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How HMOs make money

It’s called “managing the delta.”
The health plan business is pretty healthy these days, and the reason is simple – HMOs are keeping health care cost increases under 6% while increasing premiums by 7%+.
Sure, expense management is key, but so is revenue management. The question is, can HMOs manage cost increases for more than a few quarters? History indicates Not.
Thanks to Bob Laszewski for doing the heavy lifting by explaining how this happens.

4 thoughts on “How HMOs make money”

  1. I’m an old health underwriter – so please forgive me.
    Keeping increases in health insurance premiums ahead of increases in health care costs is what underwriters do. This is neither a revelation nor is it a secret.
    BTW, there would be no need to increase health insurance premiums if health care costs were not increasing. Health insurance premiums would not be high if health insurance costs were not high. The deeper problem is the cost of health care. So why are so many words written on the need for universal health insurance? Is there no one who understands the difference between health insurance and health care? Does no one understand that the cost of health care drives the cost of health insurance?

  2. John – no forgiveness necessary. Of course health care costs increase the cost of insurance. That is exactly my point. And, HMOs do little to address health care costs.
    The reason many words are written about universal health insurance is the lack of same results in a high number of uninsureds, which results in cost shifting to insureds. This is related to, but not the same as, the health care cost drives health insurance cost paradigm.

  3. “HMOs do little to address health care costs.”
    True but then again, neither do health care providers.
    Since the providers do not and probably will not take leadership to control health care costs, and since insurance companies (HMO’s are just another type of insurance company) have not been able to do this either (and doctors lobby against them daily for trying) I think it is inevitable that the government will wade in and take control.
    Old joke: “Last night I was so drunk that first I was afraid I would die and then I was afraid that I wouldn’t”
    That’s exactly how I feel about government taking control of the health care system.

  4. The problem is that people don’t understand that the insurance companies pay all of the politicians off to keep raising the price, profits for themselves. The only suffering groups would be the people and the providers. Providers see more and more patients to make ends meet. A doctor makes less money todays compared to 5 years ago. On top of making less, the cost of his office has sky rocketed as well. The amount spent with patients are not reimbursed. More and more durgs have to be requested through many paper forms and faxes in order to be filled. Patients end up with drugs that have higher side effects. i.e. (true case) someone needed a drug to be taken twice a day for a specific disease, but the insurance company would not allow it. the patient ended with massive stomach bleed one week later. They blamed the doctor for not filling out and expalining why the patient would need this twice a day. Although the paperwork revealed that it was done. patients don’t know this. Medicare and other insurance companies keep on cutting pays and even not paying the legit patient care and doctors taking it. How long will this last?? Unless sigificant people have to be hurt for the government to care. More and more doctors will have to work by charging the patients directly and having the patient deal with the insurance. Thank You

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Joe Paduda is the principal of Health Strategy Associates



A national consulting firm specializing in managed care for workers’ compensation, group health and auto, and health care cost containment. We serve insurers, employers and health care providers.



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