Staff Reporter

Health care premiums are expected to rise 5 percent or more this year as the managed care industry once credited with keeping costs down begins passing on its higher expenses to employers.

Health maintenance organizations say the price increases are largely beyond their control.

"Newly mandated benefits such as a minimum two-day maternity stay, and rising drug costs, are the main reasons for prices rising this year," said Myra Snyder, president and chief executive of the California Association of HMOs.

But analysts say there are other factors working to push up prices. Some HMOs that have gone through acquisitions are encountering efficiency problems that have proven costly to solve, according to Mike Dwyer, a principal and managing director for health care at BDO Seidman LLP.

In addition, analysts say that prices had been kept down in the last few years as a marketing maneuver to gain more patients a strategy that has about run its course.

Perhaps just as importantly, the stronger economy has given HMOs the confidence to demand higher payments in the belief that companies can afford to pay more for health care.

The escalating cost curve may get even steeper under proposed state and federal proposals to tighten regulation of HMOs and require them to provide more benefits to policy holders.

"The concern in the industry is that (government) micromanagement and mandated benefits could bring us back to double-digit cost rises like we had in the 1980s," said Lisa Haines, a spokeswoman for Woodland Hills-based Foundation Health Systems Inc. "HMOs provide appropriate care at the most efficient cost, but if more benefits are required, then someone has to pay for them."

The upward pressure on managed care prices is expected to be especially acute in California, where there have been growing calls for tighter government controls.

More than 50 HMO-reform bills are pending in the state Legislature after being carried over from the last session, and a state-appointed task force in early January submitted more than 100 recommendations to Gov. Pete Wilson on how to better regulate the companies.

The proposals focus on broadening services covered and giving policy holders easier access to specialists and prescription drugs. The task force is also recommending the creation of a new state oversight body for HMOs, which are currently regulated by the Department of Corporations.

The passage of government mandates that would force HMOs to provide certain types of care is expected to have a definite impact on costs.

"The cost for regulation of a company adds overhead, and they are going to have to recoup that money somehow, meaning higher prices," Dwyer said.

A 1997 study for the National Center for Policy Analysis examined the cost implications of 12 medical benefits that have been proposed as mandatory. The study concluded that the dozen items could raise the cost of a "standard family policy" (which now costs $3,500 a year) by as much as 30 percent. The health care items examined in the study included drug-abuse treatment, mental health care and vision exams.

Many doctors and consumer advocates counter that those types of services fall under the rubric of "appropriate care," and that the services have been unfairly denied to many policy holders.

Furthermore, doctors like Brian Johnston, medical director of the emergency room at White Memorial Medical Center in Los Angeles, contend that implementing some new services won't necessarily mean price hikes.

"Increased regulation will probably mean increased costs, but they don't have to be passed on to (policy holders)," said Johnston, immediate past president of the Los Angeles Medical Association. "Many of these HMOs have been providing substandard service while making unreasonable profits, taking 20 or 30 percent of their revenues off the top and paying their executives millions of dollars a year."

Johnston suggested that regulation of HMOs is one way to "squeeze out some of the excess" profits. He said this could be done by setting minimum levels for the percentage of HMO revenues that must be spent on furnishing medical care.

Johnston noted that some for-profit HMOs spend a far smaller portion of revenues on providing health care than the percentage spent by non-profit HMOs.

Snyder, of the California Association of HMOs, countered that HMO administrative costs and profits are generally on par with many other industries averaging 15 percent to 20 percent of revenues.

While profits could be affected by regulation, consumer advocates contend that some proposed rules could actually lower HMOs' expenses.

For example, one recommendation from the state task force is that HMOs provide prospective clients more complete information about fees and restrictions of medical care.

Fuller disclosure could prevent complaints and even litigation from customers who believe they have not received the level of care for which they contracted.

"Some of these recommendations have the potential to reduce costs for HMOs by preventing problems before they can become big problems," said Peter Lee, director of the consumer protection programs of the Center for Health Care Rights.

Haines disagreed, saying that "with each new regulation comes new administrative requirements as well as, in many cases, additional benefits that have to be paid for."

While the extent to which new regulations could raise HMOs' costs is debatable, medical industry analyst John M. Curtis said HMOs are already incurring higher costs from government efforts.

"HMOs have had a very costly past couple of years employing lobbyists and attorneys to fight the avalanche of legislation to regulate them," said Curtis, director of the Discobolos Consulting Service in Los Angeles. "They won't admit to something like that because it is not considered legitimate overhead."

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