One Cap for Health Costs

Even as medical bills climb, 277 so-called health maintenance organizations (HMOs) are managing to keep their members healthy and out of the poorhouse to boot. HMOs are group-practice health plans in which a family pays a flat fee of, say, $160 per month, and in return is provided with comprehensive medical care, ranging from doctors' visits to heart surgery. The idea behind the plans is to reduce costs by making doctors and administrators accountable for healthcare expenditures.

In HMOs, compensation to doctors for their services comes directly from the administrative office instead of the patient. Some HMOs automatically withhold a portion of medical fees and keep the funds in escrow until year's end. Then, if there is a surplus, participating physicians may get raises or bonuses. Doctors are subject to continuing scrutiny by their fellow physicians to ensure that they avoid expensive diagnostic tests that are not required. This encourages them to prescribe only what is necessary, thereby helping to hold down costs for everyone.

Corporations are especially fond of the concept, which helps them as much as their employees. Ford Motor Co.'s employee insurance program has offered HMOs since the early 1960s. Although only 8% of its employees are now enrolled in HMO programs, Ford will save an estimated $5 million in medical benefits this year.

Conventional health insurance companies are already beginning to feel the pressure from HMOs. The Massachusetts Blue Cross operates five HMOs of its own, with a total membership of 100,000 subscribers, up from 42,000 in 1980. In the St. Paul-Minneapolis area, HMOs are grabbing away subscribers at a breakneck pace, and claim a membership of 25% of the population.

Of course, in the pay-any-price world of escalating health-care costs, even the most careful of HMO budget projections can quite unexpectedly boomerang. Last year, for example, the total operating budget for the Boston-based Harvard Community Health Plan was $65 million. But an unanticipated midyear spurt in hospital admissions, combined with higher than expected rate increases for services by the hospitals, wound up producing a cost overrun of $4.9 million for the plan. The Harvard HMO was forced to boost its premium 18% over last year's level. About a half-dozen other HMOs around the country are experiencing similar difficulties. On balance, however, periodic jumps in HMO premiums seem far preferable to the relentless annual cost accelerations that nonmembers by the millions seem doomed to endure.

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