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Medicare’s Role for Latinos – (Spanish version)
Note: This publication is no longer in circulation. However, a few copies may still exist in the Foundation’s internal library that could be xeroxed. Please email order@kff.org if you would like to pursue this option
The NPR/Kaiser Family Foundation/Kennedy School of Government National Survey on Americans and Dietary Supplements was designed by staff at National Public Radio, Kaiser Family Foundation, and the Kennedy School of Government and conducted by Princeton Survey Research Associates. The survey was conduced bytelephone with 1,200 adults (age 18 or older) nationwide between February 19 andFebruary 25, 1999. The margin of sampling error is plus or minus 3 percentagepoints.
A fact sheet on the growing influence of for-profit organizations; trends in the stock prices of HMOs and health services companies compared to the overall stock market; recent HMO activity such as premium increases and mergers and acquisitions; and issues related to the financial aspects of HMOs.
A Financial Overview of the Managed Care Industry
March 1999
Part 1
The rapid growth of managed care has brought with it a growing connection between the stock market andhealth care organizations. Health care services have evolved from being delivered by physicians and tax-exempt institutions to a market-driven industry attracting investment capital from numerous sources. The market capitalization, or total stock value, of the relatively young HMO industry grew from a little over $3 billion in 1987 to almost $39 billion in 1997 an almost twelve-fold increase while the stock mar-ket as a whole grew about four-fold to a total of $10.5 trillion. However, recent health plan earnings and premium announcements indicating companies difficulties in managing medical costs have led some equity analysts and investors to question whether these health sector stocks will offer growth potential in the future. And, financial difficulties in the HMO industry may have important implications for health policy debates that are increasingly connected to the practices and potential of private health plans.
The Growing Influence of For-Profit Organizations
The increased corporate influence in health care is espe-cially evident in the growing prevalence of for-profit companies within the HMO sector. Between 1981 and January 1998, for-profit HMOs grew from representing 12% to 63% of total HMO enrollees, and from 18% to 74% of plans (InterStudy). Among hospitals, on the other hand, for-profit companies have increased their role, but nonprofit organizations continue to dominate the industry. Between 1980 and 1996, for-profit companiesgrew from representing 9% to 13% of community hospi-tal beds (American Hospital Association).
The growing role of for-profit companies in the HMO and hospital sectors has resulted from a combination of the emergence and growth of for-profit companies, as well as conversion of not-for-profit companies to for-profit status. One outcome of these conversions is the estab-lishmentof charitable foundations designed to preserve the charitable missions and assets of the formerly not-for-profit organizations. As of February 1999, there were at least 109 conversion foundations in the U.S., with assets totaling about $13 billion. Health plan con-versions represented the source of only 11 of the founda-tions, but these foundations hold almost half of the total assets (Grantmakers in Health).
Stock Trends
Many for-profit health care compa-nies have tapped the stock marketfor financing. According to an analysis prepared for the KaiserFamily Foundation by Securities Data Company, there were 233 ini-tialpublic offerings (IPOs) of stock of health companies between 1987 and 1997.
The total stock value (or market cap-italization) of publicly traded healthservices and HMO companies has increased dramatically over the pastdecade. Total market capitalization of HMOs grew from $3.3 billion inJanuary 1987 to $38.9 billion as of the end of November 1997, an almost twelve-foldincrease. For companies classifying themselves as health services (including hospitals and nursing homes), capital-ization grew from $16.3 billion to $112.7 billion over thesame time frame. In comparison, the overall stock market grew a little over four-fold during this time period. Wall Street’s growing interest and role in health care companiesis also evidenced by the increased number of investment analysts following health care stocks from 152 in 1987 to 559 in 1997, according to Nelson’s Directory of Investment Research.
Over the last decade, HMO stocks generally out-per-formed the market as a whole, although they experienced periods of significant price declines, most recently betweenJuly and September 1998. In contrast, health services companies tracked just somewhat above the marketthrough much of the decade until 1998, when health ser-vices fell below the market. Recently, average annual returns for health services and HMO companies have suf-fered relative to the overall market. Using a University of Chicago index developed for the Kaiser Family Foundationthat measures the market-weighted return of stocks, a 1987 investment of $100 in the market as a whole would have grown to $610 by the end of 1998. In comparison, an investment of $100 in HMOs would have grown to $807, while a similar investment in helath services compa-nies would have increased to only $393. In 1998, HMOs performed a bit better than in the previous couple of years with average stock prices rising 7% over the course of the year compared to a drop of 11% from 1995 to 1997 but health services companies did quite a bit worse in 1998 and saw stock values fall by 19%. Many anticipate that slow recovery will continue for HMOs in 1999, but not to historic levels of stock price growth.
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A Financial Overview of the Managed Care IndustryFact Sheet Part 1 Fact Sheet Part 2
A Financial Overview of the Managed Care Industry
March 1999
Part 2
Recent HMO Activity
After 6 years of steady growth, HMO profits declined in 1994, 1995, and 1996; in 1997, nearly 60 percent of HMOs lost money (Weiss Ratings). Although HMO net income plunged from 1994 through 1997, HMO enroll-ments were up 72% and total revenues rose 77% over that period (Best’s Aggregates & Averages HMO, 1998). At the same time, health services companies have grown increasingly profitable throughout the 1990s.
While underlying health care costs have continued to grow especially for prescription drugs plans competing for market share have until recently sought to hold premium levels down. HMO premium increases moderated through-out the early 1990s, and the rates charged to large employersactually declined by 0.4% in 1996. Since then, premiums charged to large firms have increased 2.0% in 1997 and 2.9% in 1998 (KPMG Peat Marwick). Most analysts now expect premiums to escalate, with one study predict-ing increases of 6-9% in 1999 (Hewitt Associates).
In part due to recent premium increases, some plans including PacifiCare, Wellpoint, and United HealthCare are now reporting positive balance sheets. However, other plans are continuing to report significant losses. For example, Kaiser Permanente, one of the nation’s largest andmost visible HMOs, lost $288 million in 1998 (or 2.8 percent of operating revenues), on top of a loss of $266 million in 1997 (3.2 percent of operating revenues). Kaiser attributes 1998 losses to increases in the cost of care from pharmacy and hospital services, and the use of non-Kaiser Permanente health facilities.
Responding in large part to financial pressures and to pay-ment reforms in the Balanced Budget Act of 1997, plans have pulled back from some markets, especially in theMedicare program. For 1999, nearly 100 HMOs either reduced their service areas or terminated their contracts with Medicare, affecting more than 400,000 beneficiaries (nearly 7% of Medicare HMO enrollees). The reasons cited by HMOs for the withdrawals were the inadequacyof Medicare s payment rates and the regulatory burden of participating in Medicare, including increased require-ments for consumer protections.
Mergers and acquisitions have beenanother feature of HMO activity in recent years. The proportion ofHMO enrollees in the 10 largest national managed care firms oneindicator of market concentration has grown rapidly recently afterremaining steady at about 55% for a number of years,rising to 67% in January 1998 (InterStudy). Major mergers in theindustry include Aetna’s purchase of U.S. Healthcare in 1996 andCIGNA’s acquisition of Healthsource in 1997. More recently, Aetnaannounced that it will buy Prudential for $1 billion. This deal has beencriticized by such organizations as the American Medical Association and is under review by fed-eraland state regulatory agencies. Mergers may put a strain on an HMO s financial results, in part because of the difficulties of integrating the businesses acquired. Concerns have also been raised about the resulting domi-nation of a small number of HMOs in certain geographic markets, the impact on providers ability to negotiate pay-ment rates and resulting impact on treat-ment time and options, and patient fears that provider networks will be disrupted. At the same time, mergers can lower coststhrough economies of scale and increased purchasing leverage by plans.
Issues
Do recent stock price declines signal a shift in prospects for the managed care industry?Many investors were drawn to managed care companies asgrowth stocks that would achieve success by meeting therapidly growing demand for lower-cost managed care prod-ucts,as well as the potential to increase efficiency. Now,over three-quarters of those with employment-based healthinsurance are enrolled in some type of managed care plan,so potential further growth in that segment of the market islimited. Overall, enrollment growth has been especially visi-blein open-access products, but there are uncertaintiesregarding the ability of these plans to control costs.
How will rising premiums affect insurance coverage?While premium increases may help to restore the finan-cial health of HMOs, such increasesalso impact the cost of health carefor employers and enrollees. Smallbusinesses (who are least likely tooffer coverage) and lower incomeindividuals (who are most likely tobe uninsured) are particularly vul-nerableto cost increases. The num-berof uninsured has continued inrecent years to rise by more than onemillion a year, even in a period ofunprecedented economic prosperityand moderate growth in healthinsurance premiums. Rising premi-umscan only increase the already large number of peopleuninsured.
Would the passage of consumer protection legislationaffect the financial viability of HMOs? Consumerprotection legislation has been introduced in Congressand in many states. What would be the impact of provi-sionssuch as mandating external reviewprograms, prudent layperson paymentrequirements for emergency care, andhealth plan liability? Some estimatessuggest that the cost of these and otherprovisions could be large,but independent analyses by theCongressional Budget Office andCoopers & Lybrand (prepared for theKaiser Family Foundation) point to amore modest cost impact.
What is the future of HMOs in Medicare? Despite planwithdrawals for 1999, HMOs are expected to cover anincreasing proportion of beneficiaries. With future pres-sureto lower federal payments to plans, will HMOs con-tinueto find this market attractive and provide expandedbenefits such as prescription drugs?
How do market pressures affect quality of care? It is notclear whether profit status matters in the quality of care thatis delivered, or whether, in the near future, we will havereliable measures to judge quality across not-for-profit andfor-profit organizations. Market incentives have been bothcredited for eliminating unnecessary care and blamed forforcing providers to skimp on quality and quantity of care.
The Kaiser Family Foundation, based in Menlo Park, California, is a nonprofit, independent national health care philanthropy and is not associated with Kaiser Permanente or Kaiser Industries.
For more information,visit the Foundation sweb site at www.kff.orgor call the publicationrequest line at(800) 656-4533.
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A Financial Overview of the Managed Care IndustryFact Sheet Part 1 Fact Sheet Part 2
A new survey of parents and kids ages 10-15 on topics such as sex, AIDS, violence, alcohol and drugs. The survey was conducted for the Kaiser Family Foundation and ChildrenNow, as part of a national initiative called Talking With Kids About Tough Issues. More information on the campaign is available at www.talkingwithkids.org.
This parent guide offers practical, concrete tips and techniques for talking easily and openly with young children ages 8 to 12 about tough issues:sex, HIV/AIDS, violence, drugs and alcohol.
Medicare Restructuring: The FEHBP Model
Executive Summary
As policymakers consider measures to assure the long-range solvency of Medicare, one option that has received increasing attention is a “premium support” system. Under such a system beneficiaries would choose between the original Medicare fee-for-service program and a variety of competing health plans. They would receive a fixed government contribution toward the plan of their choice and would pay any remaining costs themselves. Proponents of a premium support option have suggested as a model the Federal Employees Health Benefits Program (FEHBP), which offers multiple plans to federal employees and annuitants.
How Do Medicare and FEHBP Differ?
Medicare beneficiaries in many areas already have a choice between original Medicare and Medicare-contracting HMOs. The Medicare+CHOICE program established by the Balanced Budget Act (BBA) of 1997 will broaden the health plan options available to beneficiaries and provide for more structured competition. As a result, Medicare’s operations will more closely resemble those of FEHBP.
Table E-1 compares key features of the Medicare+CHOICE and FEHBP programs. Similarities in the two programs have sometimes been obscured by differences in terminology and administrative structures:
Still, there are important differences between Medicare+CHOICE and FEHBP:
Table E-1. Comparison of Medicare+CHOICE and Federal Employees Health Benefits Program Medicare + CHOICE FEHBP Choice of plans Beneficiaries are enrolled by default in original Medicare (the fee-for-service program operated by the government). They may obtain private supplemental coverage or may choose to obtain Medicare benefits (plus supplements) from a local or regional HMO, PPO, or other coordinated care plan; a private fee-for-service plan; or an MSA plan.
81 percent of beneficiaries are in original Medicare; 19 percent in HMOs or similar plans. Participants choose from among: a national Blue Cross/Blue Shield PPO plan, national fee-for-service plans operated by employee associations (also usually with PPO options), and about 300 local or regional HMOs, some of which offer point-of-service options.
70 percent of enrollees are in Blue Cross/Blue Shield or other fee-for-service plans; 30 percent in HMOs. Benefits All plans must provide at least the same benefits as original Medicare. Most provide supplemental benefits, including reduced cost-sharing and often additional services such as prescription drugs. (Plans whose expected Medicare profit margin is greater than that for commercial enrollees must share the excess profit in the form of supplemental benefits.) Each plan designs its own benefits subject to limited guidance from OPM. There is no fixed minimum, and benefits vary widely. Premium rates Each HMO or other plan quotes a premium for basic Medicare benefits plus any supplements.
The rate is based on what the plan would charge non-Medicare enrollees for the same benefits, adjusted for characteristics of Medicare enrollees. Each plan quotes a premium for its benefit package.
For most HMOs, the rate is what the plan would charge other large groups for the same benefits; it may or may not be adjusted for characteristics of FEHBP enrollees. For fee-for-service plans, the rate is based on actual expected costs for FEHBP enrollees. Government contributions For each enrollee, the government pays according to a fixed formula that does not take into account rates of competing plans. The government contribution varies by geography and demographic and risk characteristics of plan enrollees. For each enrollee, the government pays the lesser of: 75 percent of the plan’s premium, or 72 percent of the weighted average premium for all plans. The government contribution is not adjusted for enrollee demographics, risk, or geography. Enrollee contributions All beneficiaries pay a monthly part B premium. Enrollees in Medicare+CHOICE plans may pay an additional premium if the government contribution does not cover the plan’s full price for its benefits. The enrollee pays the portion of the plan premium not covered by the government contribution (never less than 25 percent of the plan’s premium). Plan risk The premium represents payment in full; each plan is at risk for costs exceeding premium revenues. Contingent reserves are established for each plan through a premium surcharge paid by the government and enrollees. The plan may draw on these reserves if costs exceed premium revenues. Budgetary treatment Entitlement: Medicare must pay for covered services defined by law at rates defined by law, without budgetary limit. Virtual entitlement: agencies must pay the government contribution defined by law for the plans chosen by their employees. OPM can affect this amount by negotiating premiums and benefits, but does so without any spending target. Enrollment and consumer information When Medicare+CHOICE is fully implemented, beneficiaries may generally change plans only during fixed periods. HCFA is making some progress toward providing comparative information on plan options. Enrollees may generally change plans only during an annual open season. OPM provides extensive comparative information on plans. Administration HCFA’s dealings with plans are governed by explicit statute and regulations. HCFA’s administrative costs (for functions equivalent to OPM’s) equal 0.2 percent of benefit payments. OPM has somewhat greater discretion to select health plans and negotiate benefits and premium rates. OPM’s administrative costs equal 0.1 percent of benefit payments.
The full report is available in PDF.
Additional free copies of this summary (#1462) and the full report on which it is based (#1461) are also available by calling our publications request line at 800-656-4533.Return to top
Medicare Restructuring: The FEHBP ModelSummary Part 1 Summary Part 2 Full Report
Medicare Restructuring: The FEHBP Model
Executive Summary
As policymakers consider measures to assure the long-range solvency of Medicare, one option that has received increasing attention is a “premium support” system. Under such a system beneficiaries would choose between the original Medicare fee-for-service program and a variety of competing health plans. They would receive a fixed government contribution toward the plan of their choice and would pay any remaining costs themselves. Proponents of a premium support option have suggested as a model the Federal Employees Health Benefits Program (FEHBP), which offers multiple plans to federal employees and annuitants.
How Do Medicare and FEHBP Differ?
Medicare beneficiaries in many areas already have a choice between original Medicare and Medicare-contracting HMOs. The Medicare+CHOICE program established by the Balanced Budget Act (BBA) of 1997 will broaden the health plan options available to beneficiaries and provide for more structured competition. As a result, Medicare’s operations will more closely resemble those of FEHBP.
Table E-1 compares key features of the Medicare+CHOICE and FEHBP programs. Similarities in the two programs have sometimes been obscured by differences in terminology and administrative structures:
Still, there are important differences between Medicare+CHOICE and FEHBP:
Table E-1. Comparison of Medicare+CHOICE and Federal Employees Health Benefits Program Medicare + CHOICE FEHBP Choice of plans Beneficiaries are enrolled by default in original Medicare (the fee-for-service program operated by the government). They may obtain private supplemental coverage or may choose to obtain Medicare benefits (plus supplements) from a local or regional HMO, PPO, or other coordinated care plan; a private fee-for-service plan; or an MSA plan.
81 percent of beneficiaries are in original Medicare; 19 percent in HMOs or similar plans. Participants choose from among: a national Blue Cross/Blue Shield PPO plan, national fee-for-service plans operated by employee associations (also usually with PPO options), and about 300 local or regional HMOs, some of which offer point-of-service options.
70 percent of enrollees are in Blue Cross/Blue Shield or other fee-for-service plans; 30 percent in HMOs. Benefits All plans must provide at least the same benefits as original Medicare. Most provide supplemental benefits, including reduced cost-sharing and often additional services such as prescription drugs. (Plans whose expected Medicare profit margin is greater than that for commercial enrollees must share the excess profit in the form of supplemental benefits.) Each plan designs its own benefits subject to limited guidance from OPM. There is no fixed minimum, and benefits vary widely. Premium rates Each HMO or other plan quotes a premium for basic Medicare benefits plus any supplements.
The rate is based on what the plan would charge non-Medicare enrollees for the same benefits, adjusted for characteristics of Medicare enrollees. Each plan quotes a premium for its benefit package.
For most HMOs, the rate is what the plan would charge other large groups for the same benefits; it may or may not be adjusted for characteristics of FEHBP enrollees. For fee-for-service plans, the rate is based on actual expected costs for FEHBP enrollees. Government contributions For each enrollee, the government pays according to a fixed formula that does not take into account rates of competing plans. The government contribution varies by geography and demographic and risk characteristics of plan enrollees. For each enrollee, the government pays the lesser of: 75 percent of the plan’s premium, or 72 percent of the weighted average premium for all plans. The government contribution is not adjusted for enrollee demographics, risk, or geography. Enrollee contributions All beneficiaries pay a monthly part B premium. Enrollees in Medicare+CHOICE plans may pay an additional premium if the government contribution does not cover the plan’s full price for its benefits. The enrollee pays the portion of the plan premium not covered by the government contribution (never less than 25 percent of the plan’s premium). Plan risk The premium represents payment in full; each plan is at risk for costs exceeding premium revenues. Contingent reserves are established for each plan through a premium surcharge paid by the government and enrollees. The plan may draw on these reserves if costs exceed premium revenues. Budgetary treatment Entitlement: Medicare must pay for covered services defined by law at rates defined by law, without budgetary limit. Virtual entitlement: agencies must pay the government contribution defined by law for the plans chosen by their employees. OPM can affect this amount by negotiating premiums and benefits, but does so without any spending target. Enrollment and consumer information When Medicare+CHOICE is fully implemented, beneficiaries may generally change plans only during fixed periods. HCFA is making some progress toward providing comparative information on plan options. Enrollees may generally change plans only during an annual open season. OPM provides extensive comparative information on plans. Administration HCFA’s dealings with plans are governed by explicit statute and regulations. HCFA’s administrative costs (for functions equivalent to OPM’s) equal 0.2 percent of benefit payments. OPM has somewhat greater discretion to select health plans and negotiate benefits and premium rates. OPM’s administrative costs equal 0.1 percent of benefit payments.
The full report is available in PDF.
Additional free copies of this summary (#1462) and the full report on which it is based (#1461) are also available by calling our publications request line at 800-656-4533.Return to top
Medicare Restructuring: The FEHBP ModelSummary Part 1 Summary Part 2 Full Report
This report provides a comprehensive description of the Federal Employees Health Benefits Program (FEHBP) and compares the FEHBP and Medicare programs as they are currently structured. It reviews evidence on the performance of FEHBP and examines the implications of restructuring Medicare to conform to a FEHBP-based plan. Overall, the report suggests that FEHBP offers some promise as an approach for reforming Medicare, but important issues would have to be addressed to adapt the model to Medicare.