\n\nThe strongest selling point for managed medical care-the ability to hold down price increases-may be losing strength as health care costs begin to climb and managed care organizations (MCOs) begin to look for higher premiums.\n\nTrouble began to assert itself in April, when Kaiser Permanente, the nation's largest health maintenance organization, threatened to impose a 12% premium increase on the California Public Employees' Retirement System (CalPERS), a program which purchases health care on behalf of more than 1 million state employees, their families and retirees. CalPERS froze new enrollments in the health plan and blasted the proposed increase as "outrageous." After negotiating with Kaiser for two months, in mid-June the CalPERs staff recommended a 10.75% increase in medical premiums for Kaiser Permanente next year.\n\nKaiser officials reportedly told reporters in Northern California that the health plan would seek rate increases totaling as much as 30% over the next three years in an effort to make up for losses of $270 million nationwide in 1997. At the same time, Kaiser officials said the plan added 1.5 million new enrollees last year.\n\nAnother California provider, the Health Insurance Plan of California (HIPC), a state-run health insurance purchasing cooperative for small businesses, negotiated an average rate hike of 4.3% for 1999, but some of its largest HMOs received rate hikes of 8% to 14%. On behalf of its members, HIPC recently agreed to accept a 14% increase from Kaiser. \n\nMeanwhile, in Missouri, both Kaiser's Kansas City affiliate and HealthNet's local HMO branch reported temporarily falling below the state's net worth requirements in 1997, according to the Kansas City Business Journal. Kaiser Permanente funneled $13 million into the Missouri affiliate followed by another $5 million in the third quarter of 1997. \n\nHealthNet lost $12.1 million in the first 11 months of 1997, and its owners, Shawnee Mission Medical Center and St. Luke's Hospital, agreed to put up $41 million in additional capital. Both Kaiser and HealthNet had reported substantial enrollment increases.\n\nThese are not isolated incidents. The most dramatic losses, of course, occurred at Oxford Health Plans Inc., which lost $45.3 million for the first quarter of 1998, compared with $34.4 million in net income for the comparable period last year.\n\nAetna U.S. Healthcare, which operates both managed care and indemnity insurance plans, reported first-quarter earnings 23.6% below 1997's comparable period.\n\nFoundation Health Systems Inc. reported a 44.9% decline in income from continuing operations compared with 1997's first quarter.\n\nRightCHOICE reported net income of $968,000, an 84.4% decline. The company lost $1.2 million from operations before taxes-an improvement over its first-quarter 1997 $2.2 million loss.\n\nA Colorado survey found that the state's HMOs earned only $200,000 on revenues of $1 billion in the first six months of 1997. Around the country, numerous HMOs reported lower earnings or losses for 1997 and the first quarter of 1998.\n\n"A lot of HMOs and private insurers are saying they're planning premium increases in the range of 5% to 6%, sometimes higher," said David Gross, a senior health policy analyst with the American Association of Retired Persons (AARP). "What seems to be happening is that it's been a very competitive market the last few years. HMOs have only been able to cut their costs so far. Now they're finding that they have to increase their prices again.\n\n"This may take the luster off managed care being able to solve problems," he added. "It will put the focus on what new approaches are needed to cost effectively provide health care."\n\nJoyce Dubow, another senior policy analyst in AARP's Public Policy Institute, noted, "The irony is that managed care has been promoted as being able to contain costs. The current round of premium increases probably is an indication that physician behavior hasn't changed that much in terms of care patterns. Hospital rates are way down; it's hard to imagine how they could get much lower without compromising care. Up to now, they've just picked all of the low-hanging fruit."\n\nThe latest round of premium increases and loss reports came in the wake of a study by the U.S. Department of Health and Human Services, which found that health care spending was increasing at a record low rate. According to HHS Secretary Donna E. Shalala, spending for all health services in the United States grew by only 4.4% in 1996, the lowest rate of increase in 37 years.\n\nThe Health Insurance Association of America (HIAA) said that between 1991 and 1996, the average rate of increase for premiums for most health plans fell by 10%.\n\nThe federal government's share of the nation's health bill rose to 47% in 1996, up from 40% in 1989. Between 1989 and 1996, HHS said, "public sector health spending increased an average of 9.7% a year, versus 5.8% in the private sector. This disparity is due to increased Medicare enrollment, more Medicaid coverage, and slow growth in private sector insurance premiums."\n\nMedicare and Medicaid together financed $351 billion in health care services in 1996-more than one-third of the total U.S. health bill and nearly three-fourths of all public health spending. Medicaid spending by federal and state governments totaled $147.7 billion, providing coverage to 36.1 million low-income Americans, HHS reported.\n\nMedicare, the largest public health care payer, funded $203.1 billion in benefits for 38.1 million enrollees.\n\nPremiums for employer-sponsored health plans grew by only 3.6% in 1996. \n\nHealth care spending was 13.6% of the country's gross national product, approximately where it has been since 1993. Total expenditures topped the $1 trillion mark for the first time by rising to $1.04 trillion, up from $991.4 billion in 1995. The Health Care Financing Administration estimates that annual health care spending in the United States will be $1.8 trillion dollars in the year 2000 and $16 trillion in the year 2030.\n\nBut the HHS figures tell only a portion of the story. In April 1998, medical costs led all but one of the categories of the Consumer Price In-dex for All Urban Consumers, rising at a compound annual rate of 4.1% for the three months ending April 30, compared with 1.2% for all items in the index. For the 12 months ending in April, medical costs rose 3.0%, compared with only a 1.4% rise for all items. Only the "Other Goods and Services" Index increased by more than medical care, led by a 3.8% increase for tobacco and smoking products.\n\nThe U.S. Bureau of Labor Statistics said the increase in the medical care component of the CPI rose 0.4% for April. The index for medical care commodities, such as prescription and over-the-counter drugs, rose by 0.7%; charges for medical care services rose 0.4%, and costs for professional services and hospital and related services each increased by 0.4%.\n\nSeveral factors are continuing to push medical care costs higher. The Washington Post in March reported that "HMOs are having difficulty getting primary care physicians to change prescribing patterns. "The Post explained that prescription drug costs are growing faster than other medical costs, pushed in part by patients "demanding the latest drugs, which can be expensive."\n\nThe Post also said that premium costs for HMOs are expected to increase 3% to 5% in 1998 and as much as 10% in 1999.\n\nLisa Alecxih, vice president of The Lewin Group, which monitors health costs, said, "My understanding of the reason the HMOs are asking for rate increases is that they are experiencing higher-than-expected utilization. Since they're paid on a capitated basis, a lot of the rate increases won't be reflected until next year. \n\n"Some techniques [for controlling costs] work better than others," she added. "They're supposed to be able to control utilization. It seems something has worked less well than anticipated."\n\n"HMOs have been repressing their prices to get into competitive markets," added AARP's Gross. "There have been a lot of miscalculations...Oxford is the best example. HMOs might have miscalculated the actual cost of providing care. The premium increases might reflect that."\n\nHMOs also are being subjected to outside pressures in addition to the widespread demand for new medications fueled by newspaper and television reports. Lawmakers at both the federal and state levels have begun responding to public complaints about gaps in HMO coverages. In May, for example, HIAA reported that in one bill the "Senate Finance Committee members included a mandated mastectomy length-of-stay provision that ultimately makes the cost of coverage even more expensive."\n\n"Another thing that may affect costs are the patient protection acts," Gross noted. "The managed care industry says they affect costs. The next few years will be interesting."\n\nSeveral pieces of pending federal legislation could have a significant impact on costs. For example, a study by Milliman and Robertson Inc., a leading health consulting firm, found that the proposed Patient Access to Responsible Care Act (PARCA), which has been the target of heavy lobbying and public relations campaigns from providers, could raise premiums by as much as 23%. The M&R report also provides an "estimate range" of the premium impact of 7% to 39%.\n\nBut a competing study by Muse & Associates found the effects of PARCA would only be between 0.7% and 2.6%.\n\nVirtually every state is considering legislation that would require HMOs to provide some forms of coverage other than those originally anticipated in the pricing models. For example, on top of the passage of the federal law requiring parity for mental health benefits, many states are seeking to implement even broader behavioral benefits.\n\nIn addition, legislation has been introduced at the state levels requiring coverage for prostate screening, gynecological exams, various forms of family planning and contraceptive devices, anesthesia for children's dental procedures and cleft palate surgery. In 1997, there were roughly 250 pieces of state legislation aimed at changing managed care benefits in some form.\n\n"If the cost-cutting by HMOs extends too far, you have legislators getting involved because their constituents are irate," said AARP's Dubow.\n\n"To some extent, these laws are creating a level playing field," she added. "If you impose requirements on one delivery system, you'll make it look like all the others. Clearly, people need comprehensive medical coverage. Benefit packages should reflect that. In the private sector, employers are making those decisions. In Medicare, Congress is making them. When it comes to things that Medicare is missing, such as prescription drugs and long-term care, the HMOs are providing those to make themselves attractive to Medicare beneficiaries. \n\n"At some point, you hit bone. Remember, you're dealing with plans that have incentives to underserve to begin with. It's in consumers' interest that everyone receive fair reimbursement for the population they're serving. When you start messing around with reimbursement, you begin creating perverse incentives for messing around with care."\n\nStates also are considering so-called community rating plans, which would equalize rates for various segments of the population, and premium caps aimed at holding down rates. Bill Gradison, president of the HIAA, said these plans would eventually result in high costs to consumers.\n\n"Because the purchase of insurance is voluntary, and because of the small, fragile nature of the individual market, guaranteed issue, community rating, and other similar mandates drive up insurance costs and consequently reduce...rather than increase...the number of people covered by private health insurance, "he said in a statement.\n\nHow much effect state legislation will have on the continuing HMO cost inflation remains problematic, as can been seen from two recent studies.\n\nA study by the Barents Group, a consulting firm commissioned by the American Association of Health Plans, found that proposed state laws affecting managed care organizations could reduce the cost-savings gap between managed care organizations MCOs and traditional point-of-service health plans by as much as 16%.\n\nThe American Medical Association responded by noting "the savings estimates used for price discounts accruing to HMOs have no scientific basis...[t]he data used in the analysis were actuarial projections, not actual claims or premium data."\n\nTo some extent, HMOs will be raising prices over the next year simply to satisfy the capital markets as well. Earnings in the industry have been relatively low compared to other market sectors, and many commercial HMOs have been increasing premiums with an eye to their bottom lines. Nonprofit HMOs, such as Kaiser, lagged behind their for-profit counterparts in raising prices, and now may be playing catch-up. No one expects the current round of price increases to end anytime soon.