NEW ENGLAND HMOs: Surprising Findings On Overhead Costs
A new study finds that "the only three profitable" HMOs operating in New England last year "had these things in common: They spent a greater-than-normal share of their income on health care and a less-than-normal share on overhead," the Wall Street Journal/New England Edition reports. The findings, reached by Mark Farrah Associates of Kennebunk, ME, run counter to the common industry assumption "that plans with high medical-expense ratios are the ones in deepest financial trouble." The three profitable HMOs were all based in Massachusetts. Harvard Pilgrim Health Care "spent less than 10% of its revenue on administration last year and was in the black." Overall, Harvard Pilgrim "allocated 93% to medical care," compared to a national average that ranges between 75% and 90%. The other two profitable plans, Fallon Community Health Plan and Tufts Associated Health Plan, spent 93% and 88% of total revenues on medical expenses, respectively. The study also found that "four plans spent 19% of their revenue on administrative expenses," and "all four had operating losses in New England." Those plans are: Foundation Health Systems Inc., Kaiser Permanente's northeast division, Cigna Corp. and ConnectiCare Inc.
According to the Journal, "[c]onsumer groups, not surprisingly, applaud the HMOs that spend most of their premium funds on direct patient care." Robert Restuccia, the head of Boston-based Health Care For All, said: "If they're spending less money on administration and marketing, they're using the premium dollar more effectively." On the other hand, the Journal reports that "[p]eople who study HMOs say a high medical-expense ration could be read" as an indication that "a plan isn't doing a good job of preventing illness, or of treating it appropriately once it strikes." High medical expenses also "could mean the HMO is meeting patients' needs without quibbling" (Gentry, 6/17).