Section 5 - Portrait of a modern HMO 

     Bringing in the bucks 

Having identified his customers and his scope of business, Gekko is now ready to decide how FTP is going to make its money.  There being nothing unique about the business of health care, Gekko again returns to the fundamentals.  In any business, maximizing your profits requires you to a) charge as high a price as possible for your product; and b) minimize the cost of producing that product. 

Charging what the market will bear

This is the easy part of the profit-making formula. Gekko needs to set the price of his health insurance premiums as high as he can get away with. And that’s whatever price is low enough to induce employers to switch to FTP, but not a penny lower.  

Since high-priced indemnity insurance plans are still active in all the cities in which FTP operates, all he has to do is to beat their prices by a little bit.  So Gekko sets his rates to a fixed proportion – 90%, in fact - of the indemnity rates, and he’s in business. The beauty of this methodology is that, since FTP’s rates are fixed to the highest rates in the market, whenever the indemnities are forced to increase their rates, FTP automatically gets a raise, too.

Gekko understands, of course, that the reason everybody’s pushing HMOs in the first place is that they’re supposed to reduce the cost of health care.  And most people assume that what HMOs charge for their premiums are tied somehow to that lower cost of delivering care.  Gekko just shakes his head.  Why would people assume that?  Why would anyone expect Gekko, a businessperson, to pass his savings on to the consumer (unless doing so results in a clear-cut competitive advantage)?  Businesses are supposed to make as much profit as they can. That’s how it works. To do anything else would be unfair to FTP’s shareholders; indeed, it would be unethical in Gekko's frame of reference - not to mention fatal to his job.

Gekko’s insight here deserves some elaboration.  Despite the aggressive cost-cutting measures taken by HMOs (which now enroll over 80% of insured Americans), the health insurance premiums paid by employers haven’t really fallen.  In fact, after a few years during the mid-1990s in which the inflation rate for insurance premiums dropped to below 5%, the rate of inflation has reached double digits again.  This resumption in health care inflation is inevitable, of course, due to the demographic considerations described in Section 2.   But with the drastic cuts in services being made by HMOs and the resultant lowered costs, we should have seen, at least, a rather sizeable one-time savings in health care spending.  Where did it go?

Gekko has already answered our question.  The dollars that HMOs squeeze out of the system are not returned to the payer in the form of reduced premiums; nor are they plowed back into the health care system in the form of improved or widened services; rather, they are pocketed by the HMOs in the form of administrative costs, huge bonuses for top HMO executives, and profit for the shareholders.  In fact, the best estimates suggest that an average of 25% of all health insurance premiums paid to HMOs goes for administrative overhead and profit. 

In contrast, by the way, only 20% goes to doctors.

But I’m not complaining.

Next: maximizing the revenue (keeping the bucks)

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