Markets at Risk— Current and Future Challenges in a Managed Care Marketplace. A. Industry Composition.


The diversification in product mix and product sponsorship has made it difficult to speak either in generalities about the industry, or even about individual product lines. As noted earlier, the modal managed care company is now a mixed model, multi-product firm with traditional HMO companies offering PPOs and indemnity products, and classic indemnity insurance companies offering PPOs, HMOs, and HMO-based point of service options to members. Competitive conditions motivate firms to provide this spectrum to enable them to achieve what they call “total replacement product” status—meaning a purchaser can choose to select a single company that can offer its employees a menu of products ranging from indemnity to HMO28.

One useful indicator of just how much industry composition has changed is to look just at the ownership status of products licensed as HMOs. The table below illustrates that a dramatic change has

The Changing Distribution of HMO Membership by Ownership Status

  1981 1985 1989 1993 1998
For Profit 12% 26% 46% 52% 63%
Not for Profit 88 74 54 48 37

Source: Kaiser Family Foundation, Market Facts, March 1999

occurred when looking at plans. In less than two decades enrollment in for profit plans have gone from one-eighth of all HMOs to two-thirds. The reasons for this change are beyond the scope of this paper, but the trend illustrates just how important the role of investors has become in supporting and sustaining the HMO industry, including those owning stock in the 20 or so publicly traded HMO companies. Relatively little empirical evidence has been produced to suggest that ownership is a major factor in understanding health plan performance and behavior. Some efforts to link differences in member outcomes (HEDIS) data to ownership type have been attempted29, but they typically suffer from the fact that ownership and open or closed panel status are closely entwined (nearly all closed panel plans are not-for-profit today) raising doubts about their meaning.

A similar problem exists with comparing medical loss ratios because closed panel plans commonly delegate utilization management and other functions to their affiliated medical groups and record these as medical expenses30. It is also not clear that concerns about for profit, and especially publicly traded, firms are more likely to make short-term decisions based on their periodic reporting to investor cycles, as is sometimes asserted. Nor does ownership status affect responses to broader market trends. During the troubled period of the mid-to late 1990s virtually all plans in the industry suffered substantial losses, with notable not-for-profits like Kaiser Permanente and Harvard Pilgrim racking up unprecedented negative margins.

Among publicly traded companies, stock prices have fluctuated throughout the 1990s, both for individual firms and the overall sector. By fall 2000, the industry was enjoying a substantial resurgence with prices for some firms at record or near record highs, as premium increases have restored many to profitability levels not seen for several years. Since stock analysts commonly focus on the medical loss ratios, it is obvious to them that price increases, rather than cost control is fueling this current boom31. There remains, in the views of some stock analysts, longer term concerns that the industry will still continue to face significant instability arising from both the purchaser and provider communities32. Plans simply have not found stable, long term relationships with their provider networks and the current tolerance of double digit rates of increase among employers is likely to fade when the very tight labor market weakens.

  1. R. Hurley and M. McCue. Partnership Pays: Making Medicaid Managed Care Work in a Turbulent Environment.Princeton, NJ: Center for Health Care Strategies, 2000.
  2. R. Hurley and M. McCue. Commercial Plans and Medicaid Managed Care: An At Risk Relationship. Princeton, NJ: Center for Health Care Strategies, 1998.
  3. H. Luft, “Why are Physicians So Upset about Managed Care?” Journal of Health Politics, Policy, and Law, 24(5):957-966, 1999
  4. M. Gold and R. Hurley, “The Role of Managed Care Products in Managed Care Plans, “ Inquiry34(Spring):29-37.
  5. D. Himmelstein, S. Woolhandler, I. Hellander, and S. Wolfe, “Quality of care in investor-owned vs not- for-profit HMOs,” Journal of the American Medical Association, 282(2):159-163.