Making a Killing
HMOs and the Threat to Your Health

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Making a Killing

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Chapter 4

The Financial Sting — Paying More For Less

Bob Ingram of La Canada, California lives on a fixed income and is disabled due to cancer. In May 1999, Ingram received a troubling letter from his wife's HMO, Prudential. "Your monthly premium will be increased by 21%," the letter read.

"Who can afford $8,000 per year in medical care with all the other expenses associated with going on with life?" asks Ingram. "When you don't have any more money coming in, and they are raising their premiums at this pace, it's mind boggling. You are cornered."

Managed care was premised on lower costs, but these promises now ring hollow.

Americans now face double digit premium increases and rising co-payments and deductibles to insure themselves. The nation's largest non-profit HMO, Kaiser Permanente, raised its premiums in 1999 by 12% for state employees and as much as 50% for individuals.1 Humana raised premiums 11% to 12% for big employers and 15% to 16% for smaller groups.2 The Federal Employees Health Benefits Plan, which covers all federal employees and is an important market barometer, had a 10.2% increase in premiums in 1999.3

Didn't HMOs contend that they could deliver quality medical care at reasonable cost? If patients have not been getting quality care, where did all the money go?

The final insult of corporate medicine is that it has been a financial swindle.

In Medicare, for instance, HMOs in 1998 began dropping senior patients in many counties because the companies' reimbursements were not high enough. In 1999, the HMOs told the federal government what they are now telling every other purchaser of health care — you will have to pay more for less.

Aetna testified before Congress in March 1999 that "If the current reimbursement structure is not adjusted, more Medicare-Choice organizations are likely to withdraw from areas served and beneficiaries enrolled in the remaining plans will likely experience premium increases or reduced benefits."4

In response, Congressman Pete Stark, ranking Democrat on the House Ways and Means Committee said, "As I've already described, we currently pay Medicare HMOs more than we should. We pay the plans more for the people they enroll than we would have paid if those people had stayed in Medicare fee-for-service. To rephrase that, the taxpayers would actually save money if we abolished the Medicare-Choice program today."5

To prove his point, Stark offered the following chart of overpayments to HMOs (see "Current Medicare Overpayments to Managed Care Plans," Page 101).

What incensed Congressman Stark most was that the HMO industry wanted a program of "premium support" that would require every Medicare recipient to choose an insurance program, with higher premiums charged to beneficiaries who pick traditional fee-for-service Medicare. The proposal is essentially a full employment act for HMOs because, as Stark says, "it is just a way to raise premiums on seniors and the disabled to force them into bare-bones, no-frills HMOs that will offer no extra benefits…If plans say they cannot offer extra benefits at a time when we are overpaying them, they certainly won't be able to do so if Medicare were to actually start saving money by paying them more accurately for the people they enroll. And, if plans cannot offer extra premiums, who would want to join a system that rationed their choices and services?"6

United States Senator Jay Rockefeller, Representative John Dingell and Representative Jim McDermott — who sat on the Bipartisan Commission On The Future of Health Care — agree with Stark and provide a larger context for American HMO medicine's failure: "We never seriously looked at the experience of foreign countries. All the other major industrialized nations (except Australia) have older populations than the United States, yet they are able to insure all their citizens, with reasonably good quality care, for about 30 to 50% less of their Gross National Product than we spend."7


(prepared by Rep. Pete Stark’s staff)

Overpayments due to BBA change that removed HCFA’s ability to recover overpayments when health care inflation is lower than expected $800 million in 1997

$8.7 billion over five years

$31 billion over ten years
Congressional Budget Office
Overpayments due to lack of risk adjustment 5–6% overpayment to HMOs per beneficiary who is enrolled Physician Payment Review Commission (now MedPAC) 1996 Annual Report
Overpayments due to inflation of Medicare’s share of plan administrative costs More than $1 billion annually HHS Office of Inspector General July 1998
Overpayments due to inclusion of fraud, waste and abuse dollars from FFS payments. Managed care plans should better "manage" and therefore avoid such fraud, waste and abuse. 7% annual overpayment

Annual savings with corrected 1997 base year would be:

$5 billion in 2002

$10 billion in 2007
HHS Office of Inspector General July 1998

The Congressmen quote a 1999 report of the National Academy of Social Insurance: "The United States…has the unfortunate distinction of spending relatively more per capita for the elderly while providing them with less comprehensive coverage with generally higher out-of-pocket costs."8

What happened to the claims that corporate-managed services can deliver quality medical care at reasonable cost? Where does all that money go?

One promise of managed care was that health maintenance and managed care organizations have a built-in incentive to keep patients well by providing preventive health care. Some of the best programs do try to keep patients well by providing alternative health care options and frequent screening rather than wait for serious problems to develop. Alternative medicine or health club membership can help Americans stay healthy. It is when patients become ill that the deficiencies of HMO medicine are clear. As evidenced by the stories and statistics in this book, corporate medicine has failed to exhibit caution in treating illnesses in the most timely and least expensive manner. The promise of managed care of long-term cost reduction has proven ephemeral.

Some 20 to 30% of our premiums now pays for overhead — to enrich industry executives and an army of bureaucrats — even as nurses are fired to save money and doctors are required to spend as much time with industry paperwork and obstacles as they do on treating patients. Numerous studies from sources such as the California Medical Association and the New England Journal of Medicine have documented the increasing money from our premiums going to the corporate bottom line.9 Indeed, in "managed care" speak, any money spent on patient care is a "medical loss." This speaks volumes about the goal of corporate medicine — not to lose money on patient care.

In addition to rising deductibles and co-payments, the insurance industry is shifting every health care cost it can back on patients. Many Blue Cross patients, for example, recently found themselves forced into a bind: take much higher deductible policies or pay rate increases of up to 58%.10 Many insured Americans find simple surgery can cost them thousands of dollars in out-of-pocket expenses. Orthopedic surgery typically requires serious rehabilitation and physical therapy. Any shoulder or knee surgery, for instance, can require months of physical therapy to avoid further surgery. Many managed care policies, even the more expensive preferred provider plans, typically place strict time limits (say thirty days)11 on any physical therapy. So a patient can face the choice of more surgery or paying for physical therapy out of pocket. This absurd approach may lead to some patients having more surgery (presumably covered by insurance) to avoid paying for rehabilitation costs out of pocket.

These are only some of the effects as insurers becoming increasingly monopolistic, with growing power to rapidly escalate premiums in order to squeeze out more profit.

Another symptom of this power is the narrowing freedom that HMO doctors are allowed to exercise in writing prescriptions. Physicians are charted like race horses based on the costs of the prescriptions they write, sometimes regardless of the wellness or age of the patient population they serve. Patients are forced to pay for less effective over-the-counter medications rather than receive prescription drugs at a cost to the HMO. Some HMOs exclude the most effective prescription remedies in favor of cheaper, older drugs. Because of rising costs, employers, in fact, are scaling back retiree health coverage for pharmaceuticals.12 Mental health coverage, too, has been squeezed with strict limits on therapy, and, perversely, because it is cheaper, a desire to shun therapy and instead prescribe medication.

And what of the uninsured? The promise by the architects of for-profit managed care was lower medical costs, thus expanded access for Americans without insurance. In 1988, prior to the national recession, managed care had 29% of the health care market and there were 36 million uninsured or 17% of the public. Now with a booming economy and near full employment, managed care controls 61% of the market and there are 43.4 million uninsured or 19% of the public.13 The ranks of the uninsured are growing by close to a million Americans per year. Seventy-five percent of the uninsured are gainfully employed.

In this system, where the public increasingly pays more money for less coverage, who wins?

The Robber Barons of Health Care

HMO executives have piled up truly extraordinary sums of money for themselves. Even if we accept the industry's argument that executive compensation is a result of stunning new management techniques and the elimination of inefficiencies, the money in the executives' pockets formerly was spent on health care.

Does HMO executive compensation really reach the levels of the robber barons of old?

Former U.S. Healthcare CEO Leonard Abramson, now on the board of Aetna, made over $990 million when U.S. Healthcare was acquired by Aetna.14 The merger was valued at nine billion dollars. This means over 10% of the companies' value ended up in his bank account. Remember the story of Betty Hale, forced to raise $30,000, one dollar at a time, to provide the downpayment on the breast cancer treatment that saved her life. Even so, she came out of it still owing $184,000. The money pocketed by Abramson could have paid for four thousand of these kinds of treatments!

Mr. Abramson may be the most striking example of appropriating our health care premium dollars but too many HMO executives live like sultans. Table 1 (Page 105) is illustrative.15

Even if we ignore stock options, look at just the top five 1997 salaries for the large publicly traded managed care companies in Table 2 (Page 105).16

Ironically, while Wiggins topped the 1997 list for pay, his company crumbled that year — recording consistent losses after computer problems caused it to lose track of billing records and medical costs. Too often, executive compensation and a company's performance bear little relation to one another.

Table 1
CEO Firm Pay '96 Stock mid-'97
Malik Hasan
William McGuire
Leonard Shaeffer
David Jones Humana
George Jochum
Alan Hoops
Stephen Wiggins
Larry House
United Hlthcr
$17.2 mil
$14.7 mil
$14.2 mil
$10.5 mil
$5.0 mil
$4.7 mil
$4.6 mil
$2.5 mil
$166.4 mil
$74.7 mil
$16.5 mil
$223.4 mil
$16.9 mil
$26.9 mil
$230.4 mil
$108.5 mil

Table 2
Salaries '97
Stephen Wiggins
      Chairman & CEO
Wilson Taylor
      Chairman & CEO
William McGuire
Ronald Compton
      Former Chairman
Eugene Froelich
      Executive VP

Oxford Health Plans


United Healthcare







Dr. Malik Hasan, recently forced from his position as CEO of Foundation Health, is a walking illustration of how to get rich from the current health care system. A neurologist by training, he quickly left his medical roots after he began a small Colorado-based HMO. Dr. Hasan embarked on a ferocious merger and acquisition binge that resulted in Foundation Health becoming one of the largest managed care organizations in the nation. Hasan had the dubious distinction of making the Forbes magazine list of "overpaid" executives during the nineties, the group of corporate chieftains who "made out far better than shareholders since 1993."17 Even as Foundation's stock plummeted, his annual salary was in the millions. No blushing violet, Hasan stated, "we are being innovative, and we are helping to solve some very difficult and knotty problems. If we are successful, then I think we deserve not only this, but more."18 Those "customers" of Foundation Health who were denied or delayed treatment to help amass the millions in pay and options may not agree with Dr. Hasan's definition of success. Dr. Hasan was also quoted about the problems of the uninsured and underinsured: "We are not in the business of social redistribution." Hasan claimed it is the not-for-profit companies that "have a responsibility they have not fulfilled" and they should be doing more to care for the indigent.19

Dr. Hasan also made no bones about profiting from the conservative's favorite health care idea, medical savings accounts. "We [for-profit managed care companies] would make out like bandits, but as a physician I have a serious concern about fragmenting the insurance pool…We are going into [MSAs] because these things are going to be a gold mine, let there be no doubt. They are a scam and we will get our share of that scam."20 It's a dirty job, but someone has to profit.

What is so exceptional about overpaid CEOs? Every industry has them. One answer is that HMO executives like those listed above are among the most highly paid CEOs in the country. The Crystal Report on Executive Compensation found HMO chiefs' compensation outpacing their CEO counterparts in other industries by a factor of two to three. After analyzing the pay packages of 1,568 CEOs in thirty-one industries and accounting for company size and stock performance, the study found that HMO executives topped the list, trailed by CEOs of drug manufacturers and biotech companies, brokerages and computer companies.21

But does their pay, large though it is, really burden the system? The answer is yes. One study found that the stock-related wealth of just the top twenty-three managed care executives would provide:
  • health insurance for six million people, or

  • health coverage for 14% of the nation's uninsured or alternatively 18% of California's entire population.22
In 1996, analyst Don DeMoro added the estimated stock wealth of HMO executives ($6.9 billion) to the combined five-year profits of twelve select managed care companies ($8.8 billion) to the approximate amount of merger and acquisition activity in health care from 1992 to 1996 ($134 billion). This combined amount would provide comprehensive health insurance for 130 million Americans.23 That's over half of the population currently insured.

In a democracy, how amounts of money this large are spent on a public commodity like health care ought to be the subject of major civic debate. Instead, the fate of precious health care resources is decided behind closed doors in corporate boardrooms.

As Dr. Eli Ginsburg notes, current government health care expenditures in the United States approximate 7% of the Gross Domestic Product. This is the same percentage that Britain spends to provide health care for all its citizens. When one adds all the money employers and individuals pay in an American system that still leaves more than 17% of the public uninsured, it is clear the profits currently skimmed from the system prevent more comprehensive approaches.24

Even one of the pioneers of HMO medicine has come to agree with this conclusion. Dr. Robert Gumbiner, the founder of Fountain Valley, California-based FHP, made a lot of money through his company, but insists that his primary concern as a doctor was his patients and providing access to affordable health care. His staff model HMO grew out of a physicians' group to service patients under the original HMO theory that all services would be under one roof at a reduced cost. In discussions in 1997, Gumbiner stated that he believes modern HMOs, that own no medical resources but simply contract with doctors and hospitals to provide care, should be regulated like public utilities. He charged HMOs had become too easily manipulated by the greed of corporate officers and Wall Street, causing patients to suffer.25

"The present orientation towards greed is a national catastrophe, as far as I can see," said Gumbiner. "The feeling is, it's okay to be greedy and it's okay to exploit your fellow man just to line your pockets. To me, there is something wrong with that…Quality and investment return are antithetical, because in order to generate short-term profits, the company cannot put money into research and development, new long-range concepts, management training, and all the things that will build a long-term successful organization. So people who strictly have investors' return as their motive are not interested in long-term corporate guarantees."26

Why did Gumbiner have a change of heart about the system he helped to found?

Gumbiner contends that following a bout with cancer he was forced from the helm of his company by venture capitalists who conspired to defraud FHP shareholders of over $200 million during the 1997 sale of FHP to PacifiCare. He alleges numerous violations of the federal Securities and Exchange Act.27

The allegations, made in conjunction with the lawsuit filed in a Los Angeles federal court, paint a troubling portrait of a handful of insiders seizing control of a health maintenance organization and strip-mining it of its value to long-term shareholders, patients, medical personnel and the public. According to the allegations, "dressing up" FHP for sale involved the dismantling of its medical infrastructure and forward-thinking medical programs in order to reduce overhead costs and make the HMO attractive to any new suitor. Gumbiner revealed that corporate officers not only fired one-third of FHP's doctors to make the company attractive to potential buyers, but went so far as to round up all the potted plants at the HMO and put them in a dark room to die rather than paying for a housekeeper to water them.

The FHP-PacifiCare consolidation was only one in a series of HMO mega-mergers in the 1990s demonstrating that money, not patient care, is the driving motivation of the new medical regime.

That Vexing Problem:
What Do We Do With All the Money?

As managed care companies squeezed more profit from premium dollars, the HMOs piled up so much money that by the end of 1994, Margo Vignola, a Solomon Brother's analyst, estimated the nine biggest publicly traded HMOs were sitting on $9.5 billion in cash. Using this money from premium payments, they soon began to buy up smaller competitors. "Our problem is what to do with the money that comes in, not whether we have enough cash," said Alan Bond, the treasurer of Health Systems International.28 At that point, the HMO had $475 million in cash in the bank with $15 million pouring in every month. A spending spree soon ensued in the managed care industry, not one that would help patients, but one designed simply to make more money for management and shareholders. Eighteen of the largest for-profit HMOs and managed care companies have now been reduced to six gigantic companies: Aetna, CIGNA, United Healthcare, Foundation Health Systems, PacifiCare and Wellpoint Health.29 (Kaiser, a non-profit, is the only other HMO in this company.) As Robert Hoehn, director of stock research at Solomon Brothers, recently noted, "The industry in the 21st Century will comprise a few diverse large companies who have pushed out the niche players."30 While this now seems inevitable, effective anti-trust action could prevent this course. Unfortunately, the Clinton Administration has been asleep at the switch, failing to break up any major HMO merger to date.

Acquisition and consolidation in the managed care industry is what led to inflated executive compensation packages at the top. Like many industry consolidations, mergers in health care limited choice and drove down services, as the cost of the acquisition had to be absorbed. Health care consolidation has meant riches for the few and downsizing for the rest of us. As the California Medical Association noted during the merger of PacifiCare and FHP, numerous studies indicated few new efficiencies in managed care mergers but merely fewer dominant companies that increased prices and cut services.31

For a while this game of musical chairs was possible because Wall Street investors kept bidding up the shares of certain managed care companies. These companies with inflated share prices gobbled up each other as well as community hospitals and non-profits. But then the zero sum financial nature of managed care became increasingly clear, as many companies reported losses and one time "write-offs." Kaiser Permanente lost $270 million in 1997. Stock prices for corporations like Columbia/HCA and Oxford Health collapsed, the latter plummeting by 70%. An August 1998 merger between Humana and United Healthcare to create the largest managed care organization failed when stock prices took a nose dive. Foundation Health Systems, Mr. Hasan's source of wealth, saw its stock drop from thirty-two to five by February 1999. This slump in stock prices may not be short-lived. As Joseph Nocera, editor at large of Fortune magazine, observed: "Consider the root cause of the swoon in health stocks. After years of cutting costs with impunity, managed care companies are forced — in no small part as a reaction to intense criticism from doctors and patients — to pay more for treatment."32 But industry analysts do not discount the role that mismanagement, waste and greed in the race to grow at all costs has had on corporate stability.

A Looming Bailout?

Merger mania has begun to increase prices and restrict choice for patients. The glory days for HMO stocks seem past, now that all the low-hanging fruit has been picked. New profits can be squeezed only from doctors' fees, patient services and raising premiums. In fact, in the spring of 1999, some of the largest companies, like PacifiCare and Aetna, posted significant profits from their premium increases and decision to dump more costly Medicare patients.33 The depressed stock prices of some of the weaker companies left them as easy pickings for the largest companies.

Where will all these mergers lead? A peculiar possibility is the creation of health care organizations that are "too big to fail." This will be the ultimate perversity, the taxpayer being called upon to subsidize the avarice of top managed care management. This is not just a far-fetched worse case scenario; it already occurred in New York when the taxpayers provided funds for Empire Health in 1993. In New Jersey, an HMO called HIP recently had to be taken over by the state. In 1999, the state of California seized a physician-run medical management company, MedPartners, that served 1.3 million patients. On paper, the company itself had no employees, or assets regulated by the state, only the value of its parent corporation, which said it had no obligation to debtors.34 A similar failure of San Diego-based FPA Medical Management Corporation left doctors on the hook for tens of millions of dollars in bills for services already rendered.

Sound familiar? Is it like the Savings & Loan bailout, which cost taxpayers up to $400 billion to rescue after quick-buck operators of these deregulated operations went down in fraud and flames? As Michael Schrage, a consultant at MIT noted, "HMO networks will not go bust lending money to aspiring Texas mall moguls or Arizona real-estate developers. The issue here is not bad loans and rising interest rates, it's balancing promised business performance with promised quality and quantity of care. That is becoming ever harder to do."35 In addition, many HMOs are heavily leveraged and an economic downturn or prolonged stock slump could lead to further bankruptcies.

State and federal regulators have often been slow to look at the impact of mergers on the health care of patients, even as the twin goals of market return and quality medical care now appear mutually exclusive. HMOs cut back to maintain profits in a number of ways — fewer referrals, less treatment, less caution with regard to patient health. Moreover, accountability also suffers. Why worry about fines or sanctions if you hope to sell your company before the lethargic regulatory environment catches you?

The corporate logic favoring monopoly is pushing towards a few giant health care concerns that manage the care for most Americans. To get a snapshot of where the country stands in this spiraling trend toward monopoly, one need go no farther than Aetna's proposed buyout of Prudential's health care business. Despite the slump in profits, or perhaps, in some cases, propelled by it, consolidation continues:
  • Aetna currently provides care for one in every twelve Americans; after the merger it will be close to one in eleven.

  • 38% of the HMO market in New Jersey will be controlled by the company and over 50% in other small markets. "Our concern is that when a doctor's practice is more than 20% with any carrier, it becomes almost impossible to say something is unacceptable," said Dr. Greg Bernica of the Harris County Medical Society in Texas.36

  • Aetna will control 39% of the market in Philadelphia, 30% in Atlanta and 33% in Orlando, Florida.
As competition disappears, one impact of this concentration will be increased premiums. Professor Glenn Melnick, a specialist in health care finance at USC, stated the relationship like this: "When the number of competitors goes down, the level of price competition also goes down."37

One can also expect less generous benefit packages and lower levels of basic care for the money. As health care expert Charles Blankersteen noted, "Choice in the marketplace is rapidly diminishing, customer service and value are less than spectacular. Who bears the cost of these acquisitions? My bet is the people who buy the services."38 In other words, you and I do.

Aetna has yet to integrate the last two companies it absorbed, New York Life in 1998 and U.S. Healthcare in 1996. Three years after the merger, doctors and patients of U.S. Healthcare continue to have problems with service. Perhaps what is most telling about Aetna's ongoing consolidation are the patients' and doctors' views. According to a 1998 survey in U.S. News and World Report, Aetna ranks last among insurers in customer satisfaction in nine states (Connecticut, Georgia, Illinois, Maryland, Massachusetts, New Hampshire, New York, Texas and Virginia). In five of these states, Aetna is among the biggest three insurers.39 In California, Aetna was ranked dead last in an opinion survey of doctors conducted by the Pacific Business Group on Health Negotiating Alliance.40

One consequence of being the biggest company is that patients and physicians have little leverage to maintain the quality of care. The stranglehold such a company has over physicians is profound. Aetna has employed gag orders on doctors to prevent informed choice by patients. The company has been charged by regulators in New York and Florida with the failure to comply with state laws.41 Four hundred doctors in Texas, 600 in San Jose, California and over 500 in Southern California have walked out recently due to Aetna's cut-rate reimbursements and contract clauses.

Aetna has tried to foist upon doctors the requirement that they either sign onto all Aetna's plans or they not be allowed to do business with any of its plans. With this "all or nothing" approach, the insurer tries to force physicians who accept any form of insurance from the company to accept all forms. As Dr. Howard Weiner, head of a 1,200 member physicians association noted, "This policy in essence drives the market to all HMO care."42

Concerned about Aetna bullying doctors in this way, lawmakers in Texas, Illinois and Rhode Island are considering bans on such all-or-nothing clauses. The North Dakota Senate has passed a prohibition and the Nevada Insurance Commissioner has stopped the practice. Physician concerns about only participating in plans that allow them to meet both their ethical and financial goals, since some plans have higher reimbursements and fewer restrictions on treatment options and referrals, have fallen on deaf ears at leviathan Aetna.43

Why should Aetna listen? It has expanded because of its callousness towards physicians' concerns — which has enabled the company to cut costs and conserve cash for purchases.

Financial Failure of The HM-itos

One of the newest problems is that HMOs have foisted onto physician-run medical groups responsibility and risk they are incapable of handling.

The State of California takeover of the financially bereft, physician-run medical group, MedPartners, dramatizes the newest vice spawned by HMO medicine — physicians practicing insurance without a license. When HMO bureaucrats with MBAs started to tell MDs what to do, the physicians' political establishment responded. It created another mid-level bureaucracy run by physicians, called the medical group, to manage risk, like an insurer does.

Like the HMO, the medical group receives a "capitated" rate, only from insurers instead of employers. Like the HMO, the financial incentive for the medical group means the less done for patients, the more it makes. The arrangement has won the medical groups the designation "HM-itos" among insiders.

The medical group system was once touted by some as a middle ground for managed care because doctors purportedly had control again. But as the financial collapse of MedPartners and FPA show, these groups can be financially unsound.

William Sage, who teaches health policy at Columbia University Law School, says, "The entities that are most vulnerable tend to be contractors that have been the most aggressive in terms of growing their companies."44

In fact, HMOs have paid to physicians capitated rates that are so low that it would be virtually impossible to take care of patients' real medical needs. In one case, doctors are reported to have received as little as $6 dollars per patient per month from an HMO to manage all their needs.45

Because there are so many doctors and so few HMOs, doctors have little leverage in their negotiations. If a medical group receives an HMO contract, among so much competition for them, the group has probably agreed to take whatever reduced-rate the HMO will pay.

When an HM-ito like FPA or MedPartners fails, it is the patient who pays with disruption to the continuity of care. "It's high anxiety," said Edward J. Gold, an oncologist who had patients with the failed HIP Health Plan of New Jersey. "Many patients are afraid. They don't know what's going to happen."46

The Los Angeles Times reports that the parents of twins recovering from premature delivery were told by their HMO that the children must be moved crosstown from one hospital to another because of the bankruptcy of FPA. FPA's failure forced the primary-care doctor to switch medical groups. That led the doctor to affiliate with a new hospital.

"The Raffertys did not want to break the close ties they had developed with the medical staff at the hospital, especially when it would mean putting Paige and Hannah in the care of people less familiar with the twins' histories," reported Stuart Silverstein and Davan Maharaj. "But the HMO told the Raffertys that they might be responsible for all future hospital-related costs — expenses that wound up totaling hundreds of thousands of dollars — if they refused to allow the babies to be transferred."47

Moreover, so much money is spent on bureaucracies to manage risk that the dollars actually spent on patient care has dwindled to a pittance. The irony is that the mounting administrative costs of insuring, not caring, for patients is what is driving health premiums up.

If the HMO takes 20% right off the top for its own business costs, overhead and profit, what does a medical group take? What is paid to the medical group may be reported as a "medical loss" by the HMO (i.e., dollars spent on treatment), but the medical group must then take from this remaining money its administrative costs. These include a burgeoning number of "medical directors" whose job is to say "no" to other physicians who request care. They track and compare the costs of doctors' prescriptions and treatments in fancy bar graphs. Then with remaining dollars the medical group must buy reinsurance, so-called stop-loss insurance, to cover the cost of any catastrophic care that, for instance, a cancer patient may need. In perhaps the biggest financial scam in the system, medical groups are said to even buy stop-loss insurance from the same HMO that passed them the full-risk capitated rate in the first place. So the HMO profits twice.

Climbing out of the Spiral:
Health Care Professionals and Others Fight Back

This trend of consolidation and its deleterious effects are becoming clear to many. Princeton health care expert Uwe Reinhardt echoed Wall Street analyst Hoehn, noting, "The health system is stumbling toward a bilateral monopoly of insurance companies and provider groups in every market. If only one provider is left in a community, it will send the bill to the consumer by raising premiums. The government can then say, ‘You have converted health care into a public utility, we need to regulate you.' "48 Indeed, if there is to be a role for profit-making monopoly health care in our future, it will have to be regulated much like an electrical utility. A reasonable amount of administrative overhead and return on investment would be allowed in return for strict compliance with public standards. This, of course, will be derided by some as socialized medicine, but it merely acknowledges that the market must be regulated in health care. As Professor Reinhardt notes, "If these plans keep buying each other up, there is no longer competition, because executives of the plans can regulate everything they want in one golf game."49

How did we get to this point in the monopoly spiral? Large employers clearly were looking to control their health care costs. The strategic underpinning and promises of managed care were promoted by corporate think tanks. Miracles were promised from market-based solutions. Employers signed on. Without full public debate about the wisdom of managed care, Americans now find themselves pushed into HMOs by their employers. Sixty percent of Americans insured through their employers have no choice in health plans and another 20% have only a choice between two plans.

In reaction to a system designed for profiteering that has been squeezed on many fronts, doctors and nurses have rebelled, increasingly unionizing to confront the HMO bosses. The historic approval of a doctor's union by the American Medical Association in June 1999 is instructive. Americans should realize that the concerns of doctors should be their own.

What stands in the way of a few corrective regulations? One unfortunate answer is the employers who pay for much of the insurance. The mantra the insurance industry and the Washington, D.C. trade associations employ today is, "Regulation will lead to increased costs and less coverage." This statement by some corporate employers that increased regulation will drive up costs indicates the often shredded nature of the social compact between employers and employees. It is emblematic of the times that most employers side with for-profit insurers rather than their own employees in health care decisions. If top executives were forced to endure the vagaries of managed care then perhaps we would see real change. Many in top management, however, enjoy gold-plated fee-for-service policies — the kind that used to be available to everyone. Allen Meyerson of the New York Times noted, "Many of the nation's largest corporations — including Atlantic Richfield, Charles Schwab, RJR Nabisco, SBC Communications, Gannett — are leading more by precept than example."50

The increasing complaints of employees have led some companies to join their employees in the search for increased quality health care. Some employers are indeed rethinking their allegiance to these insurance companies. Bruce Bradley, director of managed care plans for General Motors, noted recently he was, "very concerned that the health care industry is moving away from local delivery and HMOs are becoming more like insurance companies."51 It behooves our large employers to look at quality of care not just cost in seeking medical care. The managed care industry is merely an expensive middleman. Companies can begin to contract directly with non-profit hospitals or organizations of doctors.

In the meantime, corporate medicine continues to exact its financial toll not only on resources for patient care, but on academic medicine and charity care as well.

Two March 1999 studies published in the Journal of the American Medical Association found that in regions where managed care saturation is greatest, physicians are less likely to give the poor free care and academic institutions are less likely to spend their money on scientific research. Ten thousand physicians and 2,000 faculty members were surveyed. Dr. David Blumenthal, director of the Institute for Health Policy at Massachusetts General Hospital and author of the medical-school study, said the results show that where HMO medicine predominates, the ability to work toward "the common good" evaporates.52

America's great teaching hospitals and medical school physicians are the envy of the world. The current regime of financing has, however, helped strangle research and left elite physicians with ponderous paperwork fighting insurance companies to pay for required treatment in their clinical practices. The medical school mission is not merely to make money, but to train physicians and conduct cutting-edge research, as well as treating the poor. Urban medical schools frequently end up treating complicated cases from publicly supported hospitals. This is not a recipe for making money. Financial gain should not be the mission of our advanced medical institutions. Academic medicine should not be merely advanced clinics forcing physicians to see patients in a rushed manner. This is the case in many medical schools today.

If our society is going to commit less in public dollars to academic medical centers because we are training fewer doctors, then the money must come from somewhere. One solution could be a dedicated tax on HMO profits to support regional academic medical centers. The health care system benefits greatly from these institutions. As Dr. Harvey Shapiro notes, "Some type of per head tax on HMO revenues should be assessed to develop a trust fund for academics and other functions such as independent oversight, technology assessment, and standards-setting boards."53

Medical schools often treat patients with the most difficult and complex diseases or conditions. In addition, any effort to transfer risk to physicians via capitation or any other schemes will naturally hurt physicians who employ their skills treating the sickest patients. According to a recent report by the Commonwealth Fund, medical schools and their clinics make a unique contribution to communities by delivering highly specialized care. For instance, although academic medical centers are only 2% of all community hospitals, they are 47% of trauma units, 46% of burn units, and 31% of HIV/AIDS units.54 Managed care plans push patients away from academic medical centers, because of higher costs. This deprives these centers of clinical revenues which helped subsidize complex patient care and the disproportionate number of Medicaid and charity cases these hospitals take as referrals.

Teaching hospitals provide nearly 40% of the nation's charity care. How have the financial pressures impacted academic medicine's mission? "It's a total crisis, a complete crisis," said Neil Rudenstine, the president of Harvard in April 1999. "I think anybody who would call it less than that would really just not know what's going on. I'm not quite sure what the cumulative deficit of our four or five closely related hospitals is, but it's certainly well over $100 million, and we haven't even finished the year yet."55

UCSF Stanford Health Care lost $50 million in 1999 and expects to layoff 2,000 of its 12,000-person staff. Peter Van Etten, the center's chief executive, said, "I have to say the services we will provide can't be of the same quality that we would provide with 2,000 more people."56

Academic hospital downsizing has also sparked an unprecedented push towards discouraging doctoring. The nation has more than 700,000 physicians. As a result, the federal government has, for the first time, agreed to pay hospitals around the nation hundreds of million of dollars not to train doctors.57 Hospitals that limit their number of residents receive more federal funds. The idea is to give hospitals an incentive to save money.

Academic medicine has also been hurt by declines in medical research despite increased funding of the National Institute of Health in the nineties. The Administration, though, is proposing only a 2% increase in FY 2000. The United States now spends less per capita on medical research than England, Denmark and France. Research is too often conducted by pharmaceutical companies hoping to cash in with exorbitant prices on lifestyle enhancing drugs. Unchecked corporate medicine will certainly facilitate this transition. The patent offices of drug companies are working overtime. While private research can be very important, many of the most critical American medical breakthroughs have relied on public research dollars, which are now evaporating.

The Political Muscle of the Insurance Industry

Where does an increasing amount of HMO cash go? Unfortunately, to Capitol Hill lobbyists and Madison Avenue spin-doctors.

Growing monopolies mean more than rising premiums, constraining doctors, cutting care, and foisting costs onto patients. It also translates into political power. The insurance industry has added hundreds of millions in profits during the rise of managed care and is spending significant sums of this money to preserve its dominion. It defeated the Clinton health plan through its misleading "Harry and Louise" ads and millions in lobbying dollars. It is laughable that the centerpiece of the insurance industry advertising campaign concerned the inability to consult with your family physician under the Clinton plan. The proposal may have been overly complex and bureaucratic, but the industry has since limited coverage, choice and access to specialists in a manner never envisioned by the Administration. Today, "Harry and Louise" would be cast as a woman unable to get a mammogram annually and a man unable to schedule a cardiogram — the victims of corporate bureaucrats, not government employees.

The Patient Protection Bill introduced by Senator Edward Kennedy and Congressman John Dingle and endorsed by President Clinton is the best opportunity to reduce the industry's power over health care decisions. It would, among other things, hold the insurance companies legally accountable for denying medically necessary care. In March of 1999, the Business Roundtable launched yet another round of multi-million dollar television advertising against the plan during the NCAA basketball championships. The ads compare reforms allowing patients the right to sue their HMO with playing roulette and refer callers to the HMO industry's 1-800 hotline to send a message to Congress. Another multi-million dollar ad campaign is underway at this writing in the summer of 1999.

Republicans, who by and large oppose liability for the insurance industry, read the 1998 polls and did offer cosmetic reforms. The party made no real attempts to pass even these reforms, preferring to defeat the Democratic proposals and attempt to increase the strength of anti-reform forces in the 1998 election.

The message was not lost on the insurance industry in 1998. The industry certainly responded with its wallets. Direct contributions to candidates from the health insurers doubled between 1994 and 1998. Certain favorites like Republican Congresswoman Anne Northrup reportedly received more than 10% of their total contributions from the industry in return for leading the fight against increased patient protection. The industry was also active in so-called issue ads. The American Association of Health Plans spent a considerable sum against the Senate challenge of Democrat John Edwards in North Carolina who campaigned heavily on behalf of patients rights. The ads vilified trial lawyers and stated Americans would lose their health care if patient protection measures passed. The voters thought otherwise, and Edwards won a narrow victory.

Frank Pallone, a six-term New Jersey representative, also learned the dangers of opposing the insurance industry. A front group, Americans for Job Security, spent over $1.2 million trying to defeat Pallone after his aggressive promotion of the Patient Protection Bill. Over one million of the organization's $7 million advertising campaign against pro-HMO reform Democrats was reported as a grant from the insurance industry. Pallone still won handily.

One estimate of total industry spending during the first six months in 1998 for direct lobbying to defeat managed care reform topped off at $60 million. This averaged $112,000 per member of Congress. This outrageous sum of money, of course from patients' premiums, does not include direct candidate contributions nor $11 million in "feel good" advertising. This figure dwarfs the estimated $40 million spent by the tobacco industry to defeat federal anti-smoking legislation. The chief spokesman of the Texas Medical Association questioned why the health plans do not spend premium dollars on medical care: "If this were about patient care, they would shift the money into patient care aspects, therefore dissipating some of the consumer insurrection. What this is really about is control and power. It speaks volumes about their intent."58

The industry has already announced its plans to spend millions of dollars in New Hampshire and Iowa to affect the outcome of the presidential primaries in 2000 and will no doubt spend tens of millions in 1999 and 2000 in the renewed effort to prevent federal and state regulation. The industry, with allies such as the Chamber of Commerce, is intent on maintaining a stranglehold on the health care of the American public.

Corporate for-profit medicine has as its core principle interests inimical to any American who is seriously ill or injured. Unfortunately, over the course of time, this is the fate of almost all of us. The message from the industry to its captive customers is clear. Profits will be protected at all costs. Unless the public rallies to support meaningful reform, the industry will continue to curtail medical care to maintain profits. One of the founders of the HMO concept was Paul Ellwood, MD. He recently noted, "For those of us who devoted our lives to reshaping the health system trying to make it better for patients, the thing (managed care) has been a profound disappointment."59

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