Making a Killing
HMOs and the Threat to Your Health

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Making a Killing

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Chapter 6

The Battle to Make Health Care Work

Do HMOs serve only HMOs?

Will a system set up to maximize profit ever truly care for patients? One indication comes from looking at how HMOs organize their lists of approved drugs, or formularies, for their doctors to use. As one might expect, the drugs are often the cheapest and typically not the best. For instance, PacifiCare, now the nation's largest HMO for Medicare recipients, replaced an effective, high-cost schizophrenia drug called Risperdal with the low-cost, 36 year-old drug, Haldol. A thirty-day supply of Risperdal costs $240 compared to $2.50 for a similar supply of Haldol — nearly a 1,000% savings for PacifiCare. But the side effects of the inferior Haldol include severe, uncontrollable shaking.1

While such penuriousness at the expense of patients has come to be expected from HMOs, the example of how Foundation Health considered organizing its formulary shows that the hunt for profits never ends. Sabin Russell, a veteran health care writer at the San Francisco Chronicle, exposed a proposal by Bristol-Myers Squibb that would have given Foundation Health a million dollars a month as a fee for restricting its formulary exclusively to the products of the drug maker.2

"The draft agreement calls for Bristol-Myers to pay $1 million per month, for up to three years, to Sacramento-based Integrated Pharmaceutical Services," Russell reported, meaning a total fee of $36 million. "A Foundation Health subsidiary, IPS is a 'pharmacy benefits management' company that handles drug benefits of more than four million HMO members across the country. The deal appears to be the latest twist on a little-known practice called rebating, in which drug companies pay cash to insurers, hospitals and even doctor groups for high-volume sales of their products."

The rub with this kick-back was that the drugs in question were neither the most cost-effective nor medically effective in the class of drugs. Still, "preferred" status on the HMO drug list would go to Bristol-Myers' blood pressure drugs Monopril and Avapro; the antibiotic Cefzil; Plavix, a drug that inhibits blood clotting; and cholesterol-lowering drug Pravachol.

Patients who wanted or needed other drugs, which are more effective or less costly, would have to circumnavigate a time-consuming appeals process.

Foundation Health simply considered the deal for its $1 million per month kick-back at the expense of patients and the medical system.

According to Russell, "In fact, the Bristol-Myers draft agreement appears to rule out passing the payments to consumers. The drug company 'contribution' the memo states, 'is not an additional discount…and is not intended for benefit of payor organizations whose pharmacy benefits are managed by IPS.'"

Another troubling aspect of the arrangement, as the Chronicle's Russell reports, is who makes the choices about which drugs Health Net would cover. Once the choices were in the hands of a committee of the HMO's participating doctors. Now, acting on the advice of a new committee of hired consultants, the choices are made by Health Net executives.

This kind of profit-at-all-costs orientation is having an impact, even on those in industry. "Along the hallways at Sprint headquarters here [in Kansas City, Missouri], the great expectations for managed care have dimmed," reported the New York Times in October 1998. "In a score of interviews with workers and managers, no one recounted the kind of HMO horror story that makes headlines: the wrong leg amputated, a child denied a transplant. Instead, they said they had found managed care to be exasperating, callous and sometimes just senseless."3

Health care executives and large employers both admit that quality has been a casualty of the managed care system. Amazingly, an academic survey of health care industry executives found that almost half — 49% — believe the growth of managed care has decreased the quality of patient care. (At the same time, not surprisingly, 55% say there is no need for increased federal regulation of HMOs; 52% believe there is no need for more state regulation.)4

Employers concur. In 1998, 42% of employers polled believed cost pressures are hurting the quality of care, up from 33% in 1997 and 28% in 1996.5

Small employers are particularly disturbed, despite the pro-HMO leanings of the National Federation of Independent Business (NFIB). In a June 1998 Kaiser Family Foundation/Harvard survey of 800 executives of small businesses conducted for the American Small Business Alliance, 66% of the executives support enacting a new law to allow patients to sue their HMO as a way to make sure people get the care they need, rather than oppose it as unnecessary government intrusion.6

Managing costs does not mean the proper management of treatment. As we have seen in too many cases, those goals are often antagonistic.

Moreover, corporations managing their own money well does not translate to the health care system managing its costs effectively. Columbia's multi-billion dollar bilking of the taxpayer is one clear example. The recent HMO industry practice of dumping elders, because the companies are no longer permitted to cherry pick only the healthy seniors in Medicare, is another.

In mundane ways, too, HMO corporations have incentives and opportunities to make money for themselves at the expense of both cost-effectiveness and health-enhancement of the health care system.

"The price one pays to keep health care affordable is a degree of aggravation," Health Net chief medical officer Dr. Alan Zwerner told Russell.7 But affordable for whom? The company or the provision of a reasonable standard of health care?

Americans are learning from the growing exposure to HMO medicine that a system set up to manage money will never truly take care of patients. HMO corporations will simply shift costs away from themselves. The public and the patient will pay. HMO corporations will continue to charge.

But what alternatives do we have?

Big "R" Reforms

The HMO reform debate has taken place in state legislatures and Congress. In the province of politicians, the process has lent itself mostly to sound and fury without progress. Efforts to maintain a firewall between money managers and healers have fallen victim to the entrenched HMO lobby.

"They killed the health care Patients' Bill of Rights," Vice President Gore said at a White House press conference in October 1998. "I was in — I was in John Dingell's district in Dearborn — and this is a true story — an emergency room doctor told us of a man who came in to the emergency room in full cardiac arrest, his heart stopped, the doctor eventually brought him back to life. The HMO refused to pay the bill and said it was not an emergency. The man was dead! (Laughter.)"8

The New York Times reported in October 1998 that consumers' complaints about health insurers and HMOs are "surging," according to state health insurance commissioners. Interviews with twelve state insurance departments in the most densely populated states show that health care complaints have grown "50% over the last one to three years, far faster than the growth of enrollment in managed care plans."9 Audiences across the nation cheered when the lead actress denounced HMOs in the 1997 movie, "As Good As It Gets."

During 1998, politicians in Congress and state legislatures, however, failed to enact many serious reforms, folding under pressure from the HMO lobby. The Patients' Bill of Rights was defeated in Congress. The Republicans offered fig-leaf reforms with no enforceable remedies. The insurance industry is similarly attempting to prevent states from regulating managed care plans.

In July 1999, the Republican-controlled United States Senate passed purported patient rights legislation that did not include significant reforms. The G.O.P. plan allegedly applied to 48 million Americans in federally regulated health plans, but in fact only 10% of that population are actually enrolled in HMOs. Vice President Al Gore said the minimal measure would be vetoed because, "it's a fraud." Senior G.O.P. Senator John Chaffee (Rhode Island) told the Associated Press, "What have we accomplished? It seems to me we've let down the American people."

In the debate over curbing HMO power, everyone — from patient advocates, to doctors, to the HMO industry — has his own definition of "reform."

The HMO industry favors greater disclosure and a so-called external review system, where patients' disputes with their HMO are appealed to a third party for review rather than heard before a court or jury.

Those on the side of the patient — consumer groups, nurses, doctors — have made the right-to-sue without ERISA's hurdles the litmus test for genuine HMO reform. In 1998, the American Medical Association, which for decades supported capping the damages of doctors and hospitals for medical negligence, shunned its sacred cow of national damage limits. GOP leaders offered this carrot to the AMA in an attempt to split the ERISA-reform coalition, but in a valiant act, the AMA refused to take it.

Real reform must stem from serious accountability measures. Can we get there? Can we create and regulate a system that puts public health first, so that the many tragedies told in this book never appear again in our wealthy country?

One vital step is the distinction between three types of reforms, each of which will be considered in turn. "First tier" reforms would even the playing field for patients, so that they have the necessary leverage over their HMOs to get the care they need and deserve. "Second tier" changes, discussed later, would fundamentally alter the health care system to provide coverage to more patients at less cost. Lastly, it is crucial to see through the third tier of phony reforms and political placebos the HMO industry has put forth in order to stave off genuine, systemic correctives.

Level-The-Playing-Field Reforms —
Nailing Down Tier One

Restore the right to sue for damages at the federal level. The most "ripe" reform for those who know the system is to apply the same liability laws to HMOs now faced by every other industry in America. As discussed, federal ERISA law shields HMOs that administer private employer-paid insurance from damages for wrongdoing, so there is never a price to pay in court. (See Chapter Five). Congress can and should amend ERISA. Damages should be available under state common law when HMOs that administer employer-paid health care commit fraud, negligence, are responsible for a wrongful death, or breach the covenant of good faith and fair dealing that applies to every other type of business. From 1974 until 1987, patients with employer-paid benefits could receive damages against insurers. With the 1987 Pilot Life v. Dedeaux ruling, state common law was preempted in a way that the federal framers of ERISA did not intend. The easiest way to close the ERISA loophole is for Congress to specifically clarify the province of state courts and juries over HMOs that administer benefits. The Congressional Budget Office reported in July 1998 that giving patients the right to sue would add no more than 1.2% to health care premiums, including the costs of so-called defensive medicine.10 At the time of this publication, in July 1999, a bipartisan "compromise" in Congress would give patients the right to recover only compensatory damages, such as lost wages, not punitive damages, which punish wrongdoing.

Unless HMOs face significant damages, they will continue to ignore patients' needs and doctors' recommendations. In most states patients cannot collect for their pain and suffering after their death, so HMOs could have an incentive to actually let them die without punitive damages.

States can enact new HMO liability laws to protect against profiteering HMOs that put money ahead of good medicine. States can pass legislation that specifically skirts the ERISA loophole and hold HMOs accountable for their decisions by creating a new "corporate negligence" cause of action for HMOs. HMOs do deny treatment, overturn doctors' decisions and dictate limits on medical treatments and care. New state laws could require that HMOs be held accountable for reckless health care decisions. As noted, Texas recently became the first state in the nation to offer its citizens a way around ERISA to protect themselves against poor quality medical care. The Texas law assures that the physician, not the HMO, is in charge of patient care. This begins to restore the doctor-patient relationship. HMOs are liable when they exercise "influence or control which result in the failure to exercise ordinary care," in other words accountable for medical negligence and quality-of-care issues.

In the fall of 1998, a federal district court judge upheld the Texas statute because, "In this case, the Act addresses the quality of benefits actually provided. ERISA 'simply says nothing about the quality of benefits received.' Dukes, 57 F.3d at 3576."11 By contrast, the Court struck down the Texas independent review process as preempted by ERISA, because it deals with determinations of coverage disputes. The review process is the HMO industry's alternative to liability.

California legislators are also considering another way around ERISA. Pending legislation makes use of a clause in ERISA that "saves" for the states the right to regulate the business of insurance. The bill specifically makes damages available under the state's insurance law when HMOs breach their insurance contracts.12 If the legislation passes, HMOs will no doubt sue to invalidate it.

Creation of an independent non-profit consumer watchdog association funded by voluntary contributions, and governed by a board with a majority elected by members. For years, utility consumers in three states have been able to unite in order to fight fraud and unnecessarily high rates because of Consumer Utility Boards or CUBs. These voluntary associations have been effective because they have been able to contact every utility ratepayer in the state and ask them to voluntarily join. The key to this reform — devised by consumer advocate Ralph Nader — is a voluntary "check off" on the utility bill, which allows consumers to join the association with a minimal contribution ($5–$12 per year).

Congress, the state legislature, or the people via ballot initiative in some states can establish a similar consumer association (a public corporation) for patients in HMOs.13 It could be granted access to insurance company mailing lists and the power to advocate on behalf of individuals or groups of patients, and to publish reports on quality-of-service provided by HMOs, hospitals, nursing homes, and other health care businesses. The association would be a check on the health care industry's business practices, working to ensure that the profit motive does not diminish the standard of care and invade the doctor-patient relationship.

An effective consumer health care organization could save lives. Already CUBs have saved consumers billions of dollars. The Illinois Citizens Utility Board, with 200,000 members, has saved Illinois taxpayers more than $3 billion since 1983 by challenging utility rate hikes, and has successfully educated ratepayers on how to save money on services and on conservation issues.14

This vehicle is a model for HMO patients to join together to increase accountability and standards of care. It would be a democratic organization of HMO members interested solely in quality medical care.

Prohibit mandatory and secret arbitration of medical grievances as a condition for health coverage. As previously noted, most HMOs and managed care plans require the consumer to give up his rights to go to court in cases of malpractice or in disputes over quality of care — as a condition of coverage. Instead of having access to the public forum of a court, patients are forced into a system of mandatory binding arbitration. Forced arbitration is costly, unfair, and conceals quality-of-care violations from public scrutiny.15 Many states now prohibit mandatory binding arbitration agreements. Arizona's constitution, for instance, specifically bars any legislative limitation on the right to trial. However, in too many states, forced arbitration enables HMOs to hide from juries and judges in a secret and often biased justice system. Reforms to end binding arbitration as a condition of health coverage would force HMOs that delay and deny care to face the scrutiny of an open courtroom. This would publicly air quality-of-care violations so that they are not repeated.

Require prior approval from regulators before HMOs and insurers can raise their premiums or lower the rates they pay doctors via capitation. The property/casualty insurance industry has a system in most states in the nation requiring state approval before rates are raised or lowered, as opposed to the old "file and use" system, where the insurers simply filed the rate and used it. No such system is in place for health insurance, despite its life and death stakes. As mentioned earlier, many individual policyholders with Blue Cross of California saw their rates skyrocket by 58% in 1998. Elderly Kaiser individual members in Washington, D.C. saw a 49.4% increase in premiums.16 Older Americans can become costly patients and the HMOs hope to discourage them from staying. HMOs say that the young should not subsidize the old, but this is precisely the definition of an insurance pool risk. You pay in when you are young and healthy, and utilize when you are older and sicker. Requiring prior approval for rate increases, and an opportunity for a public hearing and comment, will keep the HMO industry honest. Utilities face this scrutiny, and health care is certainly as vital a public commodity as water and power.

Health care businesses should be required to show the need for rate increases and where and how the money would be used. A fair rate of return must be set on health care companies and HMOs. If care is to be rationed, so should HMO profits.17

HMOs have used their leverage to squeeze down the capitated rates for doctors so low that it is virtually impossible for physicians to do all they can for their patients. Some primary care doctors receive rates as low as $6 dollars per month for all the care of a patient. A prior approval system could require that HMOs show that the capitated rates paid to their physicians and medical groups are actuarially sound and sufficient to take care of the patients' needs — particularly the sickest patients. If the rates paid to physicians who treat a disproportionate number of sick patients are not "risk adjusted" upward, doctors will simply compete for well patients. The public has a compelling interest in this type of rate regulation to make sure the insurance system serves the sick as well as the healthy.

Ban full-risk capitation. The idea of pitting doctors' financial interests against their patients' quality of care violates the fundamental doctor-patient relationship. Today some doctors accept nearly full risk for all of a patient's care, meaning almost all costs expended on the patient are paid by the doctors, not the HMO. This development happened without public debate, comment or approval. Large physician medical groups act essentially like insurers, without the solvency requirements to make sure they are fiscally secure or hold an insurance company license. Whatever doctors spend on patients comes out of their own pockets. "The less you do for patients, the more money you make" is an unacceptable public policy for most Americans. The federal government can outlaw the payment of capitated rates to physicians, or at least "full risk" capitated payments that turn physicians into insurers. If HMOs are prevented from passing full risk, or even any risk, on to physicians, then the fire wall between the doctor's focus on care and business concerns will be rebuilt.

Prohibiting HMO bureaucrats from second-guessing physicians who examine patients. HMOs claim that if they can no longer capitate doctors, they will have to increase the number and interference of company bureaucrats. An HMO should not be allowed to deny a patient a physician-recommended treatment unless another equally qualified doctor has examined the patient and made a medical determination that the care is not warranted. In addition, any HMO employee making treatment decisions should have a valid medical license in that state.

Would the HMO industry really oppose such basic reforms? Yes. In 1997 and 1998, California's HMO industry fought such legislation twice. The reform, aimed at curtailing the overriding of doctors' decisions, focused on extreme cases, where a patient's life and health was certified to be in jeopardy by the first doctor who examined them. The industry prevailed on Governor Pete Wilson to veto this eminently reasonable reform.18 This common sense rule of law, however, must be applied to HMOs if bureaucrats are to be prevented from overruling qualified doctors and making life and death decisions. In particular, if capitation is prohibited, this reform will ensure that HMO bureaucrats do not interfere in the doctor-patient relationship when a doctor is seeking critical care for his patients. This vital legislation returns control over medicine to doctors, not accountants.

States must set safe staffing standards so that nurses and doctors are available to patients based on acuity of illness, regardless of whether the patient is in a nursing home or in a hospital. Typically, staffing protections exist only for the most severely ill patients in critical care units. Even in these areas, some businesses routinely violate the law. Stronger penalties are needed. Safe staffing requirements do not currently exist for hospital units outside of critical care, nursing homes, medical offices, and same-day surgery centers. This is why HMOs often seek to shunt patients who need to be in the hospital to so-called skilled nursing facilities or nursing homes, which are less costly because doctors and nurses do not have to be on the premises in any ratio to the patient population. Until safe nurse- and physician-staffing levels are set by regulators for all acute patients, HMOs and insurers will continue to cut corners and strand patients in inappropriate settings based solely on cost.

Mandate public disclosure of data on health care quality, financial information and complaints and arbitrations against the health care organization. One of the key components of our medical system should be informed consent by patients. HMOs may deal with questions of life or death, but they are under no obligation to tell you anything about their day-to-day operations. They do not disclose how they determine whether you receive needed care, how much money they make based on those decisions or about why any legal actions were taken against them. HMOs should be required to publicly disclose all information relating to quality of patient care. This includes all data and studies used to determine quality, staffing, and reduction of services; financial reports, including corporate affiliates or subsidiaries; and complaints and arbitrations. WARNING: Today HMOs claim they are trying to get more information into consumers' hands. But this information is often useless. For instance, patient-satisfaction surveys are often taken among people who are well and rarely use their HMO. And private report cards are maintained by industry-sponsored groups such as the Joint Commission on the Accreditation of Healthcare Organizations (JCAHO) and National Committee For Quality Assurance (NCQA).

NCQA was formed in 1979 by the trade associations for the managed care industry — the American Managed Care and Review Association and the Group Health Association of America. The group was founded, in fact, to counter the federal government's attempts to monitor HMOs.19 The main funding source for NCQA continues to be HMOs, although the group is seeking to diversify its funding to appear more independent. In 1997, NCQA's board of directors was a "Who's Who" of HMO executives and corporate chieftains, including representatives from Aetna, Blue Cross, Henry Ford Health System, PacifiCare, Harvard Pilgrim Health Care. NCQA has created its own performance measurements, the Health Plan Employer Data & Information Set (HEDIS). "The critical point here is that 'value' as used by NCQA is to be measured strictly in terms of cost of health care delivery, as distinguished from the clinical needs of a patient as defined by the trained professional," said former U.S. Justice Department attorney Kenneth Anderson, an expert in anti-trust law who contends NCQA is a part of collusive behavior among the managed care industry. "Thus, the NCQA criteria by which performance is measured are initially framed by those entities — HMOs, managed care companies and employer payers — who have a strong incentive to define 'appropriate' levels of care in narrow economic (e.g. cost) terms."20

Anderson says "This NCQA effort is, in part, essentially a massive public relations program orchestrated by the managed care industry in hopes of averting the establishment of a truly independent and objective mechanism, whether private or governmental, to define what quality health care really is and then measure plan performance against such standards."21

As for JCAHO, a July 1996 audit by the national consumer group Public Citizen found JCAHO "views hospitals not as entities to be regulated, but as customers to be serviced and kept satisfied." Part of the basis for the finding is that twenty-one out of twenty-eight members of the JCAHO's Board of Commissioners were industry representatives who each paid $20,000 a year for a seat.

Prohibit health care businesses from selling medical records without the express written authorization of the patient. Here is a scary thought: It is easier for people to find out if you have cancer or AIDS than it is for them to get a list of the videos you have rented. Patient records are now a commodity for sale.

Hospitals, HMOs, and drug companies all maintain commercial data banks which collect and store individual medical records, containing sensitive personal information. Most states' civil codes have extensive provisions for maintaining medical confidentiality, but most were written before the computer explosion. The new technology changes everything and leaves patients extremely vulnerable. Dr. Beverly Woodward, an ethicist at Brandeis University, says employees at most Boston-area hospitals enter patient information directly on-line without consent from the patient. Any doctor at any affiliated hospital can access these records, including psychiatric records.22 In Maryland, Medicaid clerks tapped into computers and accessed critical patient information — names, addresses, incomes, medical records — which they sold, sometimes for less than fifty cents per head, to HMO recruiters.23 Breach of privacy can have serious consequences. Patients with AIDS or mental illnesses have a great deal to lose if their condition is made public — sometimes their jobs, even their families.

Prohibit HMOs, hospitals, nursing homes or other health care businesses from firing, delisting or retaliating against doctors and licensed caregivers who speak out on behalf of patients or who report patient care violations to authorities. "Gag" or "disparagement" clauses in contracts between physicians and HMOs or insurers pressure doctors to keep silent about practices or policies they believe may be injurious to patients.24 Hospitals have fired, sanctioned, and threatened doctors, nurses and other licensed caregivers who advocate for their patients, challenge unsafe practices or cooperate with official investigations. These pernicious practices must be barred if doctors are to be trusted by their patients. HMOs say "gag" clauses do not exist today. If they do not, there is no reason not to ban them.

Fixing Long-term Care Insurance — Integrating Support Systems. The average life expectancy has lengthened more in the last 100 years than in the previous 2,000.25 People are living longer, but their final years are not necessarily healthier. Half of all women and a third of all men 65 years of age and older will spend their last years in a nursing home, at a cost of about $40,000 a year.26

Long-term care is the assistance people need when they are not able to accomplish some of the basic "activities of daily living" like bathing, dressing, walking or moving from the bed to a chair. The National Center for Health Care Statistics reported in 1996 that half of those 85 and older require long-term care assistance. Unfortunately, traditional health insurance and Medicare will generally not cover home care or community-assisted nursing home living. One must be poor or become poor before becoming eligible for long-term care benefits through Medicaid. Standard health policies pay less than 1% of long term care costs. Medicare covers less than 4%. Private payments, which are costly to individuals and their families, account for 29%. Medicaid — which covers the poor and those who have "spent-down" their assets (a difficult process) — accounts for 68% of the payments.27 Should it take becoming poor or disabled, or driving your family into poverty, in order to qualify for home-care coverage? Shut-ins who cannot afford home care develop bed sores or anorexia, then need to be hospitalized at a much higher cost.

Long-term care in California averages about $124 a day, or about $45,000 a year.28 According to the Brookings Institute only 4 to 5% of the elderly nationwide have some kind of private long-term care coverage.

Marketing is not prompting consumers to buy policies at a younger age — the average purchaser of private long-term care insurance is 68 years-old. Plus, policies are sold almost exclusively on an individual, rather than group, basis, with concomitant high administrative costs for insurers. According to the National Association of Insurance Commissioners (NAIC), annual premiums for long-term care insurance can run as much as $2,000 for the average-aged purchaser. Premiums increase as one gets older and there are so many options in policies that even sophisticated consumers have difficulty understanding what they are buying and how it compares with other products.

Deceptive and fraudulent marketing is also increasingly a serious problem for long-term care insurance. federal legislation in 1996 created a national long-term care insurance policy to be sold by private insurers. Drafted at the behest of the insurance industry, the federal policy provides less generous benefit payments than many state-based policies, including California's — eliminating the most common form of disability, the inability to walk, as a trigger for paying benefits. The insurance lobby sold the less generous benefits policy to Congress, and then marketed it to seniors, under the pretense that because the policy's cost was tax deductible, older Americans would benefit. The problem is that the vast majority of seniors do not itemize their medical deductions and will not reap a tax benefit.

The affordability and availability of long-term care must be addressed in a coherent national health care policy, particularly as it relates to Medicare and Medicaid.

Can society afford to pay to keep all older Americans alive as long as they and their family want and technology allows? Critical to answering this question is a more reasonable long-term care public policy. One solution is for the federal government to issue long-term care insurance that includes the most common form of disability — the inability to walk — and for it to be jointly underwritten by private companies.

A second potential solution is to build long term care insurance into the federal Medicare package, so that families will not have to "spend-down" or "go-bankrupt" just to get nursing home care. Surveys show that the majority of the American public agree with expanding Medicare to include long term care.

Private companies like Columbia/HCA have milked and bilked the homecare market at the expense of the taxpayer, mostly through Medicaid. Meanwhile, those doing the job are underpaid and overworked. Integrating the continuum of home care into the medical care delivery system is vital to cost-effectiveness and health enhancement.

Systemic Changes:
The Second Tier Reforms

Important as they are, first-tier reforms will not fundamentally alter the drive to sacrifice care in the name of profit. More potent, systemic remedies like those enumerated below are likely needed.

End For-Profit, Investor Ownership of HMOs and Health Care Businesses. Medical care is not a commodity. It should not be bought and sold like automobiles. Health care does not fit the logic of the market. Many observers trace the reckless, profit-driven care-cutting at HMOs and managed care companies to the rise of for-profit, investor-owned HMOs and health care businesses. The easy money in managed care, though, is long gone. How do investor-owned HMOs respond to the current serious slide in their stock? They move to fewer facilities, reduced access to specialists, cheaper drugs, shorter hospital stays, fewer doctors and hospitals, less caution. In the current environment, the maintenance of the company's rate of return to attract investors demands that patients pay the price. The HMO network of doctors is made more restrictive, research and training programs are cut, doctors are fired.

Former United States Surgeon General C. Everett Koop and John Baldwin, the dean of the medical school at Dartmouth College, posed the question of control of health care this way: "Sustained profits require aggressive cost-cutting. This results, inevitably, in restriction of access and withholding of care. But do we really want to relegate such decisions to analysts within the health care industry, or should we assert the public interest in these crucial ethical, societal and medical issues?"29

When California-based PacifiCare bought failing FHP International in 1997, for instance, the executives and directors took home millions. FHP patients had already paid the price. Long before the sale, about one-third of FHP doctors were fired, training programs were dismantled and the drug list cut, according to FHP's founder, in order to dress the company up for sale by clearing FHP's books of expensive overhead. FHP shareholders, who took the HMO officers to court, claimed unscrupulous board members and executives purposely destroyed a viable and healthy company just to sell off its resources and make millions for themselves.

Wall Street electronic ticker-tape machine constantly updating PacifiCare's stock price above the elevator to the medical directors' office suite.
Without new controls to protect health resources, the current system is clearly open to raids by profiteers. In the $9 billion U.S. Healthcare merger with Aetna in 1996, for instance, U.S. Healthcare chief Leonard Abramson walked away with over $900 million. PacifiCare medical directors, who are responsible for approving or denying physician requests for expensive drugs and treatment, view a constantly updated electronic ticker-tape of the company's stock price on the wall above the elevator to their offices. These medical directors decide physician requests that could affect that stock price. Do business or medical decisions rule?

Patients deserve a moratorium on for-profit HMO takeovers of not-for- profit HMOs, hospitals and clinics. This would discourage the quick buck mentality by HMO executives while protecting the availability and accessibility of health care. Medical resources are far too valuable a public commodity to evaporate the next time a Wall Street bubble bursts. A ban on for-profit, investor ownership of HMOs would put HMOs back in the hands of doctors and health care professionals who have been trained to run the system.

A study in the July 14, 1999 edition of the Journal of the American Medical Association found that not-for-profit HMOs deliver a better quality of care than investor-owned, for-profit HMOs in fourteen categories selected by the NCQA. For instance, investor-owned HMOs had lower rates of immunization, mammography and psychiatric hospitalization. One can only imagine how much better still the non-profits would perform if they did not have to compete in markets dominated by for-profit companies.

Some might say that doctors are for-profit enterprises themselves. This is correct. But, unlike HMOs, physicians also hold medical licenses that can be taken away and they can be held accountable in a court of law in every state. Effective checks on physician conflict of interest can be maintained. Doctors working within the framework of a non-profit medical system will have additional ethical constraints.

HMOs are starting to fail financially. Oxford in New York, for instance, fell apart after its stock tumbled. New Jersey officials were forced to take over HIP Health Plans of New Jersey in October of 1998 because it was bordering on insolvency. Governor Christine Whitman's administration announced that it wants to create a safety net for patients by exploring the possibility of a "guaranty fund" for HMOs — which, unlike traditional insurers, do not have reserve requirements. The stress on HMO finances will only continue.

For-profit HMOs operate in a climate of profiteering and investor demands for a strong rate of return on their capital. The non-profit HMOs compete in the same environment as the for-profits — trying to undercut their for-profit competitors' prices. This is what happened to Kaiser, a non-profit, competing in a for-profit environment. Kaiser reduced its once excellent service to maintain its price levels for employers. A disillusioned Paul Ellwood, the father of HMOs, who even coined the term managed care, relayed recently, "A Kaiser official told me the other day, 'Until better quality attracts more patients, I don't care about it any more. We've been talking about quality improvement for thirty or forty years without much to show for it.'"30 The non-profits are subject to the same downsizing demands to lower costs in order to cut premiums so they can attract more customers. Take the investor-owned, for-profit company out of the managed care equation and the management of quality care within a budget will be the primary concern, rather than return on investment. The non-profit medical group can return to its primary goal of treating patients.

Boycott HMOs and Receive Health Care Direct From Employers. Motorola Corporation received so many complaints from its employees about their HMOs that it created a new system where the company itself contracts with a network of doctors and hospitals to take care of its employees' medical needs. Motorola cut out the unnecessary middle men — the HMOs and insurance companies. Employees report greater satisfaction with their health care and doctors say they now are the ones in control of managing care, knowing they must contain costs (or they will lose their contracts), but not at the expense of medically necessary treatment. Motorola's vice president for benefits, Rick Dorozil, told CBS News, "We will continue to do this as long as we can do it faster, better, cheaper, and at better quality." For $12.50 a week and 10% of bills, employees and their families can see any doctor in the network, including specialists, without preauthorization. Seventy percent of Motorola's 80,000 employees have enrolled in this new plan.31 As more employers follow suit in this voluntary arrangement, at least patients with employer-paid health care will have more options.

There are two daunting problems with this model. First, employers have access to personal medical information about their employees. This creates a very real threat to patient privacy. AIDS patients, for instance, might find themselves out of work and filing discrimination lawsuits because of a bigoted employer. Most obviously, those without employer-paid health care would still have to deal with HMOs, and these patients would tend to be seniors on Medicare, the disabled and poor on Medicaid, and others without jobs or with low-paying jobs — people who tend to be sicker. HMOs would have to serve a sicker population without taking in the premiums from the healthier working population. This system would be destined to collapse. HMO medicine, which prefers to take in dollars from the healthy and limit care for the sick, would be destroyed by adverse selection — the "risk pool" being drained of the best risks and left with the worst.

A more comprehensive national strategy is warranted precisely because we must have one health care system that shares the risk equally for the healthy and the sick rather than many systems which compete for the healthiest and leave the sickest to the taxpayer's generosity.

The Fox Guarding the Henhouse:
Avoiding HMO Attempts to Control Reform

Privatization advocates have long tried to turn public control of our schools, courts, public assistance systems and municipal services over to private corporations in the name of greater efficiency. But Aetna, PacifiCare, Kaiser and others among the nation's largest HMOs have actually tried to privatize legislative reforms of their own industry by promising to implement private "independent" review systems, where the HMO voluntarily pays a third party to review patient problems, rather than submit to public mandates.32

State and federal legislators cannot trust the HMO industry's promise to reform itself. The HMOs' independent review systems purport to give patients facing delays and denials an appeal, but deliver infrequently.

First, reviewing companies are hardly 'independent' of the HMOs that contract and pay for their services. For instance, marketing communications from one such company, Medical Care Management Corporation of Bethesda Maryland, to HMO clients boast that the company "can save payers millions of dollars a year on just a few cases. Our expert physicians affirm the high cost, high risk procedures submitted for review in one-half to two-thirds of cases, depending on the type of disease and the patient's profile. If you are paying for 100 such cases now, inadvisable treatments may be costing you over $6 million." So the so-called independent reviewers market a "denial" rate of 33–50%.

California actually already enacted an "independent" review system in 1996 for patients in need of "experimental procedures" when standard therapies do not work. In theory, this "independent" review system was unassailable, but in practice no reviewing agency was accredited for six months to perform reviews under the law. Subsequently only two were accredited, one of which was Medical Care Management Corporation. Other companies have been unable or unwilling to prove their "independence" through detailed disclosure about their financial ties to HMOs, their protocols and their reviewers.

Appeals decided by such companies are the HMO industry's reform of choice because the private process permits bureaucratic maneuvers by HMOs against which the seriously ill patient has neither the time nor capacity to defend.

Folsom, California resident Barbara Brown, once a teacher of the year, ran up against this situation when she contracted advanced ovarian cancer and standard treatments would not do. On July 1, 1998 she appealed under California's new experimental treatment law. With no accredited reviewers, Kaiser picked an agency of its choice, Medical Care Management Corporation. Barbara says, "First, Kaiser made every effort to control all the information that went into the review process…Second, Kaiser biased the panel of experts against my proposed experimental therapy by steering the experts toward Kaiser's own leading set of questions…Third, in their reports, the experts all stated that their assigned role was to respond to Kaiser's questions."

Denied life-saving treatment by both Kaiser's internal grievance process and then its so-called external review, Barbara was forced to sell her house to pay for her treatment. Only a community bake sale and car wash that raised $25,000 provided the down payment for her care. Barbara is now recovering. Her "experimental" surgery, which her HMO said would kill her, resulted in the complete removal of all visible tumor from her abdomen. As of this writing in June 1999, she has had ten healthy months with her family. However, creditors are still pursuing her and she has had to move out of her home.

Private review systems are no substitute for civic scrutiny. Congress and state legislatures must not be deterred from enacting right-to-sue legislation and other public mandates. The wealthiest nation on earth must impose its civil values on private corporations rather than let the fate of mothers like Barbara Brown depend on the success of car washes and bake sales.

Third-party reviewing systems will only work well in conjunction with public laws for HMO accountability. Companies must know that if they do not play fair they will face large damage awards or other fines. Texas's independent review process, for instance, has been held out as successful, but the state is the only in the nation where a patient can take an HMO to state court for quality-of-care violations. The independent review and liability laws were passed simultaneously. While the review process was struck down by a federal judge as in violation of ERISA, the state and HMOs reached a voluntary agreement to continue using the system.

A private system of appeal without ultimate public accountability is destined to betray the HMO patient. Legislators who forget their public mandate to reform HMOs and favor a private solution do their constituents a grave disservice.

The Final Frontier:
The Uninsured

National Preventive Health Care.

One of HMO medicine's biggest promises was to reduce the number of uninsured Americans by making insurance more affordable. Unfortunately, HMO medicine has failed on this front too.

The Census Bureau reported in 1998 that the proportion of Americans without health insurance rose to its highest level in a decade: 16.1%. This is 43.2 million fellow citizens, a group in which most of the adults have jobs.

"In a healthy economy, you'd think you would have more people with jobs, and that would tend to increase coverage, so you'd see fewer people uninsured," Census Bureau statistician Robert L. Bennefield said.33 In the largest states, like Texas and California, the proportion of the uninsured has soared to one in five people.

The HMO industry promised that by moderating premiums, health insurance would be in the reach of more Americans. Yet many employers, particularly small businesses, are now dropping workers and their families from coverage. As noted earlier, premiums are on the rise again. Paul Ellwood predicted in May 1999 that the double-digit increases in premiums will continue "with a vengeance."34

The New York Times reported in March 1999 that "the uninsured are not the poorest of the poor, who tend to be covered by Medicaid…Of the 43 million Americans without insurance, 75% work at least part time, but are not offered insurance through an employer or cannot afford their contribution. The rest tend to be students, children and early retirees…They are a diverse group, from the chronically ill woman in Harlem who borrows her mother's medicine because she cannot afford her own, to a roofer in Yonkers who is fending off bill collectors, to a young web site designer making about $65,000 a year who takes the calculated risk he will never have to see a doctor at all."35

A letter to the New York Times from Albany Medical Center President James Barba sums up the problem the uninsured pose not only to themselves and their families, but to the nation.

"Having no insurance does not mean that these patients do not get medical attention," wrote Barba. "Regrettably, many wait until they have a health crisis, then present themselves to emergency departments, with the tab picked up by all of us in the form of charity care. This process is highly expensive and inefficient. Prevention and wellness are less expensive. Getting the uninsured assigned to primary-care physicians so that ailments can be treated before they become full-blown crises is a better use of resources, with substantial savings to the country and taxpayers."36

Mr. Barba's point is not revolutionary. Well-educated policymakers in Washington have recognized this fundamental reality since the turn of the century. The question ever since has been how to insure, not whether to.

Government-run health insurance programs like Canada's have been opposed by the American insurance industry. Insurers have effectively used their deep pockets to turn the public against legislative and ballot attempts aimed at preventing private insurers and HMOs from running the system and mandating certain coverage levels. Some segments of the industry, particularly the smaller insurers, spent tens of millions of dollars to defeat President Clinton's proposed national health care system. Opponents of a government dominated system have asked whether Americans wanted the post office as a model for their medicine. Increasingly in the age of HMOs, however, Americans may respond that at least the post office lives up to its commitments and delivers the mail. Of course, it is the Medicare system, not the post office, which is the apt comparison. The Medicare program operates with a mere 2% for overhead costs. By contrast, private HMOs spend up to 30% for their overhead and profit.

Dr. Carl Weber of White Plains, New York summed up why recent exposés about HMO medicine make a compelling case for the ouster of corporate control of our medical system: "After years of interfering in doctor-patient relations, exacerbating the problem of the uninsured, denying responsibility for medical education and research and rationing health care, health maintenance organizations are refusing to cover the elderly while asking for rate increases. How much more evidence do we need before we realize that managed care is a failed system that should be abandoned?"37

Traditionally, there have been two fundamental approaches to "universal health care" — the premise that our society as a whole will insure everyone to protect us all.

First, employers could be required to pay for health care coverage, either through a pay-roll tax or simply by providing coverage for their employees. Such an employer mandate was first proposed by Richard Nixon, so it is hardly a radical idea. The business lobby has fought the employer mandate model on the national level. This model, which currently exists in Hawaii, does not cut private insurers out in favor of a government-run system. In Hawaii, workers and non-workers are covered by the state but given care by private HMOs and health insurers. The state is simply a financing mechanism. Hawaiians, as a whole, seem to feel more satisfied with their HMOs than the rest of Americans, probably because they have the choice of three major competitors and those companies have to compete with quality treatment to win business. President Clinton was working on a similar model for the nation in 1994, but his "managed competition" concept also turned the administration of the system over to HMOs and insurers, which would then tend to compete with each other for healthier customers from the start. Moreover, under "managed competition," too large a percentage of the health care dollar could still go to the companies' profit and overhead rather than to patient care.

A second, more straightforward (some might say radical) model is to make the federal government the payer for all health care services, the ultimate administrator and coordinator of a national health care system that is serviced by private health care service givers — doctors, nurses, hospitals, HMOs that "manage care" rather than simply manage money. This system could take many forms. Canada and most European nations have a "single payer" model, which guarantees universal health coverage to all citizens.38 The problem for many American legislators, whose careers have been sustained by insurance company campaign contributions, is that the insurers are cut out of the deal. The government, not insurers, underwrites risk. More problematic, a single-payer system is typically financed by taxes on employers. Politically, the corporate lobby has teamed with the medical-insurance complex to stop implementation of a single payer health care system. The Republican Congress, of course, needs little encouragement from corporations to oppose any government-run health care plan.

The conservative American Medical Association has opposed such a system in the past because of doctors' fears that a government-run system would cap their fees. But many doctors, having seen the horrors of corporate HMO controls, may yet be ready for a government system that is more reasonable to them. While the public once believed that for-profit companies were more capable of running the health care system, attitudes have changed after prolonged exposure to HMO medicine's vices. A February 1998 poll found that, for the first time, the public believes that not-for-profit companies would do better in running the nation's health care system. In HEDIS patient satisfaction data, not-for-profits also receive much higher ratings.39

Certainly, there is enough money in the system to insure everyone. A novel proposal by Boston University professor Alan Sager calls for simply freezing all national payments to the health care system from the previous year, and covering every American with a full benefit package from that pool of money.40

The trillion dollar health care economy could easily cover every American with comprehensive benefits. Canada, for example, spends 9% of its gross domestic product to insure everyone — while we spend 14% and leave 43 million without insurance. The new American health care system could be coordinated through regional administrations representing all the stakeholders — physicians, patients, payers, and others — that calculate reasonable fees for those providing treatment and monitor utilization of doctors, as well as watching for fraud. Such a government-run system could be far more efficient than the current one.

Sager's system would require no taxes, simply a freeze on payments currently made by employers and other payers. Alternatively the same program without the co-payments patients now are forced to make would include only a moderate increase in taxes, equal to 5% of health care spending. Such a tax would substitute for the co-pay, which Sager calls, "the tax on being sick." The question Americans and their representatives must ask themselves is which model ensures greater potential for the health of the nation — one run by corporations intent on profits or one run on a non-profit basis and regulated by the government.

Ellwood, whose change of heart about his own HMO concept was fostered by his personal experiences with bad medicine, now says, "Uneven health care in the United States is a national disgrace. Ultimately this thing is going to require government intervention. The question is what form government intervention will take. I think whatever it is, it's going to have to be a condition of doing business." Ellwood agrees reform "is not going to come from within" the industry.41

Two recent independent studies, commissioned by the Massachusetts Medical Society, indicate the waste and overhead in the current system. According to a report in the Boston Globe, a Canadian-style single-payer system would save between $170 million and $1 billion annually in the state. Additionally, hundreds of thousands of Massachusetts residents would have coverage; cutting back on the fiscal strain of emergency room medicine. Surely Massachusetts is not unique in this regard.42

It is, of course, significant that a state chapter of the AMA would sponsor such a study. The national organization has been steadfast in its opposition to a single-payer system. American doctors, however, have had both their incomes and freedom to exercise appropriate medicine eroded under for-profit managed care.

Any standardized system would reduce the needless paperwork that bogs down medical offices dealing with the vagaries of private insurers. Market enthusiasts should be interested in reducing the inefficiencies in the current system. Certainly American ingenuity can design a public/private partnership to restore the primacy of the doctor/patient relationship and insure more citizens. This will require the elimination of the for-profit insurers from any significant role in American medical care. It will be a bitter political struggle because of the billions of dollars involved. But it may become inevitable as the nation grows older, requires more medical care, and experiences the many flaws of managed care.

Never before in American history has there been such an intersection between the interests of the uninsured and of those who pay for insurance but lack peace of mind that they will receive coverage for their medical conditions.

In early 1998, an insured Massachusetts newspaper publisher killed himself, leaving behind a suicide note about his travails trying to get mental health care from his HMO. In the spring of 1998, a distraught man with health insurance parked his truck on a Los Angeles freeway and unfurled a banner that read, "HMOs are in it for the money." Observed by television viewers across the nation, he proceeded to set himself on fire, then discharge a gun in his mouth.

Such despair might once have been conceivable among the uninsured, but hardly from the insured in the wealthiest nation in the world. As extreme as the reactions were, too many Americans can identify with the intense frustrations of dealing with HMOs.

In June 1999, the Los Angeles Times reported that specialists on call with local emergency rooms are now refusing to respond to emergencies for HMO patients because their HMOs do not pay enough. In one case, a surgeon refused to come to the emergency room to operate on a seven month-old who fell and cut her upper lip down to the muscle.43

A system that manages treatment and costs is needed. But who will run it? The health care crisis that led to the national debate in 1994 over universal health coverage has only been deferred. The rising anger at the deficiencies of HMO medicine is merely a symptom of the same national malaise. Americans will ultimately have to weigh in, once and for all, about the future of their health care system.

If the people do not act, private entrepreneurs certainly will.

A high-profile group of investors are already raising venture capital to launch a for-profit HMO patient assistance service and 1-800 hotline, much like the pre-paid road service plan for motorists. For an annual premium or membership fee of about $80 per year, the corporation will provide information about HMOs and limited access to an advocate to help you navigate your HMO when you run into problems — more advanced advocacy packages would cost more. The program amounts to insurance for your health insurance. Should we need to buy more insurance just to collect on our HMO policy? Can the failure of HMOs to serve us be corrected by more market mechanisms? Will private solutions result in another proliferation of niche businesses that play on patients' fears and are just as exploitive as the HMOs? Unless civil society reasserts itself, the answers may be all too clear.

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