A Conversation with Richard L. Hamer: HMOs Healthier, Less Abused, But Fail to Increase Market Share

InterStudy’s director says that the push for patients’ rights has grown into a concern for quality directed mainly at doctors.

Richard L. Hamer is director of InterStudy Publications in St. Paul, Minn. Founded as a public-policy group by Paul Ellwood Jr., MD, in 1971, InterStudy and its staff helped draft the HMO Act of 1973, which set the stage for the enormous growth in managed care in the decades to follow. InterStudy has since evolved into a market-research organization that has quantified that growth through its tracking of managed care enrollment.

Hamer directs InterStudy’s primary research of select managed care and health care quality management topics, and is a frequent speaker on those topics.

He has previous experience in corporate health maintenance programs, and in financial and management consulting for health and human services organizations.

Hamer, who received a bachelor’s degree from the University of Minnesota and a master’s degree from the University of Toronto, spoke recently with Senior Contributing Editor Patrick Mullen.

MANAGED CARE: To what degree have physicians decided that because efforts to measure quality and control costs are not going away, they should lead rather than oppose those efforts?

RICHARD HAMER: Many doctors have always considered managed care part of the practice of good medicine. They feel that requirements for documentation and information systems help them practice better medicine. But overall, the physician community isn’t saying that. Unfortunately, it boils down to a political battle by groups such as the AMA over who has power, and that’s beside the point. One lesson that we have to learn from the last 10 years is that doctors will win and so you need to work with them. If you work against them and buy their practices out from under them, those practices are likely to fail. Then they’ll buy those practices back from you for 10 cents on the dollar. That approach didn’t work for many people trying to form integrated delivery systems.

MC: MedPartners Provider Network, FPA Medical Management, and a few others have the bankruptcy filings to prove it.

HAMER: Physicians aren’t going to pay any attention to anyone who tries to ram protocols down their throats. They are the experts, so you have to tip your hat to their education and personal responsibility.

MC: A couple of years ago, you said that you thought that there might be a public backlash against providers once HMO bashing had lost steam. Is that happening?

HAMER: HMO bashing has lost steam and a critical look at providers is beginning to show up. Concerns about a Patients’ Bill of Rights and the unethical practices of managed care plans have morphed into a concern over patient safety that is much more directed at providers. Employers are looking to health plans to help assure that their employees are safe when they get into the hospital.

MC: Three years ago, in a forecast issue for Managed Care, you predicted that “The biggest wildcard facing the industry in the next two years is what physicians and other providers will do to be constructive players in this game of limited resources.” You added that, up to that point, there hadn’t been any strong statements from the physicians about this. Three years later, have you heard any?

HAMER: No, I haven’t heard any strong statements from the physician community. It’s still a critical issue, though calling it a wildcard may no longer be appropriate. Since then, provider organizations have consolidated so much that managed fee-for-service systems and fee-for-service-based HMOs have had to make concessions in setting discounts for fee schedules. Large provider organizations, specialty organizations, and hospital systems have developed quite a bit of negotiating power when talking to managed care plans. That takes away one of HMOs’ and other managed care organizations’ main economic levers, the ability to get a deep discount or take advantage of an oversupply of doctors and hospital beds. Even if there are many provider organizations with which managed care plans can deal, there are several with which they must deal in any given market, because they have a local oligarchy. To serve a certain part of a metropolitan area or region, they must have that provider on hand. So while we haven’t heard strong statements about the practice of medicine, we have seen a strong reorganization of the provider community.

MC: Let’s talk about enrollment trends. In 2000, InterStudy projected that HMO enrollment by now would be over 100 million. Instead, enrollment has stalled at about 80 million. How much of the slowdown in HMO growth is the HMOs’ own fault and how much of it reflect factors that are totally beyond their control?

HAMER: That projection was an extrapolation of past data into the future. At the time, there were 650 HMOs, and now there are 500. Our projection didn’t account for that large degree of market exit and consolidation. It didn’t account for the fact that many mergers and acquisitions led to a negative net gain in enrollment. Plans that bought other plans often decided not to renew the acquired plans’ HMO contracts. The biggest example of this is Aetna’s purchase of Prudential’s health plans. Prudential has accounted for half a million HMO enrollees lost since Aetna purchased it and will probably account for more than a million this year, because Aetna is consolidating and eliminating Prudential plans they purchased in many places. The third thing that the projection didn’t account for is the persistent profit problems that HMOs would have. In the past we usually thought of an underwriting cycle with three down years and three up years. This most recent underwriting cycle has been more like six years down, and it’s starting to come up now. In some cases, especially for smaller employers, HMOs’ rate of premium increase is faster than PPOs’ and other types of health insurance. They’re just not taking business that isn’t going to help them restore profitability. Our projections also didn’t account for the collapse of Medicare+Choice. The projection that would have topped us out at 100 million assumed that Medicare+Choice would have about 12 million members in 2002. It has less than half of that now and is going in the other direction.

MC: In measuring the managed care market, one point that InterStudy tries to hammer home is that PPOs and HMOs are fundamentally different types of organizations. Please talk about your efforts to redefine how PPOs are measured.

HAMER: On the most basic level, where a lot of PPOs continue to operate, they simply assemble and manage a network. They don’t underwrite coverage, don’t do utilization review, don’t assemble or manage pharmacy benefits, don’t design the health plan or do anything like set up copayments. The employer, a benefits consultant, or an insurance company handles those things. So at its most basic level a PPO is just one piece of a health plan. The other pieces are an employer, an insurance company, a third-party administrator, and a pharmacy benefit manager. In the PPO market, the organizations that probably have the most data and would be most able to control information are third-party administrators. Given this characteristic of PPOs as network managers, we have emphasized that PPOs don’t always have an enrollment file that lists everybody in their plan or in the plans they serve.

MC: You’ve changed how you measure PPOs.

HAMER: We’ve developed what we call a market influence index. We call it an influence index because PPOs don’t have power over providers and patients the way HMOs do. They don’t capitate or use gatekeepers, they almost always have out-of-network benefits, and their contracts are just for discounted fees. Therefore they don’t have power but they do have influence. We gauge that influence by looking at five factors: covered lives, specialty network size, primary care network size, number of employer contracts, and the dollar value of claims processed.

MC: Can you think of any popular ideas in managed care that may not have staying power?

HAMER: One system of thinking that probably won’t be the centerpiece of our thinking in a couple of years is the notion that the millions of daily decisions consumers make can bring equilibrium to the health care market. There are just too many holes in the argument that a consumer or a patient can absorb information, rank preferences, make rational decisions with or without the doctor, and assess prices.

MC: Not only are there millions of people who would probably have a hard time doing those things, there are probably millions of others who could, but wouldn’t because of other demands on their time and energy.

HAMER: Right. So while consumerism is currently at the center of our thinking, the fact remains — and we need to acknowledge as a country — that our current national health policy promotes employers as the centerpiece of our health care system. Where the rubber meets the road in health plan design, benefit structure, and cost sharing is the negotiation between employers and health plans. The consumer isn’t involved, other than by providing feedback to employers and plans. The key decisions are made once a year in negotiations between health plans and employers. That is the unique American system. Once we accept that, we can move on to what we want to do to ensure access to care for all people.

MC: Are managed care companies doing a good job of using information technology tools to improve the way they do their business?

HAMER: We did a study last year that showed that, on average, HMOs and other health insurance companies are spending about 3.5 percent to 4 percent of their premium revenues on information technology. In such a highly regulated industry, a lot of that spending is devoted to keeping up with regulations. That doesn’t just mean HIPAA compliance either. There are lots of state regulations that plans have to deal with. When those regulations change, plans have to adjust their systems. Once that’s done it might be the third quarter of the year and you’ve got very little time left in the year.

MC: And then next year’s changes come rolling in.

HAMER: Once you get beyond regulatory compliance, the second level of problem that plans use IT tools to solve is to produce greater efficiency and speed in claims processing. Some larger plans have gone beyond that. Humana, for example, has a completely digitized health plan. But most HMOs currently don’t use the Internet for transactions. After you pay claims more efficiently, one of the biggest issues in health insurance is to build bridges between islands of information. Considerable IT spending is going into developing and integrating data warehouses to integrate lab and pharmacy claims and physician databases. Once these islands of information are integrated, the next step is pulling it together into some sort of analysis tool to help managers identify cases through disease management or case management programs.

MC: Thank you.

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