UNITING PHYSICIANS & PATIENTS AS A VOICE IN HEALTH CARE
Advocates of HMOs claim that HMOs can reduce health care costs without damaging quality of care. HMO advocates argue that HMOs save money primarily by reducing unnecessary services (1, 2, 3). There can be no question that HMOs have cut utilization of certain services, most notably hospital and mental health services, and that HMOs have achieved these reductions with two mechanisms -- financial incentives, and utilization review (4, 5). HMO advocates and some policy makers and observers have erroneously concluded that if HMOs are reducing health care utilization rates then, HMOs must be reducing total heath care costs.
This syllogism -- that lower use of hospitals and other services must mean that HMOs are cutting health care costs -- would be true if the Minnesota health care industry had no administrative costs. But, of course, that is not so. Like every other sector of Minnesota's economy, the state's health care system has administrative (or overhead) costs. This is true for both sectors of Minnesota's health care industry -- the insurers and the providers (the doctors, hospitals and other health care professionals who give medical care directly to patients).
The debate about whether Minnesota's HMO-dominated health care system is an efficient one has focused almost exclusively on the impact Minnesota's HMOs have had on health care utilization. Relatively little attention has been paid to the impact HMOs have had on health care administrative costs. This is due in large measure to the paucity of reliable information on how HMOs spend their revenues. HMOs claim that their overhead costs are typically in the range of ten to 15 percent.
The Minnesota Physician-Patient Alliance (MPPA) sought to determine what portion of HMO revenues is spent on health care (that is, health care goods and services delivered directly to patients) and what portion is spent on administrative services (all services that do not qualify as direct health care services). MPPA examined the expenditure and revenue data available to the public for Minnesota's three largest HMOs -- Medica (a subsidiary of Allina), HealthPartners, and Blue Plus (a subsidiary of Blue Cross Blue Shield). In 1996, these three HMOs together received $3.3 billion to enroll 2.2 million of Minnesota's 4.6 million residents (6). Together with their myriad of affiliated companies they administer and control health care for over 70% of Minnesotans (7). This report summarizes the results of our research.