of going to just certain individuals or doctors in the HMO, and the PPO had quite a bit of network," said Gary Stevens, a business manager at the local.

Consumer demand helped reshape HMOs, which, in turn, has made them less popular.

Beginning in the late 1990s, people began demanding a broader array of doctors to pick from and more services. One of the most visible examples was pushing for additional overnight stays after a baby delivery. People also felt there was a stigma to HMOs, suspecting that in-network medical attention did not match the quality outside their networks.

And as hospitals began to consolidate in the past decade, HMOs found it increasingly difficult to exclude expensive hospitals and physicians from their networks.

Typically, the larger the number of doctors and hospitals in a network, the more expensive it becomes.

"If you have a broader network, it is pretty hard to find a cost-efficient network," Kaiser's Claxton said. What's more, the HMOs began to look and operate like PPOs.

"Most of the HMOs sold today are not HMOs but PPOs in drag," said Brad Buxton, senior vice president of Blue Cross and Blue Shield of Illinois.

Still, insurers say there are regional variances that keep HMOs competitive in certain parts of the country and popular with smaller companies. HMOs still boast of lower co-payments and out-of-pocket costs.

This year, the average out-of-pocket costs for an employee in an HMO nationally were estimated at $920 a year, compared with $1,947 in a PPO. Nationally, the annual employee contribution out of their paychecks for either HMOs or PPOs tends to be about the same, $1,581 for HMO and $1,584 for PPO, according to Hewitt.

The average HMO premium cost per person paid out by major companies is projected to jump in 2007 to $8,151, a 64 percent increase from $4,979 in 2002, according to Hewitt figures, based on data from 300 major employers providing health benefits to 18 million people. PPO premiums are projected to have risen 53 percent by next year to $8,277 from $5,421 in 2002.

One reason HMOs have become more expensive is that many have loosened purse strings on amounts paid to doctors. In the past, many paid only a fixed fee per patient, known as "capitation," regardless of how much service was provided.

The low deductibles and co-payments of HMOs also attracted sicker patients who needed more care. In turn, that caused some plans to increase their premiums.

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