Subject: Clinton's Health Plans Are Likely to Step Up The Switch to HMOs Date: Published: 5/18/93 (227 lines) Source: Wall Street Journal. Copyright Dow Jones & Co. Inc. New Treatment: Clinton's Health Plans Are Likely to Step Up The Switch to HMOs --- Traditional Medical Insurance Seems Fated to Dwindle, Maybe Even Disappear --- Hot Issue: Rejecting the Sick ---- By Greg Steinmetz Staff Reporter of The Wall Street Journal Hillary Rodham Clinton has a blunt message for many health insurers: "Get out of the insurance business." In Florida in March, she angrily said companies that turn down sick applicants should quit the business and "let other people get in who want to insure people the old-fashioned way, by making a little bit of money on a whole lot of people." As head of President Clinton's Health Care Task Force, Mrs. Clinton is making more than threats. She and her group are fine-tuning proposals that could easily clear the field for the "other people." These are the big insurers and other companies that operate managed-care networks, such as health maintenance organizations. HMOs get credit for promoting a major administration goal-controlling medical costs. They also tend to follow the standard advocated by Mrs. Clinton in Florida: They reject far fewer sick people than do conventional insurers. The losers would be the 500 or so other companies in the health-insurance business. Although the Clinton plan has been maligned as the "Health Insurance Preservation Act," the reality for many insurers -- and for thousands of independent agents who sell their policies -- could be far different. Standard & Poor's analyst Beth Morrow says reform, depending on how far it goes, will either force insurers to resign themselves to lower profits or set off a "stampede out of the health-care business altogether." The Clinton campaign to revamp health care could founder in Congress, of course. The health-insurance lobby, despite recent defections by insurers running HMOs, remains powerful. But the pressures to control health-care costs are enormous, and the president has staked so much on the issue, experts say, that some change seems inevitable. Although details of the Clinton plan won't be disclosed until next month , the administration is talking of sweeping changes for doctors, hospitals, drug makers and, especially, insurers. So, the insurance industry is bracing for changes that could put up for grabs health-care premiums totaling as much as $300 billion -- a staggering 5% of the country's gross domestic product. Much of that money would move from traditional plans into HMOs. For years, HMOs have been gaining ground on other insurers and now cover about 41 million Americans. By comparison, Medicare and Medicaid cover about 58 million people, and insurance companies insure or administer plans for 120 million who aren't in HMOs. The Clinton plan would accelerate the shift to HMOs -- though the president may impose temporary price controls that, by narrowing the HMOs' cost advantages, might slow the changeover a bit. "The traditional health insurance industry is disappearing, and the Clinton plan would pretty much kill it," says Paul Ellwood, head of the Jackson Hole Group (an industry-sponsored health-care research group) and an advocate of many health-care ideas embraced by President Clinton. Those ideas trouble Edward Kane, the general counsel for Guardian Life Insurance Co., which rejects about two of every 100 applicants -- about average for the industry. Mr. Kane makes no apologies for screening risks. "Risk selection has always been part of insurance," he says, but "now they call it discrimination." Questions about rejection might not matter to employees of big corporations, whose health plans tend to take all comers because the insurer can spread the costs across a large group. But they mean a lot to employees of small companies and to individuals who buy their own insurance. If the insurer sees them as high-risk, they either have to pay more or are denied coverage. Mr. Kane argues that because Guardian rejects, say, some applicants with cancer, it can offer lower rates to those it accepts. He adds that it is fair to charge an older person more for health insurance than a younger person, just as it is fair to charge a smoker more than a nonsmoker. But while decrying Mrs. Clinton's approach as the "socialization" of health care, Mr. Kane concedes that Guardian probably has little choice but to adapt to it. "HMOs are the future," he says. What can be expected nationally can be seen in some states. New York, for example, recently adopted a health-care package that includes some of the changes being discussed in Washington, including a prohibition on rejecting the sick. The new law isn't exactly an open invitation for people with AIDS or other diseases to come to New York; although insurers must take all comers, they can make new customers wait a year before they pay for treatment of a pre-existing condition. But the changes are nevertheless considered revolutionary -- so revolutionary that nine health insurers have quit the state. Several others have had to raise prices. The changes encouraged Bellco Corp., a Lindenhurst, N. Y., company that sells pharmaceutical and beauty products, to switch to a managed-care plan offered by Cigna Corp. Regina Kennedy, Bellco's human-resources manager, worried that if her company stayed with a traditional plan, the insurer might abruptly cancel its policy or raise rates sharply because of new laws. By moving to Cigna, Ms. Kennedy got peace of mid and saved Bellco $60,000 a year. Under Bellco's old plan, the company paid $525 a month for an employee and family; the Cigna plan costs $476 a month and provides more benefits. The biggest drawback: Employees must choose a doctor from a Cigna list or pay 30% of the costs themselves. Such restrictions aren't universally popular, but they haven't caused Bellco any problems. "I've been really surprised," Ms. Kennedy says. "Most employees have chosen to switch their doctors, and we haven't had a complaint." Conventional insurers such as Guardian put the fewest restrictions on doctors and hospitals and offer the most freedom to customers. Other insurance plans, such as preferred-provider programs, put some limits on customers and doctors. At the far end of the control spectrum are HMOs, which watch costs closely and limit customer choices. The HMO industry is dominated by independent companies such as Kaiser Permanente and U. S. Healthcare Corp., as well as by groups of doctors and hospitals that have banded together. But many giant insurers -- including Cigna, Prudential Insurance Co. of America, Metropolitan Life Insurance Co., Aetna Life & Casualty Co. and Travelers Corp. -- also saw the managed-care train coming and have invested billions in setting up HMOs. If nonprofit insurers such as the Blue Cross & Blue Shield organizations are included, insurance companies operate four of every 10 HMOs nationwide. If, as expected, HMOs -- especially large ones -- win significant advantages under the Clinton plan, other insurers could be left fighting for the scraps of health insurance, such as coverage for people in rural areas and for policies that supplement the minimum the administration is likely to require. And, if the administration tilts the balance completely toward HMOs, the market for traditional insurers could dry up entirely. Under the plan, large regional cooperatives, known as health alliances, would be created to buy insurance for individuals, small businesses, Medicaid recipients and possibly Medicare recipients. The alliances, charged with buying quality care at minimal prices, would probably choose HMOs over other types of insurance. HMOs can offer lower prices than other insurers partly because they sign up doctors and hospitals for contracts that give them volume discounts ranging from 10% to 40% on doctor services and hospital stays. And big HMOs can get bigger discounts than small ones can. Also playing into the hands of HMOs are the fairness provisions advocated by Mrs. Clinton, such as her desire that insurers accept all applicants. According to an outline of the plan released in early April, insurers not only would have to accept all comers but also would be prohibited from charging a customer with a poor medical history more than anyone else. How such restrictions can disrupt the market are obvious in New York. There, as elsewhere, small insurers don't have enough healthy customers to absorb the costs of an influx of sick people. So such companies faced a choice: Either quit the state or raise prices, sometimes sharply. Guardian decided to stay in New York for now but says it may eventually leave, depending on how the market shapes up. Because of a state rule requiring that insurers charge all customers the same rates, Guardian's older customers have seen their rates fall, while others are paying huge increases. The company's rates for young single males, for instance, have jumped to $276 a month from $176. If Guardian's customer mix had mirrored the health characteristics of the general population, its average rate wouldn't have changed. But because Guardian selects its risks -- turns down sick applicants -- its average rate has increased 15%. Such rate increases, plus the withdrawals by nine insurers, have created opportunities for HMO operators. Although the new rules took effect only April 1, Cigna is already seeking out new customers. In a banquet room of a Long Island hotel, William Corba, a Cigna sales manager, is trying to interest a couple of hundred insurance brokers in Cigna's HMO. Apologizing because his slides are out of order, he notes that such presentations are new to Cigna. It has long served large companies but never has been a force in small-business sales, where the new rules are having the biggest impact. Of all the insurers, Philadelphia-based Cigna has the biggest presence in the HMO field . The company operates HMOs in 42 markets, covers 2.2 million people and has 95,000 doctors on contract. And Mr. Corba is clearly delighted by the situation in New York. "I've been with Cigna seven years, and I don't remember when we've had competitive rates before," he tells the brokers. "This is a historic day." Customers in New York have been slower to accept HMOs than those in Southern and Western states, but the new rules are forcing people to reconsider. "Before, the only way a guy would switch is if his doctor was already in the HMO," says Ernest Fazio, an insurance broker in Centerport, N. Y. Now, with the surge in insurance costs, HMOs are becoming more popular. "People who were married to their doctors are saying, `Forget it.' " Not surprisingly, insurers are fighting a civil war over health-care reform, with companies such as Cigna squaring off against conventional rivals. Cigna fired the first shot two years ago when it withdrew from the Health Insurance Association of America, the industry's main lobbying group, and stopped paying its $1.5 million in annual dues. Cigna officials say they grew frustrated with how slowly the association was moving to promote HMOs. Aetna, MetLife and Travelers left, too. Together with Prudential, they formed a loose affiliation known in health-care circles as the "Gang of Five." The group has met with President Clinton's top health-care advisers, and the companies, except for Travelers, have given money to Dr. Ellwood's Jackson Hole Group. The insurers say they support HMOs because they genuinely believe that HMOs and health alliances offer the best solutions to health-care problems. The competition is skeptical of their motives, however. "What they're doing has nothing to do with the merits of the policy," says Greg Scandlen, executive director for the Council for Affordable Health Insurance, a group representing companies opposed to the Clinton approach. "They want to drive out their competition and have an oligopoly." Some insurers are trying to compete with the Gang of Five in various ways. One tactic is to concentrate on a few markets. New York Life Insurance Co., for example, operates HMOs in only four cities but is a market leader in each. Similarly, Principal Group runs the biggest HMOs in Delaware and in Des Moines, Iowa. Meanwhile, Guardian has joined Northwestern Mutual Life Insurance Co., Great West Life & Annuity Insurance Co., Pacific Mutual Life Insurance Co. and 12 others in a network that pools their managed-care membership to get volume discounts nationwide. Their organization, Private Healthcare Systems Inc., has 2.3 million members and operates in 63 cities. And President Clinton's election has interested other insurers in signing up. "All I've been doing is flying around the country and talking to insurers," says Gene Guselli, the group's president. [This article is made available here by Dow Jones Co. for the personal and non-commercial use of callers to this bbs, in the hope that it will be of some help to those who are suffering from the disease and others who are seeking to help them.]