Vise Tightens On HMOs as Costs Climb.

Health maintenance organizations - sandwiched between hospitals demanding higher reimbursement for medical services and employers wanting to hold the line on rate increases - are being squeezed like never before. And that squeezing is coming at a time when HMOs themselves are facing steeply higher operating costs.

Just recently, the California Public Employees Retirement System, which buys health insurance for 1.1 million public employees, rejected all 10 HMO bids for its 2002 plan year. The bids called for premium increases of 5.5 percent to 41 percent, which Calpers deemed unjustified.

At the same time, several hospital chains have played high-profile games of brinkmanship in their contract negotiations with insurers, threatening not to renew contracts unless they receive more money for medical services provided to plan members.

Adding fuel to hospital and employer arguments is the fact that HMOs have been releasing their year-end results, showing strong profits.

Among recent developments:

* Huntington Memorial Hospital in Pasadena and Methodist Hospital of Southern California in Arcadia warned patients that they were unable to reach an agreement with Health Net, only to announce last week (the day before the contract was to be terminated) that they had settled their differences.

* Sutter Health and Blue Cross of California reached a contract agreement last month, but only after a dispute that had left tens of thousands. of patients in Northern California without access to their Sutter doctors since January.

* St. Joseph Health System in Orange renewed contracts with just four health plans in October while refusing to renew 12 others, a move that has forced thousands of patients to either switch health plans or doctors.

Last summer, Catholic Healthcare West, which operates seven hospitals in Los Angeles County, sued Blue Cross for $50 million, claiming the insurer had systematically underpaid the chain for medically necessary services provided to member patients.

The San Francisco-based chain settled the lawsuit last month in a confidential settlement after agreeing to a new three-year contract, but an official with the hospital chain said the root problems persist.

"The bottom line is that there is not enough money in the system to adequately fund the delivery of health care in California," said Catholic Healthcare West spokeswoman Lori Alderete. "Consumers need to pay more. The government payers need to pay more, because hospitals cannot continue to accept payments (from HMOs) that in some cases do not even cover the cost of care."

The disputes between hospitals and the HMOs have created such a backlash that the California Association of Health Plans, an industry trade group, is pushing for legislation that would require medical providers to continue giving care even when the two sides cannot agree on a new contract.

"Health plans are getting caught between a rock and a hard place," said Bobby Pena, spokesman for the California Association of Health Plans. "We have purchasers on one side saying, 'Price, price and price,' and yet we have providers who we pay downstream saying, 'We want more money.'"

Competing pressures

HMOs have always faced competing pressures from employers and health care providers, but industry officials and experts say several factors have escalated the tension to the breaking point.

On the employer side, HMOs have sought a series of rate increases after a soft period in the mid-to-late 1990s during which Calpers, the second largest purchaser of health care aside from the federal government, was able to use its mammoth purchasing power to drive down rates.

Calpers saw rate reductions of 1.4 percent to 5.3 percent annually between 1995 and 1998, but then had to accept a series of increases that hit 9.7 percent in 2000 and 9.2 percent this year. The fund is now seeking to hold the line with the latest proposed rate increase for 2002.

"We are saying to the HMOs that these rates are unjustified and we can't pay these," said Brad Pacheco, a Calpers spokesman. "It has a ripple effect across the health care industry."

Seeking better rates, the Calpers board has asked for new bids, this time announcing it will only accept the seven best ones as an incentive for the HMOs to drop their rates or lose out on a fund contract. As a last resort, it has even begun investigating the creation of its own medical self-insurance fund.

At the same time, HMOs are hearing louder and louder demands for higher reimbursement rates, particularly from hospitals, which claim they are sinking ever more into the red.

"Sixty-four percent of the hospitals in the state are losing money, and it's from years of underpayment from everyplace you can think of," said Jan Emerson, spokeswoman for the California Healthcare Association, a hospital industry trade group. "We can no longer take it, and what you are seeing are a little bit more of them standing up for themselves."

Hospital woes

Among key factors cited by hospitals for their sinking financial performance are escalating drug costs, more expensive technology and tests, lower Medicare and Medi-Cal reimbursements and legislative care mandates driven by patient demand.

"You can look anywhere on our financial statements, revenues are being pinched and expenses are on the rise," said Bill Caswell, vice president of business development and managed care for Huntington and Methodist hospitals. 'The position we have taken is that we are looking for fair and reasonable reimbursement for the services, we provide, relative to the cost."

Caswell declined to release details of the hospitals' agreement with Health Net, except to acknowledge that the hospitals got a better deal in the end.

A Health Net official also declined to discuss the agreement, but said the insurer is doing the best it can to balance the competing interests of hospitals, patients and employers, while grappling with its own higher costs.

"You have higher pharmaceutical costs and new technologies, and all of these can enhance the health care that members can get, but we also need to keep costs low to keep health care as affordable as we can," said Lisa Kalustian, a spokeswoman for Health Net. "I think it's very difficult to come to a satisfactory resolution to some of these issues with all the parties involved."

Pena said that pharmaceutical costs are now 20 percent higher than they were three or four years ago, while more than 20 HMO reform bills passed by the Legislature have each added about 1 or 2 percent to the cost of premiums. On top of that, general health care inflation has been running 5 to 7 percent annually.

"California has had it good for quite some time. They have had a great deal and have been enjoying it," Pena said. "Health plans were forced to keep costs down, maybe artificially. Now, premiums are probably going to have to go up a little bit more."

Keeping costs down

Even harsh HMO critic Dr. Jack Lewin, CEO and executive vice president of the California Medical Association, acknowledges that, relatively speaking, California premiums are low, perhaps 30 percent below rates paid on the East Coast. But that bargain has come with its own cost.

"(HMOs) have kept costs down by squeezing patients, doctors and hospitals. Meanwhile they are posting some good profits," Lewin said. "Now, it's time for the HMOs to pay the piper. They are going to have to go to employers and tell them what it really costs to pay for health."

WellPoint Health Networks Inc., the parent of Blue Cross, reported net income of $89.5 million ($1.37 per diluted share) for the fourth quarter ended Dec. 31, up from $78.8 million ($1.20 per diluted share) in the like year-earlier quarter.

Similarly, Health Net Inc. reported net income of $46.2 million (37 cents per diluted share) for the fourth quarter ended Dec. 31, up from $37.4 million (31 cents) in the like year-earlier quarter.

However, Pena said it's not fair to read too much into the financial performances, claiming that HMOs on average in California are getting by with just a 2 to 3 percent average profit margin.

Weiss Ratings Inc., which measures HMOs' financial performances, recently rated Blue Cross as the financially strongest HMO in the state, with Blue Shield, a not-for-profit, second and Health Net third.

However, it also found that nationally 373 small HMOs with fewer than 100,000 enrollees suffered cumulative losses of $127 million in the first half of last year, while the 35 largest HMOs posted a net profit of $528 million.

Despite those hefty profits, there is no doubt that health care costs are going up and that employers will probably pass them on to employees, said Elaine Batchlor, vice president of health care finance, organization and operation for the California HealthCare Foundation, a non-profit group.