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Employer Group Rethinks Commitment to Big HMOs

July 21, 1995

Three years ago, an influential group of Minnesota employers awarded the bulk of their health-care business to one large health-maintenance organization called HealthPartners.

The results were impressive: In the first year, the employers’ health costs fell 11 percent; last year, premiums rose, but only with inflation, and costs per employee were 35 percent below the national average. But the losing health-care providers got the message that to compete they had to get big, and the market quickly consolidated into three huge, competing managed-care plans. Meantime, communities around the U.S. adapted elements of the Minnesota model to their own health-care markets, prompting hospitals and health plans to restructure in a flurry of mergers, alliances and acquisitions.

Now the Minnesota employers have decided that big isn’t better. In an about-face with ominous implications for the nation’s HMOs, the employers plan to negotiate contracts directly with smaller, organized groups of doctors and hospitals and will then provide employees with information on cost, quality and customer-service performance of each of the groups. The employees, who will receive monthly vouchers toward premiums, will shop among the competing medical groups.

``We want to get employers and health plans out of the middle″ of the transaction between doctors and patients, says Steve Wetzell, executive director of the business group. The new arrangement will begin in 1997.

Behind the employers’ change of heart is their contention that the three HMOs _ HealthPartners, Blue Cross & Blue Shield of Minnesota and Allina Health System _ are spending millions of dollars on business matters instead of medicine, are engaging in destructive price wars and are stifling rather than stimulating new approaches to care. ``The plans are competing on all the wrong things,″ says Fred Hamacher, benefits chief at Dayton Hudson Corp. and chairman of the 22-member employer coalition, known as the Business Health Care Action Group.

The plans take issue with that and vigorously defend themselves. Officials at Allina and Blue Cross say employers risk tearing apart organizations that have added value and innovation to the health-care system. ``A lot of great things are happening in this community, or we wouldn’t have had some of the results we’ve had,″ says Susan Flygare, vice president, major and national accounts at the Minnesota Blue Cross & Blue Shield. She says further: ``Big isn’t something I would apologize for.″

And big they are. Membership of the three ranges from a low of 500,000-plus to a high of 1.2 million, and each has more than 3,000 doctors on salary or under contract. Of the 3.2 million Minnesotans enrolled in managed-care plans, according to Allan Baumgarten, a health-policy consultant in Minneapolis, 78 percent are members of ``the big three.″

As for quality of care, the coalition’s Mr. Wetzell acknowledges that ``we’re dealing with some of the best health plans in the country.″ But it is other aspects of the HMOs’ performance that have made employers unhappy.

For instance, Blue Cross is investing millions of dollars in joint ventures with big physician practices around the state. Allina, taking a similar tack, has acquired 60 physician practices. After Blue Cross established a joint venture last year with the 120-doctor Aspen Medical Group, HealthPartners tossed Aspen out of the HealthPartners network, forcing 1,000 employees and dependents to find new doctors.

``That’s just goofy behavior,″ says Dayton Hudson’s Mr. Hamacher. ``We want our employees to have a long-term relationship with their doctors. I can’t win if they’re moving from provider to provider.′

George Halvorson, chief executive officer of HealthPartners, says the move was partly retaliation for similar action Blue Cross took when HealthPartners acquired a mental-health clinic. He adds, however, ``If we were faced with the same circumstance today, I’m not sure we would have done that.″

Employers were also alarmed when Allina cut its rates to state employees by 25 percent last year, tripling its market share among state workers and saving taxpayers several million dollars. The short-term result was impressive, Mr. Wetzell admits; but over time, he argues, such a strategy causes employers, especially small ones who offer their workers only one HMO, to frequently change health plans. That forces employees to constantly switch doctors. One company has changed plans twice in the past three years.

``You can’t sustain competition on that basis forever,″ Mr. Wetzell says. ``Eventually, you’ve got to compete on real innovation.″

But innovation, employers and doctors say, can go unrewarded in a market dominated by megaplans. An experiment at HealthSystems Minnesota, a group of 400 doctors and a hospital, is a case in point.

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