April 11, 2007

Illinois Managed Care Review 2006 finds:

Illinois HMOs and Chicago Hospitals Report Higher Profits

As State Grapples with Access and Affordability Issues

Chicago ?Health plans and hospitals alike had their highest profits in recent years in 2005. Illinois hospitals systems are poised to build several new hospitals, and the impact of that expanded capacity on health care costs and access is unknown. The state now contracts with only one Medicaid HMO but is testing other strategies to expand access to health care and health coverage.

These findings are reported in Illinois Managed Care Review 2006, Allan Baumgarten's tenth annual analysis of Illinois health care markets. The report, released at a meeting of the Midwest Business Group on Health, presents a competitive analysis of health plans and hospitals in the state.

Baumgarten, an independent analyst of health care finance and policy, also publishes annual market studies for eight other states: California, Colorado, Florida, Michigan, Minnesota, Ohio, Texas and Wisconsin. Sidebars in the new Illinois report compare Illinois HMOs to their counterparts in the other states. GlaxoSmithKline has provided support for his Illinois report since it was first published in 1997.

Among the report's findings:

• HMO enrollment continues to fall, although the decline has moderated

After reaching a peak of 2.4 million in 2000, HMO enrollment in Illinois has decreased in all three lines of business - commercial, Medicare and Medicaid. Enrollment decreased by 127,000 lives in 2005 (7.3%), dropping to 1.6 million for first time since 1993. Enrollment also dropped in the first half of 2006.

Most of the enrollment has been lost in HMO commercial plans, as employer groups move to PPOs and consumer-directed plans with more enrollee cost-sharing. Even HMO Illinois, part of Blue Cross Blue Shield of Illinois and the largest HMO in the state, has lost commercial members in the past two years. Humana has converted many of its employer groups to PPO plans and in 2005 it dropped its Medicaid contract with the state. Only one HMO ? Harmony ?still contracts with the state for Medicaid enrollees.

• Medicare HMO plans are highly profitable and poised to add members

In 2005, Humana was the only plan still offering HMO Medicare coverage in the Chicago area and was very profitable. It made $47.7 million on its Medicare plans in Illinois and some other states in 2005. In 2007, three more HMOs will offer senior plans in Chicago: Aetna, WellCare (the Harmony HMO) and HealthSpring, a Nashville-based company. However, the new Democratic majority in Congress is skeptical of the payment rates to Medicare HMOs and may seek to reduce those payments.

• HMO premium revenues grew at a slightly lower rate in 2005

After four years of double-digit increases, premium revenue for employer groups increased by ?only? 8.5% in 2005. HMOs collected $244.44 per member per month, up from $225.26 in 2004. Premium revenues increased by 10.5% in 2004, 12.3% in 2003 and 16.5% in 2002. Employers now pay an average of $100 more per member per month compared to 2000.

• Health plan profitability improved again in 2005.

Illinois HMOs increased their profits to $241.8 million in 2005, or 3.7% of revenues. Health plans have improved their profitability by increasing the spread between premium revenues collections and medical costs from $26 per commercial member per month in 2003 to $37 per member per month in 2005.

• Chicago area hospitals significantly improved their financial results.

Based on an analysis of Medicare facility cost reports for 2005, Chicago area hospitals had net income of $659.1 million, or 3.8% of revenues of $17.5 billion. That is up from $322.2 million in 2004 (2.3% of net patient revenues) and $263.7 million in 2003. Advocate Health Care had net income of $77.9 million (3.5%), Resurrection Health had net income of less than one million and Northwestern Memorial had net income of $116.5 million (12.3%). The Rush hospitals had net income of $54.8 million (3.7% of revenues).

After a decade of consolidation, Chicago hospital systems exert strong leverage in negotiations with health plans. They have started a new stage of system building by constructing new suburban hospitals. At the same time, some are closing inner city hospitals, raising concerns about access, especially for families on Medicaid or without coverage. In some other markets, new hospital capacity has actually helped the bargaining position of health plans.

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