Section 5 - Portrait of a modern HMO 

     Keeping the bucks - avoiding risk

While risk-taking is a fundamental activity of any aggressive business, that risk taking must be measured, and must be accompanied by a reasonable probability of paying off.  A tenet of any business is to avoid any unnecessary financial risk, that is, risk that offers little or no likelihood of increasing revenue.

A glance at the dynamics of the HMO industry is enough to convince Gekko that the biggest risk he faces is sick patients.  They are extremely expensive these days. The sickest 10% of the population, in fact, account for over 70% of all health care spending, and one really sick subscriber can wipe out the potential profit from twenty, thirty, or even fifty healthy subscribers.  Sick patients are to be avoided like the plague. 

There are two obvious ways of avoiding the sick.  First, don’t sign them up.  Second, if you do have to sign them up, make it unpleasant for them to stay with you.

Fortunately, the system Gekko has inherited helps immensely.  Since FTP’s coverage is only available through employers, only employed people can sign up for FTP.  And employed people are, on average, far healthier than unemployed people.  There are good reasons for this. In most of the cities in which FTP is active, a substantial proportion of the unemployed do not have jobs precisely because of some chronic illness, disability, or addiction. And because employers are loath to employ the obviously ill, there’s an invaluable screening process that takes place before anyone even becomes eligible for FTP. You can’t buy prescreening like that at any price, and Gekko’s getting it for free. 

Not all of Gekko’s options in this regard are purely passive. He notes that several of FTP’s new hospitals run specialty centers that are clearly counterproductive – two hospitals, for instance have Congestive Heart Failure Centers, and five have Cancer Centers.  Why should he support clinical programs that go out of their way to attract patients with chronic (and therefore expensive) illnesses? Gekko orders his Medical Director to shut these programs down immediately.

In addition, FTP’s new size gives Gekko some clout where it counts.  When he learns that Congress is considering legislation that would require insurers to make health insurance available to people who are “between” jobs, he directs FTP’s high-paid lobbyists to keep any such bill from even reaching the floor.

Despite his best efforts, Gekko realizes, FTP will get its share of patients with chronic illnesses.  He’ll deal with these simply by allowing layers of obstacles to form between those patients and the care they want.  Gekko realizes he doesn’t have to ask anyone to create such barriers – they’ll form naturally within FTP’s bureaucracy.  What he needs to do is to let the system bog down in red tape for the ill, while, at the same time, work hard to keep the system squeaky clean for healthy subscribers. 

It won’t be long before the chronically ill begin switching to another plan out of sheer frustration.  Even better, the healthy (who are receiving benefits like free memberships to health clubs) won’t know what the malcontents are complaining about – FTP seems pretty good to them. And as a result, when FTP does its periodic consumer surveys, at least 70-80% of its subscribers (i.e., a proportion representing a large majority of its healthy subscribers,) will rate its service as excellent.

The practice of discouraging usage of expensive services, and thus making health care particularly inconvenient for the ill, is openly discussed as a legitimate technique among health care managers.  A 1994 article in Journal of Health Care Marketing is particularly interesting in this regard. This article praises several useful techniques that HMOs have developed for discouraging the use of (or “demarketing”) costly health care services.  To quote:

“Decreasing accessibility to services . . . . can be accomplished by “managing” the information distributed to patients regarding services available and how to access them.  For example, an organization might excessively promote less-costly preventive procedures . . . .and repress information about other elective and/or expensive services.  In addition, providers can strategically locate and number specific services to make them easy (e.g., primary care) or difficult (e.g., specialists) to utilize.  Furthermore, lag periods . .  . . also serve as containment strategies.  Lags may be affected by the need for referrals, limited number of contracted specialists, restricted or inconvenient appointment availability, and increased office-visit waiting periods.” Borkowski NM. Demarketing of health services. Journal of Health Care Marketing 1994;14:12.

So as you can see, the professional literature has laid out a roadmap for Gekko.

Nowhere has the practice of skimming been more profitable for HMOs than in the government’s push to get Medicare patients into HMOs.  A Medicare HMO gets paid a flat amount per enrollee. If it spends less in delivering health care than it takes in, the HMO keeps the difference.  The amount Medicare HMOs receive is set at 95% of what it costs to care for a Medicare patient on a fee-for-service basis, which currently is about $5000 per year.

HMOs are plenty smart enough to figure out what Congress apparently can’t – cherry-picking is especially profitable with Medicare patients.  If HMOs can recruit from the healthiest 75% of Medicare patients (who use only 9% of the Medicare health dollar), the sickest 25% of patients then continue using fee-for-service plans, thus driving cost for those plans through the roof.  The HMOs continue to receive 95% of those higher premiums.

HMOs have to work a little harder to cherry-pick Medicare patients (since employers don’t do the dirty work for them), but they’re more than up to the task, and it’s especially worth the effort.  Watch how your local Medicare HMOs do their recruiting.  It’s likely you’ll see them advertising recruiting drives in affluent suburbs, or at country clubs, or on the third floor of a building without elevators.  They want the active, vibrant, "youthful" oldsters, like the ones who frequent the denture commercials. Medicare HMOs assiduously avoid the less affluent parts of town.  They not only avoid recruiting patients in such locations, they (and non-Medicare HMOs for that matter) also avoid contracting with doctors whose offices are located within two bus transfers of those areas.  As an added benefit, this practice punishes doctors who choose to work in such economically deprived areas.

Shedding risk

In early 1996, one of Gekko’s vice presidents hands him a report entitled “Risk Sharing – the ultimate means of reducing FTP’s fiscal risk.”  The report details the practice of risk sharing, recently taken up by several HMOs, whereby the HMOs’ patients are “assigned” to a specific consortium of doctors and hospitals (called a Physician Hospital Organization, or PHO) which agrees to go “at-risk” for those patients.  Thus, for a fixed payment, the PHO will provide all medical care for those patients, and assume the financial risk of doing so.

“It’s beautiful,” says the V.P. “We keep, say, 27% of the premium off the top and give the rest to the PHO, along with the risk. I mean, we dump all the risk. We’d actually make more money than we are now, and we wouldn’t have to worry at all about those pesky details of health care management.  The PHO worries about all that.”

Gekko likes the idea.  A lot.  The name is wrong, of course, since it’s not sharing risk at all – it’s shedding the risk.  It would remove any uncertainty about FTP’s earnings – all Gekko would have to know is how many subscribers he had, and automatically he’d know FTP’s earnings to the penny a year ahead of time.  FTP’s shareholders would like that very much.  And since it wouldn’t matter any more how sick his subscribers were (since the risk of caring for them would no longer be his), he could stop his expensive cherry-picking practices and just sign up anybody who could pay the premiums.  And if he encouraged the formation of competing PHOs, then he could let them bid against each other for the patients FTP signed up.  If he played his cards right, FTP could walk away with as much as 30 or 31% of the premium dollar.

But it’s still risky.  It would reduce FTP to a mere middleman.  It’s not likely that employers or the government would let a practice like that continue forever.  Sooner or later they’d catch on and cut FTP out altogether. Risk sharing is attractive, but it’s attractive as an end game.

Next: Controlling physician behavior

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