Overview//mike1st/mark2nd

By ANN DONAHUE

Staff Reporter

“So, how does it feel to be standing on the deck of the Titanic?”

That’s how health care analyst Sheryl Skolnick of BancBoston Robertson Stephens began her recent presentation to a group of local health care executives.

And while Skolnick might be overstating things a bit, let there be no mistake: The boat is listing.

Numerous health maintenance organizations both for-profit and non-profit are in financial trouble, as profit margins shrink and competition increases. In response, HMOs have jacked up premiums and cut payments to doctors, hospitals and other providers. That, in turn, has pushed providers to the wall. Recently, it forced MedPartners Provider Network Inc. out of business. Against this backdrop, premiums are going up significantly as consumers keep pushing for higher-quality and more available care.

It’s not just the private sector that’s facing the crunch. L.A. County’s public health system is mired with a chronic budget deficit and an exploding population of uninsured patients. If federal officials don’t extend a funding waiver next year, the county system could collapse.

“As a society, we still face a fundamental problem with health care and how we pay for it and what we’re going to get with it,” said Skolnick. “There isn’t enough money to pay for all the services we want. People need to understand that in order to provide the quality of care we want, we’re going to have to cough up more bucks.”

Part of what’s going on could have been predicted the inevitable growing pains within an industry that has made revolutionary shifts in just the last few years. To some, managed care was seen as a financial elixir to the traditional fee-for-service plans, which caused medical care costs to spiral out of control.

But the bottom line has gotten in the way whether it’s Wall Street, ever mindful of an HMO’s quarterly financial results, or increasingly sophisticated, and costly, procedures that take a huge chunk out of profits.

There also have been the effects of competition fueled, to some extent, by the movement of providers to form networks that help secure their own stream of patients (and thus revenues). Employers have formed coalitions of their own in an effort to keep down costs.

When HMOs pay out more than is coming in, they take on the look of any struggling business.

Industry lobbyists insist that things are not all that bad. Walter Zelman, president and chief executive of the California Association of Health Plans, said the managed care model generally saves consumers money without impacting the quality of care.

“California’s got the lowest cost of health care in America,” Zelman said. “Massachusetts has some great health care, but it costs $513 per family per month. California, maybe $373. New York, $475. New Jersey, $473. There’s no evidence that California quality is lower than anywhere else, and it’s largely because we have lots of HMOs and they compete very aggressively with each other.”

But other numbers tell a more sobering story. Foundation Health Systems Inc. of Woodland Hills, the parent of Health Net, had a net loss of $165 million in 1998, compared with a net loss of $67 million the year before. Kaiser Foundation Health Plan Inc. of Oakland, which has a large presence in the L.A. area, posted a net loss of $288 million in 1998, especially painful coming on the heels of its 1997 loss of $266 million.

Kaiser, the state’s largest health plan with 5.8 million members, attributed much of the losses to the large number of patients that required hospitalization. Not having enough room in its own hospitals, Kaiser was forced, at great cost, to send these patients to non-Kaiser hospitals.

“Small changes in medical costs and expenses lead to large changes in earnings,” said Glenn Melnick, a professor at USC and consultant at Rand Corp.

The widespread financial carnage points up a basic flaw in the capitation system, in which providers are paid a flat fee per patient to provide whatever care is required.

“Right now, capitation rates really aren’t predicated on the cost of patient care, but on market strength,” said Gary Hagen, senior vice present of Princeton, N.J.-based consulting firm Managed Care Resources. And market strength often revolves around cost-cutting. “There has to be significant changes or else (care provider) groups are going to go under,” Hagen said.

That’s already happening.

In March, MedPartners was seized by state regulators and forced into bankruptcy, leaving more than 1 million California patients wondering about the validity of their coverage.

Just this month, the Southern California Independent Practice Association, a subsidiary of Pasadena-based Huntington Provider Group, announced plans to shut down its managed care operations in the San Fernando Valley at the end of August, due to financial troubles.

L.A.’s public health care system also is in dire straits. Earlier this month, all five L.A. County supervisors traveled to Washington to lobby for an extension of a federal waiver that was given to the county under emergency circumstances in 1995. But some of the county’s doctors say the effort is too little, too late, and they are looking to unionize to protect their job interests. That could further exacerbate the county’s financial problems because collective bargaining would give doctors more clout in negotiating compensation.

Public-sector health care woes are not confined to the county system. Expenditures for federal programs, like Medicare, are projected to soar in the coming years as baby boomers turn gray. There were 19 million Americans aged 65 and older when Medicare started in 1967. By 2017, there will be 56.3 million eligible for the program.

It’s inevitable that the government will institute policy changes to control costs when more people enter the program in the years ahead, said Melnick. In turn, those policy changes, particularly any reductions to the reimbursement rate for Medicare patients, may mean trouble for some local health plans.

One victim could be Santa Ana-based PacifiCare Health Systems Inc., which owns Secure Horizons, the nation’s largest Medicare HMO with almost 1 million beneficiaries. “PacifiCare is so heavily dependent on Medicare that policy changes will really hit them hard,” Melnick said.

A PacifiCare spokesman conceded that 60 percent of the company’s revenues come from Medicare, but officials believe they can foresee federal policy changes far enough in advance to adapt to them.

As with many industries, health care has been passing along its financial pain to customers.

The median increase in premiums that U.S. employers are seeing this year is 7.5 percent, according to an annual survey of 293 companies, conducted by the Washington Business Group on Health. Most of those employers reported that they plan to pass that increase on to their workers. At small companies, employers sometimes respond to sharp premium increases by choosing to drop health coverage altogether. A survey recently conducted by the Kaiser Family Foundation found that less than half of small-business employees have health insurance.

Minority workers tend to be especially vulnerable. A study released last month by the UCLA Center for Health Policy Research shows that 69 percent of working-age whites have job-based health insurance, compared with 41 percent of Latinos, 55 percent of African Americans and 56 percent of Asian Americans.

“An equitable health care system should provide everyone with the same access to health insurance and health care,” said Center Director E. Richard Brown. “We’re finding that this is just not the case. Our findings are an indictment of the system as inequitable.”

But there’s cause for concern even among those who have access to care. Among the materials being gathered in the MedPartners case by the state Department of Corporations is correspondence from doctors that suggests shoddy treatment.

One diary released by a MedPartners doctor to the Los Angeles Times reflects a nightmarish scenario: A patient with bladder cancer is denied a prescription for a painkiller. A treadmill test that was ordered several weeks earlier for a patient with an abnormal EKG has yet to be approved. Charts are lost.

“Health care is ultimately an insurance risk pool,” said Jamie Court, executive director of the watchdog group Consumers for Quality Care. “We pay in and, until we’re old and sick, we don’t use it. When patients have expensive care, when patients are in a situation with cancer, with a complicated disease, it becomes a problem because HMOs are not set up to deliver that kind of care.”

In response to such criticism, and to minimize a legislative crackdown, some HMOs are instituting third-party reviews of medical coverage decisions.

In early May, Blue Shield of California announced that its members would be able to seek an independent, external review of a doctor’s decision that treatment is not medically necessary.

But many in Sacramento believe that changes in the system must have the force of law. More than 50 bills have been introduced in the state Legislature this session ranging from the modest (requiring health plans to provide enrollees with written responses to grievances) to the significant (opening up the industry to legal challenges).

A bill introduced by state Sen. Jackie Speier, D-San Mateo, would create a new government agency, the California Comprehensive Health Care Agency, within which would be the “Department of Managed Care.”

One of the responsibilities of the proposed department would be to set up a reserve fund as a safety net in the event licensed health plans become financially unable to provide care.

But some worry that the state’s desire to fix the system may do more harm than good.

“Most of the individual bills entail only modest cost increases but taken as a group, they may amount to substantial increases in costs to employers and consumers,” said Zelman. “The Legislature must begin looking at the whole, as well as the parts.”