A Double Dose.

To stave off continued poor earnings, health maintenance organizations have begun raising rates and cutting costs.

As increasing numbers of health maintenance organizations look at cost-cutting measures to put their companies back in the black, many are considering or implementing premium hikes.

Among HMOs, Aetna has come into the spotlight as an example of biting the bullet, with its disappointing second-quarter results and its top executive's blunt talk about tightening the belt.

Chairman William Donaldson said Aetna was considering raising premiums and implementing cost-cutting measures, following its 14% drop in second-quarter net income. Donaldson said Aetna was increasing prices for policy renewals in the fourth quarter to reflect higher medical costs and is directing more resources toward on-site utilization reviews that occur while care is being provided. He also said Aetna may increase copayments for emergency-room visits.

The issue of raising premiums is hitting HMOs across the board, said Winnie Cheng, an analyst with Banc of America Securities. "It's not inconceivable that we'll see premium increases of 10% or more from a lot of these companies. But just because you increase rates, that doesn't mean you'll be profitable;' Cheng said.

Follow the Leader

Although Aetna is a giant among HMOs and is considered something of a bellwether in the industry, Cheng sees premium prices trending upward regardless of Aetna's moves. "Almost all companies are raising rates," she said. "If all your competitors are losing money, you have to decide what's more important: market share or making a dollar. These companies are saying, 'We can't make a buck.'"

Jeffrey L. Pittsburg of Pittsburg Institutional Inc. also sees 10% as a benchmark for premium increases. Pittsburg said any action on premium increases by Aetna has a greater impact on other HMOs. "Sure, if Aetna raises premiums, how could others not do so? You have to follow that," Pittsburg said. "But it's a fine line--how high can you go [without losing business]?"

A look at recent announcements of premium increases seems to bear this trend out:

* Humana Inc., Louisville, Ky., said it had implemented premium increases of 10% to 11% in the second quarter in its large group commercial business. About 60% of the business renewed in the first quarter;

* Highmark Blue Cross Blue Shield of Pittsburgh said it was asking for Medicare+Choice rate hikes after deciding not to join the exodus of HMOs from the program;

* RightChoice Managed Care of St. Louis is seeking to increase premiums by 10% this year, hoping to capitalize on upheaval in the Missouri health-care market, where other providers are running multimillion-dollar deficits.

Time to Cut Costs

Equity analysts say raising premium rates will be of some help, but cost cutting will be necessary.

"The biggest thing has always been the cost side," Pittsburg said. "When you take on as many people, bought as many companies as Aetna has, costs are hard to control. I think the size is the problem [for Aetna]."

Cheng cites a number of cost factors affecting Aetna and other HMOs. "You can become very efficient; you can become very judicious. But the macroeconomic issues are that the federal government won't reimburse [for Medicare], the population in the U.S. is aging and there is a greater number of ills driving costs," she said. Other trends driving up costs include increased advertising by pharmaceutical companies to directly reach consumers, expensive medical technologies and quality-of-life treatments, such as medications for hair loss

Partly in response to these pressures, Aetna, like other HMOs, is considering cutting less profitable lines of business.

"Come the new year, Aetna's talking about exiting a number of markets," Cheng said. "They're talking about leaving about half the Medicare market, which would affect about 340,000 enrollees."

Growth and cost-cutting can clash, making both hard to handle, Pittsburg said. Cost-cutting "is a question of fine-tuning," he said. "You make a decision, see how it works; do a little more, see how it works. But when you've taken on as many companies as Aetna, they all have different identities. You can't easily fine-tune costs over the entire organization."

Emergency Measures

Another cost-cutting measure for Aetna is raising copayments for emergency-room visits. "For the most recent quarter, the number of emergency-room visits has gone up a lot," Cheng said. "Outpatient surgery is up a lot. Emergency services are extremely expensive, so they have to try to limit such visits. Some people do go to the emergency room for non-emergency care. The emergency room shouldn't be the first choice for many ailments. That's what they're trying to control."

Pittsburg agreed that cutting costs associated with emergency-room care is important.

"You have to be careful, though. With services like emergency, people can be in a state of panic," Pittsburg said. "The most important ingredient has to be customer service."

Health-care providers have to be concerned about the impact that cost cutting and premium increases have on their relationships with providers and consumers. But these concerns don't affect all HMOs in the same way.

"Aetna cultivates their relationship with consumers primarily through their employers," Cheng said. "Premium increases will impact Aetna's relationship with employers. It's the structure of the increase that matters, whether through higher copayments for visits, for pharmaceuticals or by raising the rate for the employer. If the employer offers a selection of policies, that makes a difference."

HMOs' relationships with healthcare providers could suffer under the proliferation of lawsuits in the health-care industry. But such litigation doesn't impact the bottom line, Cheng said.

"Generally, we're talking about lawsuits against doctors for malpractice," she said. "Denial-of-service suits are a product of the times. But it's hard to get a class action for denial of service...An HMO may say this patient doesn't need this or doesn't need that, and they're basing this on certain norms. An individual may fall outside the norm, so you're looking mostly at individual lawsuits."

Pittsburg, noting that litigation is on the rise in every industry, not just health care, said, "In today's world, you have to just factor it in."