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The Problem
By Tom Scheck
Minnesota Public Radio
October 29, 2001
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Attorney General Mike Hatch's year-long audit of Allina Health Systems found the health-care company overspent millions on administrative costs and wasted millions more on executive perks. But as Minnesota lawmakers begin their inquiry into Hatch's findings, employers and workers say they are more concerned with rising health insurance rates. The Minnesota Department of Health says premiums increased for five consecutive years in 2000. Last year's increase was 16 percent. Some health-care experts say if the upward trend continues, employers may look for alternatives to managed care or stop offering health insurance altogether.

Bakery owner Lynn Schurman, right, says "we've had major increases in the last two years that have wiped out my bottom-line profits over the last two years." That means some employees, like bookkeeper Carol Hommerding, left, are forced to pay more for their care.
(MPR Photo/Tom Scheck)

Research says Minnesota is one of the healthiest states in the country. The state is also considered a trend-setter in health-care reform. Beginning in the 1980s, it helped usher in the managed-care revolution and pointed the way toward increased consolidation of hospitals, physician clinics and HMOs.

But beneath this success lies frustration that the cost of insurance is now increasing at double the rate of inflation.

Walk into the Cold Spring Bakery and that frustration is not readily apparent. A smiling clerk stands behind the cases of baked goods and offers customers the traditional Halloween cookies or cakes that showcase the store's patriotism with the familiar red, white and blue.

Lynn Schurman has managed the bakery with her husband since 1986. In addition to making sure the wedding cakes, cookies and pastries are finished and delivered on time, she also juggles the benefits packages for her 55 employees.

Schurman says she struggles to provide adequate health insurance for the 17 employees who've chosen to enroll in the bakery's health insurance plan. "We've had major increases in the last two years that have wiped out my bottom-line profits over the last two years," she says.

University of Minnesota health care economist Roger Feldman says consolidation has created a stranglehold on the market and has driven up costs.
(MPR Photo/Tom Scheck)

Schurman says her health insurance premiums have gone up 80 percent in the last two years. Those numbers would be higher, she says, if she didn't cut out other benefits.

She increased her employees' deductibles and the money they pay for each visit to the doctor. That means some employees, like bookkeeper Carol Hommerding, are forced to pay more for their care.

Hommerding buys health insurance for herself, her husband and three sons. She says she works for her family's health insurance and her husband pays the rest of the bills. "It just seems like I don't have much left out of my check by the time I do my taxes, my 401k, cancer insurance, intensive care and my health insurance. It doesn't leave much for groceries or anything," Hommerding says.

The managed-care revolution promised to contain health-care costs. But for the Cold Spring Bakery and its employees, managed care has failed to deliver on that promise.

Some health-care economists and analysts say Minnesota's system of managed care is not working.

"It's not achieving the promise or the product it was promised and that's frustrating to everyone," says Allan Baumgarten, an independent analyst who issues an annual report on the HMO industry. "For all these years, managed care has said to employees 'we're the ones that can hold down utilization, we are the ones that can manage costs. We are the ones who get tough on employers and hold down costs.' Except now, every year the HMOs come back to the employers and say 'your utilization is up, your costs are up and we have to increase your premium by 15 percent."

"I'm very worried that our progress is going to come to a halt. "

- Jan Malcolm, Minnesota Health Commissioner

Originally, HMO officials promised employers that they'd keep costs down by creating a network of doctors, eliminating waste and increasing prevention. In the mid-'90s, there was a wave of mergers between the state's HMOs, hospitals and clinics. HMO executives say that consolidation reduced hospital visits and improved treatment for diabetes, asthma and heart failure.

But health care economists, like the University of Minnesota's Roger Feldman, say consolidation also created a stranglehold on the market and drove up costs. The result: Blue Cross/Blue Shield, HealthPartners and Medica control about 80 percent of Minnesota's health-insurance market.

"We have a managed-care market in the Twin Cities that is far too concentrated in a few large dominant organizations and I don't think that we've gotten the benefits of competition among the different types of HMOs, PPOs and POS plans that we'd get if they were independently run," according to Feldman.

Feldman says introducing new options into the market will help reduce costs. He says the Legislature should start by repealing the law that requires HMOs that offer insurance in the state be non-profit.

He says Minnesota is the only state in the country with such a requirement.

The other major factor in rising health-care costs may be overall consumption of health care.

Michael Scandrett, with the Minnesota Council of Health Plans, says patient demand has caused prices to increase. Since the country's unemployment rate was low by historical standards, employers went along with worker demands for greater doctor and hospital choice.
(MPR Photo/Tom Scheck)

Michael Scandrett, with the Minnesota Council of Health Plans, says patient demand has caused prices to increase as well. Since the country's unemployment rate was low by historical standards, employers went along with worker demands for greater doctor and hospital choice.

Health plans increased coverage to doctors outside of the network. Scandrett says those looser restrictions combined with more expensive medical technology and prescription drugs drove up costs. "Now it's actually more difficult to deal with the costs because you can't deal with it just by tightening your belt or by negotiating lower fees with the doctors and hospitals. The pure cost of the state-of-the-art medical care is just more expensive," he says.

In this down economic period, Scandrett says he expects employers to pass a greater proportion of the increasing cost of health care onto their employees. He says many employers and HMOs are introducing the "true cost" of health care to their workers may be the only way to reduce prices.

Ultimately some employers may cease offering health insurance altogether if costs continue to rise.

That worries Minnesota Health Commissioner Jan Malcolm. Malcolm says changes have to be made in the health-care system by businesses, HMOs and the consumers who use it. If changes aren't made, she says the state's goal of providing health insurance to every citizen would be in jeopardy. "We are worried that whereas we have been proud in the last 10 years or more in making steady progress on insuring more people, reducing the number of people who are uninsured and go without needed care and have to rely on charity care for example. We've been going in the right direction and I'm very worried that that progress is going to come to a halt and that we're going to see, very possibly, a move in the other direction," Malcolm says.

In fact, Malcolm says managed care has never given the chance to fully contain costs. She says the state's health plans were prohibited from controlling doctor visits and other health care decisions.

"We said we didn't want anybody getting in the way of our access to services and we didn't much care how strong the evidence was or wasn't that those services would add value. So we said we had a problem with someone managing our care and guess what? They stopped," Malcolm says.

Malcolm says it is possible to maintain access and manage costs. But the Legislature, the private sector and customers have to agree on the best strategy.