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JAMES FLANIGAN

For All the 'Patients' Rights' Politics, Medical Cost Are Flaring Up Again

November 22, 1998|JAMES FLANIGAN

Results of this year's elections seemed ominous for the health-care industry--the multibillion-dollar phalanx of health maintenance organizations, hospital companies and insurance providers.

As the Democrats gained strength for the forthcoming Congress, President Clinton vowed that a "medical bill of rights" would pass and be signed into law next year. That package of legislation, which failed to pass this year, would allow patients greater ability to sue hospital companies for decisions on treatment. HMO restrictions on access to specialist care would be loosened, enhancing patient choice.

In a significant political move, the traditionally conservative American Medical Assn. joined Clinton in criticizing HMOs for usurping the decision making power of doctors. Major labor unions also called for increased regulation of managed-care organizations.

But the politics of health care are mostly nonsense and the talk of patients' rights is largely a sham. HMOs have their troubles, but they are not the main problem in U.S. health care, the $1-trillion-plus activity that constitutes 14% of the nation's annual output.

The main problem is we still haven't found a way to provide and pay for good medical care for all Americans, despite more than two decades of trying.

Earlier solutions don't seem to be working, as several surprising developments in the last year indicate. Many of the despised health maintenance organizations are losing money. Kaiser Permanente, the nonprofit pioneer of health maintenance, has lost $240 million so far this year. Oxford Health Plans, which serves New York and other Northeastern locations, has lost hundreds of millions this year and last because it couldn't keep track of patients or billings.

Even MedPartners Inc., a large physician-run health organization based in Birmingham, Ala., has suffered massive losses because it couldn't keep up with rising demands for expensive medical care.

HMO losses haven't meant lower costs for the public. Medical costs are rising 3.6% this year, more than double the rate of general inflation. That reverses a trend of slowing health-care inflation that began in 1994.

Doctors' incomes are not the culprit. According to a major study by seven consultant groups, accounting firms and medical organizations, many doctors' incomes have risen less than the general inflation rate in the last year--and some only slightly above it. Emergency room doctors took a 1% cut in pay, for example. Obstetrician/gynecologists got a 1.1% rise in pay; family practitioners--among the lowest-paid doctors--saw a 2.3% rise.

What is at fault is the widespread demand for a high level of health care without realistic thinking about who pays for it. There's blame enough for all.

Patients balk at the cost restrictions HMOs impose; politicians back patients by passing laws specifying length of hospital stays and rights to treatment.

At the same time, the government attempts to control costs by, for example, limiting the price increases it will tolerate for treating Medicare patients. This causes HMOs to incur losses, so they accept fewer Medicare patients or try to raise prices on contracts with employer groups.

Employers, in turn, try to pass on the increased costs by raising their workers' co-payments on health insurance. Or they hold costs down in other ways, by refusing to give pay raises or by hiring fewer people.

The health industry's immediate solution will be to raise prices. Analyst Kenneth Abramowitz of the Sanford C. Bernstein research firm sees the industry entering "a new cycle of pricing"--or of bankruptcy.

"If HMOs can't raise prices, one-third of the health companies will be bankrupt within a year," he says.

At the moment, Wall Street thinks the industry will get the increases. The Bloomberg index of 12 HMO stocks has turned up from a low point in just the last month.

However, that's a false rally, suggests analyst Todd Richter of the Morgan Stanley investment firm. The business faces many problems, and only companies that focus their energies and grow slowly will prosper, Richter says. He cites WellPoint Health Networks, the Woodland Hills-based owner of Blue Cross of California and other companies, and Cigna, the Philadelphia-based insurance and managed-care company, as favorable examples.

Santa Ana-based PacifiCare Health Systems, coming back from an earnings reversal in 1997, and Aetna, the Hartford, Conn., insurance and health-care group, also enjoy higher stock prices than most companies in their industry.

The next few years are likely to see more mergers in health care as hospitals and giant organizations--such as Catholic Healthcare West, which represents 40 hospitals--try to gain leverage in dealings with employer groups, doctor organizations and the government.

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