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Insurers Revive HMO-Like Networks in Bid to Curb Health Spending

Insurance Companies Seek Profits In-Network
Illustrator: Peter Oumanski/Bloomberg Businessweek

Insurers are back in the business of providing medical care, just as they did in the 1990s with the much-maligned health maintenance organizations. This time, they promise, it will be different.

The largest carriers have spent about $5 billion since 2008 buying doctor practices and clinics. This month Humana Inc. purchased medical facilities in Georgia and New Jersey to add to its more than 300 clinics, while UnitedHealth Group Inc. bought a California management group of 2,300 doctors in August.

While HMOs foundered because of patient complaints about shortchanged care and doctors’ reluctance to participate, insurers say this time the effort to contain costs through networks will succeed by emphasizing quality preventive care. Insurers say the goal is keeping people healthy so they don’t need more-expensive medical services, Bloomberg Businessweek reports in its Sept. 26 edition.

“It wasn’t working as well in those days as I think it potentially can work now,” Mike McCallister, Humana’s chief executive officer, said in a telephone interview. “There’s a lot more opportunity for success.”

Physician attitudes have changed, McCallister said. They are more willing to join integrated health systems, he said, because being members of large practices and health organizations avoids the costs of maintaining an office, including electronic medical records systems and malpractice insurance. Doctors also get to keep more predictable work hours.

Technology Driven

The technology also has improved, McCallister said.

Humana, based in Louisville, Kentucky, spent the past decade building data analytics and Web-based systems that let doctors see all the care a patient is receiving. That enables physicians to avoid duplicating services and prescribing medicines that don’t interact well, as well staying on top of preventive screenings. The insurer developed systems making it easier to file insurance claims, a frequent complaint during the first round of HMOs.

“My goal is to keep members healthy and out of the hospital,” McCallister said in a June interview at Bloomberg’s New York offices.

In December, Humana, the second-largest provider of Medicare plans, paid $790 million for Concentra Inc., an Addison, Texas-based company that employs 800 doctors at urgent care centers and clinics in 42 states.

McCallister said his plan is to go “very deep in primary care in some markets” and not buy hospitals, which Humana owned in the 1990s.

Scratching Heads

The decision to acquire doctor practices and medical centers at first caused investors to “scratch their heads about why we would want to go back in that direction after having gotten out of owning hospitals and clinics years ago,” McCallister said.

“I think they’re beginning to understand, especially since there have been other recent acquisitions by some of our competitors,” McCallister said on the phone.

To Sheryl Skolnick, an analyst at CRT Capital Group LLC in Stamford, Connecticut, the insurers’ efforts are about applying more-standardized, proven approaches to treatment. Insurers opt now to provide procedures and drugs upfront if they prevent costlier surgeries and hospital stays from untreated conditions.

“Buying up the doctors is buying up the decision makers, the gatekeepers of health care,” Skolnick said in a telephone interview.

The acquisitions raised concerns that insurers may sacrifice services as they seek to curtail spending, similar to the 1990s’ complaints about the restricted care at HMOs.

Best Interest

“I see a big problem with this model,” says Arthur Caplan, a bioethicist at the University of Pennsylvania in Philadelphia. “There’s the potential to put cost savings ahead of what might be in your best interest.

“The marketplace rewards the payers for making profit, not on patient outcomes,” he said in a telephone interview.

The reorganization of the medical-delivery system has been encouraged by requirements and incentives in the 2010 U.S. health law that called for creation of networks to standardize treatment and protect patients from falling through the cracks, as well as other federal regulations. These include pay for performance, implementation of electronic medical records and a requirement to spend at least 80 percent of premiums on care.

Premium Increases

The insurance companies can’t depend on higher premiums as in the past. State commissioners are challenging rate-increase requests more often, and federal regulators have said they will review any that exceed 10 percent.

“If members agree to use only the insurer’s physicians and perhaps a limited network of lower-cost hospitals, insurers can develop more price-competitive products and contain spending,” Jason Gurda, a New York-based analyst at Leerink Swann LLC, said in a telephone interview.

Insurers are focusing on operations that cater to elderly patients, said Wayne DeVeydt, WellPoint Inc.’s chief financial officer. In June, the Indianapolis-based insurer, the largest in the U.S. by enrollment, said it would spend $800 million on CareMore Health Group, the operator of 26 clinics specializing in Medicare-eligible patients in California, Arizona and Nevada.

CareMore’s clinics provide “primary care interpreted very broadly,” DeVeydt said in a telephone interview. “It can even involve something as small as cutting a patient’s toenails because one of the biggest reasons diabetics end up in the hospital is from infections in their toenails.”

Chronic Conditions

Since seniors have more chronic conditions, take more medications and see more doctors than the general population, they’ll get greater benefit from coordinated care aimed at keeping them healthy, DeVeydt said. While plan members with chronic illnesses account for 20 percent of WellPoint’s enrollment, they consume 80 percent of the company’s medical spending, he said.

UnitedHealth, the largest insurer by sales, led the current wave of acquisitions with a $2.6 billion purchase of managed-care provider Sierra Health Services and its subsidiary Southwest Medical Associates in 2008.

UnitedHealth, based in Minnetonka, Minnesota, is using the information and expertise from its doctor practices to sell health services to employers and other health plans, said Ana Gupte, an analyst at Sanford C. Bernstein & Co. in New York.

‘The Best Mousetrap’

“They’re looking to build the best mousetrap to contain health-care costs that can help any payer, and use that to build revenue,” Gupte said by telephone. UnitedHealth has said it wants to raise the health-service unit’s contribution to revenue from 22 percent to more than 35 percent in the next three years, she said.

Aetna Inc., the third-largest U.S. health insurer, has decided against buying doctor groups or other providers, investing instead in electronic medical records technology and risk-management tools.

The Hartford, Connecticut-based insurer works with physicians on ways to avoid medicine aimed at treating patients only when they’re sick, said Joe Zubretsky, Aetna’s chief financial officer.

“Ten, 15, 20 years ago the nature of the relationship between payers and providers was more contentious and combative,” Zubretsky said. “Insurers and doctors now see how they can work together to ensure coordinated care. That’s changed the conversation.”

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