Minnesota HMOs lose money as premiums rise

August 1, 1998

Pharmaceutical Representative

Despite raising premium revenue by 4%, health maintenance organizations in Minnesota lost $47.2 million on commercial operations in 1997, according to the spring edition of the Minnesota Managed Care Review.

Despite raising premium revenue by 4%, health maintenance organizations in Minnesota lost $47.2 million on commercial operations in 1997, according to the spring edition of the Minnesota Managed Care Review.

The report, which analyzed key issues and trends in the state's managed care-heavy market, noted that the drop was an improvement over the $62 million that HMOs lost in 1996. However, it is a far cry from profitability. Net loss for the year was $10.1 million for 1997, or 0.4% of their revenue of $2.7 billion.

Increased spending on medical costs without a significant increase in revenue is the simplest answer to why Minnesota HMOs are struggling, according to the report's key researcher Alan Baumgarten. "They've been in the hole in commercial revenue for the past two years," Baumgarten said. "They didn't raise revenue in 1995 or 1996 but they were still experiencing medical costs inflation. They began raising prices in 1997, but they are still lagging."

Another reason is that patient populations in HMOs are starting to represent a more accurate picture of the general population as a whole.

"They are insuring an enrolled population that looks more like the rest of the world," Baumgarten said. "These patients are more likely to need care as opposed to the younger, healthier enrollees they had in the past."

While enrollment in insured HMO plans in Minnesota may have become more diverse, it remained steady in terms of numbers, increasing by only 0.6%. With the minimal addition, statewide enrollment in insured HMO plans reached 1.4 million members, according to the report.

How will the state's larger, more diverse HMOs adapt, and reverse their recent downward spiral of profitability? Is disease management the answer?

"You would think so, but I don't necessarily see it," Baumgarten said. "More money spent now will reduce costs in the future, but HMOs are looking at a turnover rate of 15% to 25% per year. When they look at what it would take to implement those kinds of programs, they are reluctant to make those kinds of investments."

HMOs in other states may be approximately a year behind Minnesota HMOs in terms of implementing increases per member per month in order to raise revenue, Baumgarten said.

Not all of the report's statistics were grim, however. One area of profitability for Minnesota HMOs was in Medical Assistance, or Medicaid, plans. Profits rose by $26.5 million in 1997, leaving HMOs with a surplus of $12.84 per Medicaid enrollee per month.

Another corner of growth was in self-funded group benefit plans. In these plans, employer groups assume more of the financial risks associated with their employees' health care coverage. Minnesota HMOs added more than 300,000 lives to such plans last year, according to the Minnesota Council of Health Plans. PR