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Competition among Health Plans
Jon Gabel
Vice President
Health Research and Educational
Trust
Objectives
• To review recent trends in health care costs
• To examine the underwriting cycle in recent
years
• To examine the pattern of entry into local
insurance markets
• To assess why insurers have not entered
markets in recent years
Increases in Health Insurance Premiums
Compared to Other Indicators, 1988-2002
20%
18% 18.0%
16%
14% 14.0%
12.7%
12% 12.0%
10% 11.0%
8% 8.5%
8.3%
6%
4.8%
4% 3.4%
1.6%
2%
0.8%
0%
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Health Insurance Premiums Workers Earnings Overall Inflation
Source: KFF/HRET Survey of Employer-Sponsored Health Benefits: 1999, 2000, 2001, 2002; KPMG Survey of Employer-Sponsored Health Benefits: 1988,
1989, 1990, 1993, 1996.
Note: Data on premium increases reflect the cost of health insurance premiums for a family of four.
Percentage Increase in Underlying Health Care
Spending, 1991-2001,
for All Services
12
10.0
10
Percentage Increase
7.8
8 7.1
6.9 6.6
5.0 5.3
6
3.3
4
2.1 2.2 2.0
2
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Source: Strunk, Ginsburg and Gabel, Health Affairs, 2002
Trends in Provider Revenues from
Non-Medicare Patients, 1991 – 2001,
(Annual Percent Change Per Capita)
20
15
10
Percentage
5
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
-5
-10
Hosp. Inpat. Hosp. Outpatient Physician Precription Drug
Blue Cross-Blue Shield Underwriting
Gains and Losses, 1990-2002
(in percentages of revenue)
3
2.4
2.5 2.2
2 1.7
1.5
1.5 1.3
1.1 1.1
1 0.6
0.5 0.1
0
-0.5
93
94
95
96
97
98
99
90
91
92
-0.2
00
01
02
20
20
20
-1
-1 -1
-1.5 -1.2
Source: Author’s analysis of unpublished data provided by the Blue Cross-Blue Shield Association
Average Expenses and Profits for Publicly Traded
Managed Care Companies
1.8 3.1 4.4
100% 1.8 2.2 3.3 3.3
80%
60% Income
Other Net Expenses
40% 79.3 77.9 77.4 76.3 Sales, Admin. Expenses
Benefit Expenses
20%
0%
1999 2000 2001 2002
Decline in Investment Income, 1999-2002
6
5
5 4.4
4.1
4 3.6 1999
2000
3
2001
2 2002
1
0
% of revenue
Source: Lehman Brothers
A Quick Summary of the Literature about
HMO Market Structure and Performance
• Greater numbers of HMOs in local markets are associated
with lower premiums (Wholey, Feldman and Christianson,
1995).
• Economies of scale apply up to enrollment of 115,000
(Given, 1996).
• Period of 1994-1997, despite national mergers, was
characterized by increased competition in local markets
(Christianson et al, 1997).
• Concentration in the HMO industry is growing nationally,
(Feldman, Wholey and Christianson, 1999) but it is local
markets that determine level of competition.
New Commercial HMOs: National Figures,
1980-2001
60 56
54
50
40
31 32
30 26 27
19 21
20
14 14
12 12 11 11
9
10 6 5 5 5
3 1 2
0
1980 1990 2000
Source: Interstudy
Why HMO Entry at Local Markets
Should Be on the Rise
• Four years of underwriting profits
• Growing profitability among publicly traded
MCOs
• Limited number of competitors in many
local markets – I.e. Norfolk, Va.
Fewer Commercial HMOs Compete per State,
1996-2001
45
39
40 36
35 32 31
29
30
25
20
15 15 15
15 12 13
10 11
8 9
10
5
0
Ariz. Cal. Conn. Fla. Ga. Ill. Md.
1996 2001
Source: InterStudy
Fewer Commercial HMOs Compete per State,
1996-2001 (Continued)
45 40
40
35
30 28
26
25 21
19 19 19 18
20 16 15 15
15 13
9 9 8 9
10
5
0
Mass. Minn. NJ NY NC Ohio Va. Wisc.
1996 2001
Source: InterStudy
BCBS Underwriting Gains and Losses and
Number of New Commercial HMOs
35 3
2.5
30
2
25
1.5 New Commercial
20 1 HMOs
BCBS Underwriting
15 0.5
Gains and Losses
0
10
-0.5
5
-1
0 -1.5
1990 1992 1994 1996 1998 2000 2002
Why Insurers and HMOs Are Not
Entering Local Markets
• Most were badly burned by the fierce price
competition of the mid 1990s.
• Wall Street is leery of MCOs with aggressive
entry strategy.
Cost of entry is greater today.
– Employers want wide networks.
– This requires greater purchasing power.
– Provider pushback makes it more difficult to secure
broad networks with substantial discounts.
– Capital investments in better information systems make
entry more difficult to finance.
Conclusion
• Depart with a question rather than an
answer.
• If HMOs do not enter new markets, the
current round of inflation is likely to:
– Last longer
– Less innovation
– Less aggressive in controlling costs
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