Industry Outlook 1991: SERVICES
LET'S PLAY `SHUFFLE THE COSTS'
The nation's health care system faces more surgery in 1991. As the economy slows and the federal deficit rises, Congress will again try to curb medicare spending, which last year soared 12%, to $108 billion. Health care providers, who are bracing for smaller fee increases from Washington, will try to shift costs to private payers. And this means that business, which pays most of that tab, faces a fight with providers, employees, and retirees as it tries to hold down spending. Says Thomas J. Morr, General Motors Corp.'s general director of employee benefits: "Cost containment is uppermost in our minds."
The No. 1 auto maker had a $2.9 billion health bill in 1989--$622 for every car and truck it made. To rein in costs, it has signed up both health maintenance organizations (HMOs) and preferred-provider organizations, known as PPOs; 45% of its hourly and 67% of its salaried employees are enrolled in such plans. Yet costs per employee still jumped 15% in 1990. So Morr plans to clamp down on GM's psychiatric care and substance-abuse programs, and he will try to get better deals with HMOs and PPOs. "Managed care is the watchword," he says.
DEEP DISCOUNTS. As GM goes, so goes the nation. Corporate America's push to hold down its medical tab will affect every part of the $680 billion health care industry this year. Enrollment in PPOs rose 42% last year and may leap as much again in 1991. As growth in traditional plans sputters, health insurers will set up their own HMOs and PPOs. Financially strapped hospitals will offer deep discounts to win managed-care contracts. Medical-supply companies will pitch cost-saving products and services to hospitals. Doctors will band together to cut better deals with the HMOs. And unionized workers may confront employers over cuts in benefits.
A growing cost consciousness on the part of corporations helped HMOs post their best year ever in 1990. After hiking rates an average 16.8%, they racked up estimated profits of more than $1 billion. Rates are now expected to rise just 9% in 1991, partly because the HMOs are on firmer footing and because consolidation has permitted them to spread their costs over a larger membership base.
The good news for managed-care plans, however, is bad for the insurance industry's traditional health plans. After insurers hiked rates for traditional policies more than 20% last year, their growth plunged. That's why many are pushing into managed care, too. Travelers Corp., for instance, plans to spend $1 billion by 1995 to develop its own PPO. It hopes that managed care, which provided 16% of its $12.5 billion in revenues in 1989, will grow to at least 40% of revenues by decade's end. Other insurers are on the same road. "Traditional insurance will become so expensive it will be unsalable," predicts Bernard R. Tresnowski, president of the Blue Cross & Blue Shield Assn.
BIDDING WAR. Some hospital-management companies are also moving into managed care. Humana Inc., the Louisville-based hospital chain, agreed to buy Chicago's Michael Reese Hospital last October, in large part for its 240,000-member HMO. Reese's managed-care plan should help Humana fill its beds with profitable private-pay patients. For publicly traded chains such as Humana, analysts expect annual earnings gains of 13% to 15% in the year ahead.
But most of the nation's 5,500 hospitals won't do nearly this well. Their profit margins fell 10% on average in 1990, and are expected to slide an additional 8% this year, to 2.9%. With occupancy rates falling and the government reducing its medicare fees, many hospitals now plan to bid more aggressively against one another to win managed-care contracts--an approach that could place them in an even more dire financial fix.
Hospital-supply companies are well aware of their customers' problems. That's why they will offer just-in-time inventory and other services and products to cut costs in 1991. Baxter International Inc., for instance, has designed an automatically controlled IV that saves nurses' time. Nursing shortages make "hospitals willing to look at innovative products," says Wilbur H. Gantz, Baxter's president. Thus, supply-company earnings may jump 14% to 17% in 1991, says Kenneth S. Abramowitz, a Sanford C. Bernstein & Co. analyst.
For a change, in fact, doctors could suffer the most in 1991. Primarily because the American Medical Assn. is such a powerful lobby, "physicians weren't hit in the 1980s at all," says Uwe E. Reinhardt, a political economy professor at Princeton University. U. S. doctors, he notes, earned 110% more in 1988 than in 1980, in real dollars. "One day, there'll be a backlash."
WILD CARD. Perhaps that day is dawning. A new medicare fee schedule for the nation's 600,000 doctors will reduce payments to surgeons and other highly paid specialists starting in 1992. And doctors, whose fees are the fastest-growing sector of the U. S. health bill, fear even deeper cuts. Some are joining groups such as the Michael Reese Doctors Group and Independent Practice Assn. in Chicago, to negotiate better deals with managed-care plans. "They're facing an erosion in their practices, largely because of the success of the HMOs," says John R. Dolan, the group's CEO.
The wild card in the health care deck this year is the consumer. The opposition of the elderly to higher medicare payments, and telephone-company strikes over health care benefits the past two years, suggest that Americans are growing more militant when threatened with price hikes or cuts in benefits. This much is certain: Attempts to pass the buck on health costs will give the industry a monumental headache in 1991.Julia Flynn Siler in Chicago, with Susan B. Garland in Washington