It's no secret that health plan premiums are up sharply. Last year marked the first time since HMOs' go-go period in the early- to mid-'90s that premium increases were higher than the increase in underlying medical costs. When medical costs slowed in the mid '90s, premium hikes did, too — but the rates of increase often fell below those of medical-cost inflation because of health plans' desire to grab market share. Now, after many lean years in the health plan industry, rising medical costs have forced plans to adopt what would appear to be a more sound pricing structure — one that covers medical costs and administration. In this round of escalating medical costs, though, the margin between premium increases and medical-cost inflation is far smaller than was typical in the early '90s, perhaps again due to competitive pressures.
Whether this pricing tactic helps health plans return to profitability remains to be seen, but it appears the industry's financial picture is brightening. Data from Interstudy Publications reveal that average profit (in these cases, loss) levels improved, from –3.2 percent in 1998 to –1.3 percent in 1999. Operating margins were poorer for HMOs in small markets (fewer than 250,000 people) than in large markets (more than 1 million).
SOURCES: CENTER FOR STUDYING HEALTH SYSTEM CHANGE, WASHINGTON, NOVEMBER 2000; REGIONAL MARKET ANALYSIS 10.2, INTERSTUDY PUBLICATIONS, MINNEAPOLIS, NOVEMBER 2000