NCPA - National Center for Policy Analysis

HMO Costs Double

March 14, 2001

The Health Care Financing Administration (HCFA) reports the costs of Health Maintenance Organizations (HMO) are rising at a double-digit annual pace. The last time employers faced such inflation in health costs, it ignited a revolution in health care delivery, one that saw 60 percent of patients switch from traditional insurance to HMOs in the decade after 1988.

Or, as critics put it, goodbye doctor-patient relationships, hello HMO second-guessing.

Now, new changes could be coming from employers that would make patients painfully aware of the cost of modern medicine. Among them:

  • Workers could pay more of the premiums, lowering employers' costs but giving workers no more say in their coverage.
  • Co-pays and deductibles could be raised, forcing workers to pay a greater share of doctor and hospital bills out of pocket.
  • Tiered drug benefits could lower the cost of generic drugs and steer patients away from higher-priced name version.
  • Employers could use a defined contribution plan, paying a fixed amount toward a range of health-plan options with workers paying the difference for more expensive plans - a radical change that would cap the amount companies pay for benefits and turning them into something akin to a 401(k).

The defined benefit option has at least two potential pluses, analysts believe. First, it would force the health care industry to answer to individuals, rather than corporations that pay the bills. Second, properly designed defined contribution plans would force health plans to compete on price and quality, and unhappy customers could simply take their business elsewhere.

A Booz-Allen & Hamilton survey found all but a handful of companies queried expected a switch to defined benefit plans someday.

Source: Editorial, "HMOs' Failures to Tame Costs Spurs Quick-Fix Replacements," USA Today, March 14, 2001


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