Premium Rates Increase To Keep Up With Costs

With anticipated average medical costs increases of 11% to 12% in 2003, the third straight year of double digit increase, the managed care industry will continue to benefit from an upswing in the underwriting cycle, a phenomenon that occurs when premium growth exceeds medical cost growth. Therefore profit margins are expanding, albeit only in the lower single digits, from 1.8% in 1999 to 4.4% in 2002, according to the Centers for Medicare & Medicaid Services (CMS) Health Care Industry Market Update report.

Similar margin improvement has been observed among the Blue Cross Blue Shield plans, the publicly traded Medicaid HMOs, and Kaiser Permanente, the largest nonprofit HMO in the country. “Most of these companies expect to maintain or expand profit margin levels,” the report said.

Market Trends

The commercial market has moved “towards more open and flexible plans,” in recent years, evidenced by over 70% of commercial enrollees now enrolled in preferred provider organizations (PPO), 52% of that total, or point-of-service (POS) plans, 18%, compared to 26% in health maintenance organizations (HMOs).

The numbers from 2002 continue a trend that began in 1993 when combined PPO and POS enrollment for covered workers more than doubled from 33% to 70%, while conventional fee-for-service indemnity enrollment declined from 46% to 5%. Comparatively, HMO enrollment has declined from its 31% peak in 1996, but has remained relatively steady at an average of 27% over the past five years.

Part of the shift is attributed to the more hybrid plans turning away from the direct utilization controls of HMOs. PPOs and their hybrid brethren incorporate other mechanisms to control utilization and costs, such as tiered pharmacy and provider co-pays. Additionally, the number of employers that incorporate disease management, those programs designed to target segments of the population with dispositions toward conditions that tend to drive healthcare costs higher, into health plan designs rose to 50% in 2003 from 44% in 2002.

Analysts project the commercial market to continue shifting toward self-funded plans, which are not subject to state-mandated benefits under ERISA and can better control costs.

Offering a picture into the opposite view, 89% of Medicare's 41.5 million beneficiaries were covered by the traditional fee-for-service plan in 2003. The remaining 11% of beneficiaries were covered by Medicare managed care plans known as Medicare+Choice (M+C) coordinated care plans.

However, health care costs in many parts of the country continue to exceed available M+C payments. As a result, many M+C plans have reduced benefit packages or exited from certain markets altogether. In 1999, 74% of beneficiaries had access to at least one M+C plan; in 2003, this number dropped to 59%.

Of course, complete withdrawal from a market is considered a M+C organization's most drastic reaction to insufficient payment increases. Many other M+C plans are increasing out-of-pocket costs for beneficiaries and reducing benefits, particularly:

• The percent of beneficiaries who had access to zero premium M+C coordinated care plans dropped from 61% in 1999 to 29% in 2003.
• The average out-of-pocket costs for Medicare-covered services per M+C enrollee per month increased from $25 in 2002 to $34 in 2003.
• Average premiums for a basic M+C plan increased from $31 to $37 per month between 2002 and 2003.
• Access to prescription drug benefits through M+C has also declined for beneficiaries, from 65% in 1999 to 50% in 2003. Additionally, the percent of beneficiaries with drug coverage in a basic M+C plan who have generic only coverage will rise from 30% in 2002 to 44% in 2003.

Medicaid Outlook

Medicaid managed care enrollment has grown rapidly, increasing from 40% of Medicaid beneficiaries in 1996 to 58% in 2002. Medicaid managed care includes comprehensive benefit plans such as primary care case management, prepaid health plans, and HMOs, as well as more limited plans such as mental health or partial hospitalization programs. Analysts believe that Medicaid is the only market where HMO enrollment will grow, as commercial plans have reduced their exposure to Medicare managed care revenue in recent years.

Evidence of this is the growing number of beneficiaries enrolled in managed care in Medicaid. In fact, 48 Medicaid programs offer managed care options, 42 of these require managed care enrollment for beneficiaries.

Further noted in the report is the continuing consolidation of health plans, especially among the Blue Cross Blue Shield plans. The number of HMOs has declined from 643 in 1999, to 490 in 2002. One analyst predicts that the number of Blues plans will shrink, from the current 42 to about 25 to 30 over the next five years. Consolidated health plans "create larger membership blocks, increasing bargaining leverage with providers and leveraging administrative costs," CMS said.

A smaller share of the total HMO enrollment is in nonprofit health plans compared to previous years. For 1981, 88% of the HMO enrollees were in nonprofits, while in 2000, the share of enrollees in nonprofits declined to just 37%.

The copy of the full report can be found at http://www.cms.hhs.gov/reports/hcimu/hcimu_03242003.pdf.