Playing The HMO Game

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As the health plans squeezed, their profits grew--at least until recently. Pressured by rising medical costs on one side and employers' refusal to pay higher premiums on the other, a number of managed-care firms began running into trouble. Case in point: Kaiser Permanente, which posted a $270 million loss last year. This was on the heels of a sudden $291 million loss at Oxford Health Plans of Norwalk, Conn., which CEO Stephen Wiggins blamed on the collapse of his overtaxed computer billing system. Wiggins was forced to resign, but that wasn't the end of his troubles. Last week the New York State attorney general's office confirmed to TIME that it was investigating Wiggins for possible insider trading.

In theory, the marketplace should provide a check on health plans that cut too far; if your managed-care organization won't deliver the quality of care you need, you can always switch to one that will. But that assumes there is competition and free choice. Most employers let their workers choose from only a handful of plans. Industry consolidation, meanwhile, is reducing competition even further.

It didn't have to be this way, says Dr. Paul Ellwood, 71, the man who invented the phrase "health-maintenance organization" and who, along with Stanford University economist Alain Enthoven, developed much of the theory behind managed care. From his ranch in Wyoming, Ellwood sounds like a broken man, and in a too literal sense he is. He was thrown from a horse last month, fracturing his neck. (No, he was not paralyzed or treated by managed care.) The painful healing process has given him a lot of time to consider how disappointed he is with the system he helped create. "The idea was to have health-care organizations compete on price and quality," Ellwood says. "The form it took, driven by employers, is competition on price alone."

In fact, a growing number of experts believe that quality control is the crucial innovation that could save managed care. Alas, quality is harder to count than dollars and cents. It's one thing to measure immunization rates and quite another to determine whether one managed-care group has a better mortality rate for coronary surgery than another. "Even if employers were willing to spend a few dollars more to buy quality," says Janet Corrigan, director of health-care services at the Institute of Medicine in Washington, "there is really no way to identify it in the marketplace."

Even if they wanted to, most managed-care organizations aren't set up to gather such data; the computer programs needed to perform the necessary risk analyses are very different from those used for billing. Nor is there an independent governing body that could do the job. Currently, the National Committee for Quality Assurance, the nearest thing to an industry watchdog, issues rudimentary report cards on more than 300 different managed-care plans. Although it used to get most of its funding from the health-care industry, it has received only 40% from that source in recent years.