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PacifiCare's New HMO to Limit Choice

Benefits: The Value Network will offer fewer options based on price and quality, a radical change that could hold down health-care costs.


In a major shift in health-care benefits likely to be followed by others, PacifiCare Health Systems Inc. today will unveil an HMO that will limit members' choices to a relatively small network of doctors and hospitals.

The approach marks a radical change from past years when, at the behest of employers and consumers, health maintenance organizations offered ever broader networks of medical groups and hospitals. The thinking was the bigger the network, the better the HMO.

But now, with health premiums rising unchecked, employers and managed-care companies are moving, albeit gingerly, in the other direction. Many employers, led by those in California, already are offering their employees HMOs and other health plans that charge members higher co-payments for using more expensive hospitals.

PacifiCare's new HMO goes much further. Starting next year, members who enroll in the plan, called Value Network, will have available to them about one-third of the hospitals and one-half of the doctors of a standard HMO. Altogether, there are 300 hospitals and 250 medical groups in California. Value Network members who use providers outside the slimmed-down network generally will have to foot the bills.

Cypress-based PacifiCare, one of California's largest HMO companies, with 2.3 million members, said the narrow network would include those providers that have met PacifiCare's cost threshold and scored high on several quality measures. The new HMO will be offered only in California.

Some hospitals and doctors have sharply criticized the health insurance industry's increasing efforts to rate providers on cost and quality, saying it is an attempt by the HMO companies to gain leverage in negotiating rates.

Excluded from PacifiCare's new HMO are a number of well-regarded institutions such as Cedars-Sinai Medical Center, UCLA Medical Center and Childrens Hospital of Los Angeles.

Even so, some of California's largest employers, including Wells Fargo Bank and Lockheed Martin, have signed up for PacifiCare's new HMO, although employees at those firms won't learn specifics of the change until they receive their open-enrollment forms in the next few weeks.

Analysts said this type of HMO, which will be offered to tens of thousands of Californians in open enrollment this fall, could spread widely because it is seen as one of the few options to hold down health costs for employers and consumers.

"This is one of the models everybody is looking to," said Helen Darling, president of the Washington Business Group on Health, which represents 175 major companies in the United States. "There will be some people who embrace it, some who don't. But I think that's the direction we're headed in."

The main appeal for employers is the prospect of lower health benefits costs. Darling said a recent survey of her member companies--which sponsor health insurance for about 40 million Americans--showed average health-care costs rising 14% to 18% next year. Employees will be sharing in those cost increases through bigger contributions for premiums and higher co-payments.

Dr. Sam Ho, PacifiCare's chief medical director, said the new HMO would reduce an employer's premium increases by 6% to 16%. Some employers said those savings would be passed on to employees.

"We've been encouraging [PacifiCare] to develop something like this for some period of time," said Sally Welborn, Wells Fargo's vice president of corporate benefits. "We really believe there are differences in the quality of care between hospitals, medical groups and physicians. Some provide good quality, but are not aggressive on pricing. We can't afford to pay more for something that can be equally had at a lower price."

Welborn said PacifiCare's new HMO would be offered as an option, along with the standard HMO, to the bank's 30,000 employees in California.

She said there is no way of knowing how many will sign up for the new option, which will be cheaper. Welborn declined to reveal how much, saying only that the savings to Wells Fargo will be less than 10%.

Like many big employers, Wells Fargo is taking other steps to reduce premiums, including boosting co-payments from $15 to $20 for doctor visits.

But the use of quality and cost measures to differentiate among providers--and develop various health plans around them--is seen as a revolutionary step that could transform the health-care marketplace.

"We're talking about a cultural change for employers--from broad access equals high quality to selective access equals high quality," said Kirby Bosley, who heads the health-care practice at Mercer Human Resource Consulting in Los Angeles.

Bosley said it would take time before this change catches on. She said some employers are waiting to see how consumers react to this HMO before making the leap.

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