Where has all the money gone?

Not into your pockets, but hospitals and health plan executives are making good money, indeed.

By Ken Terry
Senior Editor

Primary care physicians lost ground to inflation for two years in a row. Yet the media voice loud concerns about soaring health care costs, and employers complain about skyrocketing health insurance premiums. Where's all the money going?

Health insurers' profits grew an average of 25 percent in 2001. And the average hospital's operating margin jumped from 2.8 percent in 2000 to 4.3 percent the next year.

Hospital outpatient spending rose 16.3 percent in 2001, surpassing outlays for prescription drugs, which increased by 13.8 percent, according to the Washington, DC-based Center for Studying Health System Change. Inpatient spending, which had declined in the mid-'90s' heyday of managed care, leaped 7.1 percent in 2001—its third straight year of expansion. More than half the total growth in health spending came from inpatient and outpatient expenditures.

This is good news for some doctors. Outpatient procedures are the bread and butter of many specialists, including cardiologists, orthopedic surgeons, and ophthalmologists. Hospital-based doctors and surgeons benefit from rising inpatient expenditures. But primary care doctors aren't on this gravy train.

Ironically, neither are HMOs. While they've jacked up their premiums dramatically—the average raise for 2003 will be 17 percent—HMO profit margins have been close to zero for the past few years, according to Steve Cigich, consulting actuary for Milliman USA, which tracks HMO financial data. Insurance companies have made their money on PPOs, which require far less administration, and on fees from self-insured employers, rather than on HMOs.

Although physicians love to hate HMOs, primary care doctors got bigger raises when they were in demand as HMO gatekeepers in the mid-'90s than they do today. Some salaried physicians received raises. Other doctors reaped substantial financial rewards from capitation, sharing savings from reduced utilization with the plans. But when capitation rates dropped, physicians turned against prepaid care.

Why isn't the money trickling down to primary care?

Stuart Altman, professor of national health policy at Brandeis University, sympathizes with doctors who believe HMOs have treated them unfairly. But he sees the root of their current problems in the decline of capitation. "Primary care physicians are out of the loop. They're not the winners in this health care arms race; the winners are specialists and technology."

Cigich agrees. "Physician unit price levels haven't been going up appreciably," he notes. But utilization has, and with it, health care costs. Much of the rise in utilization has occurred in the outpatient clinics where specialists use expensive, high-tech equipment. New procedures have also multiplied.

Paul Ginsburg, president of the Center for Studying Health System Change, concurs that technology is driving costs up. But Ginsburg and his co-authors argue that "the retreat from tightly managed care has also played an important role in rising cost trends." First, by reducing authorization requirements for tests, referrals, and procedures, health plans let physicians do more of all three. Second, the consolidation of hospitals into bigger systems and the demand of employers for broader networks gave the hospitals more bargaining power with health plans. As a result, hospital rates rose and the use of their services increased.

Many health care systems have shed unprofitable physician practices and closed weaker hospitals, bolstering their bottom lines. And overbedding is no longer an issue in most areas. In fact, many hospitals don't have enough capacity now, so they're launching big construction projects.

Again, this is good news for specialists, but not for primary care physicians. In fact, 61 percent of family physicians and general internists who responded to a Medical Economics fax poll no longer practice in hospitals; they hand off their inpatients to hospitalists.

Hospitals have also dealt with health plans more effectively than all but the largest physician groups have, say Ginsburg and Cigich. That's partly because antitrust laws prevent independent doctors who aren't taking joint financial risk from negotiating collectively with insurers. This has especially hurt small practices, observes Cigich. But recently the FTC has sent signals that it might approve noncapitated physician bargaining units, as long as they have some degree of clinical integration.

"This is a real opportunity for physicians, reflecting the belief within health policy circles that clinical integration serves the patient better," says Ginsburg.

What about all the insurance money?

Insurance companies continue to hit employers with double-digit premium hikes, and health plan CEOs receive millions of dollars a year in compensation. Meanwhile, physicians are growing increasingly restive about the relatively small percentage of those big rate hikes they've received. In Chicago, for example, contract talks between the Advocate Health Care system, representing 1,700 doctors, and Blue Cross and Blue Shield of Illinois nearly broke down over this issue.

The plans have raised their prices far more than the amount required to cover health care costs. Premiums soared an average of 12.7 percent in 2002, even though total health spending rose only 10 percent the previous year. Ginsburg attributes that to the "underwriting cycle." In the '90s, he notes, insurers gave up profits to get market share; now they're making up for past losses by boosting prices.

But another group of researchers blames the explosion in insurance costs on "accelerating medical-claims expenses," and forecasts that double-digit increases could continue for "many years."

The question is, how long will employers keep paying the bill? Some companies, especially smaller ones, have already dropped health insurance. Other employers are shifting as much of the cost as they dare onto employees by raising copays, deductibles, and their workers' share of the premiums. This tends to have more impact on procedures than on office visits, notes Ginsburg, because the latter still require only small copays. But if defined-contribution plans with very high deductibles catch on, they'll directly affect primary care physicians. Patients at financial risk in these plans may think twice about going to the doctor or having a test done.

For now, we're left with our back-to-the-future scenario: "poorly paid primary care doctors, better-paid specialists, and growing use of technology," says Stuart Altman. And all of us will foot the ever-expanding bill.

How much top insurance executives rake in annually

Ken Terry. Where has all the money gone?.

Medical Economics

2003;1:72.