New HMO plan limits access

PacifiCare has chosen two valley hospitals to participate in a new low-cost HMO product that could mark the beginning of a trend toward pushing health care costs and decision making to the patient.

O'Connor Hospital and St. Louise Hospital in Gilroy will offer the lowest costs for patients enrolled in the "Select Hospital" HMO PacifiCare has just introduced on the market. This HMO reverses a trend toward including most, if not all, hospitals in a market to offer broad choices for members. The Select Hospital concept offers lower costs to employers that limit the number of hospitals available to employees.

As health insurance premiums increase by double digits during an economic downturn, employers are looking for ways to cut health-care costs. Their choices: to reduce benefits or pass along more of the costs to employees.

Select Hospital is expected to reduce an employer's health premiums between 5 percent and 20 percent, says Mike Chiarodit, vice president of product management and development for PacifiCare.

"What we are trying to do is tie the member's medical cost to the true cost of care," says Mr. Chiarodit.

The new HMO product is a four-tier system. For example, hospital benefits are paid in full at select hospitals such as O'Connor and St. Louise while members using the nine other hospitals in the county could incur co-payments of $100, $250 and $400 per day, depending on what tier of the plan the employer enrolls in.

Under the plan, differences in co-payments for medical care other than hospitals aren't as great. For example, physician office visits can range between $10 and $20 co-payments, close to what they are now.

O'Connor, St. Louise and other select hospitals were chosen based on the lowest-cost contract in a market. The select hospital designation does not reflect positively or negatively on the quality of the hospital's services, PacifiCare officials say.

There are 111 select hospitals in the program statewide, out of more than 300 hospitals.

"Now that business has softened and revenues are declining and cost of care is on the rise, health care cost is getting attention from the highest level of management," says Peter Kuhn, health insurance broker with IBP Insurance Services in San Jose.
PacifiCare's new product is seen as just the start of others that are expected to be rolled out from many other health insurance organizations.

Hospital costs are the highest expense for health plans, and therefore, employers. Hospitals used to charge a global fee to health plans to care for a patient, which allowed the insurance industry to have predictable costs.
But hospitals were losing money under that arrangement and in the past 18 months, hospitals have renegotiated contracts to be paid on a per diem basis, depending on the patient's diagnosis.
Instead of being paid one rate to care for a patient no matter how much it costs, hospitals wanted to be paid based on cost. Such a change in payment strategy left the health insurance industry with unpredictable costs.
As a result, costs jumped 200 percent to 300 percent in the last year depending on the hospital, Mr. Chiarodit says.
PacifiCare raised its rates this year an average of 16 percent to cover the rise in health-care costs. Some plans raised rates more than 30 percent. Health plans had to develop a strategy that would get those fast rising costs under control.
One way to control those costs is to encourage a patient to use the lowest cost provider in a community and if he doesn't, charge him extra.
"This is a positive move for us," says Joanne Allen, administrator for patient and physician services and contracting at O'Connor Hospital. "But we don't know how many (patients) we may be talking about. We could get a slight increase, but I would not consider it a windfall."
The HMO has no enrollees since it was just launched in late October.
"The industry needs to change and go in the direction PacifiCare is going," says Mark Hyde, president and CEO of Lifeguard, the only San Jose-based HMO. The company has its own cost cutting products in development.
"When times are tough, people look for alternatives," Mr. Hyde says.

Health insurance experts are taking a cautious attitude toward PacifiCare's new product. "I think it will have limited appeal," says Mr. Hyde.
A member in this HMO will have to choose a physician who uses O'Connor Hospital. And many people aren't usually willing to switch doctors.
PacifiCare officials say this new product could generate more price competition in the market between hospitals, and encourage other hospitals to reduce costs to get on the select hospital list.
But that might be unlikely. "I think hospitals will just choose not to participate," Mr. Hyde says.
Officials at William M. Mercer, one of the largest health benefits consulting companies in the country, have been working with PacifiCare in the last year to develop a low cost HMO product for employers, says James Kinney, consultant with Mercer in San Jose.
"It's going to be interesting to see how it's accepted in the market," Mr. Kinney says. "We've been focused on quality of care, but now it's all about cost again."