Why Employers and Physicians Select HMOs: An Analysis with Management Implications

By Jones, Walter J.; McLaurin, James R. et al. | Journal of Managerial Issues, Spring 1994 | Go to article overview

Why Employers and Physicians Select HMOs: An Analysis with Management Implications


Jones, Walter J., McLaurin, James R., Johnson, James A., Journal of Managerial Issues


The beginning of the 1990s finds both the private and public sectors in the United States grappling with serious and growing problems in providing its citizens with quality health care at affordable prices. In 1990, the nation spent an estimated $615 billion on health care. The Health Care Finance Administration (HCFA) projects that this amount will more than double, to $1.6 trillion by the year 2000 (Health Care Trends Report, 1991: 16). Federal and state governments, facing major deficits, are severely pressured by health care cost inflation and the burden of caring for many of the retired, indigent and uninsured. Employers have borne the brunt of paying for workers, and their costs rose to $176.8 billion in 1989. This constitutes 29.3% of total American health care spending in that year (Cantor et al., 1992: 98).

These factors have made the Health Maintenance Organization (HMO) option increasingly attractive. HMOs vary widely in structure and functioning (Brown, 1983), but have the common element of prepaid health care and increasing pressures for quality services (Omachoru and Johnson, 1993). HMO providers, including physicians, are usually paid by salary, not fee-for-service. Members (including employers) pay a fixed price for annual coverage under a plan which provides a specified array of services. Their subsequent utilization of the HMOs services is not tied to additional payments. Since HMOs do not receive fees for each service provided, they should (at least theoretically) have no incentive to provide unnecessary health services (Jacobs, 1991). They should also attempt to encourage wellness and prevent practices with members, and treat illnesses as inexpensively as possible (Inglehart, 1986; Ellwood and Paul, 1986).

As cost containment pressures have risen, HMO formation has accelerated and membership rolls have grown rapidly (Christianson et al., 1991). By 1988, the 614 HMOs in the United States had enrolled 32.6 million individuals. "HMOs market share for employer-provided health insurance by large and medium-sized organizations grew to 19 percent in 1988, up from 13 percent in 1986 and 7 percent in 1985" (Gold and Hodges, 1989: 125). There is significant evidence that these HMOs are indeed providing lower cost medical care for their members than that obtained from fee-for-service (FFS) practitioners (Luft, 1991; Kralewski et al., 1992).

The performance of and outlook for HMOs is not entirely positive, however. HMO managers face a wide array of complex tasks (Brown, 1983; Kralewski et al., 1991). They must balance financial and quality care concerns. As part of their efforts to achieve cost containment and service quality goals, HMOs must also make extensive use of emerging information technologies (Austin and Sobczak, 1993). In a competitive marketplace, they must be able to attract and retain employers and their work forces. One major survey of HMOs has found that "HMOs received considerable pressure from employers for change in certain areas" (Gold and Hodges, 1990: 134). In many cases, employers have requested expanded benefits in such areas as substance abuse and mental health, and increased use of cafeteria plans. Many HMOs have reacted by attempting to increase cost-sharing by employers and subscribers. This effort, however, increases the out-of-pocket charges of HMOs, thus reducing their competitiveness with other forms of service delivery. Reduced competitiveness in turn leads to increased financial difficulties. To survive, HMO managers must understand the motivations of their customers. How are employers reacting to the mixed incentives and risks in selecting and offering HMO coverage? Is cost the only, or the overwhelming factor in this process? Are there other important considerations?

Managers of HMOs must also be concerned with recruitment and retention of their own employees, particularly physicians. HMO research and writings have emphasized the cost containment features that the HMO has to offer (Fottler et al. …

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