A Balm for Business : Cost of Using HMOs Dips for First Time in Survey’s History

WASHINGTON —  With business demanding savings in health expenses, the average cost to corporations of using health maintenance organizations dropped 3.8% last year, the first decline in 10 years of surveys, according to a report released Monday.

And HMO enrollment had its biggest jump in a decade, from 23% of workers in 1994 to 27% last year, according to Foster Higgins, an employee benefit firm that surveyed 2,800 companies.

The average cost to a company for HMO coverage fell to $3,255 per worker, down from $3,385 a year earlier. In California, HMO charges dropped to $3,415 from $3,556 in 1994.

Employers, who eagerly seek price reductions, are now also increasingly concerned with quality. “The employer feeling is that the HMOs have pretty much squeezed everything they can out of the doctors and the hospitals and other providers,” said Glenn Meister, a principal at Foster Higgins’ Los Angeles office.

Corporate executives are wondering, “How tightly can we squeeze this before quality is impacted?” Meister said. “Employers are wrestling with that.”

Business “wants to strike a balance--companies are focusing not on the provider so much but on the [HMO] plans themselves,” he said.

HMOs now typically pay hospitals and doctors on a fixed basis, with the doctors getting a certain amount each month for every person enrolled in a health plan, regardless of the services rendered. The hospitals might be paid on a per diem basis, or a fixed amount for each hospital stay.

Under the traditional fee-for-service medicine, separate charges are submitted for each office visit, test, treatment or surgery.

National health benefit costs for business, including all types of insurance, rose 2.1% last year to $3,821 per worker, up from $3,741. California’s increase was 1.8% to $4,525, from $4,445. Costs rose overall because traditional fee-for-service plans jumped in price nearly 5%, even as the HMO charges were falling.

The low growth rate for 1995, and an overall dip in 1994, confirms that the era of huge double-digit cost increases paid by business for health coverage is over. As businesses accelerate the shift to managed care and other tightly controlled health systems, more pressure to hold down costs is expected on doctors and hospitals.

HMOs have long been popular among big corporations, but they are now making inroads among companies with less than 500 workers, according to the report.

In California, where Kaiser Permanente made the HMO system familiar for two generations, nearly 50% of the insured population already belongs to HMOs. Other forms of managed care, such as preferred provider organizations--a restricted listing of doctors and hospitals--are also widespread in the state.

Although fee-for-service coverage--also known as indemnity insurance--is still commonplace in much of the country, it is dwindling rapidly in California. For most hospitals in the state, less than 5% of their patients are charged on a fee-for-service basis, according to C. Duane Dauner, president of the California Healthcare Assn.

In Southern California, the traditional system of payment “will be extinct in the next five years,” said David Langness, a spokesman for the Healthcare Assn. of Southern California, which represents hospitals and groups of doctors in six counties, including Los Angeles and Orange.

Foster Higgins said the national survey shows indemnity plans had an average cost of $3,650 per worker last year, up from $3,495. Preferred provider organizations cost $3,169 per worker, down from $3,238. And point of service plans, which allow workers to go outside the restricted network of doctors and hospitals in return for paying more out of their own pocket, cost an average of $3,415, up from $3,302.

In addition to shifting to HMOs and other managed-care systems, companies are striving to control their costs by reducing or eliminating health insurance for retirees, according to the report. Just 41% of retirees under 65 were given health insurance last year, down from 43% in 1993.

The survey uses a sample of employers weighted to reflect all companies and government agencies with 10 or more workers. This makes it valid for more than 700,000 employers and 75 million full- and part-time workers, Foster Higgins said.

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Coming Down

A survey of 2,800 companies by the employee benefit firm Foster Higgins has found that the average health-care benefit cost to businesses rose a modest 2.1% last year after dipping 1.1% in 1994. The survey found that the cost of using health maintenance organizations dropped 3.8% in 1995, the first decline in 10 years of surveys. Foster Higgins said enrollment in HMOs showed a big increase in 1995, to 27% of all employees.

While Cost Increases to Employers Slow. . .

Percentage change in total health benefit cost:

1987: +6.9

1988: +18.6

1989: +16.7

1990: +17.1

1991: +12.1

1992: +10.1

1993: +8.0

1994: -1.1

1995: +2.1

. . .HMO and PPO Costs Are Declining

Average cost per employee in 1995 and percentage change from 1994, by category of medical plan:

Health maintenance organizations: $3,255 (-3.8%)

Point of service plans: $3,415 (+3.4%)

Preferred provider organizations: $3,169 (+2.1%)

Traditional indemnity plans: $3,650 (+4.4%)

Source: Foster Higgins